SAN LEANDRO, Calif.--(BUSINESS WIRE)--Energy Recovery, Inc. (Nasdaq: ERII), a trusted global leader in energy efficiency technology, today announced Joshua Ballard has made the decision to step down from his position as Chief Financial Officer at the end of June 2024. A search to identify Energy Recovery’s next CFO is underway with the executive search firm Korn Ferry. “I want to thank Josh for his tremendous leadership and contributions to the success of Energy Recovery. He is leaving a stronger organizat ...

SAN LEANDRO, Calif.--(BUSINESS WIRE)--Energy Recovery, Inc. (Nasdaq:ERII) (“Energy Recovery” or the “Company”) today announced its financial results for the fourth quarter and year ended December 31, 2023. Fiscal Year 2023 Highlights Record annual revenue of $128.3 million, which includes a 79% growth in wastewater and represents nine consecutive years of revenue growth. Record quarterly revenue of $57.2 million, representing a 35% year-on-year growth with strong performance in Energy Recovery’s prim ...

PART I [Business Overview](index=5&type=section&id=Item%201%20Business) Energy Recovery, Inc. is a global leader in energy efficiency technology, designing and manufacturing high-performance solutions to reduce costs by improving energy efficiency in commercial and industrial processes, with a strong foundation in seawater reverse osmosis (SWRO) desalination and expansion into wastewater treatment and CO2 refrigeration [Company Overview](index=5&type=section&id=Overview) The company focuses on delivering cost savings and environmental sustainability through its energy efficiency technologies - Energy Recovery, Inc. was founded in 2001, headquartered in San Leandro, California, with global sales and technical support teams[29](index=29&type=chunk) - The company is dedicated to achieving cost savings and environmental sustainability in commercial and industrial processes through its energy efficiency technologies[27](index=27&type=chunk)[28](index=28&type=chunk) [Sustainability](index=6&type=section&id=Sustainability) Sustainability is a core business focus, managed through dedicated teams, internal projects, and customer solutions - The company integrates sustainability as a core business, managing operational impact and producing high-quality energy recovery devices through dedicated teams, internal projects, and customer solutions[30](index=30&type=chunk) - Sustainability objectives focus on employees, environmental and climate change risks, innovation and opportunities, and products, with the first corporate greenhouse gas reduction target announced in 2023[31](index=31&type=chunk) [Pressure Exchanger Technology](index=6&type=section&id=Pressure%20Exchanger%20Technology) The company's Pressure Exchanger technology platform enhances efficiency and environmental performance in commercial and industrial processes - The company's Pressure Exchanger technology platform makes commercial and industrial processes more efficient and environmentally friendly by effectively capturing and transferring pressure energy, thereby reducing costs, saving energy, and decreasing emissions[36](index=36&type=chunk) - PX Pressure Exchangers are the energy recovery standard in the seawater reverse osmosis (SWRO) desalination industry, capable of reducing energy consumption in SWRO facilities by up to **60%**[39](index=39&type=chunk)[44](index=44&type=chunk) [Water Treatment](index=7&type=section&id=Water%20Treatment) The company addresses the growing global demand for clean water and energy optimization by reducing costs and emissions in desalination and wastewater treatment [Markets](index=7&type=section&id=Markets) Seawater desalination is the primary revenue source, with brackish water applications representing a potential growth area - Seawater desalination is the company's primary revenue market, while brackish water applications represent a potential growth area, with market opportunities including new projects and retrofits of existing facilities[46](index=46&type=chunk)[47](index=47&type=chunk) - The wastewater treatment market is diverse, driven by increasingly stringent water conservation, reuse, and discharge regulations, leading to growing demand for Zero Liquid Discharge (ZLD) and Minimum Liquid Discharge (MLD) applications[49](index=49&type=chunk) [Water Treatment Solutions](index=10&type=section&id=Water%20Treatment%20Solutions) The company offers high-efficiency isobaric energy recovery devices, including the PX Pressure Exchanger series, for various water treatment applications - The company offers the high-efficiency isobaric energy recovery device PX Pressure Exchanger series, including high-pressure PX, Ultra PX, and low-pressure PX, suitable for seawater, brackish water desalination, and wastewater treatment[57](index=57&type=chunk)[58](index=58&type=chunk)[60](index=60&type=chunk)[62](index=62&type=chunk) - Ultra PX is designed to address key challenges in wastewater treatment, such as energy intensity and environmental impact, by improving the affordability and efficiency of RO to accelerate its adoption in Zero Liquid Discharge (ZLD) and Minimum Liquid Discharge (MLD) markets[60](index=60&type=chunk)[61](index=61&type=chunk) - The company also provides high-pressure centrifugal pumps and hydraulic turbochargers as complements to energy recovery devices for various capacities and applications in RO plants[63](index=63&type=chunk)[64](index=64&type=chunk)[67](index=67&type=chunk) [Sales and Marketing](index=11&type=section&id=Sales%20and%20Marketing) The company leverages a global direct sales team and industry events to deliver products and develop new solutions - The company provides products and on-site technical support through a global direct sales team in strategic regions such as the United States, China, India, Latin America, Spain, Saudi Arabia, and the UAE[68](index=68&type=chunk) - The majority of the company's revenue is generated from outside the United States, and it develops new solutions by participating in water industry events and utilizing market intelligence[68](index=68&type=chunk)[69](index=69&type=chunk) [Competition](index=11&type=section&id=Competition) The water treatment industry is increasingly competitive, but the company's PX products maintain an advantage - The water treatment industry is increasingly competitive, but the company's flagship PX products maintain a competitive advantage due to their highly durable, corrosion-resistant alumina ceramic components, high efficiency, low downtime, and cost-effectiveness[70](index=70&type=chunk) [Project Channels](index=11&type=section&id=Project%20Channels) Water business sales are categorized into Megaproject (MPD), Original Equipment Manufacturer (OEM), and Aftermarket (AM) channels - Water business sales are categorized into three channels: Megaproject (MPD), Original Equipment Manufacturer (OEM), and Aftermarket (AM)[71](index=71&type=chunk) - MPD customers primarily focus on operating and lifecycle costs, typically choosing the company's PX solutions; OEM customers are more concerned with initial capital expenditure, potentially opting for PX or hydraulic turbochargers; the AM channel provides spare parts, repairs, and field services[72](index=72&type=chunk)[73](index=73&type=chunk)[74](index=74&type=chunk) [Seasonality](index=12&type=section&id=Seasonality) Desalination and wastewater treatment revenue does not exhibit specific seasonality, but quarterly and annual revenue can fluctuate significantly - Desalination and wastewater treatment revenue does not exhibit specific seasonality, but quarterly and annual revenue may fluctuate significantly due to the uncertainty of MPD project shipment timing[75](index=75&type=chunk) [Emerging Technologies](index=12&type=section&id=Emerging%20Technologies) The company is leveraging its Pressure Exchanger technology platform to develop new product applications and diversify into new industries like CO2 refrigeration [CO2 Refrigeration](index=12&type=section&id=CO2) The global refrigeration industry is transitioning to CO2 refrigerants, with the company's PX G1300™ enhancing system performance - The global refrigeration industry is transitioning from HFC to CO2 refrigerants to address greenhouse gas emission regulations, but CO2 systems have higher energy consumption in warmer climates[77](index=77&type=chunk)[78](index=78&type=chunk) - The company's PX G1300™ Pressure Exchanger is designed to improve the performance of CO2 refrigeration systems, making them economically viable in a wider range of climates by reducing compressor workload to enhance cooling capacity, system stability, and energy efficiency[78](index=78&type=chunk)[80](index=80&type=chunk) [Sales and Marketing (CO2)](index=13&type=section&id=Sales%20and%20Marketing%20%28CO2%29) The PX G1300 holds significant potential in commercial and industrial refrigeration markets, offering energy savings and improved cooling - The PX G1300 has significant potential in commercial and industrial refrigeration markets, such as supermarket chains and cold storage facilities, with key value propositions including energy savings, reduced emissions, enhanced cooling capacity, and lower initial capital investment[82](index=82&type=chunk)[88](index=88&type=chunk) [Channels and Customers (CO2)](index=13&type=section&id=Channels%20and%20Customers%20%28CO2%29) CO2 product sales are channeled through OEMs, targeting commercial and industrial customers - CO2 product sales are categorized under the OEM channel, including direct sales to commercial/industrial customers (e.g., supermarkets, cold storage) and sales through refrigeration system installers or OEMs[84](index=84&type=chunk) - The company initially sells PX G1300 directly to end-users and OEMs, with future plans to primarily sell through OEMs[86](index=86&type=chunk) [Competition (CO2)](index=13&type=section&id=Competition%20%28CO2%29) While no direct competitors exist for the company's Pressure Exchanger technology in refrigeration, other energy-saving methods and alternative equipment are present - There are no direct competitors to Pressure Exchanger technology in the refrigeration industry, but other energy-saving methods and alternative equipment exist, with potential for competitive technologies to emerge as CO2 refrigeration systems become more widespread[87](index=87&type=chunk)[89](index=89&type=chunk) [Seasonality (CO2)](index=14&type=section&id=Seasonality%20%28CO2%29) CO2 products currently do not exhibit specific revenue seasonality in their early lifecycle - CO2 products do not exhibit specific revenue seasonality in their early lifecycle[90](index=90&type=chunk) [Manufacturing](index=14&type=section&id=Manufacturing) The company designs, manufactures, assembles, and tests its products in two California facilities, emphasizing quality and environmental responsibility - The company's products are designed, manufactured, assembled, and tested in two facilities in California, including advanced ceramic manufacturing and testing equipment[91](index=91&type=chunk) - Alumina ceramic components for PX products are produced in-house through vertically integrated precision manufacturing processes, ensuring high quality, durability, and reliability[92](index=92&type=chunk) - The company is committed to reducing its operational environmental impact through waste management strategies, optimizing renewable energy use, and monitoring key environmental indicators, such as recycling test water[93](index=93&type=chunk) [Research, Development and Technology](index=14&type=section&id=Research%2C%20Development%20and%20Technology) R&D is central to the company's strategy, focusing on advancing existing solutions and exploring new applications - R&D is core to the company's history, culture, and corporate strategy, focusing on advancing existing water treatment solutions, applying Pressure Exchanger technology to new markets (e.g., wastewater and CO2), and fundamental research for new applications[94](index=94&type=chunk)[95](index=95&type=chunk) - The company possesses advanced analytical and testing capabilities, including complex analysis tools like 3D, multiphase, and multiphysics computational fluid dynamics, to reduce reliance on expensive full-scale testing[96](index=96&type=chunk) [Intellectual Property](index=15&type=section&id=Intellectual%20Property) The company protects its proprietary technology through a robust portfolio of patents, trade secret laws, and contractual safeguards - The company protects its proprietary technology, inventions, and improvements through patents, trade secret laws, and contractual safeguards, maintaining a strong portfolio of U.S. and international patents and trademark registrations[98](index=98&type=chunk)[99](index=99&type=chunk) [Human Capital Resources](index=15&type=section&id=Human%20Capital%20Resources) The company prioritizes a safe and supportive work environment, valuing diversity and investing in employee development - As of December 31, 2023, the company had 269 full-time employees, committed to providing a safe, supportive work environment, and valuing employees' diverse backgrounds and experiences[101](index=101&type=chunk)[102](index=102&type=chunk) - The company attracts, develops, and retains employees through global training and development programs, competitive compensation and benefits, and workplace health and safety policies[104](index=104&type=chunk)[106](index=106&type=chunk)[108](index=108&type=chunk) [Additional Information](index=16&type=section&id=Additional%20Information) The company provides important information through its investor relations website, serving as a channel for FD Regulation compliance - The company provides important information, including annual reports, quarterly reports, 8-K reports, and proxy statements, through its investor relations website (ir.energyrecovery.com), using it as a channel for compliance with Regulation FD[110](index=110&type=chunk) - The company is a global leader in energy efficiency technology, focused on delivering cost savings and enhanced energy efficiency in commercial and industrial processes through its Pressure Exchanger technology[27](index=27&type=chunk)[28](index=28&type=chunk)[290](index=290&type=chunk) - The company has over 30 years of experience in the desalination industry and applies its core technology to emerging wastewater treatment and CO2 refrigeration markets[28](index=28&type=chunk)[39](index=39&type=chunk)[76](index=76&type=chunk) - The company's sustainability strategy includes internal projects and customer solutions, aiming for operational profitability and environmental sustainability, and has achieved the highest AAA rating from MSCI ESG[30](index=30&type=chunk)[31](index=31&type=chunk)[206](index=206&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A%20Risk%20Factors) The company faces diverse risks, including reliance on large desalination projects, competition in emerging technologies, supply chain dependencies, manufacturing defects, and geopolitical conflicts, which may cause operational volatility and adverse financial impacts [Risks Related to our Water Segment](index=16&type=section&id=Risks%20Related%20to%20our%20Water%20Segment) Water business revenue is highly dependent on the construction and retrofitting of large desalination plants, leading to potential volatility - Water business revenue primarily relies on the construction and retrofitting of large desalination plants, with operating results influenced by capital expenditures, project financing, project timing, and geopolitical events, potentially leading to significant fluctuations[112](index=112&type=chunk)[113](index=113&type=chunk)[114](index=114&type=chunk) - The water market is increasingly competitive, and competitors may offer superior products or lower prices, harming the company's market position and revenue[115](index=115&type=chunk) - The company's product promotion in the wastewater treatment market may be unsuccessful due to its diverse nature and incomplete regulations, potentially facing challenges from existing competitors and alternative technologies[117](index=117&type=chunk) [Risks Related to our Emerging Technologies Segment](index=17&type=section&id=Risks%20Related%20to%20our%20Emerging%20Technologies%20Segment) The company may face challenges in the CO2 refrigeration market due to slow adoption of new technologies and established competitors - The company may not successfully compete in the CO2 refrigeration system market due to slow adoption of new technologies in the industry, and the presence of large, established competitors and alternative technologies[118](index=118&type=chunk)[119](index=119&type=chunk) - The company may be unsuccessful in developing future new technologies, with R&D investments having long payback periods and new markets potentially yielding lower profitability than the water business[120](index=120&type=chunk) [General Business Risks](index=18&type=section&id=Risks%20Related%20to%20our%20General%20Business) Quarterly and annual operating results may fluctuate significantly due to various factors, including long sales cycles and project shipment timing - The company's quarterly and annual operating results may fluctuate significantly due to various factors such as long sales cycles, customer purchasing patterns, and the timing of large project shipments, making them difficult to predict[121](index=121&type=chunk)[122](index=122&type=chunk) - Retention clauses in water contracts may delay accounts receivable collection, and failure to collect could adversely affect operating results and financial condition[123](index=123&type=chunk)[124](index=124&type=chunk) - The company relies on a few suppliers for critical components, posing risks of supply disruptions, quality issues, and increased costs[125](index=125&type=chunk)[126](index=126&type=chunk) - Manufacturing risks, especially for new products, may lead to increased scrap, quality defects, and claims exceeding warranty reserves[127](index=127&type=chunk) - Inventory may become excessive or obsolete, increasing cost of revenue, particularly with inaccurate demand forecasts[128](index=128&type=chunk)[129](index=129&type=chunk) - R&D strategies may not generate positive returns, as product development is costly and has long payback periods[130](index=130&type=chunk) - Business interruptions from natural disasters or power outages could damage company facilities or suppliers, and insurance may be insufficient to cover all losses[131](index=131&type=chunk) - Legal proceedings could result in significant adverse outcomes, incurring high costs and diverting management's attention[132](index=132&type=chunk) - Actual operating results may differ significantly from company guidance, as guidance is based on assumptions and estimates and is speculative[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type:chunk) - Inaccurate assumptions, judgments, and estimates in financial statements could significantly impact financial results[137](index=137&type=chunk) [Risks Related to Economic Conditions and Geopolitical Conflicts](index=22&type=section&id=Risks%20Related%20to%20Economic%20Conditions%20and%20Geopolitical%20Conflicts) Global operations expose the company to international business risks, including macroeconomic factors, government policies, and foreign exchange fluctuations - Global operations expose the company to international business risks, including macroeconomic factors, government policies, and foreign exchange fluctuations, particularly in Middle Eastern and Asian markets[147](index=147&type=chunk) - Global economic and political uncertainties, such as the supply chain environment, inflationary pressures, rising interest rates, and labor shortages, as well as conflicts in Europe and the Middle East, may affect product demand and operating results[149](index=149&type=chunk)[150](index=150&type=chunk) [Risks Related to Information Technology](index=23&type=section&id=Risks%20Related%20to%20Information%20Technology) Information technology systems face security risks, including cyberattacks and data theft, potentially leading to intellectual property misuse and production downtime - Information technology systems face security risks, such as cyberattacks, information theft, or asset damage, which could lead to the disclosure of confidential information, misuse of intellectual property, and production downtime[151](index=151&type=chunk) - Failure to adequately protect personal data could result in reputational damage, loss of customer and investor confidence, adverse business and financial results, and exposure to evolving privacy regulations and high compliance costs[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) [Risks Related to Intellectual Property](index=24&type=section&id=Risks%20Related%20to%20Intellectual%20Property) Inability to protect technology or enforce intellectual property rights could harm the company's competitive position and incur high legal costs - Inability to protect technology or enforce intellectual property rights could harm the company's competitive position and incur high enforcement costs[155](index=155&type=chunk) - Third-party claims of infringement on their proprietary rights could harm the company's business, leading to high litigation costs, diversion of management attention, significant damages, or product injunctions[156](index=156&type=chunk) [Risks Related to Tax and Governmental Regulations](index=24&type=section&id=Risks%20Related%20to%20Tax%20and%20Governmental%20Regulations) Changes in tax legislation or government policies related to international business activities could significantly impact the company's financial condition - Changes in tax legislation for international business activities, corporate tax reform, or changes in tax law policies could significantly impact the company's financial condition and operating results[157](index=157&type=chunk)[158](index=158&type:chunk)[159](index=159&type:chunk) - The interpretation, modification, or unfavorable application of new or existing tax laws and regulations could have a significant adverse effect on the company's business, cash flow, financial condition, or operating results[160](index=160&type:chunk) - The U.S. Congress may make significant changes to fiscal, regulatory, and other federal policies, which could adversely affect the company's business, financial condition, operating results, and cash flow, including trade policies and tariffs[161](index=161&type:chunk)[162](index=162&type:chunk) [Risks Related to our Common Stock](index=26&type=section&id=Risks%20Related%20to%20our%20Common%20Stock) Insiders and major shareholders may exert significant influence over matters requiring shareholder approval - Insiders and major shareholders may exert significant influence over matters requiring shareholder approval, such as director elections and major corporate transactions[167](index=167&type:chunk) - The market price of the company's common stock may continue to fluctuate due to market, geopolitical, economic, and business factors, potentially harming the company's ability to recruit and retain key employees[168](index=168&type:chunk) - Anti-takeover provisions in the company's charter and Delaware law may deter, delay, or prevent a change in control of the company and affect the trading price of common stock[169](index=169&type:chunk)[170](index=170&type:chunk)[171](index=171&type:chunk) - Actions by activist shareholders could negatively impact the company's business, divert management's attention, and lead to volatility in securities trading value[172](index=172&type:chunk) - Future equity issuances may result in dilution for existing shareholders, and newly issued securities may have rights superior to common stock[173](index=173&type:chunk) - Water business revenue is highly dependent on the construction and retrofitting of large desalination plants, influenced by capital expenditures, project financing, project timing, and geopolitical events, potentially leading to significant operational volatility[112](index=112&type=chunk)[113](index=113&type=chunk)[114](index=114&type=chunk) - Emerging technology markets, such as CO2 refrigeration systems, face intense competition, technological challenges, and uncertain market acceptance, which may hinder successful market adoption and anticipated growth[118](index=118&type=chunk)[119](index=119&type:chunk)[120](index=120&type:chunk) - The company faces general business risks including supply chain disruptions, manufacturing defects, uncertain R&D investment returns, long sales cycles, global economic uncertainty, geopolitical conflicts, information technology system vulnerabilities, and intellectual property infringement[125](index=125&type=chunk)[127](index=127&type=chunk)[130](index=130&type:chunk)[149](index=149&type=chunk)[151](index=151&type:chunk)[155](index=155&type:chunk) [Unresolved Staff Comments](index=27&type=section&id=Item%201B%20Unresolved%20Staff%20Comments) No unresolved staff comments are disclosed in this report - The company has no unresolved staff comments[174](index=174&type=chunk) [Cybersecurity](index=27&type=section&id=Item%201C%20Cybersecurity) The company integrates cybersecurity risk management into its overall risk framework, continuously assessing threats with internal teams and external experts, and overseen by the Board through the Audit Committee [Managing Material Risks & Integrated Overall Risk Management](index=27&type=section&id=Managing%20Material%20Risks%20%26%20Integrated%20Overall%20Risk%20Management) The company integrates cybersecurity risk management into its overall risk management framework - The company integrates cybersecurity risk management into its overall risk management framework, ensuring cybersecurity considerations are an integral part of decision-making at all levels[175](index=175&type:chunk) [Engage Third-parties on Risk Management](index=27&type=section&id=Engage%20Third-parties%20on%20Risk%20Management) The company collaborates with external cybersecurity experts to assess and test risk management systems - The company collaborates with external cybersecurity experts to assess and test risk management systems, ensuring cybersecurity strategies and processes align with industry best practices[176](index=176&type:chunk) [Oversee Third-party Risk](index=27&type=section&id=Oversee%20Third-party%20Risk) The company implements stringent processes to oversee and manage risks from third-party service providers - The company implements stringent processes to oversee and manage risks from third-party service providers, including security assessments before collaboration and continuous monitoring to mitigate data breach risks[177](index=177&type:chunk) [Risks from Cybersecurity Threats](index=27&type=section&id=Risks%20from%20Cybersecurity%20Threats) The company maintains a cybersecurity program and insurance, but coverage may not be sufficient for all future claims - The company maintains a cybersecurity program and purchases cybersecurity insurance, but there is no guarantee that coverage will be sufficient for future claims or timely payments[178](index=178&type:chunk) - As of December 31, 2023, cybersecurity threats have not had a material impact on the company's business strategy, operating results, or financial condition[179](index=179&type:chunk) [Governance](index=28&type=section&id=Governance) The Board of Directors prioritizes cybersecurity threat management and has established oversight mechanisms - The Board of Directors places high importance on cybersecurity threat management and has established oversight mechanisms to ensure effective governance[180](index=180&type:chunk) [Board of Directors Oversight](index=28&type=section&id=Board%20of%20Directors%20Oversight) The Board's Audit Committee is responsible for cybersecurity risk oversight, comprising independent directors with diverse expertise - The Board's Audit Committee is responsible for cybersecurity risk oversight, composed of independent directors with diverse professional expertise and experience[181](index=181&type:chunk) [Management's Role Managing Risk](index=28&type=section&id=Management%27s%20Role%20Managing%20Risk) The management risk management team regularly reports cybersecurity risks to the Audit Committee - The management risk management team regularly reports cybersecurity risks to the Audit Committee, including current threats, status of initiatives, incident reports, and compliance[182](index=182&type:chunk)[185](index=185&type:chunk) [Risk Management Personnel](index=28&type=section&id=Risk%20Management%20Personnel) The Director of Information Technology, with 23 years of IT experience, leads cybersecurity strategy and risk management - The Director of Information Technology, with 23 years of IT experience, is responsible for developing and executing cybersecurity strategies, and collaborates with the risk management team to assess, monitor, and manage cybersecurity risks[183](index=183&type:chunk) [Monitor Cybersecurity Incidents](index=28&type=section&id=Monitor%20Cybersecurity%20Incidents) The IT Director and team continuously monitor cybersecurity developments, implement advanced security measures, and maintain incident response plans - The Director of Information Technology and their team continuously monitor the latest cybersecurity developments, implement advanced security measures and regular system audits, and develop comprehensive incident response plans[184](index=184&type:chunk) [Reporting to Board of Directors](index=29&type=section&id=Reporting%20to%20Board%20of%20Directors) Cybersecurity risks and incidents are regularly reported to the risk management team, with significant matters escalated to the Audit Committee - The Director of Information Technology regularly reports cybersecurity risks and incidents to members of the risk management team, with significant matters and strategic risk management decisions escalated to the Audit Committee[186](index=186&type:chunk) - The company integrates cybersecurity risk management into its overall risk management framework to foster a company-wide culture of cybersecurity risk management[175](index=175&type:chunk) - The company collaborates with external cybersecurity experts for regular audits, threat assessments, and security enhancement consulting, and conducts stringent security assessments and continuous monitoring of third-party service providers[176](index=176&type:chunk)[177](index=177&type:chunk) - The Board of Directors oversees cybersecurity risks through the Audit Committee, which comprises independent directors with diverse expertise[180](index=180&type=chunk)[181](index=181&type:chunk) - The management risk management team, including the CFO, CLO, Corporate Controller, Senior Director of SEC Reporting, and Director of Information Technology, is responsible for monitoring cybersecurity risks and regularly reporting to the Audit Committee[182](index=182&type=chunk)[183](index=183&type:chunk) - As of December 31, 2023, cybersecurity threats have not had a material impact on the company's business strategy, operating results, or financial condition[179](index=179&type=chunk) [Properties](index=29&type=section&id=Item%202%20Properties) The company leases headquarters, R&D, manufacturing, warehouse, and office facilities in the U.S., and offices in Dubai and Shanghai, deeming existing facilities sufficient for foreseeable needs Major Facility Details | Facility | Location | Status | Approximate Area (sq ft) | Lease Expiration Date | | :--- | :--- | :--- | :--- | :--- | | Headquarters, R&D, and Manufacturing | San Leandro, California | Leased | 171,000 | December 2028 | | Manufacturing and Warehouse | Tracy, California | Leased | 54,429 | April 2030 | | Office, R&D, Warehouse, and Yard | Katy, Texas | Leased | 221,220 | June 2029 | - The company also leases offices in Dubai, United Arab Emirates, and Shanghai, China[188](index=188&type:chunk) - The company believes these facilities will be sufficient for its purposes for the foreseeable future[188](index=188&type:chunk) [Legal Proceedings](index=29&type=section&id=Item%203%20Legal%20Proceedings) The company was not involved in any legal proceedings or claims with a material impact on its financial condition, operating results, or cash flows during the reporting period - As of December 31, 2023, the company was not involved in any legal proceedings, legal actions, or claims that would have a material impact on its financial condition, operating results, or cash flows[402](index=402&type:chunk) [Mine Safety Disclosures](index=29&type=section&id=Item%204%20Mine%20Safety%20Disclosures) This item is not applicable - This item is not applicable[190](index=190&type:chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the Nasdaq Global Select Market under "ERII", with approximately 15 registered shareholders as of December 31, 2023, and no dividends declared or planned for the foreseeable future [Market Information](index=30&type=section&id=Market%20Information) The company's common stock is traded on the Nasdaq Global Select Market - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "ERII"[193](index=193&type:chunk) [Stockholders](index=30&type=section&id=Stockholders) As of December 31, 2023, the company had approximately 15 registered shareholders - As of December 31, 2023, the company had approximately **15** registered shareholders[193](index=193&type:chunk) [Dividend Policy](index=30&type=section&id=Dividend%20Policy) The company has never declared or paid dividends on its common stock and does not intend to in the foreseeable future - The company has never declared or paid dividends on its common stock and currently does not intend to pay them in the foreseeable future[194](index=194&type:chunk) [Securities Authorized for Issuance Under Equity Compensation Plans](index=30&type=section&id=Securities%20Authorized%20for%20Issuance%20Under%20Equity%20Compensation%20Plans) Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference - Information regarding securities authorized for issuance under equity compensation plans is incorporated into Part III, Item 12 of this annual report[195](index=195&type:chunk) [Sales of Unregistered Securities](index=30&type=section&id=Sales%20of%20Unregistered%20Securities) The company has not engaged in the sale of unregistered securities - The company has not engaged in the sale of unregistered securities[196](index=196&type:chunk) [Stock Performance Graph](index=30&type=section&id=Stock%20Performance%20Graph) The stock performance graph illustrates the company's five-year cumulative total shareholder return compared to market indices Five-Year Cumulative Total Shareholder Return Comparison (as of December 31, 2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Energy Recovery, Inc. | $100.00 | $145.47 | $202.67 | $319.32 | $304.46 | $279.94 | | NASDAQ Composite Index | $100.00 | $138.27 | $199.64 | $243.92 | $164.56 | $238.01 | | Peer Group | $100.00 | $130.56 | $161.69 | $225.56 | $188.67 | $249.19 | - The company's stock performance graph shows the five-year cumulative total shareholder return as of December 31, 2023, compared to the Nasdaq Composite Index and a peer group[197](index=197&type:chunk)[201](index=201&type:chunk) - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "ERII"[193](index=193&type:chunk) - As of December 31, 2023, the company had approximately **15** registered shareholders[193](index=193&type:chunk) - The company has never declared or paid dividends on its common stock and currently does not intend to pay them in the foreseeable future[194](index=194&type:chunk) Five-Year Cumulative Total Shareholder Return Comparison (as of December 31, 2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Energy Recovery, Inc. | $100.00 | $145.47 | $202.67 | $319.32 | $304.46 | $279.94 | | NASDAQ Composite Index | $100.00 | $138.27 | $199.64 | $243.92 | $164.56 | $238.01 | | Peer Group | $100.00 | $130.56 | $161.69 | $225.56 | $188.67 | $249.19 | [Reserved](index=31&type=section&id=Item%206%20%5BReserved%5D) This item is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%207%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) The company's total revenue increased by **2%** to **$128.3 million** in fiscal year 2023, driven by a **26%** rise in Aftermarket (AM) revenue, while Megaproject (MPD) revenue slightly increased by **2%** and OEM revenue decreased by **10%**; gross margin declined to **67.8%** from **69.6%** due to higher manufacturing costs, and operating expenses grew **8.8%** to **$68 million** [Overview](index=31&type=section&id=Overview) The company's operating segments are Water and Emerging Technologies, based on industry, equipment type, and potential revenue - The company's reported operating segments include Water and Emerging Technologies, based on the industries served by technology solutions, types of energy recovery devices, and potential revenue from emerging technologies[204](index=204&type:chunk) - Corporate operating expenses include expenditures supporting both Water and Emerging Technologies segments, as well as R&D expenditures applicable to future industry verticals or enabling technologies[205](index=205&type:chunk) [Highlights, Economic Conditions, Challenges, and Risks](index=32&type=section&id=Highlights%2C%20Economic%20Conditions%2C%20Challenges%2C%20and%20Risks) The company released its fourth annual Sustainability Report, detailing efforts to accelerate customer environmental sustainability and enhance internal sustainability management - The company released its fourth annual Sustainability Report, detailing its efforts to accelerate environmental sustainability in customer operations and enhance the management of sustainability issues within its own operations[205](index=205&type:chunk) - In 2023, MSCI ESG Research LLC upgraded the company's ESG rating from AA to the highest rating of **AAA**, recognizing its outstanding performance in the industrial machinery industry[206](index=206&type:chunk) - In 2023, the company announced the expansion of its PX U-Series product line, the appointment of Fieuw Koeltechniek as the exclusive distributor for PX G1300 in the Benelux region, and the successful installation and commissioning of PX G1300 in major supermarket chains[209](index=209&type:chunk)[211](index=211&type:chunk) - The company's PX G1300 received the "Refrigeration Innovation of the Year" award at the ATMO Awards Ceremony and the "Innovation of the Year" award from RAC Magazine[212](index=212&type:chunk) - Global macroeconomic factors, geopolitical uncertainties, and conflicts have impacted demand for the company's products, and the company continuously assesses these factors' effects on its business, financial condition, and operating results[209](index=209&type:chunk)[210](index=210&type:chunk) [Results of Operations](index=33&type=section&id=Results%20of%20Operations) [Revenue](index=33&type=section&id=Revenue) Total revenue increased by **2%** in 2023, primarily driven by a **26%** increase in Aftermarket revenue Fiscal Year 2023 Revenue by Channel | Channel | 2023 ($ thousand) | 2023 (% of Revenue) | 2022 ($ thousand) | 2022 (% of Revenue) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Megaproject | $83,665 | 65% | $81,888 | 65% | $1,777 | 2% | | Original Equipment Manufacturer (OEM) | $25,995 | 20% | $28,858 | 23% | $(2,863) | (10%) | | Aftermarket | $18,689 | 15% | $14,845 | 12% | $3,844 | 26% | | **Total Revenue** | **$128,349** | **100%** | **$125,591** | **100%** | **$2,758** | **2%** | Fiscal Year 2023 Revenue by Geographic Market and Segment | Geographic Market | Water (2023 $ thousand) | Emerging Technologies (2023 $ thousand) | Total (2023 $ thousand) | Water (2022 $ thousand) | Emerging Technologies (2022 $ thousand) | Total (2022 $ thousand) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Middle East and Africa | $76,437 | $177 | $76,614 | $86,227 | $94 | $86,321 | | Asia | $30,500 | — | $30,500 | $24,777 | — | $24,777 | | Americas | $15,048 | $153 | $15,201 | $8,544 | $34 | $8,578 | | Europe | $5,740 | $294 | $6,034 | $5,880 | $35 | $5,915 | | **Total Revenue** | **$127,725** | **$624** | **$128,349** | **$125,428** | **$163** | **$125,591** | - Total revenue increased by **2%** in 2023, primarily driven by a **26%** increase in Aftermarket revenue, while Megaproject revenue slightly increased by **2%**, and OEM revenue decreased by **10%**[215](index=215&type:chunk)[217](index=217&type:chunk) - Desalination OEM revenue decreased by **$6.3 million**, primarily due to project shipment timing; wastewater OEM revenue increased by **$3.0 million**, driven by growth in Asian, European, and American markets; Emerging Technologies revenue increased by **$0.6 million**, primarily due to growth in the European and American CO2 markets[216](index=216&type:chunk) Fiscal Year 2023 Revenue by Geographic Location | Geographic Location | 2023 (%) | 2022 (%) | | :--- | :--- | :--- | | United States | 2% | 1% | | International | 98% | 99% | | **Total Revenue** | **100%** | **100%** | Fiscal Year 2023 Major Customer Revenue Concentration | Customer | Segment | 2023 (%) | 2022 (%) | | :--- | :--- | :--- | :--- | | Customer E | Water | 13% | ** | | Customer B | Water | ** | 18% | | Customer D | Water | ** | 15% | | Customer F | Water | ** | 11% | [Gross Profit and Gross Margin](index=34&type=section&id=Gross%20Profit%20and%20Gross%20Margin) Gross profit decreased by **0.3%** in 2023, primarily due to a lower gross margin Fiscal Year 2023 Gross Profit and Gross Margin | Metric | 2023 ($ thousand) | 2023 (%) | 2022 ($ thousand) | 2022 (%) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $87,079 | 67.8% | $87,356 | 69.6% | $(277) | (0.3%) | - Gross profit decreased by **0.3%** in 2023, primarily due to a lower gross margin, partially offset by increased revenue[223](index=223&type:chunk) - The decrease in gross margin was mainly attributable to higher manufacturing costs, partially offset by changes in product mix and lower freight and duties[223](index=223&type:chunk) [Operating Expenses](index=35&type=section&id=Operating%20Expenses) Total operating expenses increased by **$5.5 million (8.8%)** in 2023, driven by higher employee and stock-based compensation costs Fiscal Year 2023 Operating Expenses by Segment | Expense Category | Emerging Technologies (2023 $ thousand) | Water (2023 $ thousand) | Corporate (2023 $ thousand) | Total (2023 $ thousand) | Water (2022 $ thousand) | Emerging Technologies (2022 $ thousand) | Corporate (2022 $ thousand) | Total (2022 $ thousand) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and Administrative | $7,751 | $3,927 | $17,186 | $28,864 | $6,936 | $4,104 | $17,301 | $28,341 | | Sales and Marketing | $13,691 | $6,053 | $2,420 | $22,164 | $11,065 | $3,047 | $2,165 | $16,277 | | Research and Development | $4,251 | $12,750 | — | $17,001 | $4,151 | $13,758 | — | $17,909 | | **Total Operating Expenses** | **$25,693** | **$22,730** | **$19,606** | **$68,029** | **$22,152** | **$20,909** | **$19,466** | **$62,527** | - Total operating expenses increased by **$5.5 million (8.8%)** in 2023, primarily due to higher employee costs and stock-based compensation expenses, as well as increased salaries and benefits in G&A, S&M, and R&D[225](index=225&type:chunk) - Water segment operating expenses increased by **$3.5 million (16.0%)**, mainly due to higher employee costs (including stock-based compensation) and marketing costs in G&A, S&M, and R&D, partially offset by lower product development costs[225](index=225&type:chunk) - Emerging Technologies segment operating expenses increased by **$1.8 million (8.7%)**, primarily due to higher employee costs (including stock-based compensation) in G&A, S&M, and R&D, as well as increased travel and marketing costs related to CO2 market development and product development[226](index=226&type:chunk) - Corporate operating expenses increased by **$0.1 million (0.7%)**, mainly due to higher consulting fees, CEO and board member search fees, and stock-based compensation expenses, partially offset by lower employee compensation and software license costs[227](index=227&type:chunk)[228](index=228&type:chunk) [Other Income, Net](index=36&type=section&id=Other%20Income%2C%20Net) Other income, net, increased in 2023, primarily due to higher investment yields Fiscal Year 2023 Other Income, Net | Category | 2023 ($ thousand) | 2022 ($ thousand) | | :--- | :--- | :--- | | Interest Income | $3,756 | $908 | | Other Non-Operating (Expense) Income, Net | $(101) | $334 | | **Total Other Income, Net** | **$3,655** | **$1,242** | - Other income, net, increased in 2023, primarily due to higher investment yields and increased investments in investment-grade marketable debt securities[230](index=230&type:chunk) [Income Taxes](index=36&type=section&id=Income%20Taxes) Income tax provision decreased in 2023, mainly due to reduced operating income and increased tax benefits Fiscal Year 2023 Income Tax Provision and Effective Tax Rate | Metric | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | | :--- | :--- | :--- | :--- | | Income Tax Provision | $1,201 | $2,022 | $(821) | | Effective Tax Rate | 5% | 8% | - | - The income tax provision decreased in 2023, primarily due to reduced operating income, an increase of **$0.6 million** in Foreign Derived Intangible Income (FDII) tax benefits, and an increase of **$0.3 million** in R&D tax credits, partially offset by a **$0.7 million** decrease in stock-based compensation related windfall benefits[231](index=231&type:chunk) - The effective tax rate for fiscal year 2023 includes **$2.4 million** in FDII benefits, **$1.3 million** in R&D tax credits, and **$0.7 million** in stock-based compensation related tax deductions[231](index=231&type:chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) [Overview](index=37&type=section&id=Overview) As of December 31, 2023, the company held **$68.1 million** in unrestricted cash and cash equivalents and **$54.3 million** in investment-grade marketable debt securities - As of December 31, 2023, the company held **$68.1 million** in unrestricted cash and cash equivalents, and **$54.3 million** in investment-grade short-term and long-term marketable debt securities[233](index=233&type:chunk) - The company primarily invests cash not required for current operations in investment-grade marketable debt securities, aiming for capital preservation and liquidity[233](index=233&type:chunk) [Short-term Contract Assets](index=37&type=section&id=Short-term%20Contract%20Assets) As of December 31, 2023, the company had **$0.6 million** in short-term contract assets - As of December 31, 2023, the company had **$0.6 million** in short-term contract assets, representing unbilled trade receivables from contract sales in the Water segment, including contract retention clauses[234](index=234&type:chunk) [Credit Agreement](index=37&type=section&id=Credit%20Agreement) The company maintains a credit agreement with JPMorgan Chase Bank for a **$50 million** revolving credit facility - The company has a credit agreement with JPMorgan Chase Bank for a **$50 million** revolving credit facility, which was amended in September 2023 to increase the letter of credit (LCs) sublimit from **$25 million** to **$30 million**[235](index=235&type:chunk) - As of December 31, 2023, the company was in compliance with all credit agreement terms, had no outstanding revolving loans, and utilized **$21.8 million** of the letter of credit sublimit[235](index=235&type:chunk) [Cash Flows](index=38&type=section&id=Cash%20Flows) Net cash provided by operating activities increased in 2023, driven by higher revenue and improved working capital management Fiscal Year 2023 Cash Flow Summary | Cash Flow Category | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $26,054 | $12,631 | $13,423 | | Net Cash Used in Investing Activities | $(19,114) | $(6,946) | $(12,168) | | Net Cash Provided by (Used in) Financing Activities | $4,794 | $(23,668) | $28,462 | | Effect of Exchange Rate Differences | $33 | $(20) | $53 | | **Net Change in Cash, Cash Equivalents, and Restricted Cash** | **$11,767** | **$(18,003)** | **$29,770** | - Cash flow from operating activities is highly variable due to the project-driven, non-cyclical nature of the business[238](index=238&type:chunk) - Net cash provided by operating activities increased in 2023, primarily due to higher revenue, timely collection of accounts receivable, reduced inventory build-up, and increased accounts payable[239](index=239&type:chunk) - Net cash used in investing activities increased by **$12.2 million**, mainly due to increased net cash used for marketable debt securities investments, partially offset by reduced capital expenditures[239](index=239&type:chunk) - Net cash provided by financing activities was primarily due to increased cash from equity issuances under equity incentive plans, offsetting **$26.7 million** in stock repurchases under the 2022 stock repurchase program[240](index=240&type:chunk) [Liquidity and Capital Resource Requirements](index=38&type=section&id=Liquidity%20and%20Capital%20Resource%20Requirements) The company believes existing resources and cash generated from operations will meet capital needs for at least the next 12 months - The company believes existing resources and cash generated from operations are sufficient to meet capital requirements for at least the next 12 months, though additional financing may be needed in the future to support operations, acquisitions, or new technology investments[241](index=241&type:chunk)[242](index=242&type:chunk) - The company leases facilities and equipment, with lease terms extending through fiscal year 2030[243](index=243&type:chunk) - As of December 31, 2023, the company had approximately **$1.5 million** in cancellable purchase order arrangements[397](index=397&type:chunk) - As of December 31, 2023, the company's primary liquidity sources included **$68.1 million** in unrestricted cash and cash equivalents, **$54.3 million** in investment-grade short-term and long-term marketable debt securities, and **$46.9 million** in net accounts receivable[233](index=233&type:chunk) - The company believes its existing cash balance and future cash inflows are sufficient to meet liquidity needs for at least the next 12 months[233](index=233&type:chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's consolidated financial statements are prepared under U.S. GAAP, requiring management to make estimates and judgments affecting reported amounts [Revenue Recognition](index=39&type=section&id=Revenue%20Recognition) Revenue is recognized when control of goods or services is transferred to the customer, reflecting the consideration the company expects to be entitled to - Revenue is recognized when control of goods or services is transferred to the customer, and the amount reflects the consideration the company expects to be entitled to[247](index=247&type:chunk) [Stock-based Compensation](index=39&type=section&id=Stock-based%20Compensation) Stock-based compensation expense is measured and recognized at the grant-date fair value of equity awards - Stock-based compensation expense is measured and recognized at the grant-date fair value of equity awards granted to employees and directors, with the Black-Scholes model used to estimate the fair value of stock options[248](index=248&type:chunk) [Goodwill](index=40&type=section&id=Goodwill) Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination - Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination, tested annually for impairment, and involves significant judgments and estimates regarding the number of reporting units, asset allocation, and fair value[249](index=249&type:chunk) [Inventories](index=40&type=section&id=Inventories) Inventories are measured at the lower of cost (FIFO) or net realizable value - Inventories are measured at the lower of cost (first-in, first-out method) or net realizable value, with valuation adjustments for excess and obsolete inventory estimated based on current inventory levels, turnover, expected useful life, and future demand[250](index=250&type:chunk) [Income Taxes](index=40&type=section&id=Income%20Taxes) The annual tax rate is determined based on income, jurisdiction, statutory rates, and tax impacts - The annual tax rate is determined based on income, jurisdiction, statutory rates, and tax impacts, involving judgments and assumptions regarding the recoverability of deferred tax balances and the ability to sustain tax positions[251](index=251&type:chunk) [Recent Accounting Pronouncements](index=40&type=section&id=Recent%20Accounting%20Pronouncements) The company is evaluating the impact of new ASUs on its consolidated financial statements and disclosures - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) on its consolidated financial statements and disclosures, and ASU 2023-06 (Disclosure Agreements) is not expected to have a material impact[338](index=338&type:chunk)[339](index=339&type:chunk)[340](index=340&type:chunk) Fiscal Year 2023 Revenue by Channel | Channel | 2023 ($ thousand) | 2023 (% of Revenue) | 2022 ($ thousand) | 2022 (% of Revenue) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Megaproject | $83,665 | 65% | $81,888 | 65% | $1,777 | 2% | | Original Equipment Manufacturer (OEM) | $25,995 | 20% | $28,858 | 23% | $(2,863) | (10%) | | Aftermarket | $18,689 | 15% | $14,845 | 12% | $3,844 | 26% | | **Total Revenue** | **$128,349** | **100%** | **$125,591** | **100%** | **$2,758** | **2%** | Fiscal Year 2023 Gross Profit and Gross Margin | Metric | 2023 ($ thousand) | 2023 (%) | 2022 ($ thousand) | 2022 (%) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $87,079 | 67.8% | $87,356 | 69.6% | $(277) | (0.3%) | Fiscal Year 2023 Operating Expenses | Expense Category | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Operating Expenses | $68,029 | $62,527 | $5,502 | 8.8% | | Water Segment Operating Expenses | $25,693 | $22,152 | $3,541 | 16.0% | | Emerging Technologies Operating Expenses | $22,730 | $20,909 | $1,821 | 8.7% | | Corporate Operating Expenses | $19,606 | $19,466 | $140 | 0.7% | Fiscal Year 2023 Cash Flow Summary | Cash Flow Category | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $26,054 | $12,631 | $13,423 | | Net Cash Used in Investing Activities | $(19,114) | $(6,946) | $(12,168) | | Net Cash Provided by (Used in) Financing Activities | $4,794 | $(23,668) | $28,462 | | Effect of Exchange Rate Differences | $33 | $(20) | $53 | | **Net Change in Cash, Cash Equivalents, and Restricted Cash** | **$11,767** | **$(18,003)** | **$29,770** | [Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%207A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company primarily faces foreign currency risk and interest rate risk, which can impact operating results, cash flows, and investment portfolio value [Foreign Currency Risk](index=40&type=section&id=Foreign%20Currency%20Risk) The company's foreign currency risk stems from fluctuations in the U.S. dollar against various foreign currencies - The company's foreign currency risk stems from fluctuations in the U.S. dollar against currencies such as the British Pound, Saudi Riyal, UAE Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar[253](index=253&type:chunk) - While revenue contracts are denominated in U.S. dollars, international customers may face difficulties obtaining U.S. dollar payments, increasing collection risk[254](index=254&type:chunk) - Expansion of international sales may lead to more revenue denominated in foreign currencies, increasing exposure to exchange rate fluctuations[254](index=254&type:chunk) - The company pays suppliers in foreign currencies, and international sales and service operations incur foreign currency-denominated expenses, which may be affected by exchange rate fluctuations[255](index=255&type:chunk) - The company does not hold excessive foreign currency cash balances to mitigate risk[256](index=256&type:chunk) [Interest Rate and Credit Risks](index=41&type=section&id=Interest%20Rate%20and%20Credit%20Risks) The company's investment activities prioritize capital preservation and liquidity while maximizing returns without significantly increasing risk - The company's primary objectives for investment activities are capital preservation and liquidity, while maximizing returns without significantly increasing risk[257](index=257&type:chunk) - The company primarily invests in investment-grade short-term and long-term marketable debt securities, such as U.S. Treasury securities, corporate notes and bonds, and municipal and agency notes and bonds, which are subject to counterparty credit risk[257](index=257&type:chunk)[258](index=258&type:chunk) - To minimize interest rate fluctuation risk, the company maintains a weighted-average maturity of approximately nine months for its investments[258](index=258&type:chunk) - As of December 31, 2023, a hypothetical **1%** increase in interest rates would result in a decrease of less than **$0.3 million** in the fair value of investments[258](index=258&type:chunk) - The company primarily faces foreign currency risk and interest rate risk[252](index=252&type:chunk) [Financial Statements and Supplementary Data](index=41&type=section&id=Item%208%20Financial%20Statements%20and%20Supplementary%20Data) This section includes the company's consolidated financial statements for the fiscal year ended December 31, 2023, and the preceding two fiscal years, along with related notes, and an unqualified opinion from the independent registered public accounting firm on both financial statements and internal control effectiveness [Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34)](index=42&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firm%20%28PCAOB%20ID%20No.%2034%29) Deloitte & Touche LLP issued an unqualified opinion on the company's consolidated financial statements - Deloitte & Touche LLP has issued an unqualified opinion on the company's consolidated financial statements as of December 31, 2023, and 2022, stating that they fairly present the company's financial position and results of operations in all material respects[261](index=261&type:chunk) - Revenue recognition processes were identified as a critical audit matter due to the high volume of the company's product revenue transactions and the combination of automated and manual processes for recording and reviewing revenue recognition, requiring significant audit effort[266](index=266&type:chunk)[267](index=267&type:chunk) [Report of Independent Registered Public Accounting Firm (Internal Control)](index=44&type=section&id=REPORT%20OF%20INDEPENDENT%20REGISTERED%20PUBLIC%20ACCOUNTING%20FIRM) Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting - Deloitte & Touche LLP has issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023, stating that the company maintained effective internal control in all material respects[271](index=271&type:chunk) [Consolidated Financial Statements](index=45&type=section&id=Consolidated%20Financial%20Statements) Consolidated Balance Sheets (as of December 31, 2023) | Asset | 2023 ($ thousand) | 2022 ($ thousand) | | :--- | :--- | :--- | | Cash and Cash Equivalents | $68,098 | $56,354 | | Short-term Investments | $40,445 | $33,479 | | Accounts Receivable, Net | $46,937 | $34,062 | | Inventories, Net | $26,149 | $28,366 | | Prepaid Expenses and Other Assets | $3,843 | $5,606 | | **Total Current Assets** | **$185,472** | **$157,867** | | Long-term Investments | $13,832 | $3,058 | | Deferred Tax Assets, Net | $10,324 | $10,263 | | Property and Equipment, Net | $18,699 | $19,580 | | Operating Lease Right-of-Use Assets | $11,469 | $13,115 | | Goodwill | $12,790 | $12,790 | | Other Non-current Assets | $388 | $366 | | **Total Assets** | **$252,974** | **$217,039** | | Liabilities and Stockholders' Equity | | | | Accounts Payable | $3,000 | $814 | | Accrued Expenses and Other Liabilities | $15,583 | $14,693 | | Lease Liabilities | $1,791 | $1,600 | | Contract Liabilities | $1,097 | $1,195 | | **Total Current Liabilities** | **$21,471** | **$18,302** | | Non-current Lease Liabilities | $11,488 | $13,278 | | Other Non-current Liabilities | $207 | $121 | | **Total Liabilities** | **$33,166** | **$31,701** | | **Total Stockholders' Equity** | **$219,808** | **$185,338** | | **Total Liabilities and Stockholders' Equity** | **$252,974** | **$217,039** | Consolidated Statements of Operations (as of December 31, 2023) | Metric | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Revenue | $128,349 | $125,591 | $103,904 | | Cost of Revenue | $41,270 | $38,235 | $32,670 | | **Gross Profit** | **$87,079** | **$87,356** | **$71,234** | | Operating Expenses: | | | | | General and Administrative | $28,864 | $28,341 | $25,174 | | Sales and Marketing | $22,164 | $16,277 | $12,160 | | Research and Development | $17,001 | $17,909 | $20,069 | | **Total Operating Expenses** | **$68,029** | **$62,527** | **$57,403** | | **Operating Income** | **$19,050** | **$24,829** | **$13,831** | | Other Income (Expense): | | | | | Interest Income | $3,756 | $908 | $204 | | Other Non-Operating Income (Expense), Net | $(101) | $334 | $(31) | | **Total Other Income, Net** | **$3,655** | **$1,242** | **$173** | | **Income Before Taxes** | **$22,705** | **$26,071** | **$14,004** | | Income Tax Provision (Benefit) | $1,201 | $2,022 | $(265) | | **Net Income** | **$21,504** | **$24,049** | **$14,269** | | Net Income Per Share: | | | | | Basic | $0.38 | $0.43 | $0.25 | | Diluted | $0.37 | $0.42 | $0.24 | Consolidated Statements of Comprehensive Income (as of December 31, 2023) | Metric | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Net Income | $21,504 | $24,049 | $14,269 | | Other Comprehensive Income (Loss), Net of Tax | | | | | Foreign Currency Translation Adjustments | $51 | $15 | $(68) | | Unrealized Gains (Losses) on Investments | $254 | $(215) | $(134) | | **Total Other Comprehensive Income (Loss), Net of Tax** | **$305** | **$(200)** | **$(202)** | | **Comprehensive Income** | **$21,809** | **$23,849** | **$14,067** | Consolidated Statements of Stockholders' Equity (as of December 31, 2023) | Stockholders' Equity Category | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Common Stock | $65 | $64 | $64 | | Additional Paid-in Capital | $217,617 | $204,957 | $195,593 | | Accumulated Other Comprehensive Loss | $(44) | $(349) | $(149) | | Treasury Stock | $(80,486) | $(80,486) | $(53,832) | | Retained Earnings | $82,656 | $61,152 | $37,103 | | **Total Stockholders' Equity** | **$219,808** | **$185,338** | **$178,779** | Consolidated Statements of Cash Flows (as of December 31, 2023) | Cash Flow Category | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $26,054 | $12,631 | $13,526 | | Net Cash Used in Investing Activities | $(19,114) | $(6,946) | $(20,563) | | Net Cash Provided by (Used in) Financing Activities | $4,794 | $(23,668) | $(12,792) | | Effect of Exchange Rate Differences | $33 | $(20) | $(68) | | **Net Change in Cash, Cash Equivalents, and Restricted Cash** | **$11,767** | **$(18,003)** | **$(19,897)** | | Cash, Cash Equivalents, and Restricted Cash at Beginning of Year | $56,458 | $74,461 | $94,358 | | **Cash, Cash Equivalents, and Restricted Cash at End of Year** | **$68,225** | **$56,458** | **$74,461** | [Notes to Consolidat

Executive Summary & Business Outlook [Fiscal Year 2023 Highlights](index=1&type=section&id=Fiscal%20Year%202023%20Highlights) Energy Recovery achieved record annual and quarterly revenue in 2023, marking its ninth consecutive year of revenue growth, driven by strong performance in desalination and rapid expansion in wastewater, despite a project delay. Gross margin and operating cash flow also showed positive trends - Record annual revenue of **$128.3 million**, including **79% growth in wastewater**, marking nine consecutive years of revenue growth[5](index=5&type=chunk) - Record quarterly revenue of **$57.2 million**, a **35% year-on-year growth**, with strong desalination and rapid wastewater expansion, though below guidance due to a delayed project[5](index=5&type=chunk) - Gross margin of **67.8%**, within expectations and above guidance[5](index=5&type=chunk) - Operating cash flow for the year more than doubled largely due to strong customer collections and strategic efforts to optimize raw inventory turnover rates[5](index=5&type=chunk) - Cash and investments totaled **$122.4 million**[5](index=5&type=chunk) [CEO Commentary & Strategic Outlook](index=1&type=section&id=CEO%20Commentary%20%26%20Strategic%20Outlook) CEO David Moon highlighted record revenue and continued growth across core desalination, rapidly expanding wastewater, and progress in CO2 refrigeration. The company plans to focus on rebuilding shareholder value, diversifying into new markets, defending its leadership in desalination, and investing in CO2 and wastewater, while maintaining disciplined expense and cash management - Achieved record annual and fourth quarter revenue in 2023, representing the ninth consecutive year of revenue growth, despite an **$8 million** revenue shift from Q4 2023 to 2024 due to a single project[3](index=3&type=chunk) - Core desalination business is healthy, wastewater business continues rapid growth, and progress is being made in CO2 refrigeration[4](index=4&type=chunk) - Expects the newest product, PX Q400, to achieve roughly **50% of sales** in the megaproject channel in 2024, and wastewater could reach up to **10% of Water revenue** in three years[4](index=4&type=chunk) - Strategic focus for 2024 and beyond includes rebuilding shareholder value, diversification into new markets (CO2 and wastewater), defending desalination leadership, and disciplined expense and cash management[4](index=4&type=chunk) Financial Performance Overview [GAAP Financial Highlights](index=2&type=section&id=Financial%20Highlights_GAAP) Energy Recovery reported a 35% increase in Q4 2023 revenue and a 2% increase for the full year 2023. While Q4 net income and EPS saw significant growth, full-year net income and EPS decreased by 11% and 12% respectively, primarily due to a decrease in operating margin GAAP Financial Highlights (Q4 and Full Year) | Metric | Q4'2023 | Q4'2022 | vs. Q4'2022 | 2023 | 2022 | 2023 vs. 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $57.2M | $42.3M | up 35% | $128.3M | $125.6M | up 2% | | Gross margin | 69.1% | 70.7% | down 160 bps | 67.8% | 69.6% | down 180 bps | | Operating margin | 36.0% | 34.5% | up 150 bps | 14.8% | 19.8% | down 500 bps | | Net income | $19.8M | $13.7M | up 44% | $21.5M | $24.0M | down 11% | | Net income per share | $0.34 | $0.24 | up 42% | $0.37 | $0.42 | down 12% | | Cash provided by operations | $13.8M | $6.4M | | $26.1M | $12.6M | | [Non-GAAP Financial Highlights](index=2&type=section&id=Non-GAAP%20Financial%20Highlights) Non-GAAP adjusted metrics show strong Q4 2023 performance with adjusted operating margin up 200 bps and adjusted net income up 50%. However, full-year 2023 adjusted operating margin and adjusted net income decreased by 510 bps and 5% respectively, while free cash flow more than doubled Non-GAAP Financial Highlights (Q4 and Full Year) | Metric | Q4'2023 | Q4'2022 | vs. Q4'2022 | 2023 | 2022 | 2023 vs. 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Adjusted operating margin | 39.9% | 37.9% | up 200 bps | 21.1% | 26.2% | down 510 bps | | Adjusted net income | $22.0M | $14.7M | up 50% | $28.9M | $30.5M | down 5% | | Adjusted net income per share | $0.39 | $0.26 | up 50% | $0.51 | $0.54 | down 6% | | Adjusted EBITDA | $23.9M | $17.0M | | $31.2M | $36.8M | | | Free cash flow | $12.4M | $5.1M | | $23.5M | $8.4M | | Non-GAAP Financial Measures [Use and Rationale](index=3&type=section&id=Use%20of%20Non-GAAP%20Financial%20Measures) Energy Recovery uses non-GAAP financial measures to analyze operating performance, develop budgets, and facilitate period-to-period comparisons, believing they offer a more complete understanding of business factors and trends when viewed alongside GAAP results - Non-GAAP financial measures are used to analyze operating performance, future prospects, develop internal budgets and financial goals, and facilitate period-to-period comparisons[9](index=9&type=chunk) - The Company believes these non-GAAP measures provide a more complete understanding of factors and trends affecting its business when viewed with GAAP results[9](index=9&type=chunk) [Definitions of Non-GAAP Measures](index=3&type=section&id=Notes%20to%20the%20Fourth%20Quarter%20and%20Fiscal%202023%20Financial%20Results) This section provides specific definitions for key non-GAAP financial measures used by the company, including adjusted operating margin, adjusted net income, adjusted net income per share, adjusted effective tax rate, adjusted EBITDA, and free cash flow, detailing the exclusions and inclusions for each - Adjusted operating margin excludes share-based compensation and non-core operational costs (e.g., VorTeq-related severance, accelerated depreciation)[10](index=10&type=chunk) - Adjusted net income excludes share-based compensation, non-core operational costs, and their applicable tax effects[10](index=10&type=chunk) - Adjusted EBITDA excludes depreciation and amortization, share-based compensation, non-core operational costs, other income (net), and provision for income taxes[10](index=10&type=chunk) - Free cash flow is defined as net cash provided by operating activities less capital expenditures[10](index=10&type=chunk) Company Information & Disclosures [Forward-Looking Statements](index=2&type=section&id=Forward-Looking%20Statements) This section contains a standard disclaimer regarding forward-looking statements, noting that they are based on current information and management's beliefs, and actual results may differ materially due to various risks and uncertainties - Statements regarding future events, business strength, and growth are forward-looking and subject to risks and uncertainties[8](index=8&type=chunk) - Actual results may differ materially from predictions due to factors discussed in SEC filings, including risks relating to future demand, customer performance, and timing of revenue[8](index=8&type=chunk) [Conference Call Details](index=4&type=section&id=Conference%20Call%20to%20Discuss%20Fourth%20Quarter%20and%20Fiscal%202023%20Financial%20Results) Energy Recovery announced details for its conference call to discuss Q4 and Fiscal 2023 financial results, including live call and replay access information for investors - Live conference call held on Wednesday, February 21, 2024, at **2:00 PM PT / 5:00 PM ET**[11](index=11&type=chunk) - Replay available until **March 22, 2024**, via toll-free and international numbers, and online[11](index=11&type=chunk) [Disclosure Information](index=4&type=section&id=Disclosure%20Information) Energy Recovery uses the investor relations section of its website to comply with Regulation FD disclosure obligations, advising investors to monitor this resource in addition to other public communications - The investor relations section on the company's website serves as a means of complying with disclosure obligations under Regulation FD[12](index=12&type=chunk) - Investors should monitor the investor relations website in addition to press releases, SEC filings, and public conference calls[12](index=12&type=chunk) [About Energy Recovery](index=4&type=section&id=About%20Energy%20Recovery) Energy Recovery is a global leader in energy efficiency technology, specializing in pressure exchanger technology for cost savings and increased energy efficiency across industries, with a strong foundation in desalination and a 30-year history of positive environmental impact - Energy Recovery is a trusted global leader in energy efficiency technology, building on its pressure exchanger technology platform[13](index=13&type=chunk) - Designs and manufactures reliable, high-performance solutions that generate cost savings and increase energy efficiency across several industries, with a strong foundation in desalination[13](index=13&type=chunk) - Headquartered in the San Francisco Bay Area, with manufacturing and R&D facilities across California and Texas, and global sales and technical support[13](index=13&type=chunk) [Contact Information](index=4&type=section&id=Contact) Provides contact details for investor relations inquiries - Investor Relations contact: **ir@energyrecovery.com**, **+1 (346) 382-6927**[14](index=14&type=chunk) Condensed Consolidated Financial Statements [Condensed Consolidated Balance Sheets](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) As of December 31, 2023, total assets increased to $252.97 million from $217.04 million in 2022, driven primarily by an increase in cash, cash equivalents, and investments, and accounts receivable. Total liabilities also saw a slight increase Condensed Consolidated Balance Sheets (In thousands) | ASSETS | 2023 | 2022 | | :--- | :--- | :--- | | Cash, cash equivalents and investments | $122,375 | $92,891 | | Accounts receivable and contract assets | $47,529 | $35,782 | | Inventories, net | $26,149 | $28,366 | | TOTAL ASSETS | $252,974 | $217,039 | | LIABILITIES AND STOCKHOLDERS' EQUITY | 2023 | 2022 | | Accounts payable and accrued expenses | $18,583 | $15,507 | | Total liabilities | $33,166 | $31,701 | | Stockholders' equity | $219,808 | $185,338 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $252,974 | $217,039 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) For the year ended December 31, 2023, revenue increased slightly to $128.35 million, while net income decreased to $21.50 million from $24.05 million in 2022, primarily due to higher operating expenses, particularly in sales and marketing Condensed Consolidated Statements of Operations (Years Ended December 31, In thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $128,349 | $125,591 | | Cost of revenue | $41,270 | $38,235 | | Gross profit | $87,079 | $87,356 | | Total operating expenses | $68,029 | $62,527 | | Income from operations | $19,050 | $24,829 | | Net income | $21,504 | $24,049 | | Diluted Net income per share | $0.37 | $0.42 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) For the year ended December 31, 2023, net cash provided by operating activities more than doubled to $26.05 million from $12.63 million in 2022. Net cash used in investing activities increased significantly, while financing activities shifted from a net use to a net provision of cash Condensed Consolidated Statements of Cash Flows (Years Ended December 31, In thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,054 | $12,631 | | Net cash used in investing activities | $(19,114) | $(6,946) | | Net cash provided by (used in) financing activities | $4,794 | $(23,668) | | Net change in cash, cash equivalents and restricted cash | $11,767 | $(18,003) | | Cash, cash equivalents and restricted cash, end of year | $68,225 | $56,458 | Supplemental Financial Information [Channel Revenue](index=8&type=section&id=Channel%20Revenue) In Q4 2023, all revenue channels showed growth, with Aftermarket revenue increasing by 59% and Megaproject by 35% YoY. For the full year 2023, Megaproject and Aftermarket revenues grew by 2% and 26% respectively, while Original Equipment Manufacturer (OEM) revenue decreased by 10% Channel Revenue (In thousands, except percentages) | Channel | Q4'2023 | Q4'2022 | vs. Q4'2022 | 2023 | 2022 | vs. 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Megaproject | $41,382 | $30,631 | up 35% | $83,665 | $81,888 | up 2% | | Original equipment manufacturer | $9,150 | $7,466 | up 23% | $25,995 | $28,858 | down 10% | | Aftermarket | $6,657 | $4,194 | up 59% | $18,689 | $14,845 | up 26% | | Total revenue | $57,189 | $42,291 | up 35% | $128,349 | $125,591 | up 2% | [Segment Activity](index=8&type=section&id=Segment%20Activity) The Water segment remains the primary revenue driver, showing strong operating income for both Q4 and the full year 2023. The Emerging Technologies segment, while generating minimal revenue, incurred significant operating losses due to higher R&D and sales & marketing expenses, reflecting investment in new areas Segment Revenue and Operating Income (In thousands) | Segment | Q4'2023 Revenue | Q4'2023 Operating Income (Loss) | 2023 Revenue | 2023 Operating Income (Loss) | | :--- | :--- | :--- | :--- | :--- | | Water | $57,103 | $32,781 | $127,725 | $61,742 | | Emerging Technologies | $86 | $(7,111) | $624 | $(23,086) | | Corporate | $0 | $(5,056) | $0 | $(19,606) | | Total | $57,189 | $20,614 | $128,349 | $19,050 | [Share-based Compensation](index=8&type=section&id=Share-based%20Compensation) Total stock-based compensation expense increased in both Q4 and the full year 2023, rising to $2.23 million in Q4 (from $1.41 million in Q4 2022) and to $8.04 million for the full year (from $6.51 million in 2022), with the largest portion allocated to General and Administrative expenses Stock-based Compensation Expense (In thousands) | Expense Category | Q4'2023 | Q4'2022 | 2023 | 2022 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenue | $164 | $136 | $719 | $506 | | General and administrative | $1,033 | $701 | $3,661 | $3,436 | | Sales and marketing | $649 | $360 | $2,333 | $1,592 | | Research and development | $381 | $210 | $1,325 | $977 | | Total stock-based compensation expense | $2,227 | $1,407 | $8,038 | $6,511 | Reconciliation of Non-GAAP Financial Measures [Reconciliation of Non-GAAP Financial Measures](index=10&type=section&id=Reconciliation%20of%20Non-GAAP%20Financial%20Measures_Table) This section provides a detailed reconciliation of GAAP to non-GAAP financial measures, including adjustments for share-based compensation, severance, accelerated depreciation, and litigation charges, to derive adjusted operating margin, net income, EPS, effective tax rate, EBITDA, and free cash flow Reconciliation of Non-GAAP Financial Measures (In millions, except percentages) | Metric | Q4'2023 | Q4'2022 | 2023 | 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating margin (GAAP) | 36.0% | 34.5% | 14.8% | 19.8% | | Share-based compensation adjustment | 3.9 | 3.3 | 6.3 | 5.2 | | Adjusted operating margin | 39.9% | 37.9% | 21.1% | 26.2% | | Net income (GAAP) | $19.8 | $13.7 | $21.5 | $24.0 | | Total adjustments to net income | $2.2 | $1.0 | $7.4 | $6.5 | | Adjusted net income | $22.0 | $14.7 | $28.9 | $30.5 | | Adjusted EBITDA | $23.9 | $17.0 | $31.2 | $36.8 | | Free cash flow | $12.4 | $5.1 | $23.5 | $8.4 |

SAN LEANDRO, Calif.--(BUSINESS WIRE)--Energy Recovery, Inc. (Nasdaq: ERII) today announced the award of contracts totaling over $28 million to supply its newest top-of-the-line PX® Pressure Exchanger® energy recovery device (ERD), the PX Q400, to mega desalination projects in the Gulf region. These facilities will produce nearly 1.5 million cubic meters of water for municipal use in the Gulf, a significantly water-stressed region, and the awards demonstrate confidence in Energy Recovery’s latest innovati ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission File Number: 001-34112 Energy Recovery, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 01-0616 ...

Financial Data and Key Metrics Changes - The company generated revenue of $20.7 million in the second quarter, within the guidance of $20 million to $25 million, with over $26 million shipped but $6 million to be recognized in Q3 due to GAAP rules [52] - Operating loss in Q2 was approximately $2.5 million due to delays in recognizing a mega project, but overall profitability is expected to align with annual targets as more shipments occur in Q3 and Q4 [3][61] - Research and development spending decreased by 22% year-to-date, with an anticipated year-over-year decline of 4% to 8% by year-end [5] Business Line Data and Key Metrics Changes - The wastewater segment recognized $600,000 in revenue for a total of $2 million year-to-date, with confidence in achieving annual targets based on signed contracts and pipeline [60] - Desalination revenues are projected to be in the lower half of guidance, with a significant increase expected in Q4, potentially exceeding $60 million [63] Market Data and Key Metrics Changes - In Latin America, particularly Chile, contracts totaling over $8 million were announced for desalination projects, with expectations of growing water stress driving demand [28][45] - The company anticipates nearly doubling revenues in Central and South America from single-digit millions to mid-teens in 2023 [45] Company Strategy and Development Direction - The company is focused on expanding its team and capabilities to support a doubling of revenue in 2024, with ongoing investments in wastewater and CO2 technologies [39][65] - A new training facility in partnership with a major U.S. OEM is planned to enhance technical support for the PX G technology [58] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving guidance for the year despite short-term risks related to project timing and operational issues [61][62] - The company is well-positioned for the remainder of the year, with expectations of a strong Q4 driven by mega project shipments [38][63] Other Important Information - The company received the highest ESG rating of AAA from MSCI, marking a significant achievement in its industry [2] - Gross margins are expected to increase to between 65% to 67% in the latter half of the year, reflecting a positive product mix [64] Q&A Session Summary Question: What are the risks for Q3 and Q4 regarding project delays? - Management indicated that risks are primarily operational, such as paperwork and testing delays, but they remain confident in meeting overall annual targets [11][23] Question: Is there momentum in the Latin American market? - Management confirmed significant contracts in Chile and noted that the region is experiencing increasing water stress, which is expected to drive future demand [25][28] Question: Are there any M&A opportunities being considered? - While the company is always on the lookout for M&A opportunities, there are currently no immediate plans, as the focus remains on executing existing projects [87][96]

PART I FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=6&type=section&id=Item%201%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements, highlighting a net loss of **$8.0 million** for the six months ended June 30, 2023, a significant decline from **$5.5 million** net income in the prior year, driven by a **35% revenue decrease** Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $150,291 | $157,867 | | **Total Assets** | $209,674 | $217,039 | | **Total Current Liabilities** | $15,189 | $18,302 | | **Total Liabilities** | $27,892 | $31,701 | | **Total Stockholders' Equity** | $181,782 | $185,338 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $20,723 | $20,292 | $34,124 | $52,838 | | **Gross Profit** | $13,543 | $13,372 | $21,698 | $36,420 | | **Income (Loss) from Operations** | $(2,586) | $(2,904) | $(10,697) | $5,318 | | **Net Income (Loss)** | $(1,665) | $(2,359) | $(7,961) | $5,535 | | **Diluted EPS** | $(0.03) | $(0.04) | $(0.14) | $0.10 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $4,523 | $7,479 | | **Net cash used in investing activities** | $(17,036) | $(12,979) | | **Net cash provided by (used in) financing activities** | $379 | $(25,638) | | **Net change in cash, cash equivalents and restricted cash** | $(12,093) | $(31,134) | [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies and financial results, including revenue disaggregation by segment, geography, and channel, segment performance, and customer concentration, highlighting reliance on the Water segment and Middle East/Africa region Revenue by Segment (Six Months Ended June 30, in thousands) | Segment | 2023 Revenue | 2022 Revenue | | :--- | :--- | :--- | | Water | $33,810 | $52,729 | | Emerging Technologies | $314 | $109 | Revenue by Geographical Market (Six Months Ended June 30, 2023, in thousands) | Geographical Market | Revenue | % of Total | | :--- | :--- | :--- | | Middle East and Africa | $13,837 | 40.6% | | Asia | $13,492 | 39.5% | | Americas | $4,567 | 13.4% | | Europe | $2,228 | 6.5% | | **Total** | **$34,124** | **100%** | Segment Operating Income (Loss) (Six Months Ended June 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Water | $9,672 | $26,433 | | Emerging Technologies | $(10,667) | $(11,730) | - For the six months ended June 30, 2022, Customer A and Customer B accounted for **25%** and **15%** of total revenue, respectively[84](index=84&type=chunk) - For the six months ended June 30, 2023, Customers C, D, and F accounted for **13%**, **11%**, and **12%** of revenue, respectively, indicating a shifting but concentrated customer base[84](index=84&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, noting a **35% revenue decrease** for the first six months of 2023, a decline in gross margin to **63.6%**, and a **4.2% increase** in operating expenses, while maintaining a strong liquidity position [Results of Operations](index=29&type=section&id=Results%20of%20Operations) This section details the **35% revenue decline** to **$34.1 million** for the six months ended June 30, 2023, driven by a **54% drop** in Megaproject revenue, alongside a **40.4% decrease** in gross profit and a **4.2% rise** in operating expenses Revenue by Channel (Six Months Ended June 30, in thousands) | Channel | 2023 Revenue | 2022 Revenue | % Change | | :--- | :--- | :--- | :--- | | Megaproject | $15,454 | $33,910 | (54%) | | Original equipment manufacturer | $11,538 | $12,360 | (7%) | | Aftermarket | $7,132 | $6,568 | 9% | | **Total Revenue** | **$34,124** | **$52,838** | **(35%)** | Gross Profit and Margin (Six Months Ended June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Gross Profit (in thousands) | $21,698 | $36,420 | | Gross Margin | 63.6% | 68.9% | Operating Expenses by Segment (Six Months Ended June 30, 2023, in thousands) | Segment | Operating Expenses | % Change YoY | | :--- | :--- | :--- | | Water | $12,116 | 22.4% | | Emerging Technologies | $10,577 | (10.5%) | | Corporate | $9,702 | 3.4% | | **Total** | **$32,395** | **4.2%** | [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity as of June 30, 2023, includes **$44.2 million** in cash and **$53.3 million** in marketable debt instruments, with **$4.5 million** net cash from operations and a **$50.0 million** revolving credit line, deemed sufficient for the next 12 months - Principal sources of liquidity as of June 30, 2023, consisted of **$44.2 million** in cash and cash equivalents, **$53.3 million** in marketable debt instruments, and **$15.4 million** in net accounts receivable[118](index=118&type=chunk) - The company has a **$50.0 million** committed revolving credit line expiring in December 2026[119](index=119&type=chunk) - As of June 30, 2023, no revolving loans were outstanding, and **$20.5 million** of the **$25.0 million** letters of credit sub-limit was utilized[120](index=120&type=chunk) Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,523 | $7,479 | | Net cash used in investing activities | $(17,036) | $(12,979) | | Net cash provided by (used in) financing activities | $379 | $(25,638) | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are unhedged foreign currency exposure from vendor payments and interest rate risk on its **$53.3 million** investment portfolio, where a **1% rate increase** would decrease fair value by less than **$0.2 million** - The company's revenue contracts are denominated in U.S. dollars, but it pays many vendors in foreign currencies, creating exposure to exchange rate fluctuations[134](index=134&type=chunk)[135](index=135&type=chunk) - The company has not hedged this exposure as it has been insignificant to date[136](index=136&type=chunk) - The investment portfolio of **$53.3 million** is subject to interest rate risk[138](index=138&type=chunk) - To minimize this, the weighted average maturity of investments is kept under five months[138](index=138&type=chunk) - A hypothetical **1%** increase in interest rates would cause a decrease of less than **$0.2 million** in the portfolio's fair value[138](index=138&type=chunk) [Item 4. Controls and Procedures](index=39&type=section&id=Item%204%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The President and Chief Executive Officer and the Chief Financial Officer concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[140](index=140&type=chunk) - No changes in internal control over financial reporting occurred during the period that have materially affected, or are reasonably likely to materially affect, these controls[141](index=141&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=41&type=section&id=Item%201%20Legal%20Proceedings) The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or operating results - As of the reporting date, the company is not a party to any legal proceedings that it believes are likely to have a material adverse effect on its business[144](index=144&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A%20Risk%20Factors) No material changes to the company's risk factors have occurred since those disclosed in its 2022 Annual Report on Form 10-K and Q1 2023 Form 10-Q - No material changes in risk factors have occurred since those disclosed in the 2022 Annual Report and the Q1 2023 Form 10-Q[145](index=145&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[146](index=146&type=chunk) [Item 5. Other Information](index=41&type=section&id=Item%205%20Other%20Information) This section discloses the termination of a Rule 10b5-1 trading arrangement by CFO Joshua Ballard on June 7, 2023 - On June 7, 2023, CFO Joshua Ballard terminated a Rule 10b5-1 trading arrangement[150](index=150&type=chunk) [Item 6. Exhibits](index=42&type=section&id=Item%206%20Exhibits) This section lists exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, and Inline XBRL data[152](index=152&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission File Number: 001-34112 Energy Recovery, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 01-0616867 ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 Form 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number: 001-34112 Energy Recovery, Inc. (Exact Name of Registrant as Specified in its Charter) (State or Other Jurisdiction of Incorp ...