Energy Recovery(ERII) - 2021 Q4 - Annual Report

PART I Item 1 Business Energy Recovery designs and manufactures sustainable industrial solutions, leveraging pressure exchanger technology for SWRO desalination and expanding into industrial wastewater and commercial refrigeration markets - Energy Recovery, Inc. designs and manufactures solutions that make industrial processes more efficient and sustainable, leveraging its pressure exchanger technology to lower costs, save energy, reduce waste, and minimize emissions[27] - The PX Pressure Exchanger (PX) is considered the industry standard for energy recovery in SWRO desalination, achieving up to 98% efficiency with minimal maintenance[28] - The company is expanding its technology into new markets, including industrial wastewater (IWW) treatment (e.g., battery manufacturers, mining) and commercial/industrial refrigeration (using CO2 as a natural refrigerant)[28][37] Overview Energy Recovery specializes in sustainable industrial solutions, utilizing its pressure exchanger technology to enhance efficiency, reduce costs, and minimize environmental impact - The company's solutions leverage pressure exchanger technology to lower costs, save energy, reduce waste, and minimize emissions in various industrial processes[27] - The PX Pressure Exchanger (PX) is a major contributor to SWRO advancement, significantly lowering energy intensity and cost, and is considered the industry standard with up to 98% efficiency[28] - Energy Recovery is applying its core technology to new markets like industrial wastewater and commercial/industrial refrigeration, with R&D being a central part of its strategy[29][30] Environmental, Social and Governance Program Energy Recovery released its second annual ESG report, detailing efforts to accelerate environmental sustainability for customers and enhance internal ESG management - The company's ESG efforts resulted in an increase in its MSCI rating from BBB to A in February 2021, leading to inclusion in the MSCI USA Small Cap Leaders Index[32] - Key ESG goals include developing the workforce, protecting employee safety, reporting climate-related risk strategy aligned with TCFD by end of FY2024, achieving ISO 14001 certification by end of 2022, doubling emissions reductions from products by end of FY2025 (vs. FY2019 baseline), and delivering trustworthy products[33][34] Markets Energy Recovery offers products for SWRO and IWW treatment, including ERDs and high-pressure pumps, and is expanding into natural gas processing and CO2 refrigeration systems - The company offers products for SWRO and IWW treatment, including ERDs and high-pressure feed/recirculation pumps[37] - New market focuses include natural gas processing and CO2 refrigeration systems, which are environmentally sustainable alternatives to HFC-based systems[37] The PX Technology Energy Recovery's proprietary PX pressure exchanger technology efficiently recycles pressure energy with up to 98% efficiency, minimizing emissions and downtime - The PX pressure exchanger technology recycles pressure energy from high-pressure fluid or gas to low-pressure fluid, achieving efficiencies up to 98%[39][41] - This technology lowers costs, saves energy, reduces waste, and minimizes emissions and unplanned downtime in various industrial systems[40] - The PX family of products is scalable, ranging from 20 to 300 gallons per minute per device, and can achieve unlimited capacities through parallel installations[42] Solutions Energy Recovery offers the PX, Ultra PX for industrial wastewater, Turbochargers for desalination and natural gas, and specialized high-pressure pumps - The PX is a high-efficiency isobaric ERD made of ceramic, designed for various RO processes in water treatment, including SWRO, BWRO, and IWW[44] - The Ultra PX, introduced in 2020, addresses challenges in industrial wastewater treatment by recovering up to 60% of wasted energy in higher pressure RO processes, aiming to accelerate RO adoption in ZLD/MLD markets[45][46] - Turbochargers are high-efficiency centrifugal ERDs used in low-pressure brackish and high-pressure seawater desalination, IWW, and natural gas processing, offering substantial savings and ease of integration[47] - The company also manufactures and supplies specialized high-pressure feed and circulation pumps for SWRO, designed to complement ERDs[48] Water Treatment Global water scarcity drives demand for desalination and industrial wastewater treatment, where Energy Recovery's ERDs have saved billions in energy costs - Global water scarcity is intensifying, making desalination and industrial wastewater treatment increasingly vital[50] - By 2020, Energy Recovery's installed ERDs saved water desalination customers approximately $2.6 billion in energy costs and avoided over 26 terawatt-hours of energy usage, representing a 4% reduction in global energy consumption for potable water utilities[51] - The company anticipates revenue growth opportunities in markets not traditionally associated with desalination, such as the U.S. and China[57] - In the IWW market, the Ultra PX is expected to significantly lower thermal demand in ZLD and MLD processes, saving energy and reducing emissions, as RO technology replaces thermal treatments[65] Project Channels Energy Recovery categorizes sales into Megaproject (MPD), Original Equipment Manufacturer (OEM), and Aftermarket (AM) channels, each with distinct customer priorities - MPD customers, developing large-scale desalination plants (over 50.0 thousand m³/day), prioritize ongoing operating costs and life cycle costs, with projects representing $1 million to $21 million in revenue opportunities[67] - OEM customers, supplying small to medium-sized desalination plants (up to 50.0 thousand m³/day), prioritize initial capital expenditure, leading to sales of PX, Turbochargers, and pumps, with projects typically representing up to $1 million in revenue[68] - AM customers are existing plant owners/operators who utilize the company's technology for upgrades, spare parts, repair services, and field services to maximize plant availability and profitability[70] Sales and Marketing Energy Recovery employs a global direct sales force with offices in strategic regions, and a significant portion of revenue is generated outside the U.S. - The company maintains a global sales and service footprint in strategic territories, including the U.S., China, India, Latin America, Spain, Saudi Arabia, and the United Arab Emirates[71] - A significant portion of the company's revenue is derived from outside the U.S.[73] Competition The market for ERDs and pumps is competitive, but Energy Recovery believes its solutions offer advantages in life-cycle costs, durability, and efficiency - Main competitors for ERDs include Flowserve Corporation, Fluid Equipment Development Company (FEDCO), and Danfoss Group[74] - The company believes its PX has a competitive advantage over Flowserve's DWEER due to durable alumina ceramic parts (25+ year life), high efficiencies, and minimal unplanned downtime, resulting in lower lifecycle costs[75] - The PX also has a distinct competitive advantage over FEDCO's turbochargers and Danfoss' iSave ERDs due to significantly higher energy savings, lower lifecycle maintenance costs, and durable alumina ceramic parts[76] Seasonality The company does not experience specific seasonality, but product revenue fluctuates significantly due to the timing and execution of Megaproject shipments - There is no specific seasonality to highlight throughout a calendar year[78] - Product revenue experiences substantial fluctuations quarter-to-quarter and year-to-year, mainly due to the timing and execution of MPD shipments[78] Emerging Technologies Energy Recovery is diversifying into new industries like refrigeration and natural gas processing by leveraging its pressure exchanger technology - The company is leveraging its pressure exchanger technology platform to develop new product applications and diversify into new industries[79] - In refrigeration, the PX G1300 aims to reduce energy consumption and operating costs of CO2 refrigeration systems, accelerating adoption of CO2 as an environmentally sustainable alternative to HFCs[81][83] - The IsoBoost product recovers energy wasted during the depressurization of amine in natural gas processing, reducing energy consumption, carbon footprint, capital expenditures, and maintenance costs[86] Manufacturing Energy Recovery designs, produces, assembles, and tests its products in California facilities, emphasizing in-house ceramic manufacturing and environmental commitment - Products are designed, produced, assembled, and tested in California facilities, which include advanced ceramics manufacturing and testing laboratories[88] - Alumina ceramic components for the PX are manufactured in-house, with excess powder collected and reused as part of waste management strategies[89] - The company is committed to reducing environmental impact, pursuing ISO14001 certification by end of fiscal year 2022, and operates under Lean Manufacturing principles with ISO9001:2015 and ISO45001 certifications[92] Research, Development and Technology Energy Recovery's R&D focuses on advancing existing solutions, applying technology to new markets, and fundamental research, adhering to strict commercialization timelines - R&D investments are focused on advancing solutions for historical markets, applying technology to new markets, and fundamental research for new applications[94] - New technologies must be proven viable within 12 months, commercialized within 24 months, and achieve breakeven run rate within 36 months of project inception[95] - The company uses advanced analytical tools, including 3D modeling and computational fluid dynamics, to refine existing technologies and develop new derivatives[96] Information Technology Energy Recovery relies heavily on IT and data systems, with a strong focus on cybersecurity, overseen by the Audit Committee - The company actively monitors and manages IT for security risks through enterprise-wide programs, annual employee training, and vulnerability assessments[98] - Cybersecurity is a 'high-level' risk reported to and overseen by the Audit Committee of the Board of Directors[100] - Enhanced security features include endpoint security, network intrusion prevention, security patches, SIEM systems, restricted network access, and multi-factor authentication for remote work[99] Intellectual Property Energy Recovery protects its proprietary technology through patents, trade secret laws, and contractual safeguards, maintaining a robust IP portfolio - The company relies on patents, trade secret laws, and contractual safeguards to protect its proprietary tooling, processing techniques, and know-how[101] - It maintains a robust intellectual property portfolio consisting of U.S. and international issued patents and pending patent applications[102] - Registered trademarks include "ERI," "PX," "PX Pressure Exchanger," "Ultra PX," "IsoBoost," and "Making Desalination Affordable," with applications pending for "PX G1300," "PX G," and "VorTeq"[104] Human Capital Resources Energy Recovery emphasizes its employees as key to success, fostering an innovative, safe, and collaborative work environment with competitive benefits - As of December 31, 2021, the company had 222 full-time employees, who are not unionized, and relations are considered good[106] - The company focuses on creating an engaged employee experience through attracting, onboarding, developing, and retaining employees, providing competitive benefits and a safe workplace[108] - Employee safety is a top priority, with company-wide policies, compliance with OSHA and ISO45001 standards, and enhanced COVID-19 safety protocols, including weekly testing[111] Additional Information Energy Recovery's Investor Relations website serves as a routine channel for important information, including SEC filings, to comply with Regulation FD - The company's Investor Relations website (ir.energyrecovery.com) is a routine channel for distributing important information, including news releases, presentations, and financial statements[113] - The Investor Relations section is used to comply with disclosure obligations under Regulation FD, requiring investors to monitor it in addition to other public communications[113] Item 1A Risk Factors This section outlines significant risks that could impact Energy Recovery's business, operations, and financial condition, spanning water, emerging technologies, general business, and financial aspects - The company's Water segment revenues are highly dependent on the construction and retrofit of desalination plants, making operating results susceptible to variability from capital spending, project financing, and other industry factors[115][117] - Diversification into new fluid flow markets like commercial refrigeration and industrial wastewater may not be successful, posing risks to growth strategy, market acceptance, and profitability[127] - Operating results may fluctuate significantly due to long and unpredictable sales cycles, substantial fixed costs, and reliance on a limited number of suppliers for critical components[134][136][137][142] - The COVID-19 pandemic poses ongoing risks including supply chain disruptions, labor shortages, increased costs, and potential delays or cancellations of customer projects[180][183] - Failure to protect intellectual property rights or claims of infringement by third parties could harm the company's competitive position and incur significant legal expenses[190][191][192] Risks Related to our Water Segment The Water segment faces significant risks from revenue variability tied to desalination plant construction, intense competition, and potential product defects - Water segment revenues depend on the construction of new desalination plants and retrofits, leading to significant variability due to factors like capital spending, project financing, and technology shifts (e.g., from thermal to SWRO)[115][116][117] - The market for ERDs and pumps is competitive, with new and improved products from competitors potentially harming market share and margins[119][120] - Risks related to product defects could result in warranty claims exceeding provisions, adversely affecting business and financial condition[123][124] Risks Related to our Emerging Technologies Diversification into new fluid flow markets like commercial refrigeration and industrial wastewater carries risks, as success is not guaranteed and commercialization challenges exist - Diversification into new fluid flow markets, such as commercial refrigeration and IWW, may not be successful, potentially damaging reputation, limiting growth, and negatively affecting operating results[127] - Successful development, launch, and commercialization of CO2 refrigeration technology (PX G1300) face technological challenges and competition from large, established companies[128] - Commercialization of VorTeq technology depends heavily on finding a suitable collaboration partner and adoption by fracking operators; failure could result in no return on R&D investment[130][131] Risks Related to our General Business The company's operating results are subject to significant fluctuations due to long sales cycles, fixed costs, supply chain reliance, and international operational risks - Operating results may fluctuate significantly due to long and unpredictable sales cycles (16-36+ months for MPD, 1-12 months for OEM) and substantial fixed costs that are difficult to reduce in the short term[134][136][137][138] - Reliance on a limited number of single-source suppliers for critical components (vessel housings, stainless steel ports, alumina powder, tungsten carbide) creates risks of delivery delays, quality issues, and capacity shortages[142][143] - Global operations expose the company to risks including compliance with international laws (e.g., FCPA, export controls), geopolitical uncertainty, and potential adverse effects from ESG issues and climate change regulations[158][159][160][161][162][163][164] - The transition away from LIBOR as a reference rate for financial obligations could adversely affect financial condition and results of operations, potentially increasing borrowing costs[166][168][169] - Future growth may require additional capital, which may not be available on favorable terms, and expansion through acquisitions carries integration and financial risks[171][172][173][174] Risks Related to COVID-19 The COVID-19 pandemic continues to pose significant risks, including operational disruptions, travel restrictions, and impacts on suppliers and customers - The COVID-19 pandemic and its variants have caused widespread travel restrictions, shutdowns, and operational disruptions, with uncertain long-term impacts on financial condition, results of operations, liquidity, and cash flows[179][180] - Supply chain disruptions, including restrictions, logistics delays, labor shortages, and inflation, could disrupt product production and increase costs, particularly from near sole-source suppliers[182][183] Risks Related to Information Technology The company faces ongoing risks related to the security and integrity of its IT systems and data, including cyberattacks and evolving data privacy regulations - The company faces risks of industrial espionage, cyberattacks (e.g., LOG4J), misuse or theft of information/assets, and damage to assets, despite significant efforts to maintain IT system security[185] - Cybersecurity breaches could lead to disclosure of confidential information, improper use of IP, data theft, production downtimes, and costly legal actions[185] - Evolving data privacy laws (e.g., GDPR, CCPA) impose costly compliance requirements and risks of enforcement actions, fines, and reputational damage for inadequate personal data protection[186][189] Risks Related to Intellectual Property The company's competitive position relies on protecting its technology and enforcing IP rights, facing risks from patent expiration, limited foreign protection, and infringement claims - The company's competitive position depends on establishing and maintaining proprietary rights in its technology and protecting it from copying[190] - Risks include patent expiration, limited IP protection in foreign countries, and the possibility that pending patent applications may not result in issued patents or may be contested[191] - Claims by third parties of IP infringement could lead to substantial defense costs, damages, injunctions, or the need for expensive licensing or non-infringing technology development[192] Risks Related to Tax and Governmental Regulations Changes in tax legislation, trade policies, and regulations, including those related to conflict minerals, could materially impact the company's financial position - Changes in tax laws, regulations, or interpretations (e.g., U.S. Tax Act, international BEPS recommendations) could materially impact the company's effective tax rates and financial results[194][195][196][197][198] - Changes in fiscal, regulation, and other federal policies, including modifications to international trade policy and tariffs (e.g., U.S. tariffs on Chinese goods), could adversely affect business, revenues, and gross margins[199][200][201][203] - Regulations related to conflict minerals impose compliance costs, potential changes to products/supply, and reputational challenges if products contain non-conflict-free minerals[204] Risks Related to our Internal Control Changes in U.S. GAAP or material weaknesses in internal control over financial reporting could adversely affect financial results and investor perception - Changes in U.S. GAAP could adversely affect financial results and require significant changes to internal accounting systems and processes[205][206] - Failure to maintain effective internal control over financial reporting or disclosure of material weaknesses could adversely affect investor perception and stock price[207][208] Risks Related to our Common Stock Risks related to common stock include significant insider influence, market price volatility, anti-takeover provisions, and no cash dividends in the foreseeable future - Directors, executive officers, and principal stockholders hold substantial common stock, giving them significant influence over matters requiring stockholder approval[210] - The market price of common stock is volatile and subject to fluctuations from various factors, potentially harming the ability to recruit/retain employees and access capital[212] - Anti-takeover provisions in charter documents and Delaware law could discourage, delay, or prevent a change in control[213][214] - The company does not intend to pay cash dividends in the foreseeable future, making capital appreciation the sole source of potential gain for shareholders[220][221] Item 1B Unresolved Staff Comments There are no unresolved staff comments to report Item 2 Properties Energy Recovery leases approximately 171,000 sq ft in San Leandro for manufacturing, R&D, and headquarters, with additional facilities in Katy, Texas, and Tracy, California - The company leases approximately 171,000 sq ft in San Leandro, California, for product manufacturing, R&D, and executive headquarters, with a lease expiring December 31, 2028[223] - An industrial lease in Katy, Texas (25,200 sq ft, expires 2029) is for testing VorTeq technology and new pressure exchanger applications[223] - An additional manufacturing and warehousing space in Tracy, California (54,429 sq ft, expires 2030) supplements ERD manufacturing and distribution[223] Item 3 Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 7, "Commitments and Contingencies – Litigation" of the Notes to Consolidated Financial Statements Item 4 Mine Safety Disclosures This item is not applicable to the company PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Energy Recovery's common stock is listed on The Nasdaq Global Select Market, with a $50.0 million share repurchase program authorized in March 2021 - The company's common stock is listed on The Nasdaq Global Select Market under the symbol "ERII"[227] - As of December 31, 2021, there were approximately 17 stockholders of record[227] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[228] Share Repurchase Program Activity (October - December 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Dollar Value That May Yet to be Purchased Under the Program (In thousands) | |:---|:---|:---|:---|:---| | October 1 – October 31, 2021 | 217,270 | $19.43 | 1,169,936 | $28,618 | | November 1 – November 30, 2021 | 14,173 | $20.69 | 1,184,109 | $28,324 | | December 1 – December 31, 2021 | 81,109 | $20.57 | 1,265,218 | $26,654 | Comparison of Five-Year Cumulative Total Return (December 31, 2016 - December 31, 2021) | | December 31, 2016 | December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | |:---|:---|:---|:---|:---|:---|:---| | Energy Recovery, Inc. | $100.00 | $84.54 | $65.02 | $94.59 | $131.79 | $207.63 | | NASDAQ Composite Index | 100.00 | 129.64 | 125.96 | 172.17 | 249.51 | 304.85 | | Former Peer Group | 100.00 | 116.59 | 100.58 | 133.99 | 145.82 | 190.38 | | New Peer Group | 100.00 | 122.43 | 100.60 | 131.03 | 158.90 | 207.25 | Item 6 [Reserved] This item is reserved and contains no information Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Energy Recovery's financial condition and results of operations, highlighting key achievements despite COVID-19 challenges - The company's reportable operating segments are Water and Emerging Technologies, based on industries, technology solutions, and management's performance evaluation[240] - Key highlights for the year include product revenues exceeding $100 million, the first commercial contract for PX G1300, contracts for Ultra PX in Chinese lithium-ion battery manufacturing, and a new $50 million credit agreement[241] - The company believes its existing cash, marketable securities, and ongoing cash from operations will be sufficient to meet liquidity needs for at least the next 12 months[274] Overview The Management's Discussion and Analysis section provides insight into Energy Recovery's financial performance, focusing on its Water and Emerging Technologies segments - Reportable operating segments are Water and Emerging Technologies, based on industries, technology solutions, and management's performance evaluation[240] - Corporate operating expenses support both segments and R&D for potential future industry verticals[240] Highlights Despite global COVID-19 challenges, Energy Recovery achieved significant milestones in 2021, including product revenue exceeding $100 million and new commercial contracts - Product revenues exceeded $100 million, driven by new large greenfield plant installations, brownfield retrofits, and plant-level resupply of critical components[241] - The company announced its first commercial contract for the PX G1300 with a U.S. supermarket chain[241] - Contracts were announced to supply the Ultra PX for industrial wastewater treatment in Chinese lithium-ion battery manufacturing facilities, chemical manufacturing, landfill leachate, and natural gas plants[241] - A new $50 million credit agreement was entered into with JPMorgan Chase Bank, N.A. in December 2021 to replace an existing loan and provide additional capital for growth[241] COVID-19 Pandemic In response to the COVID-19 pandemic, Energy Recovery implemented enhanced safety measures and believes its liquidity is sufficient for the next 12 months - The company implemented enhanced safety measures, including masking, social distancing, personal safety equipment, weekly employee/vendor testing, and a work-at-home policy for support functions[242] - Despite uncertainties, the company believes its cash on hand, marketable securities, and ongoing cash from operations will be sufficient to cover capital requirements for the next 12 months[243] Results of Operations Energy Recovery's total revenue decreased by 13% in 2021 due to a license agreement termination, but product revenue increased by 13% across all channels Total Revenue (2021 vs. 2020) | | 2021 ($ thousands) | % of Total Revenue | 2020 ($ thousands) | % of Total Revenue | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|:---|:---| | Product revenue | $103,904 | 100% | $92,091 | 77% | $11,813 | 13% | | License and development revenue | — | —% | $26,895 | 23% | $(26,895) | (100%) | | Total revenue | $103,904 | 100% | $118,986 | 100% | $(15,082) | (13%) | Product Revenue by Channel (2021 vs. 2020) | | 2021 ($ thousands) | % of Product Revenue | 2020 ($ thousands) | % of Product Revenue | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|:---|:---| | Megaproject | $75,391 | 73% | $66,763 | 73% | $8,628 | 13% | | Original equipment manufacturer | $17,604 | 17% | $15,834 | 17% | $1,770 | 11% | | Aftermarket | $10,909 | 10% | $9,494 | 10% | $1,415 | 15% | | Total product revenue | $103,904 | 100% | $92,091 | 100% | $11,813 | 13% | Product Gross Profit and Gross Margin (2021 vs. 2020) | | 2021 ($ thousands) | Gross Margin | 2020 ($ thousands) | Gross Margin | Change in Product Gross Profit ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|:---|:---| | Product gross profit and gross margin | $71,234 | 68.6% | $63,842 | 69.3% | $7,392 | 11.6% | Total Operating Expenses (2021 vs. 2020) | | 2021 ($ thousands) | 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---| | General and administrative | $25,162 | $25,519 | $(357) | (1%) | | Sales and marketing | $12,160 | $8,127 | $4,033 | 50% | | Research and development | $20,069 | $23,449 | $(3,380) | (14%) | | Amortization of intangible assets | $12 | $16 | $(4) | (25%) | | Impairment of long-lived assets | — | $2,332 | $(2,332) | (100%) | | Total operating expenses | $57,403 | $59,443 | $(2,040) | (3%) | Net Income and EPS (2021 vs. 2020) | | 2021 | 2020 | |:---|:---|:---|\ | Net income ($ thousands) | $14,269 | $26,387 | | Net income per share: Basic | $0.25 | $0.47 | | Net income per share: Diluted | $0.24 | $0.47 | Liquidity and Capital Resources Energy Recovery maintains strong liquidity with $74.4 million in cash and equivalents, a new $50.0 million credit agreement, and sufficient resources for the next 12 months - As of December 31, 2021, principal liquidity sources included $74.4 million in unrestricted cash and cash equivalents, $33.6 million in investment-grade marketable debt instruments, and $20.6 million in net accounts receivable[274] - A new $50.0 million revolving credit agreement with JPMorgan Chase Bank, N.A. was entered into in December 2021, replacing a previous $16.0 million loan, with no revolving loan amounts outstanding and $14.0 million in outstanding LCs as of December 31, 2021[275] Cash Flows Summary (2021 vs. 2020) | | 2021 ($ thousands) | 2020 ($ thousands) | Change ($ thousands) | |:---|:---|:---|:---| | Net cash provided by operating activities | $13,526 | $16,870 | $(3,344) | | Net cash (used in) provided by investing activities | $(20,563) | $46,600 | $(67,163) | | Net cash (used in) provided by financing activities | $(12,792) | $4,374 | $(17,166) | | Net change in cash, cash equivalents and restricted cash | $(19,897) | $67,870 | $(87,767) | - Net cash provided by operating activities decreased due to increased planned inventory purchases and finished goods production, and timing of invoices and cash collected on accounts receivables[281] - Net cash used in financing activities was primarily due to $23.3 million in share repurchases under the March 2021 Authorization[283] Item 7A Quantitative and Qualitative Disclosures About Market Risk Energy Recovery's market risk exposure primarily stems from foreign currency fluctuations and interest rates, which are managed through investment strategies - Foreign currency exposures are due to fluctuations in exchange rates for USD versus the British pound, Saudi riyal, Emirati dirham, European euro, Chinese yuan, Indian rupee, and Canadian dollar[301] - As international sales expand, a portion of revenue could be denominated in foreign currencies, increasing the impact of exchange rate changes on cash and operating results[302] - The investment portfolio of $33.6 million in marketable debt instruments is subject to interest rate fluctuations; however, the company minimizes this risk by maintaining investments with a weighted average maturity of less than six months[306] Item 8 Financial Statements and Supplementary Data This section presents Energy Recovery's audited consolidated financial statements, with an unqualified opinion from Deloitte & Touche LLP on both financial statements and internal control effectiveness - Deloitte & Touche LLP, the independent registered public accounting firm, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[311][312][324][325] Consolidated Balance Sheet Highlights (2021 vs. 2020) | ASSETS | December 31, 2021 ($ thousands) | December 31, 2020 ($ thousands) | |:---|:---|:---| | Cash and cash equivalents | $74,358 | $94,255 | | Short-term investments | $31,332 | $20,446 | | Accounts receivable, net | $20,615 | $11,792 | | Inventories, net | $20,383 | $11,748 | | Total current assets | $151,763 | $143,191 | | Total assets | $213,690 | $204,314 | | LIABILITIES | | | | Total current liabilities | $19,785 | $15,729 | | Total liabilities | $34,911 | $32,690 | | STOCKHOLDERS' EQUITY | | | | Total stockholders' equity | $178,779 | $171,624 | Consolidated Statements of Operations Highlights (2021 vs. 2020 vs. 2019) | | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | |:---|:---|:---|:---| | Product revenue | $103,904 | $92,091 | $72,834 | | License and development revenue | — | $26,895 | $14,108 | | Total operating expenses | $57,403 | $59,443 | $56,243 | | Income from operations | $13,831 | $31,294 | $10,364 | | Net income | $14,269 | $26,387 | $10,913 | | Basic EPS | $0.25 | $0.47 | $0.20 | | Diluted EPS | $0.24 | $0.47 | $0.19 | Consolidated Statements of Cash Flows Highlights (2021 vs. 2020 vs. 2019) | | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | |:---|:---|:---|:---| | Net cash provided by operating activities | $13,526 | $16,870 | $5,268 | | Net cash (used in) provided by investing activities | $(20,563) | $46,600 | $(6,881) | | Net cash (used in) provided by financing activities | $(12,792) | $4,374 | $5,963 | | Net change in cash, cash equivalents and restricted cash | $(19,897) | $67,870 | $4,350 | | Cash, cash equivalents and restricted cash, end of year | $74,461 | $94,358 | $26,488 | Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure Item 9A Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the quarter - Disclosure controls and procedures were evaluated as effective as of December 31, 2021, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[516][517] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, based on COSO criteria[518] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter, even with a majority of non-manufacturing employees working remotely due to COVID-19[520] Item 9B Other Information There is no other information to report under this item Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company PART III Item 10 Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement Item 11 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management, equity compensation plan details, and related stockholder matters is incorporated by reference from the company's 2022 Proxy Statement Equity Compensation Plan Information (as of December 31, 2021) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) | |:---|:---|:---|:---| | Equity compensation plans approved by security holders | 3,238,278 | $9.21 | 5,208,569 | | Equity compensation plans not approved by security holders | None | Not applicable | Not applicable | Item 13 Certain Relationships and Related Transactions and Director Independence Information concerning certain relationships, related transactions, and director independence is incorporated by reference from the company's 2022 Proxy Statement Item 14 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2022 Proxy Statement PART IV Item 15 Exhibits and Financial Statement Schedules This section lists the financial statements and schedules included in the Annual Report on Form 10-K, along with a comprehensive list of exhibits - The financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," are part of this Annual Report[332][533] - All financial statement schedules are omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or notes[533] - A comprehensive list of exhibits required by Item 601 of Regulation S-K is provided, including corporate governance documents, compensation plans, and financial agreements[535][536][537][538][539][540][541][542][543] Item 16 Form 10-K Summary This item indicates that there is no Form 10-K Summary provided Signatures The Annual Report on Form 10-K was duly signed on February 24, 2022, by Robert Yu Lang Mao, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer - The Report was signed on February 24, 2022, by Robert Yu Lang Mao, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer[550][551][552]