Energy Recovery(ERII) - 2023 Q4 - Annual Report

PART I Business Overview Energy Recovery, Inc. is a global leader in energy efficiency technology, designing and manufacturing high-performance solutions to reduce costs by improving energy efficiency in commercial and industrial processes, with a strong foundation in seawater reverse osmosis (SWRO) desalination and expansion into wastewater treatment and CO2 refrigeration Company Overview The company focuses on delivering cost savings and environmental sustainability through its energy efficiency technologies - Energy Recovery, Inc. was founded in 2001, headquartered in San Leandro, California, with global sales and technical support teams[29] - The company is dedicated to achieving cost savings and environmental sustainability in commercial and industrial processes through its energy efficiency technologies[27][28] Sustainability Sustainability is a core business focus, managed through dedicated teams, internal projects, and customer solutions - The company integrates sustainability as a core business, managing operational impact and producing high-quality energy recovery devices through dedicated teams, internal projects, and customer solutions[30] - Sustainability objectives focus on employees, environmental and climate change risks, innovation and opportunities, and products, with the first corporate greenhouse gas reduction target announced in 2023[31] Pressure Exchanger Technology The company's Pressure Exchanger technology platform enhances efficiency and environmental performance in commercial and industrial processes - The company's Pressure Exchanger technology platform makes commercial and industrial processes more efficient and environmentally friendly by effectively capturing and transferring pressure energy, thereby reducing costs, saving energy, and decreasing emissions[36] - PX Pressure Exchangers are the energy recovery standard in the seawater reverse osmosis (SWRO) desalination industry, capable of reducing energy consumption in SWRO facilities by up to 60%[39][44] Water Treatment The company addresses the growing global demand for clean water and energy optimization by reducing costs and emissions in desalination and wastewater treatment Markets Seawater desalination is the primary revenue source, with brackish water applications representing a potential growth area - Seawater desalination is the company's primary revenue market, while brackish water applications represent a potential growth area, with market opportunities including new projects and retrofits of existing facilities[46][47] - The wastewater treatment market is diverse, driven by increasingly stringent water conservation, reuse, and discharge regulations, leading to growing demand for Zero Liquid Discharge (ZLD) and Minimum Liquid Discharge (MLD) applications[49] Water Treatment Solutions The company offers high-efficiency isobaric energy recovery devices, including the PX Pressure Exchanger series, for various water treatment applications - The company offers the high-efficiency isobaric energy recovery device PX Pressure Exchanger series, including high-pressure PX, Ultra PX, and low-pressure PX, suitable for seawater, brackish water desalination, and wastewater treatment[57][58][60][62] - Ultra PX is designed to address key challenges in wastewater treatment, such as energy intensity and environmental impact, by improving the affordability and efficiency of RO to accelerate its adoption in Zero Liquid Discharge (ZLD) and Minimum Liquid Discharge (MLD) markets[60][61] - The company also provides high-pressure centrifugal pumps and hydraulic turbochargers as complements to energy recovery devices for various capacities and applications in RO plants[63][64][67] Sales and Marketing The company leverages a global direct sales team and industry events to deliver products and develop new solutions - The company provides products and on-site technical support through a global direct sales team in strategic regions such as the United States, China, India, Latin America, Spain, Saudi Arabia, and the UAE[68] - The majority of the company's revenue is generated from outside the United States, and it develops new solutions by participating in water industry events and utilizing market intelligence[68][69] Competition The water treatment industry is increasingly competitive, but the company's PX products maintain an advantage - The water treatment industry is increasingly competitive, but the company's flagship PX products maintain a competitive advantage due to their highly durable, corrosion-resistant alumina ceramic components, high efficiency, low downtime, and cost-effectiveness[70] Project Channels Water business sales are categorized into Megaproject (MPD), Original Equipment Manufacturer (OEM), and Aftermarket (AM) channels - Water business sales are categorized into three channels: Megaproject (MPD), Original Equipment Manufacturer (OEM), and Aftermarket (AM)[71] - MPD customers primarily focus on operating and lifecycle costs, typically choosing the company's PX solutions; OEM customers are more concerned with initial capital expenditure, potentially opting for PX or hydraulic turbochargers; the AM channel provides spare parts, repairs, and field services[72][73][74] Seasonality Desalination and wastewater treatment revenue does not exhibit specific seasonality, but quarterly and annual revenue can fluctuate significantly - Desalination and wastewater treatment revenue does not exhibit specific seasonality, but quarterly and annual revenue may fluctuate significantly due to the uncertainty of MPD project shipment timing[75] Emerging Technologies The company is leveraging its Pressure Exchanger technology platform to develop new product applications and diversify into new industries like CO2 refrigeration CO2 Refrigeration The global refrigeration industry is transitioning to CO2 refrigerants, with the company's PX G1300™ enhancing system performance - The global refrigeration industry is transitioning from HFC to CO2 refrigerants to address greenhouse gas emission regulations, but CO2 systems have higher energy consumption in warmer climates[77][78] - The company's PX G1300™ Pressure Exchanger is designed to improve the performance of CO2 refrigeration systems, making them economically viable in a wider range of climates by reducing compressor workload to enhance cooling capacity, system stability, and energy efficiency[78][80] Sales and Marketing (CO2) The PX G1300 holds significant potential in commercial and industrial refrigeration markets, offering energy savings and improved cooling - The PX G1300 has significant potential in commercial and industrial refrigeration markets, such as supermarket chains and cold storage facilities, with key value propositions including energy savings, reduced emissions, enhanced cooling capacity, and lower initial capital investment[82][88] Channels and Customers (CO2) CO2 product sales are channeled through OEMs, targeting commercial and industrial customers - CO2 product sales are categorized under the OEM channel, including direct sales to commercial/industrial customers (e.g., supermarkets, cold storage) and sales through refrigeration system installers or OEMs[84] - The company initially sells PX G1300 directly to end-users and OEMs, with future plans to primarily sell through OEMs[86] Competition (CO2) While no direct competitors exist for the company's Pressure Exchanger technology in refrigeration, other energy-saving methods and alternative equipment are present - There are no direct competitors to Pressure Exchanger technology in the refrigeration industry, but other energy-saving methods and alternative equipment exist, with potential for competitive technologies to emerge as CO2 refrigeration systems become more widespread[87][89] Seasonality (CO2) CO2 products currently do not exhibit specific revenue seasonality in their early lifecycle - CO2 products do not exhibit specific revenue seasonality in their early lifecycle[90] Manufacturing The company designs, manufactures, assembles, and tests its products in two California facilities, emphasizing quality and environmental responsibility - The company's products are designed, manufactured, assembled, and tested in two facilities in California, including advanced ceramic manufacturing and testing equipment[91] - Alumina ceramic components for PX products are produced in-house through vertically integrated precision manufacturing processes, ensuring high quality, durability, and reliability[92] - The company is committed to reducing its operational environmental impact through waste management strategies, optimizing renewable energy use, and monitoring key environmental indicators, such as recycling test water[93] Research, Development and Technology R&D is central to the company's strategy, focusing on advancing existing solutions and exploring new applications - R&D is core to the company's history, culture, and corporate strategy, focusing on advancing existing water treatment solutions, applying Pressure Exchanger technology to new markets (e.g., wastewater and CO2), and fundamental research for new applications[94][95] - The company possesses advanced analytical and testing capabilities, including complex analysis tools like 3D, multiphase, and multiphysics computational fluid dynamics, to reduce reliance on expensive full-scale testing[96] Intellectual Property The company protects its proprietary technology through a robust portfolio of patents, trade secret laws, and contractual safeguards - The company protects its proprietary technology, inventions, and improvements through patents, trade secret laws, and contractual safeguards, maintaining a strong portfolio of U.S. and international patents and trademark registrations[98][99] Human Capital Resources The company prioritizes a safe and supportive work environment, valuing diversity and investing in employee development - As of December 31, 2023, the company had 269 full-time employees, committed to providing a safe, supportive work environment, and valuing employees' diverse backgrounds and experiences[101][102] - The company attracts, develops, and retains employees through global training and development programs, competitive compensation and benefits, and workplace health and safety policies[104][106][108] Additional Information The company provides important information through its investor relations website, serving as a channel for FD Regulation compliance - The company provides important information, including annual reports, quarterly reports, 8-K reports, and proxy statements, through its investor relations website (ir.energyrecovery.com), using it as a channel for compliance with Regulation FD[110] - The company is a global leader in energy efficiency technology, focused on delivering cost savings and enhanced energy efficiency in commercial and industrial processes through its Pressure Exchanger technology[27][28][290] - The company has over 30 years of experience in the desalination industry and applies its core technology to emerging wastewater treatment and CO2 refrigeration markets[28][39][76] - The company's sustainability strategy includes internal projects and customer solutions, aiming for operational profitability and environmental sustainability, and has achieved the highest AAA rating from MSCI ESG[30][31][206] Risk Factors The company faces diverse risks, including reliance on large desalination projects, competition in emerging technologies, supply chain dependencies, manufacturing defects, and geopolitical conflicts, which may cause operational volatility and adverse financial impacts Risks Related to our Water Segment Water business revenue is highly dependent on the construction and retrofitting of large desalination plants, leading to potential volatility - Water business revenue primarily relies on the construction and retrofitting of large desalination plants, with operating results influenced by capital expenditures, project financing, project timing, and geopolitical events, potentially leading to significant fluctuations[112][113][114] - The water market is increasingly competitive, and competitors may offer superior products or lower prices, harming the company's market position and revenue[115] - The company's product promotion in the wastewater treatment market may be unsuccessful due to its diverse nature and incomplete regulations, potentially facing challenges from existing competitors and alternative technologies[117] Risks Related to our Emerging Technologies Segment The company may face challenges in the CO2 refrigeration market due to slow adoption of new technologies and established competitors - The company may not successfully compete in the CO2 refrigeration system market due to slow adoption of new technologies in the industry, and the presence of large, established competitors and alternative technologies[118][119] - The company may be unsuccessful in developing future new technologies, with R&D investments having long payback periods and new markets potentially yielding lower profitability than the water business[120] General Business Risks Quarterly and annual operating results may fluctuate significantly due to various factors, including long sales cycles and project shipment timing - The company's quarterly and annual operating results may fluctuate significantly due to various factors such as long sales cycles, customer purchasing patterns, and the timing of large project shipments, making them difficult to predict[121][122] - Retention clauses in water contracts may delay accounts receivable collection, and failure to collect could adversely affect operating results and financial condition[123][124] - The company relies on a few suppliers for critical components, posing risks of supply disruptions, quality issues, and increased costs[125][126] - Manufacturing risks, especially for new products, may lead to increased scrap, quality defects, and claims exceeding warranty reserves[127] - Inventory may become excessive or obsolete, increasing cost of revenue, particularly with inaccurate demand forecasts[128][129] - R&D strategies may not generate positive returns, as product development is costly and has long payback periods[130] - Business interruptions from natural disasters or power outages could damage company facilities or suppliers, and insurance may be insufficient to cover all losses[131] - Legal proceedings could result in significant adverse outcomes, incurring high costs and diverting management's attention[132] - Actual operating results may differ significantly from company guidance, as guidance is based on assumptions and estimates and is speculative[133][134]135 - Inaccurate assumptions, judgments, and estimates in financial statements could significantly impact financial results[137] Risks Related to Economic Conditions and Geopolitical Conflicts Global operations expose the company to international business risks, including macroeconomic factors, government policies, and foreign exchange fluctuations - Global operations expose the company to international business risks, including macroeconomic factors, government policies, and foreign exchange fluctuations, particularly in Middle Eastern and Asian markets[147] - Global economic and political uncertainties, such as the supply chain environment, inflationary pressures, rising interest rates, and labor shortages, as well as conflicts in Europe and the Middle East, may affect product demand and operating results[149][150] Risks Related to Information Technology Information technology systems face security risks, including cyberattacks and data theft, potentially leading to intellectual property misuse and production downtime - Information technology systems face security risks, such as cyberattacks, information theft, or asset damage, which could lead to the disclosure of confidential information, misuse of intellectual property, and production downtime[151] - Failure to adequately protect personal data could result in reputational damage, loss of customer and investor confidence, adverse business and financial results, and exposure to evolving privacy regulations and high compliance costs[152][153][154] Risks Related to Intellectual Property Inability to protect technology or enforce intellectual property rights could harm the company's competitive position and incur high legal costs - Inability to protect technology or enforce intellectual property rights could harm the company's competitive position and incur high enforcement costs[155] - Third-party claims of infringement on their proprietary rights could harm the company's business, leading to high litigation costs, diversion of management attention, significant damages, or product injunctions[156] Risks Related to Tax and Governmental Regulations Changes in tax legislation or government policies related to international business activities could significantly impact the company's financial condition - Changes in tax legislation for international business activities, corporate tax reform, or changes in tax law policies could significantly impact the company's financial condition and operating results[157]158159 - The interpretation, modification, or unfavorable application of new or existing tax laws and regulations could have a significant adverse effect on the company's business, cash flow, financial condition, or operating results160 - The U.S. Congress may make significant changes to fiscal, regulatory, and other federal policies, which could adversely affect the company's business, financial condition, operating results, and cash flow, including trade policies and tariffs161162 Risks Related to our Common Stock Insiders and major shareholders may exert significant influence over matters requiring shareholder approval - Insiders and major shareholders may exert significant influence over matters requiring shareholder approval, such as director elections and major corporate transactions167 - The market price of the company's common stock may continue to fluctuate due to market, geopolitical, economic, and business factors, potentially harming the company's ability to recruit and retain key employees168 - Anti-takeover provisions in the company's charter and Delaware law may deter, delay, or prevent a change in control of the company and affect the trading price of common stock169170171 - Actions by activist shareholders could negatively impact the company's business, divert management's attention, and lead to volatility in securities trading value172 - Future equity issuances may result in dilution for existing shareholders, and newly issued securities may have rights superior to common stock173 - Water business revenue is highly dependent on the construction and retrofitting of large desalination plants, influenced by capital expenditures, project financing, project timing, and geopolitical events, potentially leading to significant operational volatility[112][113][114] - Emerging technology markets, such as CO2 refrigeration systems, face intense competition, technological challenges, and uncertain market acceptance, which may hinder successful market adoption and anticipated growth[118]119120 - The company faces general business risks including supply chain disruptions, manufacturing defects, uncertain R&D investment returns, long sales cycles, global economic uncertainty, geopolitical conflicts, information technology system vulnerabilities, and intellectual property infringement[125][127]130[149]151155 Unresolved Staff Comments No unresolved staff comments are disclosed in this report - The company has no unresolved staff comments[174] Cybersecurity The company integrates cybersecurity risk management into its overall risk framework, continuously assessing threats with internal teams and external experts, and overseen by the Board through the Audit Committee Managing Material Risks & Integrated Overall Risk Management The company integrates cybersecurity risk management into its overall risk management framework - The company integrates cybersecurity risk management into its overall risk management framework, ensuring cybersecurity considerations are an integral part of decision-making at all levels175 Engage Third-parties on Risk Management The company collaborates with external cybersecurity experts to assess and test risk management systems - The company collaborates with external cybersecurity experts to assess and test risk management systems, ensuring cybersecurity strategies and processes align with industry best practices176 Oversee Third-party Risk The company implements stringent processes to oversee and manage risks from third-party service providers - The company implements stringent processes to oversee and manage risks from third-party service providers, including security assessments before collaboration and continuous monitoring to mitigate data breach risks177 Risks from Cybersecurity Threats The company maintains a cybersecurity program and insurance, but coverage may not be sufficient for all future claims - The company maintains a cybersecurity program and purchases cybersecurity insurance, but there is no guarantee that coverage will be sufficient for future claims or timely payments178 - As of December 31, 2023, cybersecurity threats have not had a material impact on the company's business strategy, operating results, or financial condition179 Governance The Board of Directors prioritizes cybersecurity threat management and has established oversight mechanisms - The Board of Directors places high importance on cybersecurity threat management and has established oversight mechanisms to ensure effective governance180 Board of Directors Oversight The Board's Audit Committee is responsible for cybersecurity risk oversight, comprising independent directors with diverse expertise - The Board's Audit Committee is responsible for cybersecurity risk oversight, composed of independent directors with diverse professional expertise and experience181 Management's Role Managing Risk The management risk management team regularly reports cybersecurity risks to the Audit Committee - The management risk management team regularly reports cybersecurity risks to the Audit Committee, including current threats, status of initiatives, incident reports, and compliance182185 Risk Management Personnel The Director of Information Technology, with 23 years of IT experience, leads cybersecurity strategy and risk management - The Director of Information Technology, with 23 years of IT experience, is responsible for developing and executing cybersecurity strategies, and collaborates with the risk management team to assess, monitor, and manage cybersecurity risks183 Monitor Cybersecurity Incidents The IT Director and team continuously monitor cybersecurity developments, implement advanced security measures, and maintain incident response plans - The Director of Information Technology and their team continuously monitor the latest cybersecurity developments, implement advanced security measures and regular system audits, and develop comprehensive incident response plans184 Reporting to Board of Directors Cybersecurity risks and incidents are regularly reported to the risk management team, with significant matters escalated to the Audit Committee - The Director of Information Technology regularly reports cybersecurity risks and incidents to members of the risk management team, with significant matters and strategic risk management decisions escalated to the Audit Committee186 - The company integrates cybersecurity risk management into its overall risk management framework to foster a company-wide culture of cybersecurity risk management175 - The company collaborates with external cybersecurity experts for regular audits, threat assessments, and security enhancement consulting, and conducts stringent security assessments and continuous monitoring of third-party service providers176177 - The Board of Directors oversees cybersecurity risks through the Audit Committee, which comprises independent directors with diverse expertise[180]181 - The management risk management team, including the CFO, CLO, Corporate Controller, Senior Director of SEC Reporting, and Director of Information Technology, is responsible for monitoring cybersecurity risks and regularly reporting to the Audit Committee[182]183 - As of December 31, 2023, cybersecurity threats have not had a material impact on the company's business strategy, operating results, or financial condition[179] Properties The company leases headquarters, R&D, manufacturing, warehouse, and office facilities in the U.S., and offices in Dubai and Shanghai, deeming existing facilities sufficient for foreseeable needs Major Facility Details | Facility | Location | Status | Approximate Area (sq ft) | Lease Expiration Date | | :--- | :--- | :--- | :--- | :--- | | Headquarters, R&D, and Manufacturing | San Leandro, California | Leased | 171,000 | December 2028 | | Manufacturing and Warehouse | Tracy, California | Leased | 54,429 | April 2030 | | Office, R&D, Warehouse, and Yard | Katy, Texas | Leased | 221,220 | June 2029 | - The company also leases offices in Dubai, United Arab Emirates, and Shanghai, China188 - The company believes these facilities will be sufficient for its purposes for the foreseeable future188 Legal Proceedings The company was not involved in any legal proceedings or claims with a material impact on its financial condition, operating results, or cash flows during the reporting period - As of December 31, 2023, the company was not involved in any legal proceedings, legal actions, or claims that would have a material impact on its financial condition, operating results, or cash flows402 Mine Safety Disclosures This item is not applicable - This item is not applicable190 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Select Market under "ERII", with approximately 15 registered shareholders as of December 31, 2023, and no dividends declared or planned for the foreseeable future Market Information The company's common stock is traded on the Nasdaq Global Select Market - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "ERII"193 Stockholders As of December 31, 2023, the company had approximately 15 registered shareholders - As of December 31, 2023, the company had approximately 15 registered shareholders193 Dividend Policy The company has never declared or paid dividends on its common stock and does not intend to in the foreseeable future - The company has never declared or paid dividends on its common stock and currently does not intend to pay them in the foreseeable future194 Securities Authorized for Issuance Under Equity Compensation Plans Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference - Information regarding securities authorized for issuance under equity compensation plans is incorporated into Part III, Item 12 of this annual report195 Sales of Unregistered Securities The company has not engaged in the sale of unregistered securities - The company has not engaged in the sale of unregistered securities196 Stock Performance Graph The stock performance graph illustrates the company's five-year cumulative total shareholder return compared to market indices Five-Year Cumulative Total Shareholder Return Comparison (as of December 31, 2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Energy Recovery, Inc. | $100.00 | $145.47 | $202.67 | $319.32 | $304.46 | $279.94 | | NASDAQ Composite Index | $100.00 | $138.27 | $199.64 | $243.92 | $164.56 | $238.01 | | Peer Group | $100.00 | $130.56 | $161.69 | $225.56 | $188.67 | $249.19 | - The company's stock performance graph shows the five-year cumulative total shareholder return as of December 31, 2023, compared to the Nasdaq Composite Index and a peer group197201 - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "ERII"193 - As of December 31, 2023, the company had approximately 15 registered shareholders193 - The company has never declared or paid dividends on its common stock and currently does not intend to pay them in the foreseeable future194 Five-Year Cumulative Total Shareholder Return Comparison (as of December 31, 2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Energy Recovery, Inc. | $100.00 | $145.47 | $202.67 | $319.32 | $304.46 | $279.94 | | NASDAQ Composite Index | $100.00 | $138.27 | $199.64 | $243.92 | $164.56 | $238.01 | | Peer Group | $100.00 | $130.56 | $161.69 | $225.56 | $188.67 | $249.19 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations The company's total revenue increased by 2% to $128.3 million in fiscal year 2023, driven by a 26% rise in Aftermarket (AM) revenue, while Megaproject (MPD) revenue slightly increased by 2% and OEM revenue decreased by 10%; gross margin declined to 67.8% from 69.6% due to higher manufacturing costs, and operating expenses grew 8.8% to $68 million Overview The company's operating segments are Water and Emerging Technologies, based on industry, equipment type, and potential revenue - The company's reported operating segments include Water and Emerging Technologies, based on the industries served by technology solutions, types of energy recovery devices, and potential revenue from emerging technologies204 - Corporate operating expenses include expenditures supporting both Water and Emerging Technologies segments, as well as R&D expenditures applicable to future industry verticals or enabling technologies205 Highlights, Economic Conditions, Challenges, and Risks The company released its fourth annual Sustainability Report, detailing efforts to accelerate customer environmental sustainability and enhance internal sustainability management - The company released its fourth annual Sustainability Report, detailing its efforts to accelerate environmental sustainability in customer operations and enhance the management of sustainability issues within its own operations205 - In 2023, MSCI ESG Research LLC upgraded the company's ESG rating from AA to the highest rating of AAA, recognizing its outstanding performance in the industrial machinery industry206 - In 2023, the company announced the expansion of its PX U-Series product line, the appointment of Fieuw Koeltechniek as the exclusive distributor for PX G1300 in the Benelux region, and the successful installation and commissioning of PX G1300 in major supermarket chains209211 - The company's PX G1300 received the "Refrigeration Innovation of the Year" award at the ATMO Awards Ceremony and the "Innovation of the Year" award from RAC Magazine212 - Global macroeconomic factors, geopolitical uncertainties, and conflicts have impacted demand for the company's products, and the company continuously assesses these factors' effects on its business, financial condition, and operating results209210 Results of Operations Revenue Total revenue increased by 2% in 2023, primarily driven by a 26% increase in Aftermarket revenue Fiscal Year 2023 Revenue by Channel | Channel | 2023 ($ thousand) | 2023 (% of Revenue) | 2022 ($ thousand) | 2022 (% of Revenue) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Megaproject | $83,665 | 65% | $81,888 | 65% | $1,777 | 2% | | Original Equipment Manufacturer (OEM) | $25,995 | 20% | $28,858 | 23% | $(2,863) | (10%) | | Aftermarket | $18,689 | 15% | $14,845 | 12% | $3,844 | 26% | | Total Revenue | $128,349 | 100% | $125,591 | 100% | $2,758 | 2% | Fiscal Year 2023 Revenue by Geographic Market and Segment | Geographic Market | Water (2023 $ thousand) | Emerging Technologies (2023 $ thousand) | Total (2023 $ thousand) | Water (2022 $ thousand) | Emerging Technologies (2022 $ thousand) | Total (2022 $ thousand) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Middle East and Africa | $76,437 | $177 | $76,614 | $86,227 | $94 | $86,321 | | Asia | $30,500 | — | $30,500 | $24,777 | — | $24,777 | | Americas | $15,048 | $153 | $15,201 | $8,544 | $34 | $8,578 | | Europe | $5,740 | $294 | $6,034 | $5,880 | $35 | $5,915 | | Total Revenue | $127,725 | $624 | $128,349 | $125,428 | $163 | $125,591 | - Total revenue increased by 2% in 2023, primarily driven by a 26% increase in Aftermarket revenue, while Megaproject revenue slightly increased by 2%, and OEM revenue decreased by 10%215217 - Desalination OEM revenue decreased by $6.3 million, primarily due to project shipment timing; wastewater OEM revenue increased by $3.0 million, driven by growth in Asian, European, and American markets; Emerging Technologies revenue increased by $0.6 million, primarily due to growth in the European and American CO2 markets216 Fiscal Year 2023 Revenue by Geographic Location | Geographic Location | 2023 (%) | 2022 (%) | | :--- | :--- | :--- | | United States | 2% | 1% | | International | 98% | 99% | | Total Revenue | 100% | 100% | Fiscal Year 2023 Major Customer Revenue Concentration | Customer | Segment | 2023 (%) | 2022 (%) | | :--- | :--- | :--- | :--- | | Customer E | Water | 13% | ** | | Customer B | Water | ** | 18% | | Customer D | Water | ** | 15% | | Customer F | Water | ** | 11% | Gross Profit and Gross Margin Gross profit decreased by 0.3% in 2023, primarily due to a lower gross margin Fiscal Year 2023 Gross Profit and Gross Margin | Metric | 2023 ($ thousand) | 2023 (%) | 2022 ($ thousand) | 2022 (%) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $87,079 | 67.8% | $87,356 | 69.6% | $(277) | (0.3%) | - Gross profit decreased by 0.3% in 2023, primarily due to a lower gross margin, partially offset by increased revenue223 - The decrease in gross margin was mainly attributable to higher manufacturing costs, partially offset by changes in product mix and lower freight and duties223 Operating Expenses Total operating expenses increased by $5.5 million (8.8%) in 2023, driven by higher employee and stock-based compensation costs Fiscal Year 2023 Operating Expenses by Segment | Expense Category | Emerging Technologies (2023 $ thousand) | Water (2023 $ thousand) | Corporate (2023 $ thousand) | Total (2023 $ thousand) | Water (2022 $ thousand) | Emerging Technologies (2022 $ thousand) | Corporate (2022 $ thousand) | Total (2022 $ thousand) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and Administrative | $7,751 | $3,927 | $17,186 | $28,864 | $6,936 | $4,104 | $17,301 | $28,341 | | Sales and Marketing | $13,691 | $6,053 | $2,420 | $22,164 | $11,065 | $3,047 | $2,165 | $16,277 | | Research and Development | $4,251 | $12,750 | — | $17,001 | $4,151 | $13,758 | — | $17,909 | | Total Operating Expenses | $25,693 | $22,730 | $19,606 | $68,029 | $22,152 | $20,909 | $19,466 | $62,527 | - Total operating expenses increased by $5.5 million (8.8%) in 2023, primarily due to higher employee costs and stock-based compensation expenses, as well as increased salaries and benefits in G&A, S&M, and R&D225 - Water segment operating expenses increased by $3.5 million (16.0%), mainly due to higher employee costs (including stock-based compensation) and marketing costs in G&A, S&M, and R&D, partially offset by lower product development costs225 - Emerging Technologies segment operating expenses increased by $1.8 million (8.7%), primarily due to higher employee costs (including stock-based compensation) in G&A, S&M, and R&D, as well as increased travel and marketing costs related to CO2 market development and product development226 - Corporate operating expenses increased by $0.1 million (0.7%), mainly due to higher consulting fees, CEO and board member search fees, and stock-based compensation expenses, partially offset by lower employee compensation and software license costs227228 Other Income, Net Other income, net, increased in 2023, primarily due to higher investment yields Fiscal Year 2023 Other Income, Net | Category | 2023 ($ thousand) | 2022 ($ thousand) | | :--- | :--- | :--- | | Interest Income | $3,756 | $908 | | Other Non-Operating (Expense) Income, Net | $(101) | $334 | | Total Other Income, Net | $3,655 | $1,242 | - Other income, net, increased in 2023, primarily due to higher investment yields and increased investments in investment-grade marketable debt securities230 Income Taxes Income tax provision decreased in 2023, mainly due to reduced operating income and increased tax benefits Fiscal Year 2023 Income Tax Provision and Effective Tax Rate | Metric | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | | :--- | :--- | :--- | :--- | | Income Tax Provision | $1,201 | $2,022 | $(821) | | Effective Tax Rate | 5% | 8% | - | - The income tax provision decreased in 2023, primarily due to reduced operating income, an increase of $0.6 million in Foreign Derived Intangible Income (FDII) tax benefits, and an increase of $0.3 million in R&D tax credits, partially offset by a $0.7 million decrease in stock-based compensation related windfall benefits231 - The effective tax rate for fiscal year 2023 includes $2.4 million in FDII benefits, $1.3 million in R&D tax credits, and $0.7 million in stock-based compensation related tax deductions231 Liquidity and Capital Resources Overview As of December 31, 2023, the company held $68.1 million in unrestricted cash and cash equivalents and $54.3 million in investment-grade marketable debt securities - As of December 31, 2023, the company held $68.1 million in unrestricted cash and cash equivalents, and $54.3 million in investment-grade short-term and long-term marketable debt securities233 - The company primarily invests cash not required for current operations in investment-grade marketable debt securities, aiming for capital preservation and liquidity233 Short-term Contract Assets As of December 31, 2023, the company had $0.6 million in short-term contract assets - As of December 31, 2023, the company had $0.6 million in short-term contract assets, representing unbilled trade receivables from contract sales in the Water segment, including contract retention clauses234 Credit Agreement The company maintains a credit agreement with JPMorgan Chase Bank for a $50 million revolving credit facility - The company has a credit agreement with JPMorgan Chase Bank for a $50 million revolving credit facility, which was amended in September 2023 to increase the letter of credit (LCs) sublimit from $25 million to $30 million235 - As of December 31, 2023, the company was in compliance with all credit agreement terms, had no outstanding revolving loans, and utilized $21.8 million of the letter of credit sublimit235 Cash Flows Net cash provided by operating activities increased in 2023, driven by higher revenue and improved working capital management Fiscal Year 2023 Cash Flow Summary | Cash Flow Category | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $26,054 | $12,631 | $13,423 | | Net Cash Used in Investing Activities | $(19,114) | $(6,946) | $(12,168) | | Net Cash Provided by (Used in) Financing Activities | $4,794 | $(23,668) | $28,462 | | Effect of Exchange Rate Differences | $33 | $(20) | $53 | | Net Change in Cash, Cash Equivalents, and Restricted Cash | $11,767 | $(18,003) | $29,770 | - Cash flow from operating activities is highly variable due to the project-driven, non-cyclical nature of the business238 - Net cash provided by operating activities increased in 2023, primarily due to higher revenue, timely collection of accounts receivable, reduced inventory build-up, and increased accounts payable239 - Net cash used in investing activities increased by $12.2 million, mainly due to increased net cash used for marketable debt securities investments, partially offset by reduced capital expenditures239 - Net cash provided by financing activities was primarily due to increased cash from equity issuances under equity incentive plans, offsetting $26.7 million in stock repurchases under the 2022 stock repurchase program240 Liquidity and Capital Resource Requirements The company believes existing resources and cash generated from operations will meet capital needs for at least the next 12 months - The company believes existing resources and cash generated from operations are sufficient to meet capital requirements for at least the next 12 months, though additional financing may be needed in the future to support operations, acquisitions, or new technology investments241242 - The company leases facilities and equipment, with lease terms extending through fiscal year 2030243 - As of December 31, 2023, the company had approximately $1.5 million in cancellable purchase order arrangements397 - As of December 31, 2023, the company's primary liquidity sources included $68.1 million in unrestricted cash and cash equivalents, $54.3 million in investment-grade short-term and long-term marketable debt securities, and $46.9 million in net accounts receivable233 - The company believes its existing cash balance and future cash inflows are sufficient to meet liquidity needs for at least the next 12 months233 Critical Accounting Policies and Estimates The company's consolidated financial statements are prepared under U.S. GAAP, requiring management to make estimates and judgments affecting reported amounts Revenue Recognition Revenue is recognized when control of goods or services is transferred to the customer, reflecting the consideration the company expects to be entitled to - Revenue is recognized when control of goods or services is transferred to the customer, and the amount reflects the consideration the company expects to be entitled to247 Stock-based Compensation Stock-based compensation expense is measured and recognized at the grant-date fair value of equity awards - Stock-based compensation expense is measured and recognized at the grant-date fair value of equity awards granted to employees and directors, with the Black-Scholes model used to estimate the fair value of stock options248 Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination - Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination, tested annually for impairment, and involves significant judgments and estimates regarding the number of reporting units, asset allocation, and fair value249 Inventories Inventories are measured at the lower of cost (FIFO) or net realizable value - Inventories are measured at the lower of cost (first-in, first-out method) or net realizable value, with valuation adjustments for excess and obsolete inventory estimated based on current inventory levels, turnover, expected useful life, and future demand250 Income Taxes The annual tax rate is determined based on income, jurisdiction, statutory rates, and tax impacts - The annual tax rate is determined based on income, jurisdiction, statutory rates, and tax impacts, involving judgments and assumptions regarding the recoverability of deferred tax balances and the ability to sustain tax positions251 Recent Accounting Pronouncements The company is evaluating the impact of new ASUs on its consolidated financial statements and disclosures - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) on its consolidated financial statements and disclosures, and ASU 2023-06 (Disclosure Agreements) is not expected to have a material impact338339340 Fiscal Year 2023 Revenue by Channel | Channel | 2023 ($ thousand) | 2023 (% of Revenue) | 2022 ($ thousand) | 2022 (% of Revenue) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Megaproject | $83,665 | 65% | $81,888 | 65% | $1,777 | 2% | | Original Equipment Manufacturer (OEM) | $25,995 | 20% | $28,858 | 23% | $(2,863) | (10%) | | Aftermarket | $18,689 | 15% | $14,845 | 12% | $3,844 | 26% | | Total Revenue | $128,349 | 100% | $125,591 | 100% | $2,758 | 2% | Fiscal Year 2023 Gross Profit and Gross Margin | Metric | 2023 ($ thousand) | 2023 (%) | 2022 ($ thousand) | 2022 (%) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $87,079 | 67.8% | $87,356 | 69.6% | $(277) | (0.3%) | Fiscal Year 2023 Operating Expenses | Expense Category | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Operating Expenses | $68,029 | $62,527 | $5,502 | 8.8% | | Water Segment Operating Expenses | $25,693 | $22,152 | $3,541 | 16.0% | | Emerging Technologies Operating Expenses | $22,730 | $20,909 | $1,821 | 8.7% | | Corporate Operating Expenses | $19,606 | $19,466 | $140 | 0.7% | Fiscal Year 2023 Cash Flow Summary | Cash Flow Category | 2023 ($ thousand) | 2022 ($ thousand) | Change ($ thousand) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $26,054 | $12,631 | $13,423 | | Net Cash Used in Investing Activities | $(19,114) | $(6,946) | $(12,168) | | Net Cash Provided by (Used in) Financing Activities | $4,794 | $(23,668) | $28,462 | | Effect of Exchange Rate Differences | $33 | $(20) | $53 | | Net Change in Cash, Cash Equivalents, and Restricted Cash | $11,767 | $(18,003) | $29,770 | Quantitative and Qualitative Disclosures About Market Risk The company primarily faces foreign currency risk and interest rate risk, which can impact operating results, cash flows, and investment portfolio value Foreign Currency Risk The company's foreign currency risk stems from fluctuations in the U.S. dollar against various foreign currencies - The company's foreign currency risk stems from fluctuations in the U.S. dollar against currencies such as the British Pound, Saudi Riyal, UAE Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar253 - While revenue contracts are denominated in U.S. dollars, international customers may face difficulties obtaining U.S. dollar payments, increasing collection risk254 - Expansion of international sales may lead to more revenue denominated in foreign currencies, increasing exposure to exchange rate fluctuations254 - The company pays suppliers in foreign currencies, and international sales and service operations incur foreign currency-denominated expenses, which may be affected by exchange rate fluctuations255 - The company does not hold excessive foreign currency cash balances to mitigate risk256 Interest Rate and Credit Risks The company's investment activities prioritize capital preservation and liquidity while maximizing returns without significantly increasing risk - The company's primary objectives for investment activities are capital preservation and liquidity, while maximizing returns without significantly increasing risk257 - The company primarily invests in investment-grade short-term and long-term marketable debt securities, such as U.S. Treasury securities, corporate notes and bonds, and municipal and agency notes and bonds, which are subject to counterparty credit risk257258 - To minimize interest rate fluctuation risk, the company maintains a weighted-average maturity of approximately nine months for its investments258 - As of December 31, 2023, a hypothetical 1% increase in interest rates would result in a decrease of less than $0.3 million in the fair value of investments258 - The company primarily faces foreign currency risk and interest rate risk252 Financial Statements and Supplementary Data This section includes the company's consolidated financial statements for the fiscal year ended December 31, 2023, and the preceding two fiscal years, along with related notes, and an unqualified opinion from the independent registered public accounting firm on both financial statements and internal control effectiveness Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) Deloitte & Touche LLP issued an unqualified opinion on the company's consolidated financial statements - Deloitte & Touche LLP has issued an unqualified opinion on the company's consolidated financial statements as of December 31, 2023, and 2022, stating that they fairly present the company's financial position and results of operations in all material respects261 - Revenue recognition processes were identified as a critical audit matter due to the high volume of the company's product revenue transactions and the combination of automated and manual processes for recording and reviewing revenue recognition, requiring significant audit effort266267 Report of Independent Registered Public Accounting Firm (Internal Control) Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting - Deloitte & Touche LLP has issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023, stating that the company maintained effective internal control in all material respects271 Consolidated Financial Statements Consolidated Balance Sheets (as of December 31, 2023) | Asset | 2023 ($ thousand) | 2022 ($ thousand) | | :--- | :--- | :--- | | Cash and Cash Equivalents | $68,098 | $56,354 | | Short-term Investments | $40,445 | $33,479 | | Accounts Receivable, Net | $46,937 | $34,062 | | Inventories, Net | $26,149 | $28,366 | | Prepaid Expenses and Other Assets | $3,843 | $5,606 | | Total Current Assets | $185,472 | $157,867 | | Long-term Investments | $13,832 | $3,058 | | Deferred Tax Assets, Net | $10,324 | $10,263 | | Property and Equipment, Net | $18,699 | $19,580 | | Operating Lease Right-of-Use Assets | $11,469 | $13,115 | | Goodwill | $12,790 | $12,790 | | Other Non-current Assets | $388 | $366 | | Total Assets | $252,974 | $217,039 | | Liabilities and Stockholders' Equity | | | | Accounts Payable | $3,000 | $814 | | Accrued Expenses and Other Liabilities | $15,583 | $14,693 | | Lease Liabilities | $1,791 | $1,600 | | Contract Liabilities | $1,097 | $1,195 | | Total Current Liabilities | $21,471 | $18,302 | | Non-current Lease Liabilities | $11,488 | $13,278 | | Other Non-current Liabilities | $207 | $121 | | Total Liabilities | $33,166 | $31,701 | | Total Stockholders' Equity | $219,808 | $185,338 | | Total Liabilities and Stockholders' Equity | $252,974 | $217,039 | Consolidated Statements of Operations (as of December 31, 2023) | Metric | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Revenue | $128,349 | $125,591 | $103,904 | | Cost of Revenue | $41,270 | $38,235 | $32,670 | | Gross Profit | $87,079 | $87,356 | $71,234 | | Operating Expenses: | | | | | General and Administrative | $28,864 | $28,341 | $25,174 | | Sales and Marketing | $22,164 | $16,277 | $12,160 | | Research and Development | $17,001 | $17,909 | $20,069 | | Total Operating Expenses | $68,029 | $62,527 | $57,403 | | Operating Income | $19,050 | $24,829 | $13,831 | | Other Income (Expense): | | | | | Interest Income | $3,756 | $908 | $204 | | Other Non-Operating Income (Expense), Net | $(101) | $334 | $(31) | | Total Other Income, Net | $3,655 | $1,242 | $173 | | Income Before Taxes | $22,705 | $26,071 | $14,004 | | Income Tax Provision (Benefit) | $1,201 | $2,022 | $(265) | | Net Income | $21,504 | $24,049 | $14,269 | | Net Income Per Share: | | | | | Basic | $0.38 | $0.43 | $0.25 | | Diluted | $0.37 | $0.42 | $0.24 | Consolidated Statements of Comprehensive Income (as of December 31, 2023) | Metric | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Net Income | $21,504 | $24,049 | $14,269 | | Other Comprehensive Income (Loss), Net of Tax | | | | | Foreign Currency Translation Adjustments | $51 | $15 | $(68) | | Unrealized Gains (Losses) on Investments | $254 | $(215) | $(134) | | Total Other Comprehensive Income (Loss), Net of Tax | $305 | $(200) | $(202) | | Comprehensive Income | $21,809 | $23,849 | $14,067 | Consolidated Statements of Stockholders' Equity (as of December 31, 2023) | Stockholders' Equity Category | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Common Stock | $65 | $64 | $64 | | Additional Paid-in Capital | $217,617 | $204,957 | $195,593 | | Accumulated Other Comprehensive Loss | $(44) | $(349) | $(149) | | Treasury Stock | $(80,486) | $(80,486) | $(53,832) | | Retained Earnings | $82,656 | $61,152 | $37,103 | | Total Stockholders' Equity | $219,808 | $185,338 | $178,779 | Consolidated Statements of Cash Flows (as of December 31, 2023) | Cash Flow Category | 2023 ($ thousand) | 2022 ($ thousand) | 2021 ($ thousand) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $26,054 | $12,631 | $13,526 | | Net Cash Used in Investing Activities | $(19,114) | $(6,946) | $(20,563) | | Net Cash Provided by (Used in) Financing Activities | $4,794 | $(23,668) | $(12,792) | | Effect of Exchange Rate Differences | $33 | $(20) | $(68) | | Net Change in Cash, Cash Equivalents, and Restricted Cash | $11,767 | $(18,003) | $(19,897) | | Cash, Cash Equivalents, and Restricted Cash at Beginning of Year | $56,458 | $74,461 | $94,358 | | Cash, Cash Equivalents, and Restricted Cash at End of Year | $68,225 | $56,458 | $74,461 | [Notes to Consolidat