Energy Recovery(US:ERII)2025-05-07 20:09PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the three months ended March 31, 2025, show a significant decrease in revenue and a wider net loss compared to the same period in 2024, with total assets decreasing from year-end 2024 primarily due to reduced accounts receivable and short-term investments. Condensed Consolidated Statements of Operations (Q1 2025 vs Q1 2024) | Metric | Q1 2025 (In thousands) | Q1 2024 (In thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $8,065 | $12,090 | -33.3% | | Gross Profit | $4,458 | $7,135 | -37.5% | | Loss from Operations | $(12,562) | $(10,934) | +14.9% | | Net Loss | $(9,880) | $(8,260) | +19.6% | | Diluted Net Loss per Share | $(0.18) | $(0.14) | +28.6% | Condensed Consolidated Balance Sheets (As of March 31, 2025) | Metric | March 31, 2025 (In thousands) | December 31, 2024 (In thousands) | | :--- | :--- | :--- | | Total Current Assets | $154,592 | $173,656 | | Total Assets | $225,394 | $242,792 | | Total Current Liabilities | $18,434 | $23,428 | | Total Liabilities | $27,281 | $32,782 | | Total Stockholders' Equity | $198,113 | $210,010 | Condensed Consolidated Statements of Cash Flows (Q1 2025 vs Q1 2024) | Metric | Q1 2025 (In thousands) | Q1 2024 (In thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,678 | $6,497 | | Net cash provided by (used in) investing activities | $12,674 | $(4,986) | | Net cash (used in) provided by financing activities | $(3,874) | $1,190 | Notes to Condensed Consolidated Financial Statements The notes detail key accounting policies and financial data, with the Water segment generating nearly all revenue, a restructuring plan substantially completed in Q1 2025, and a new share repurchase program initiated in February 2025. - The Water Technologies segment accounted for $8.064 million of the total $8.065 million revenue in Q1 202537 - A restructuring plan initiated in Q4 2024 resulted in $0.5 million of charges in Q1 2025 and is now substantially complete, with total restructuring expenses recognized at $3.015 million55 - In February 2025, the Board authorized a new $30.0 million share repurchase program, under which the company had repurchased 279,295 shares for $4.5 million as of March 31, 20257374 - In Q1 2025, the company granted 287,298 Performance Restricted Stock Units (PRSUs) that vest over 3 years based on cumulative revenue and adjusted EBITDA targets, with no expense recognized as performance conditions are not yet considered probable7576 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 33% year-over-year revenue decline in Q1 2025 primarily to a $4.1 million (99%) drop in megaproject shipments, leading to a gross margin contraction from 59.0% to 55.3% due to lower sales volume over fixed costs, while operating expenses decreased by $1.0 million driven by lower employee costs, partially offset by restructuring charges and consulting fees. Results of Operations Total revenue for Q1 2025 was $8.1 million, a 33% decrease from $12.1 million in Q1 2024, driven by a 99% decline in Megaproject revenue, partially offset by a 20% increase in Original Equipment Manufacturer (OEM) revenue, leading to a $2.7 million drop in gross profit and a 370 basis point contraction in gross margin to 55.3%. Revenue by Channel (Q1 2025 vs Q1 2024) | Channel | Q1 2025 Revenue (thousands) | Q1 2024 Revenue (thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Aftermarket | $4,028 | $4,644 | (13%) | | Original equipment manufacturer | $4,001 | $3,346 | 20% | | Megaproject | $36 | $4,100 | (99%) | | Total revenue | $8,065 | $12,090 | (33%) | - The decrease in gross profit and margin was primarily due to lower sales volume spread over fixed manufacturing costs87 - Operating expenses in the Emerging Technologies segment decreased by $2.1 million (34.6%) due to lower development costs and employee-related expenses89 - Corporate operating expenses increased by $1.7 million (32.9%) due to higher consulting, restructuring, and recruiting costs, as well as impairment costs from a sublease90 Liquidity and Capital Resources As of March 31, 2025, the company's principal liquidity sources included $49.1 million in cash and cash equivalents and $57.6 million in marketable securities, with a $50.0 million revolving credit facility having no outstanding loans but $15.7 million utilized for letters of credit. - Principal sources of liquidity as of March 31, 2025, consist of $49.1 million in cash and cash equivalents, $57.6 million in short- and long-term investments, and $32.4 million in net accounts receivable95 - The company has a $50.0 million credit agreement expiring in December 2026, with no revolving loans outstanding and $15.7 million of a $30.0 million sub-limit for Letters of Credit utilized as of Q1 202596 - Cash flow from investing activities provided $12.7 million, a significant shift from a $5.0 million use of cash in the prior year, driven by lower purchases and higher maturities of marketable securities99102 - Cash flow from financing activities was a use of $3.9 million, compared to a source of $1.2 million in the prior year, mainly due to $4.5 million spent on common stock repurchases100103 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency exchange rates and interest rates, with foreign currency risk arising from expenses denominated in various foreign currencies, though revenue contracts are in USD, and interest rate risk affecting its $63.1 million investment portfolio, which is mitigated by a weighted average maturity of approximately nine months. - Revenue contracts are denominated in USD, but the company incurs expenses in foreign currencies, creating exposure to fluctuations in the British pound, Saudi riyal, Emirati dirham, European euro, Chinese yuan, Indian rupee, and Canadian dollar108110 - The investment portfolio of $63.1 million is subject to interest rate risk, where a hypothetical 1% increase in interest rates would cause a fair value decrease of less than $0.3 million as of March 31, 2025114 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded that they were effective as of March 31, 2025, with no material changes in internal control over financial reporting during the quarter. - Based on an evaluation, the President and CEO and the CFO concluded that as of March 31, 2025, the company's disclosure controls and procedures were effective116 - No material changes to internal control over financial reporting occurred during the first quarter of 2025117 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any legal proceedings that it believes are likely to have a material adverse effect on its financial condition or operating results. - As of the report date, the company is not involved in any legal proceedings expected to have a material adverse effect on its business119 Item 1A. Risk Factors There have been no material changes to risk factors from the 2024 Annual Report, except for an updated risk concerning U.S. trade policy, highlighting that changes in U.S. policy, particularly regarding tariffs and trade relations with China, could increase costs or reduce global access to its products, potentially having a material adverse impact on the business. - A specific risk factor has been updated to address the potential material adverse impact of changes in U.S. trade policy, including tariffs and trade relations, particularly with China120121123 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None reported for the period. - The company reported no unregistered sales of equity securities during the period124 Item 5. Other Information During the first quarter of 2025, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement, and on January 23, 2025, the Compensation Committee adopted a new form of Performance Restricted Stock Unit (PRSU) award agreement under the 2020 Equity Incentive Plan. - No directors or officers adopted or terminated a Rule 10b5-1 trading plan in Q1 2025126 - On January 23, 2025, the Compensation Committee adopted a new form of PRSU award agreement to define performance metrics and periods127 Item 6. Exhibits This section lists the exhibits filed with the report, including employment agreements and officer certifications.