Energy Recovery(ERII) - 2021 Q2 - Quarterly Report

Part I - Financial Information Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, with notes on segment reporting and revenue disaggregation Condensed Consolidated Balance Sheets As of June 30, 2021, total assets were $209.3 million, a slight increase from $204.3 million at December 31, 2020, primarily reflecting growth in stockholders' equity to $179.8 million Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $147.8 | $143.2 | | Total Assets | $209.3 | $204.3 | | Total Current Liabilities | $13.3 | $15.7 | | Total Liabilities | $29.5 | $32.7 | | Total Stockholders' Equity | $179.8 | $171.6 | Condensed Consolidated Statements of Operations For the six months ended June 30, 2021, the company reported net income of $7.9 million, a significant decrease from $17.5 million in 2020, primarily due to the absence of license revenue Statement of Operations Summary (in millions, except per share data) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Product Revenue | $20.6 | $19.3 | $49.5 | $38.3 | | License and Development Revenue | $0 | $24.4 | $0 | $26.9 | | Total Revenue | $20.6 | $43.6 | $49.5 | $65.2 | | Income from Operations | $0.3 | $21.3 | $6.4 | $21.4 | | Net Income | $1.1 | $16.9 | $7.9 | $17.5 | | Diluted EPS | $0.02 | $0.30 | $0.13 | $0.31 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $11.5 million for the six months ended June 30, 2021, while investing and financing activities saw substantial changes Cash Flow Summary (in millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $11.5 | $(0.3) | | Net cash provided by investing activities | $0.4 | $35.8 | | Net cash (used in) provided by financing activities | $(2.9) | $1.1 | | Net change in cash | $9.0 | $36.6 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, revenue disaggregation by geography, segment realignment into Water and Emerging Technologies, and the impact of the VorTeq License Agreement termination - In Q1 2021, the company realigned its segment reporting into two segments: Water (desalination and industrial wastewater products) and Emerging Technologies (VorTeq, ISOBoost, PX G1300, etc.). Prior year amounts were recast for comparability[96][97] - The termination of the VorTeq License Agreement with Schlumberger, effective June 1, 2020, led to the full recognition of the remaining $24.4 million deferred revenue balance in Q2 2020. No further license revenue was recognized from this agreement[47][102][124] Revenue by Geography (Six Months Ended June 30, 2021, in millions) | Region | Revenue | % of Total | | :--- | :--- | :--- | | Middle East and Africa | $37.4 | 75.5% | | Asia | $9.5 | 19.2% | | Americas | $1.4 | 2.8% | | Europe | $1.3 | 2.5% | | Total | $49.5 | 100% | - In March 2021, the Board authorized a stock repurchase program of up to $50.0 million. As of June 30, 2021, 656,938 shares had been repurchased for $11.6 million[94] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 24% decrease in total revenue for H1 2021 due to the VorTeq agreement termination, offset by 30% product revenue growth, and segment realignment Results of Operations Total revenue for H1 2021 decreased 24% to $49.5 million due to the absence of license revenue, while product revenue increased 30% driven by the Megaproject channel Total Revenue Comparison (in millions) | Revenue Type | Six Months 2021 | Six Months 2020 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Product revenue | $49.5 | $38.3 | $11.3 | 30% | | License and development revenue | $0 | $26.9 | $(26.9) | (100%) | | Total revenue | $49.5 | $65.2 | **$(15.6) | (24%) | Product Revenue by Channel (Six Months Ended June 30, in millions) | Channel | 2021 | 2020 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Megaproject | $37.0 | $26.4 | $10.6 | 40% | | Original equipment manufacturer | $7.1 | $7.6 | $(0.5) | (7%) | | Aftermarket | $5.5 | $4.2 | $1.2 | 29% | | Total product revenue | $49.5 | $38.3 | $11.3 | 30% | - Product gross margin for the first six months of 2021 decreased to 67.4% from 68.0% in 2020. This was attributed to rising labor and overhead costs, lower average PX selling prices, and a change in product mix, which offset gains from operational efficiencies[128] - R&D expenses for the first six months of 2021 decreased by 32% to $8.9 million, primarily due to lower testing supplies expenditures related to reduced development of the VorTeq technology[137][139] Liquidity and Capital Resources The company maintains strong liquidity with $103.3 million in cash and $17.4 million in investments, sufficient to meet future capital requirements, and initiated a $50.0 million stock repurchase program - Principal sources of liquidity as of June 30, 2021, consisted of $103.3 million in cash and cash equivalents, $17.4 million in short-term investments, and $7.6 million in net accounts receivable[154] - A stock repurchase program of up to $50.0 million was authorized on March 9, 2021. By June 30, 2021, the company had repurchased 656,938 shares for $11.6 million[157] Cash Flow Summary (Six Months Ended June 30, in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $11.5 | $(0.3) | | Net cash provided by investing activities | $0.4 | $35.8 | | Net cash (used in) provided by financing activities | $(2.9) | $1.1 | Quantitative and Qualitative Disclosures About Market Risk The company's market risks are minimal, primarily foreign currency and interest rates, with foreign currency exposure being insignificant and interest rate risk managed through short-term investments - Foreign currency exposure is considered insignificant as revenue contracts are denominated in USD, and the company does not currently hedge this risk[173][174][176] - Interest rate risk is managed by investing in a portfolio with a weighted average maturity of less than seven months. A hypothetical 1% interest rate increase would decrease the fair value of its $17.4 million debt securities portfolio by less than $0.1 million[178] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal controls - The President and Chief Executive Officer and the Chief Financial Officer concluded that as of June 30, 2021, the company's disclosure controls and procedures are effective[180] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[181] Part II - Other Information Legal Proceedings As of June 30, 2021, the company reported no material losses from legal proceedings that were considered probable or reasonably possible - As of June 30, 2021, the company determined there were no material losses from litigation that were probable or reasonably possible to accrue for[89][185] Risk Factors The company reports no material changes to its risk factors from those previously disclosed in its 2020 Annual Report and Q1 2021 10-Q filing - There have been no material changes in risk factors from those disclosed in the 2020 Annual Report and the Q1 2021 10-Q[186] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 656,938 shares for $11.6 million during Q2 2021 under its $50.0 million stock repurchase program, with $38.4 million remaining Issuer Purchases of Equity Securities (Q2 2021, in millions) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | | April 1 – April 30, 2021 | 1,770 | $17.90 | $49.97 | | May 1 – May 31, 2021 | 655,168 | $17.57 | $38.45 | | June 1 – June 30, 2021 | 0 | N/A | $38.45 | | Total | 656,938 | - | $38.45 | Other Items This section covers standard disclosures, reporting no defaults on senior securities, no mine safety disclosures, and no other material information - Item 3: No defaults upon senior securities were reported[189] - Item 4: Mine Safety Disclosures are not applicable[190] - Item 5: No other information was reported[191]