Energy Recovery(ERII) - 2019 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Presents the unaudited condensed consolidated financial statements and related notes for the reporting period Item 1 — Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Energy Recovery, Inc., including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, revenue disaggregation, earnings per share, balance sheet items, investments, intangible assets, credit facilities, commitments, income taxes, stock-based compensation, segment information, and concentrations Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Assets | | | | | Cash and cash equivalents | $29,696 | $22,052 | +$7,644 | | Short-term investments | $59,905 | $73,338 | -$13,433 | | Accounts receivable, net | $20,848 | $10,212 | +$10,636 | | Inventories, net | $8,977 | $7,138 | +$1,839 | | Total current assets | $123,664 | $119,648 | +$4,016 | | Total assets | $190,587 | $179,841 | +$10,746 | | Liabilities & Equity | | | | | Accounts payable | $1,559 | $1,439 | +$120 | | Accrued expenses and other current liabilities | $8,519 | $8,497 | +$22 | | Total current liabilities | $28,604 | $27,132 | +$1,472 | | Total liabilities | $55,833 | $66,463 | -$10,630 | | Total stockholders' equity | $134,754 | $113,378 | +$21,376 | | Total liabilities and stockholders' equity | $190,587 | $179,841 | +$10,746 | Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net income over specific periods Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Product revenue | $21,752 | $18,578 | +$3,174 | $57,050 | $47,042 | +$10,008 | | License and development revenue | $3,098 | $3,661 | -$563 | $10,391 | $9,768 | +$623 | | Total revenue | $24,850 | $22,239 | +$2,611 | $67,441 | $56,810 | +$10,631 | | Product gross profit | $16,327 | $13,556 | +$2,771 | $41,207 | $32,730 | +$8,477 | | Income from operations | $4,571 | $5,650 | -$1,079 | $11,275 | $8,559 | +$2,716 | | Net income | $5,149 | $4,658 | +$491 | $11,522 | $19,675 | -$8,153 | | Basic EPS | $0.09 | $0.09 | $0.00 | $0.21 | $0.37 | -$0.16 | | Diluted EPS | $0.09 | $0.08 | +$0.01 | $0.21 | $0.36 | -$0.15 | Condensed Consolidated Statements of Comprehensive Income Reports net income and other comprehensive income items, such as foreign currency adjustments and unrealized gains/losses on investments Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Net income | $5,149 | $4,658 | +$491 | $11,522 | $19,675 | -$8,153 | | Foreign currency translation adjustments | ($19) | $5 | -$24 | ($20) | ($7) | -$13 | | Unrealized gain (loss) on investments | ($5) | $88 | -$93 | $127 | $31 | +$96 | | Other comprehensive income (loss), net of tax | ($24) | $93 | -$117 | $107 | $24 | +$83 | | Comprehensive income | $5,125 | $4,751 | +$374 | $11,629 | $19,699 | -$8,070 | Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including common stock, retained earnings, and treasury stock Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Sep 30, 2019 (9 Months) | Sep 30, 2018 (9 Months) | YoY Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Common stock, beginning balance | $59 | $58 | +$1 | | Additional paid-in capital, beginning balance | $158,404 | $149,006 | +$9,398 | | Accumulated other comprehensive loss, beginning balance | ($133) | ($125) | -$8 | | Treasury stock, beginning balance | ($30,486) | ($20,486) | -$10,000 | | Accumulated deficit, beginning balance | ($14,466) | ($36,559) | +$22,093 | | Net income | $11,522 | $19,674 | -$8,152 | | Total stockholders' equity, end of period | $134,754 | $109,595 | +$25,159 | Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Net cash provided by operating activities | $503 | $9,749 | -$9,246 | | Net cash provided by (used in) investing activities | $1,821 | ($150) | +$1,971 | | Net cash provided by (used in) financing activities | $5,335 | ($6,250) | +$11,585 | | Net change in cash, cash equivalents and restricted cash | $7,659 | $3,363 | +$4,296 | | Cash, cash equivalents and restricted cash, end of period | $29,797 | $33,989 | -$4,192 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering significant accounting policies, revenue recognition, earnings per share calculations, balance sheet components, investment classifications, intangible assets, credit facilities, commitments, income taxes, stock-based compensation, segment information, and concentrations Note 1 — Description of Business and Significant Accounting Policies Describes the company's business operations and outlines its key accounting principles and policies - Energy Recovery, Inc. is an energy solutions provider focusing on industrial fluid flow markets globally, utilizing fluid dynamics and advanced material science to offer products that enhance operational and capital expenditure efficiency by converting wasted pressure energy or preserving pumping technology in harsh environments. Key trademarks include ERI®, PX®, Pressure Exchanger®, VorTeq™, MTeq™, IsoBoost®, IsoGen®, AT™ and AquaBold™[25] - The Company early adopted ASU 2018-15 in Q2 2019, prospectively deferring $0.6 million in implementation costs for cloud computing arrangements, with an additional $0.3 million expected in Q4 2019[32] Note 2 — Revenue Provides detailed information on revenue recognition, including disaggregation by geography and product/service line Total Revenue by Primary Geographical Market (in thousands) | Region | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Middle East and Africa | $16,691 | $12,284 | $36,297 | $27,975 | | Americas | $5,325 | $4,858 | $18,369 | $13,670 | | Asia | $2,188 | $2,711 | $9,364 | $10,041 | | Europe | $646 | $2,386 | $3,411 | $5,124 | | Total Revenue | $24,850 | $22,239 | $67,441 | $56,810 | Total Revenue by Major Product/Service Line (in thousands) | Product/Service Line | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | PX, pumps and turbo devices | $21,752 | $18,578 | $57,050 | $47,042 | | License and development | $3,098 | $3,661 | $10,391 | $9,768 | | Total Revenue | $24,850 | $22,239 | $67,441 | $56,810 | Transaction Price Allocated to Remaining Performance Obligation (in thousands) | Year | September 30, 2019 | | :-------------------- | :-------------------------- | | 2019 (remaining 3 months) | $4,337 | | 2020 | $19,998 | | 2021 | $5,715 | | 2022 | $661 | | 2023 and thereafter | $5,031 | | Total performance obligation | $35,742 | Note 3 — Earnings per Share Explains the calculation of basic and diluted earnings per share and related share counts Earnings Per Share (EPS) Data | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $5,149 | $4,658 | $11,522 | $19,675 | | Basic common shares outstanding (in thousands) | 54,975 | 53,665 | 54,594 | 53,719 | | Diluted common shares outstanding (in thousands) | 56,384 | 55,295 | 55,971 | 55,382 | | Basic EPS | $0.09 | $0.09 | $0.21 | $0.37 | | Diluted EPS | $0.09 | $0.08 | +$0.01 | $0.21 | $0.36 | - Anti-dilutive stock awards excluded from EPS calculation were 1,610 thousand for the three months ended September 30, 2019, and 1,964 thousand for the nine months ended September 30, 2019[46] Note 4 — Balance Sheet Information Offers additional details and breakdowns for specific balance sheet accounts Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $29,696 | $21,955 | | Restricted cash, current | $0 | $97 | | Restricted cash, non-current | $101 | $86 | | Total cash, cash equivalents and restricted cash | $29,797 | $22,138 | Inventories by Category (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | | Raw materials | $3,947 | $2,238 | | Work in process | $2,135 | $2,689 | | Finished goods | $2,895 | $2,211 | | Inventories, net | $8,977 | $7,138 | Accrued Expenses and Other Current Liabilities (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Payroll and commissions payable | $5,273 | $5,843 | | Accrued warranty reserve | $633 | $478 | | Other accrued expenses and current liabilities | $2,613 | $2,176 | | Total accrued expenses and other current liabilities | $8,519 | $8,497 | Note 5 — Investments and Fair Value Measurements Details the company's investment portfolio and fair value measurement methodologies Total Cash, Cash Equivalents and Marketable Securities (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $29,696 | $21,955 | | Short-term investments | $59,905 | $73,338 | | Long-term investments | $7,549 | $1,269 | | Total | $97,150 | $96,562 | - The Company's available-for-sale investments, primarily corporate notes and bonds and U.S. Treasury securities, are classified as Level 2 fair value measurements. Sales of available-for-sale investments totaled $3.5 million for the nine months ended September 30, 2019, compared to none in the prior year period[55][61][63] Available-for-Sale Investments with Unrealized Loss Positions (in thousands) | Investment Type | Sep 30, 2019 Fair Value | Sep 30, 2019 Gross Unrealized Losses | Dec 31, 2018 Fair Value | Dec 31, 2018 Gross Unrealized Losses | | :-------------------------------- | :-------------------------- | :----------------------------------- | :-------------------------- | :----------------------------------- | | U.S. Treasury securities | $449 | ($1) | $8,101 | ($2) | | Corporate notes and bonds | $9,096 | ($15) | $61,809 | ($88) | | Total | $9,545 | ($16) | $69,910 | ($90) | Note 6 — Goodwill and Intangible Assets Presents information on goodwill and other intangible assets, including amortization and impairment assessments - The net carrying amount of goodwill remained stable at $12.8 million as of September 30, 2019, and December 31, 2018, with no impairment recorded[67] Intangible Assets, Net (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | | Finite-lived intangible assets | $6,643 | $6,643 | | Accumulated amortization | ($6,472) | ($6,003) | | Intangible assets, net | $171 | $640 | Note 7 — Lines of Credit Describes the company's credit facilities and any outstanding debt or commitments - The Company's Loan and Pledge Agreement provides a committed revolving credit line of $16.0 million and an uncommitted line of $4.0 million, extended to June 30, 2022. No debt was outstanding as of September 30, 2019, and December 31, 2018[70][74][75] - Outstanding Stand-By Letters of Credit (SBLCs) increased to $11.2 million at September 30, 2019, from $8.8 million at December 31, 2018[76] Note 8 — Commitments and Contingencies Outlines the company's contractual obligations, lease liabilities, warranty reserves, and potential legal contingencies Maturities of Lease Liabilities (in thousands) | Year | Amount | | :-------------------- | :-------------------------- | | 2019 (remaining 3 months) | $460 | | 2020 | $1,855 | | 2021 | $1,653 | | 2022 | $1,812 | | 2023 | $1,714 | | 2024 and thereafter | $10,042 | | Total lease liabilities | $12,796 | - The Company entered into a new industrial lease agreement in January 2019 for a commercial development center in Katy, Texas, with a 120-month initial term and monthly base rent of approximately $0.3 million, commencing in Q4 2019[78] Accrued Product Warranty Reserve (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $599 | $389 | $478 | $366 | | Warranty costs charged to cost of revenue | $97 | $78 | $339 | $213 | | Utilization charges against reserve | ($15) | ($8) | ($53) | ($36) | | Release of accrual related to expired warranties | ($48) | ($50) | ($131) | ($134) | | Ending balance | $633 | $409 | $633 | $409 | - The Company had approximately $8.6 million in open cancellable purchase order arrangements as of September 30, 2019[84] Note 9 — Income Taxes Provides details on income tax expense, effective tax rates, and significant tax adjustments - For the nine months ended September 30, 2019, the Company recognized an income tax expense of $1.2 million, with an effective tax rate of 9.6%. This included a $1.0 million discrete tax benefit from increased U.S. federal R&D credits and a $0.4 million benefit from stock-based compensation deductions, partially offset by a $0.4 million deferred tax expense due to state effective tax rate remeasurement[90][92] - In contrast, the nine months ended September 30, 2018, saw an income tax benefit of $10.1 million, with an effective tax rate of (106.3%), largely due to a $12.4 million discrete tax benefit from a change in international tax structure in Ireland and the full valuation allowance related to Irish operations losses[91][92] Note 10 — Stock-based Compensation Explains the company's stock-based compensation plans and related expenses Stock-based Compensation Expense (in thousands) | Expense Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of revenue | $33 | $24 | $99 | $64 | | General and administrative | $661 | $564 | $2,435 | $2,695 | | Sales and marketing | $229 | $156 | $606 | $575 | | Research and development | $431 | $298 | $1,285 | $892 | | Total stock-based compensation expense | $1,354 | $1,042 | $4,425 | $4,226 | - Additional stock-based compensation expense of $0.3 million was recorded in the nine months ended September 30, 2019, due to the modification of equity awards related to the former Chairman's retirement. This is lower than the $0.9 million recorded in the prior year for the former President and CEO's resignation[97][98] Unamortized Stock-Based Compensation Costs (in thousands) | Award Type | Unamortized Compensation Costs | Weighted Average Service Period (In years) | | :-------------------------------- | :-------------------------- | :----------------------------------- | | Stock options | $5,181 | 2.3 | | RSUs | $3,356 | 2.8 | | Total | $8,537 | | Total Grant Date Fair Value of Vested Stock Options and RSUs (in thousands) | Award Type | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock options | $794 | $554 | $3,287 | $3,071 | | RSUs | $575 | $108 | $1,574 | $733 | | Total | $1,369 | $662 | $4,861 | $3,804 | Note 11 — Business Segment and Geographic Information Presents financial data disaggregated by business segment and geographic region - The Company operates in two reportable segments: Water (reverse osmosis desalination) and Oil & Gas (hydraulic fracturing, gas/chemical processing). The CEO acts as the chief operating decision-maker, allocating resources and assessing performance based on revenue and operating income/loss for each segment[107][108] Segment Operating Income (Loss) (in thousands) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Water Segment Operating Income | $13,076 | $11,005 | $31,514 | $25,732 | | Oil & Gas Segment Operating Loss | ($3,092) | ($817) | ($4,909) | ($3,556) | | Corporate operating expenses | $5,413 | $4,538 | $15,330 | $13,617 | | Income from operations | $4,571 | $5,650 | $11,275 | $8,559 | Product Revenue by Geographic Location | Location | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | 2% | 2% | 2% | 3% | | International | 98% | 98% | 98% | 97% | | Total product revenue | 100% | 100% | 100% | 100% | Product Revenue by Country (Countries >10%) | Country | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Saudi Arabia | 38% | 52% | 27% | 38% | | United Arab Emirates | ** | ** | 12% | ** | | Egypt | ** | ** | ** | 14% | | China | ** | 11% | ** | 10% | Note 12 — Concentrations Identifies significant concentrations of revenue, customers, and accounts receivable Product Revenue Concentration by Customer (Customers >10%) | Customer | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Customer B | Water | 26% | ** | 10% | ** | | Customer C | Water | ** | 49% | ** | 19% | | Customer D | Water | 11% | ** | ** | 14% | | Customer A | Water | ** | ** | 17% | ** | | Customer E | Water | ** | ** | ** | 12% | - One international Oil & Gas Segment customer accounted for 100% of the Company's license and development revenue for both the three and nine months ended September 30, 2019 and 2018[117] Accounts Receivable and Contract Asset Concentration by Customer (Customers >10%) | Customer | Segment | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :-------------------- | :-------------------------- | :-------------------------- | | Customer A | Water | 26% | ** | | Customer B | Water | 25% | ** | | Customer D | Water | 11% | ** | | Customer F | Oil & Gas | ** | 26% | | Customer G | Water | ** | 20% | | Customer H | Water | ** | 11% | Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition for the three and nine months ended September 30, 2019, compared to the prior year. It covers revenue trends by segment, gross profit and margin changes, operating expense drivers, income taxes, and a detailed analysis of liquidity and cash flows from operating, investing, and financing activities, along with future capital requirements Overview Provides a general introduction to the company's business and operational context - Energy Recovery, Inc. is an engineering-driven technology company providing solutions for industrial fluid flow processes, focusing on converting wasted pressure energy and preserving pumps in hostile environments across water and oil & gas markets. The company was incorporated in Virginia in 1992, reincorporated in Delaware in 2001, and maintains its headquarters in California, with a new commercial development center for oil and gas field testing and training opening in Texas in Q4 2019[130][131] Water Segment Describes the revenue sources and sales channels for the company's Water Segment - The Water Segment's revenue primarily comes from selling energy recovery devices (ERDs) and high-pressure/circulation pumps for seawater, brackish, and wastewater reverse osmosis desalination. Sales channels include mega-project (MPD) firms (typically $1 million-$10 million per project), original equipment manufacturers (OEMs) for small-to-medium plants (up to $1 million per project), and the aftermarket (AM) for spare parts and service contracts[133] Oil & Gas Segment Details the revenue streams and strategic focus of the company's Oil & Gas Segment - The Oil & Gas Segment's revenue is mainly derived from license and development activities related to solutions for hydraulic fracturing, gas processing, and chemical processing, reflecting significant R&D and S&M investments in expanding into these pressurized fluid flow industries[134] Total Revenue Analyzes the company's total revenue performance, disaggregated by segment and product line Total Revenue by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Water Product Revenue | $21,752 | $18,464 | +$3,288 (18%) | $56,946 | $46,628 | +$10,318 (22%) | | Oil & Gas Product Revenue | $0 | $114 | -$114 (-100%) | $104 | $414 | -$310 (-75%) | | License and Development Revenue | $3,098 | $3,661 | -$563 (-15%) | $10,391 | $9,768 | +$623 (6%) | | Total Revenue | $24,850 | $22,239 | +$2,611 (12%) | $67,441 | $56,810 | +$10,631 (19%) | - Water Segment product revenue increased by 18% ($3.3 million) for the three months and 22% ($10.3 million) for the nine months ended September 30, 2019, driven by higher shipments across all channels (AM, MPD, OEM). Oil & Gas Segment product revenue decreased significantly due to no product sales in Q3 2019, while license and development revenue decreased by 15% in Q3 but increased by 6% for the nine-month period, primarily due to changes in estimated project costs[137][139][141][142] Product Gross Profit and Gross Margin Examines the trends in product gross profit and gross margin across business segments Product Gross Profit and Gross Margin by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2019 Gross Profit | 3 Months Ended Sep 30, 2019 Gross Margin | 3 Months Ended Sep 30, 2018 Gross Profit | 3 Months Ended Sep 30, 2018 Gross Margin | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Water | $16,327 | 75.1% | $13,613 | 73.7% | | Oil & Gas | $0 | 0% | ($57) | (50.0)% | | Total Product Gross Profit | $16,327 | 75.1% | $13,556 | 73.0% | - Product gross profit increased by 20.4% ($2.8 million) for the three months and 25.9% ($8.5 million) for the nine months ended September 30, 2019, primarily due to higher Water Segment volumes, especially PX sales, and favorable price/product mix. Gross margin improved by 210 basis points to 75.1% (three months) and 260 basis points to 72.2% (nine months) due to these factors and manufacturing efficiencies[144][145][146][147] Operating Expenses Reviews the components and changes in the company's operating expenses, including R&D and S&M Total Operating Expenses (in thousands) | Expense Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | General and administrative | $5,711 | $5,266 | +$445 (8%) | $16,790 | $16,030 | +$760 (5%) | | Sales and marketing | $2,367 | $1,873 | +$494 (26%) | $6,710 | $5,643 | +$1,067 (19%) | | Research and development | $6,620 | $4,270 | +$2,350 (55%) | $16,354 | $11,792 | +$4,562 (39%) | | Amortization of intangible assets | $156 | $158 | -$2 (-1%) | $469 | $474 | -$5 (-1%) | | Total Operating Expenses | $14,854 | $11,567 | +$3,287 (28%) | $40,323 | $33,939 | +$6,384 (19%) | - Total operating expenses increased by 28% ($3.3 million) for the three months and 19% ($6.4 million) for the nine months ended September 30, 2019. This was primarily driven by a 55% increase in R&D expenses for the three months (due to higher testing supplies, depreciation, and personnel costs) and a 39% increase for the nine months (due to testing supplies, personnel, and equipment depreciation)[151][154][160][163] - Water Segment operating expenses increased by 25% ($0.6 million) for the three months and 36% ($2.6 million) for the nine months, mainly due to higher S&M and R&D. Oil & Gas Segment operating expenses increased by 40% ($1.8 million) for the three months and 16% ($2.1 million) for the nine months, primarily due to increased R&D for new technology commercialization[148][149][157][158] Other Income, Net Reports on non-operating income and expenses, primarily interest income Total Other Income, Net (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Interest income | $500 | $369 | +$131 | $1,551 | $1,043 | +$508 | | Other non-operating expense, net | ($5) | ($22) | +$17 | ($77) | ($66) | -$11 | | Total other income, net | $495 | $347 | +$148 | $1,474 | $976 | +$498 | - Total other income, net, increased by $0.1 million for the three months and $0.5 million for the nine months ended September 30, 2019, primarily driven by an increase in interest income[165][166] Income Taxes Discusses the company's income tax expense, benefits, and effective tax rates - For the nine months ended September 30, 2019, the Company recognized an income tax expense of $1.2 million, with an effective tax rate of 9.6%. This included a $1.0 million discrete tax benefit from increased U.S. federal R&D credits and a $0.4 million benefit from stock-based compensation deductions, partially offset by a $0.4 million deferred tax expense due to state effective tax rate remeasurement[168][170] - In contrast, the nine months ended September 30, 2018, saw an income tax benefit of $10.1 million, with an effective tax rate of (106.3%), largely due to a $12.4 million discrete tax benefit from a change in international tax structure in Ireland and the full valuation allowance related to Irish operations losses[169][170] Liquidity and Capital Resources This section details the Company's financial resources, including cash, investments, and receivables, and analyzes cash flow activities. It also outlines the terms of the Loan and Pledge Agreement, the status of Stand-By Letters of Credit, and management's outlook on future capital requirements and potential financing needs Overview Summarizes the company's primary sources of liquidity and working capital components - Primary liquidity sources as of September 30, 2019, included $29.7 million in unrestricted cash and cash equivalents, $59.9 million in short-term investments (marketable debt instruments), and $20.8 million in net accounts receivable[172] - Short-term contract assets (unbilled receivables) decreased to $1.1 million at September 30, 2019, from $4.1 million at December 31, 2018, primarily due to Water Segment customer contractual holdback provisions[173] Loan Agreements Details the terms and status of the company's revolving credit facilities - The Loan and Pledge Agreement provides a $16.0 million committed and $4.0 million uncommitted revolving credit line, extended to June 30, 2022. No debt was outstanding as of September 30, 2019, or December 31, 2018[174][178][179] Stand-By Letters of Credit Explains the company's outstanding Stand-By Letters of Credit and their impact on liquidity - As of September 30, 2019, the Company had $11.2 million in SBLCs, requiring a corresponding U.S. investment balance, an increase from $8.8 million at December 31, 2018[180] Cash Flows from Operating Activities Analyzes cash generated or used by the company's core business operations - Net cash provided by operating activities significantly decreased to $0.5 million for the nine months ended September 30, 2019, from $9.7 million in the prior year. This was primarily due to $12.7 million in cash used for operating assets and liabilities, driven by changes in accounts receivable, inventory, and contract liabilities[181][183] - Operating cash flow can fluctuate significantly quarter-to-quarter due to the project-driven, non-cyclical nature of the business and the timing of large project orders, making individual quarterly comparisons not necessarily indicative of long-term trends[184] Cash Flows from Investing Activities Details cash flows related to the acquisition and disposal of investments and property, plant, and equipment - Net cash provided by investing activities increased by $2.0 million, shifting from a $0.15 million use in 2018 to a $1.8 million provision in 2019 for the nine months ended September 30. This was mainly due to higher net sales and maturities of investments ($5.4 million increase), partially offset by a $3.5 million increase in capital expenditures[181][189] Cash Flows from Financing Activities Summarizes cash flows from debt, equity transactions, and share repurchases - Net cash provided by financing activities increased by $11.6 million, moving from a $6.25 million use in 2018 to a $5.3 million provision in 2019 for the nine months ended September 30. This significant change was primarily due to the absence of common stock repurchases in 2019 (which totaled $10.0 million in 2018) and a $1.6 million increase in cash from common stock issuance under employee programs[181][191] Liquidity and Capital Resource Requirements Discusses management's assessment of future capital needs and funding strategies - Management believes existing resources and operating cash flow will cover anticipated capital requirements for the next 12 months. However, additional capital or debt financing may be needed for future acquisitions or investments in new technology due to rapid market adoption[192] Off-Balance Sheet Arrangements Reports on any significant off-balance sheet financial commitments or obligations - The Company did not have any off-balance sheet arrangements with unconsolidated entities or financial partnerships during the reported periods[193] Recent Accounting Pronouncements Refers to disclosures on new accounting standards and their impact - Refer to Note 1, 'Description of Business and Significant Accounting Policies,' for details on recent accounting pronouncements[194] Item 3 — Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to market risks, primarily focusing on foreign currency fluctuations and interest rate changes, and outlines strategies to mitigate these risks Foreign Currency Risk Analyzes the company's exposure to foreign currency exchange rate fluctuations - The Company is exposed to foreign currency fluctuations against the USD, including the British Pound, Saudi Riyal, UAE Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar. While revenue contracts are USD-denominated, international sales expansion could lead to foreign currency-denominated revenue, increasing exchange rate impact on cash and operating results[196][197] - The Company has not hedged foreign currency exposure due to historically insignificant foreign currency expenses and minimal impact on operating results and cash flows[199] Interest Rate Risk and Credit Risk Examines the company's exposure to interest rate changes and credit risk in its investment portfolio - The Company's investment portfolio of $67.5 million (as of September 30, 2019) consists of fixed-income marketable debt securities, primarily investment-grade corporate and U.S. government instruments. These investments are subject to interest rate risk, with a hypothetical 1% interest rate increase estimated to decrease fair value by approximately $0.4 million[200][201] - To mitigate interest rate risk, the Company maintains investments with an average maturity of less than seven months and adheres to an investment policy with high credit rating requirements and concentration limits to minimize counter-party credit risk[200][201] Item 4 — Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the period Evaluation of Disclosure Controls and Procedures Assesses the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2019[203] Changes in Internal Controls Reports on any material changes to the company's internal control over financial reporting - There were no material changes in internal control over financial reporting during the period covered by the report[204] PART II — OTHER INFORMATION Contains additional information not included in the financial statements, such as legal proceedings and risk factors Item 1 — Legal Proceedings Refers to disclosures on legal proceedings and claims - Information on legal proceedings is incorporated by reference from Note 8, 'Commitments and Contingencies – Litigation,' of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and the Annual Report on Form 10-K filed March 7, 2019[206][207] Item 1A — Risk Factors States that there have been no material changes to previously disclosed risk factors - No material changes to risk factors have occurred since those disclosed in the Annual Report on Form 10-K filed on March 7, 2019[208] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds Indicates no unregistered sales of equity securities or use of proceeds to report - None[209] Item 3 — Defaults Upon Senior Securities Reports no defaults upon senior securities - None[210] Item 4 — Mine Safety Disclosures States that mine safety disclosures are not applicable to the Company - Not applicable[211] Item 5 — Other Information Indicates no other information to report - None[212] Item 6 — Exhibits Lists exhibits filed or furnished with the report, including certifications and XBRL documents - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1*) and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[214] SIGNATURES Contains the signatures of the Company's authorized officers certifying the report - The report was signed on November 1, 2019, by Chris Gannon, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer[218]