Energy Recovery Reports Unaudited Financial Results for the Third Quarter of 2012

Energy Recovery Reports Unaudited Financial Results for the Third Quarter of


  *Reflecting strong volume related to mega-project shipments, net revenue
    increased 113% from the third quarter of 2011 to the third quarter of 2012
  *Gross profit margin increased from 15% in the third quarter of 2011 to 55%
    in the current period
  *Due primarily to increased research and development activities for oil &
    gas diversification, operating expenses increased by 3% from the third
    quarter of 2011 to the current quarter
  *Operating loss reduced from $(6.7 million) in the third quarter of 2011 to
    $(1.8 million) in the third quarter of 2012, demonstrating an improvement
    of $4.9 million
  *Including an increase in tax provision related to a valuation allowance
    for deferred tax assets of $4.5 million in the third quarter of 2011, the
    Company reduced its loss per share from $(0.22) in the third quarter of
    last year to $(0.04) in the current period
  *The Company's balance sheet remains sound, with a combined value of $43.7
    million between unrestricted and restricted cash as well as short- and
    long-term investments
  *Anticipating increased revenue in the fourth quarter, management expects
    to exceed previous guidance of 40% revenue growth for the full year of
    2012 compared to 2011

SAN LEANDRO, Calif., Nov. 7, 2012 (GLOBE NEWSWIRE) -- Energy Recovery, Inc.
(Nasdaq:ERII), a global leader in harnessing reusable energy from industrial
fluid flows and pressure cycles, announced today its unaudited financial
results for the third quarter of 2012. The Company achieved net revenue of
$10.5 million, representing an increase of $5.6 million, or 113%, from the
third quarter of 2011 to the current period. Similar to the second quarter of
2012, the Company realized the forecasted benefit of revenue associated with
large mega-project (MPD) shipments comprised entirely of PX^® devices,
including shipments for two separate projects in Israel. Complementing the
continuation of MPD revenue in the third quarter was meaningful growth in OEM
sales. Of the $10.5 million in net revenue recorded in the third quarter of
2012, PX devices and related products and services represented $8.7 million,
or 83%, while turbochargers and pumps comprised $1.8 million, or 17%.
Comparatively, for the three months ended September 30, 2011, PX devices and
related products and services comprised 56% of net revenue, whereas
turbochargers and pumps represented 44% in the same period. Management expects
revenue to increase in the fourth quarter of 2012 due to subsequent and
impending shipments of orders in backlog; forecasted performance in the fourth
quarter, if achieved, would allow the Company to exceed its previous guidance
of 40% revenue growth for the full year of 2012.

In light of strong revenue levels, the Company improved its gross profit
margin from 15% in the third quarter of 2011 to 55% in the current
quarter.Gross profit margin was 54% in the second quarter of 2012.The
increase in gross profit margin from the third quarter of 2011 to the third
quarter of 2012 was due primarily to positive operating leverage achieved
through increased volume, a favorable product mix of PX devices over
turbochargers and pumps (the latter of which command lower gross profit
margins), and diminished costs realized through plant consolidation and
vertical integration.Management believes that these elevated levels of gross
profit margin are sustainable and improvable to the extent that volume
persists and the Company continues to realize cost savings through production
efficiencies and enhanced yields.Moreover, the Company is actively
implementing other initiatives to reduce product costs through
value-engineered design as well as aggressive procurement and supply chain

Total operating expenses were $7.6 million in the current period, reflecting
an increase of $0.2 million, or 3%, from the third quarter of 2011 to the
third quarter of 2012.This modestly unfavorable variance was caused
principally by increased spending on research and development activities, as
the Company deliberately reinvested savings achieved through restructuring
into the accelerated design and prototyping of new devices for the oil & gas
market.Primarily a result of increased fees for outside legal services,
general and administrative expenses increased 7% from the third quarter of
2011 to the third quarter of 2012.Importantly, the Company has experienced
significant legal expense in 2012 due to pending litigation matters, of which
one matter recently settled in October and resulted in a non-recurring payment
received by the Company from one of its suppliers for $0.8
million.Considering receipt of this payment in October, the settlement amount
is excluded from the financial results for the third quarter of
2012.Operating expenses are estimated to increase moderately in future
periods as the Company continues to invest in research and development,
reinforced by increased spending for sales and marketing activities, to
facilitate full product launches and direct sales efforts into the oil & gas

With strong revenue realized through large shipments for mega-projects, an
expansion of gross profit margin attributable primarily to volume and product
mix, and slightly increased operating expenses due mainly to focused research
and development and outside legal services, the Company reduced its operating
loss from $(6.7 million) in the third quarter of 2011 to $(1.8 million) in the
third quarter of 2012.Likewise, the Company reduced its net loss from $(11.3
million), or $(0.22) per share, in the third quarter of 2011 to $(1.8
million), or $(0.04) per share, in the third quarter of 2012. Year to date,
the Company reduced its net loss from $(16.4 million), or $(0.31) per share,
for the nine months ended September 30, 2011 to $(6.1 million), or $(0.12) per
share, for the nine months ended September 30, 2012.Affecting earnings in the
third quarter of 2011 was a significant increase in the provision for income
taxes of $4.5 million due to the recognition of a full valuation allowance for
deferred tax assets.

After a share repurchase program that used $4.0 million in cash to buy back
1.8 million shares in the first and second quarters of 2012, the Company's
balance sheet and cash position remain strong. As of September 30, 2012, the
Company reported unrestricted cash of $18.3 million, restricted cash (current
and non-current) of $10.3 million, short-term investments of $11.4 million,
and long term-investments of $3.7 million, all of which represent a combined
total of $43.7 million.Capital expenditures were $2.1 million over the first
nine months of the year due primarily to costs associated with fixed assets
and testing equipment as part of oil & gas development along with the
implementation of a new ERP system.Future capital projects will likely
include subsequent investment for ERP implementation and continued investment
underlying the strategy to achieve oil & gas diversification.In the third
quarter of 2012, the operating loss of $(1.8 million) included certain
non-cash expenses, the largest of which were depreciation and amortization of
$1.0 million and share-based compensation of $0.6 million.In summary, while
the Company continues to invest in strategic initiatives like oil & gas
diversification, the balance sheet remains strong, with ample cash and almost
no debt, allowing tenacious implementation of the long-term strategy as

Tom Rooney, President and Chief Executive Officer, commented that "we continue
to manage disciplined execution against the focused strategy that we
communicated over one year ago:to increase market share and drive growth in
our core desalination market, to generate cost savings through operational
excellence, and to diversify our business by penetrating new, large
addressable markets where our innovative technologies are able to transform
industrial fluid flows and pressure cycles into reusable energy.As evidence
of success on the first prong of our strategy, market share remains at
historically high levels, and the Company has sufficient backlog to underwrite
what is forecasted to be a strong fourth quarter.On the matter of operational
excellence, we have achieved compelling gross profit margin for the second
consecutive quarter, confirming that plant consolidation, vertical
integration, and other streamlining measures are indeed bearing fruit and
allowing us to reinvest a portion of these cost savings into research and
development activities for new products and new markets."

"With respect to the third prong of the strategy," continued Rooney, "we are
making progress as planned toward the design, prototyping, and ultimate
commercialization of new devices with applications in the oil & gas
market.Specifically, we have shipped two devices already to a large customer
in Asia, and these devices continue to undergo testing and validation.In the
fourth quarter of this year, we plan to ship two more devices to different
customers, one in North America and another in the Middle East, for subsequent
testing and validation.To be sure, we remain intensely focused on a clear and
concise strategy, and indications of our progress continue to manifest
throughout the business.Finally, I would like to address the guidance
previously conveyed:with the forecast for the fourth quarter demonstrating
comparative strength, we expect to exceed 40% revenue growth for the full year
of 2012 as compared to 2011, and we firmly believe that we are driving
disciplined execution of a focused strategy that will create shareholder value
in future periods." 

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include: backlog and revenue projections, gross profit margin trends and
expectations, cost-reduction initiatives, operating expense trends and
expectations, planned expansion into the oil & gas market, future capital
projects, the sufficiency of our balance sheet and cash position, and
strategic initiatives to enhance shareholder value in future periods.Because
such forward-looking statements involve risks and uncertainties, the Company's
actual results may differ materially from the predictions in these
forward-looking statements. All forward-looking statements are made as of
today, and the Company assumes no obligation to update such statements.In
addition to any other factors that may have been discussed herein regarding
the risks and uncertainties of our business, please see "Risk Factors" in our
Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on
March 13, 2012 as well as other reports filed by the Company with the SEC from
time to time.

Conference Call to Discuss Third Quarter Results

The conference call scheduled for tomorrow at 7:30 a.m. PST will be in a
"listen-only" mode for all participants other than the sell-side investment
professionals who regularly follow the Company. The toll-free phone number
for the call is 877-941-0844 or local 480-629-9835, and the access code is
4567166. Callers should dial in approximately 15 minutes prior to the
scheduled start time. A telephonic replay will be available at 800-406-7325
or 303-590-3030 (access code: 4567166) until November 22, 2012. Investors may
also access the live call or the replay over the internet at or The replay will be available
approximately three hours after the live call concludes.

About Energy Recovery, Inc.

Energy Recovery, Inc. (Nasdaq:ERII) is the world leader in harnessing energy
from industrial fluid flows and pressure cycles.The Company's innovations
make industrial processes within the water, oil & gas, and chemical industries
environmentally cleaner and economically more profitable.By developing the
highest-efficiency technologies that deliver substantial cost savings, Energy
Recovery's solutions offer the best economics for any industrial
application.In total, the Company has installed 14,000 devices on every
continent, saving its clients more than one billion dollars in energy costs
each year.The company is headquartered in the San Francisco Bay Area with
offices worldwide, including Madrid, Shanghai, and Dubai. For more
information about Energy Recovery, Inc., please visit

Unaudited Consolidated Financial Results

(in thousands, except per share data)

                                Three Months Ended    Nine Months Ended
                                September 30,        September 30,
                                2012     2011      2012     2011
Net revenue                      $10,498  $4,933    $27,550  $21,932
Cost of revenue                  4,696    4,214     13,836   14,221
Gross profit                     5,802    719       13,714   7,711
Operating expenses:                                             
General and administrative       3,825     3,571      10,899    11,953
Sales and marketing              1,860     2,291      5,114     6,370
Research and development         1,495     726        3,055     2,626
Amortization of intangible       262       346        785       1,037
Restructuring charges            167      470       277      470
Total operating expenses         7,609    7,404     20,130   22,456
Loss from operations             (1,807)   (6,685)    (6,416)   (14,745)
Interest expense                 (1)       (5)        (6)       (30)
Other non-operating income       36       (127)     99       128
(expense), net
Loss before income taxes         (1,772)   (6,817)    (6,323)   (14,647)
Provision for (benefit from)     54       4,509     (253)    1,775
income taxes
Net loss                         $(1,826) $ (11,326) $(6,070) $ (16,422)
Basic and diluted net loss per   $(0.04)  $(0.22)   $(0.12)  $(0.31)
Shares used in basic and diluted 50,872   52,636    51,638   52,602
per share calculation

(in thousands, except share data and par value)

                                                September 30,  December 31,
                                                2012         2011
Current assets:                                               
Cash and cash equivalents                        $18,287       $18,507
Restricted cash                                  5,207         5,687
Short-term investments                           11,442        11,706
Accounts receivable, net of allowance for
doubtful accounts of $145 and $248 at September  10,224        6,498
30, 2012 and December 31, 2011, respectively
Unbilled receivables                             1,961         1,059
Inventories                                      6,521         7,824
Deferred tax assets, net                         460           460
Prepaid expenses and other current assets        4,520         4,929
Land and building held for sale                  1,417        1,660
Total current assets                             60,039        58,330
Restricted cash, non-current                     5,101         5,232
Long-term investments                            3,705         11,198
Unbilled receivables, non-current                460           —
Property and equipment, net                      16,522        16,170
Goodwill                                         12,790        12,790
Other intangible assets, net                     6,206         6,991
Other assets, non-current                        2            2
Total assets                                     $104,825     $110,713
Current liabilities:                                           
Accounts payable                                 $1,865       $1,506
Accrued expenses and other current liabilities   6,625         6,474
Income taxes payable                             32            21
Accrued warranty reserve                         1,018         852
Deferred revenue                                 2,232         859
Current portion of long-term debt                —             85
Current portion of capital lease obligations     24           82
Total current liabilities                        11,796        9,879
Capital lease obligations, non-current           —             18
Deferred tax liabilities, non-current, net       1,678         1,516
Deferred revenue, non-current                    86            261
Other non-current liabilities                    2,229        2,085
Total liabilities                                15,789       13,759
Commitments and Contingencies                                  
Stockholders' equity:                                          
Preferred stock, $0.001 par value; 10,000,000
shares authorized; no shares issued or           —             —
Common stock, $0.001 par value; 200,000,000
shares authorized; 52,656,629 and 52,645,129
shares issued at September 30, 2012 and December 53            53
31, 2011, respectively; and 50,874,026 and
52,645,129 shares outstanding at September 30,
2012 and December 31, 2011, respectively
Additional paid-in capital                       116,725       114,619
Notes receivable from stockholders               (24)          (23)
Accumulated other comprehensive loss             (45)          (92)
Treasury stock, at cost, 1,782,603 and 0 shares
repurchased at September 30, 2012 and December   (4,000)       —
31, 2011, respectively
Accumulated deficit                              (23,673)     (17,603)
Total stockholders' equity                       89,036       96,954
Total liabilities and stockholders' equity       $104,825     $110,713

CONTACT: Alexander J. Buehler
         Chief Financial Officer
         (510) 483-7370
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