Energy Recovery(ERII) - 2023 Q4 - Annual Results

Executive Summary & Business Outlook Fiscal Year 2023 Highlights Energy Recovery achieved record annual and quarterly revenue in 2023, marking its ninth consecutive year of revenue growth, driven by strong performance in desalination and rapid expansion in wastewater, despite a project delay. Gross margin and operating cash flow also showed positive trends - Record annual revenue of $128.3 million, including 79% growth in wastewater, marking nine consecutive years of revenue growth[5] - Record quarterly revenue of $57.2 million, a 35% year-on-year growth, with strong desalination and rapid wastewater expansion, though below guidance due to a delayed project[5] - Gross margin of 67.8%, within expectations and above guidance[5] - Operating cash flow for the year more than doubled largely due to strong customer collections and strategic efforts to optimize raw inventory turnover rates[5] - Cash and investments totaled $122.4 million[5] CEO Commentary & Strategic Outlook CEO David Moon highlighted record revenue and continued growth across core desalination, rapidly expanding wastewater, and progress in CO2 refrigeration. The company plans to focus on rebuilding shareholder value, diversifying into new markets, defending its leadership in desalination, and investing in CO2 and wastewater, while maintaining disciplined expense and cash management - Achieved record annual and fourth quarter revenue in 2023, representing the ninth consecutive year of revenue growth, despite an $8 million revenue shift from Q4 2023 to 2024 due to a single project[3] - Core desalination business is healthy, wastewater business continues rapid growth, and progress is being made in CO2 refrigeration[4] - Expects the newest product, PX Q400, to achieve roughly 50% of sales in the megaproject channel in 2024, and wastewater could reach up to 10% of Water revenue in three years[4] - Strategic focus for 2024 and beyond includes rebuilding shareholder value, diversification into new markets (CO2 and wastewater), defending desalination leadership, and disciplined expense and cash management[4] Financial Performance Overview GAAP Financial Highlights Energy Recovery reported a 35% increase in Q4 2023 revenue and a 2% increase for the full year 2023. While Q4 net income and EPS saw significant growth, full-year net income and EPS decreased by 11% and 12% respectively, primarily due to a decrease in operating margin GAAP Financial Highlights (Q4 and Full Year) | Metric | Q4'2023 | Q4'2022 | vs. Q4'2022 | 2023 | 2022 | 2023 vs. 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $57.2M | $42.3M | up 35% | $128.3M | $125.6M | up 2% | | Gross margin | 69.1% | 70.7% | down 160 bps | 67.8% | 69.6% | down 180 bps | | Operating margin | 36.0% | 34.5% | up 150 bps | 14.8% | 19.8% | down 500 bps | | Net income | $19.8M | $13.7M | up 44% | $21.5M | $24.0M | down 11% | | Net income per share | $0.34 | $0.24 | up 42% | $0.37 | $0.42 | down 12% | | Cash provided by operations | $13.8M | $6.4M | | $26.1M | $12.6M | | Non-GAAP Financial Highlights Non-GAAP adjusted metrics show strong Q4 2023 performance with adjusted operating margin up 200 bps and adjusted net income up 50%. However, full-year 2023 adjusted operating margin and adjusted net income decreased by 510 bps and 5% respectively, while free cash flow more than doubled Non-GAAP Financial Highlights (Q4 and Full Year) | Metric | Q4'2023 | Q4'2022 | vs. Q4'2022 | 2023 | 2022 | 2023 vs. 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Adjusted operating margin | 39.9% | 37.9% | up 200 bps | 21.1% | 26.2% | down 510 bps | | Adjusted net income | $22.0M | $14.7M | up 50% | $28.9M | $30.5M | down 5% | | Adjusted net income per share | $0.39 | $0.26 | up 50% | $0.51 | $0.54 | down 6% | | Adjusted EBITDA | $23.9M | $17.0M | | $31.2M | $36.8M | | | Free cash flow | $12.4M | $5.1M | | $23.5M | $8.4M | | Non-GAAP Financial Measures Use and Rationale Energy Recovery uses non-GAAP financial measures to analyze operating performance, develop budgets, and facilitate period-to-period comparisons, believing they offer a more complete understanding of business factors and trends when viewed alongside GAAP results - Non-GAAP financial measures are used to analyze operating performance, future prospects, develop internal budgets and financial goals, and facilitate period-to-period comparisons[9] - The Company believes these non-GAAP measures provide a more complete understanding of factors and trends affecting its business when viewed with GAAP results[9] Definitions of Non-GAAP Measures This section provides specific definitions for key non-GAAP financial measures used by the company, including adjusted operating margin, adjusted net income, adjusted net income per share, adjusted effective tax rate, adjusted EBITDA, and free cash flow, detailing the exclusions and inclusions for each - Adjusted operating margin excludes share-based compensation and non-core operational costs (e.g., VorTeq-related severance, accelerated depreciation)[10] - Adjusted net income excludes share-based compensation, non-core operational costs, and their applicable tax effects[10] - Adjusted EBITDA excludes depreciation and amortization, share-based compensation, non-core operational costs, other income (net), and provision for income taxes[10] - Free cash flow is defined as net cash provided by operating activities less capital expenditures[10] Company Information & Disclosures Forward-Looking Statements This section contains a standard disclaimer regarding forward-looking statements, noting that they are based on current information and management's beliefs, and actual results may differ materially due to various risks and uncertainties - Statements regarding future events, business strength, and growth are forward-looking and subject to risks and uncertainties[8] - Actual results may differ materially from predictions due to factors discussed in SEC filings, including risks relating to future demand, customer performance, and timing of revenue[8] Conference Call Details Energy Recovery announced details for its conference call to discuss Q4 and Fiscal 2023 financial results, including live call and replay access information for investors - Live conference call held on Wednesday, February 21, 2024, at 2:00 PM PT / 5:00 PM ET[11] - Replay available until March 22, 2024, via toll-free and international numbers, and online[11] Disclosure Information Energy Recovery uses the investor relations section of its website to comply with Regulation FD disclosure obligations, advising investors to monitor this resource in addition to other public communications - The investor relations section on the company's website serves as a means of complying with disclosure obligations under Regulation FD[12] - Investors should monitor the investor relations website in addition to press releases, SEC filings, and public conference calls[12] About Energy Recovery Energy Recovery is a global leader in energy efficiency technology, specializing in pressure exchanger technology for cost savings and increased energy efficiency across industries, with a strong foundation in desalination and a 30-year history of positive environmental impact - Energy Recovery is a trusted global leader in energy efficiency technology, building on its pressure exchanger technology platform[13] - Designs and manufactures reliable, high-performance solutions that generate cost savings and increase energy efficiency across several industries, with a strong foundation in desalination[13] - Headquartered in the San Francisco Bay Area, with manufacturing and R&D facilities across California and Texas, and global sales and technical support[13] Contact Information Provides contact details for investor relations inquiries - Investor Relations contact: ir@energyrecovery.com, +1 (346) 382-6927[14] Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets As of December 31, 2023, total assets increased to $252.97 million from $217.04 million in 2022, driven primarily by an increase in cash, cash equivalents, and investments, and accounts receivable. Total liabilities also saw a slight increase Condensed Consolidated Balance Sheets (In thousands) | ASSETS | 2023 | 2022 | | :--- | :--- | :--- | | Cash, cash equivalents and investments | $122,375 | $92,891 | | Accounts receivable and contract assets | $47,529 | $35,782 | | Inventories, net | $26,149 | $28,366 | | TOTAL ASSETS | $252,974 | $217,039 | | LIABILITIES AND STOCKHOLDERS' EQUITY | 2023 | 2022 | | Accounts payable and accrued expenses | $18,583 | $15,507 | | Total liabilities | $33,166 | $31,701 | | Stockholders' equity | $219,808 | $185,338 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $252,974 | $217,039 | Condensed Consolidated Statements of Operations For the year ended December 31, 2023, revenue increased slightly to $128.35 million, while net income decreased to $21.50 million from $24.05 million in 2022, primarily due to higher operating expenses, particularly in sales and marketing Condensed Consolidated Statements of Operations (Years Ended December 31, In thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $128,349 | $125,591 | | Cost of revenue | $41,270 | $38,235 | | Gross profit | $87,079 | $87,356 | | Total operating expenses | $68,029 | $62,527 | | Income from operations | $19,050 | $24,829 | | Net income | $21,504 | $24,049 | | Diluted Net income per share | $0.37 | $0.42 | Condensed Consolidated Statements of Cash Flows For the year ended December 31, 2023, net cash provided by operating activities more than doubled to $26.05 million from $12.63 million in 2022. Net cash used in investing activities increased significantly, while financing activities shifted from a net use to a net provision of cash Condensed Consolidated Statements of Cash Flows (Years Ended December 31, In thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,054 | $12,631 | | Net cash used in investing activities | $(19,114) | $(6,946) | | Net cash provided by (used in) financing activities | $4,794 | $(23,668) | | Net change in cash, cash equivalents and restricted cash | $11,767 | $(18,003) | | Cash, cash equivalents and restricted cash, end of year | $68,225 | $56,458 | Supplemental Financial Information Channel Revenue In Q4 2023, all revenue channels showed growth, with Aftermarket revenue increasing by 59% and Megaproject by 35% YoY. For the full year 2023, Megaproject and Aftermarket revenues grew by 2% and 26% respectively, while Original Equipment Manufacturer (OEM) revenue decreased by 10% Channel Revenue (In thousands, except percentages) | Channel | Q4'2023 | Q4'2022 | vs. Q4'2022 | 2023 | 2022 | vs. 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Megaproject | $41,382 | $30,631 | up 35% | $83,665 | $81,888 | up 2% | | Original equipment manufacturer | $9,150 | $7,466 | up 23% | $25,995 | $28,858 | down 10% | | Aftermarket | $6,657 | $4,194 | up 59% | $18,689 | $14,845 | up 26% | | Total revenue | $57,189 | $42,291 | up 35% | $128,349 | $125,591 | up 2% | Segment Activity The Water segment remains the primary revenue driver, showing strong operating income for both Q4 and the full year 2023. The Emerging Technologies segment, while generating minimal revenue, incurred significant operating losses due to higher R&D and sales & marketing expenses, reflecting investment in new areas Segment Revenue and Operating Income (In thousands) | Segment | Q4'2023 Revenue | Q4'2023 Operating Income (Loss) | 2023 Revenue | 2023 Operating Income (Loss) | | :--- | :--- | :--- | :--- | :--- | | Water | $57,103 | $32,781 | $127,725 | $61,742 | | Emerging Technologies | $86 | $(7,111) | $624 | $(23,086) | | Corporate | $0 | $(5,056) | $0 | $(19,606) | | Total | $57,189 | $20,614 | $128,349 | $19,050 | Share-based Compensation Total stock-based compensation expense increased in both Q4 and the full year 2023, rising to $2.23 million in Q4 (from $1.41 million in Q4 2022) and to $8.04 million for the full year (from $6.51 million in 2022), with the largest portion allocated to General and Administrative expenses Stock-based Compensation Expense (In thousands) | Expense Category | Q4'2023 | Q4'2022 | 2023 | 2022 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenue | $164 | $136 | $719 | $506 | | General and administrative | $1,033 | $701 | $3,661 | $3,436 | | Sales and marketing | $649 | $360 | $2,333 | $1,592 | | Research and development | $381 | $210 | $1,325 | $977 | | Total stock-based compensation expense | $2,227 | $1,407 | $8,038 | $6,511 | Reconciliation of Non-GAAP Financial Measures Reconciliation of Non-GAAP Financial Measures This section provides a detailed reconciliation of GAAP to non-GAAP financial measures, including adjustments for share-based compensation, severance, accelerated depreciation, and litigation charges, to derive adjusted operating margin, net income, EPS, effective tax rate, EBITDA, and free cash flow Reconciliation of Non-GAAP Financial Measures (In millions, except percentages) | Metric | Q4'2023 | Q4'2022 | 2023 | 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating margin (GAAP) | 36.0% | 34.5% | 14.8% | 19.8% | | Share-based compensation adjustment | 3.9 | 3.3 | 6.3 | 5.2 | | Adjusted operating margin | 39.9% | 37.9% | 21.1% | 26.2% | | Net income (GAAP) | $19.8 | $13.7 | $21.5 | $24.0 | | Total adjustments to net income | $2.2 | $1.0 | $7.4 | $6.5 | | Adjusted net income | $22.0 | $14.7 | $28.9 | $30.5 | | Adjusted EBITDA | $23.9 | $17.0 | $31.2 | $36.8 | | Free cash flow | $12.4 | $5.1 | $23.5 | $8.4 |