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Energy Recovery(ERII) - 2021 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1 — Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Q3 and YTD 2021 versus 2020, including balance sheets, statements of operations, cash flows, and explanatory notes Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2021, shows total assets increased to $208.8 million, with shifts in cash, investments, and inventories, while liabilities remained stable Balance Sheet Summary (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $146,809 | $143,191 | | Cash and cash equivalents | $65,745 | $94,255 | | Inventories, net | $20,557 | $11,748 | | Total Assets | $208,788 | $204,314 | | Total Current Liabilities | $16,215 | $15,729 | | Total Liabilities | $32,049 | $32,690 | | Total Stockholders' Equity | $176,739 | $171,624 | Condensed Consolidated Statements of Operations Q3 2021 product revenue decreased 24% YoY, reducing net income to $1.1 million, while nine-month net income fell to $9.0 million due to the absence of 2020 license revenue Q3 2021 vs Q3 2020 (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Product Revenue | $20,781 | $27,408 | -24.2% | | Income from Operations | $1,427 | $6,078 | -76.5% | | Net Income | $1,071 | $5,387 | -80.1% | | Diluted EPS | $0.02 | $0.10 | -80.0% | Nine Months Ended Sep 30, 2021 vs 2020 (in thousands, except per share data) | Metric | YTD 2021 | YTD 2020 | Change | | :--- | :--- | :--- | :--- | | Product Revenue | $70,328 | $65,665 | +7.1% | | License and Development Revenue | $0 | $26,895 | -100% | | Income from Operations | $7,858 | $27,481 | -71.4% | | Net Income | $9,006 | $22,934 | -60.7% | | Diluted EPS | $0.15 | $0.41 | -63.4% | Condensed Consolidated Statements of Cash Flows Nine-month operating cash flow decreased to $7.3 million, investing activities used $27.5 million, and financing activities used $8.2 million, resulting in a net cash decrease of $28.5 million Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,294 | $10,350 | | Net cash (used in) provided by investing activities | $(27,547) | $42,166 | | Net cash (used in) provided by financing activities | $(8,217) | $1,237 | | Net change in cash | $(28,510) | $53,764 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, financial results, revenue disaggregation, segment reporting, and the share repurchase program, highlighting the Water segment's revenue contribution - In June 2020, the company terminated its VorTeq License Agreement with Schlumberger, recognizing the remaining deferred revenue of $24.4 million in Q2 2020, with no further license and development revenue recognized after this date47 - The company initiated a $50.0 million share repurchase program in March 2021, and as of September 30, 2021, it had repurchased 952,666 shares for $17.2 million, with $32.8 million remaining under the authorization9697 Revenue by Segment - Nine Months Ended Sep 30, 2021 (in thousands) | Segment | Product Revenue | Operating Income (Loss) | | :--- | :--- | :--- | | Water | $70,275 | $34,854 | | Emerging Technologies | $53 | $(16,020) | Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 revenue decline due to megaproject timing and the impact of the 2020 Schlumberger agreement termination on YTD revenue, highlighting Emerging Technologies progress and supply chain mitigation - The company is advancing its PX G1300 for commercial refrigeration, entering into an agreement to deploy the device at a California grocery store, and anticipates increased S&M spending for this initiative in late 2021 and 2022112 - To mitigate significant global inflationary and supply chain issues, the company has proactively increased its raw material inventory, which has nearly doubled in value, helping avoid manufacturing disruptions and delaying inflation impact113 Segments The company operates two segments: Water, focused on desalination and industrial wastewater, and Emerging Technologies, developing solutions for new markets like commercial refrigeration and natural gas processing - The Water segment secured over $6.0 million in contracts for SWRO desalination facilities in Asia and new awards for industrial wastewater treatment in China, including for lithium-ion battery manufacturing119 - The Emerging Technologies segment focuses on commercializing its pressure exchanger technology for CO2 refrigeration systems to help the industry transition away from high-GWP HFCs, aligning with global initiatives like the Kigali Amendment122 Results of Operations Q3 2021 product revenue decreased 24% to $20.8 million due to megaproject timing, while YTD product revenue grew 7% to $70.3 million, with gross margin slightly down and operating expenses decreasing 11% due to reduced R&D activities Product Revenue by Channel - Q3 2021 vs Q3 2020 (in thousands) | Channel | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Megaproject | $13,275 | $20,725 | -36% | | Original equipment manufacturer | $4,844 | $4,081 | +19% | | Aftermarket | $2,662 | $2,602 | +2% | Product Revenue by Channel - YTD 2021 vs YTD 2020 (in thousands) | Channel | YTD 2021 | YTD 2020 | Change | | :--- | :--- | :--- | :--- | | Megaproject | $50,307 | $47,147 | +7% | | Original equipment manufacturer | $11,909 | $11,687 | +2% | | Aftermarket | $8,112 | $6,831 | +19% | - The decrease in R&D expenses for the nine months ended Sep 30, 2021 was primarily due to a $4.0 million reduction in testing supplies for the VorTeq technology146 Liquidity and Capital Resources As of September 30, 2021, liquidity included $65.7 million in cash and $42.7 million in marketable debt, deemed sufficient for 12 months, with $5.6 million in stock repurchases during the quarter - The company's Board of Directors authorized a $50.0 million share repurchase program in March 2021, with approximately $32.8 million remaining available as of September 30, 2021163 - Net cash used in financing activities for the nine months ended Sep 30, 2021 was $8.2 million, primarily due to $17.2 million in share repurchases, partially offset by $7.7 million in proceeds from equity issuance169 Item 3 — Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency exchange rate fluctuations and interest rate risk, with no current hedging for foreign currency and interest rate risk managed through short-maturity debt investments - As of September 30, 2021, a hypothetical 1% increase in interest rates would result in an approximate $0.2 million decrease in the fair value of the company's fixed-income debt securities portfolio183 Item 4 — Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control over financial reporting - The President and Chief Executive Officer and the Chief Financial Officer concluded that as of September 30, 2021, the company's disclosure controls and procedures are effective185 PART II — OTHER INFORMATION Item 1 — Legal Proceedings This section refers to litigation disclosures in the 2020 Annual Report and financial statement notes, indicating no material updates to ongoing legal matters as of September 30, 2021 - As of September 30, 2021, there were no material losses from litigation which were considered probable or reasonably possible91190 Item 1A — Risk Factors The company highlights supply chain disruptions, shortages, or delays due to COVID-19 as a key risk, potentially impacting production, increasing costs, and materially affecting financial results - A key risk is the potential for supply chain disruptions due to COVID-19, including logistics delays, labor shortages, and inflation, which could disrupt production or increase costs if the company cannot source materials or pass on price increases to customers192193 Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity during Q3 2021 under the March 2021 Authorization, with 295,728 shares repurchased during the three-month period Share Repurchase Activity - Q3 2021 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2021 | 2,120 | $19.76 | | August 2021 | 280,172 | $18.90 | | September 2021 | 13,436 | $19.33 | Other Items (Items 3, 4, 5, 6) Items 3, 4, and 5 report no applicable information, while Item 6 provides a list of exhibits filed with the report