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Energy Recovery Reports Unaudited Financial Results for the Second Quarter of 2013



Energy Recovery Reports Unaudited Financial Results for the Second Quarter of
2013

SECOND QUARTER HIGHLIGHTS:

  * Gross profit margin increased from 54% in the second quarter of 2012 to
    62% in the current period, while net revenue decreased as expected due to
    the foreseeable timing of mega-project shipments
  * Operating expenses remained stable from the prior-year period at $6.6
    million
  * Exceeding expectations, the net loss was only $(1.5) million, or $(0.03)
    per share, in the second quarter of 2013
  * Reinforcing previous guidance, the Company anticipates strong revenue
    levels in the fourth quarter of 2013, and the forecast for 2014 continues
    to show meaningful revenue growth along with bottom-line profitability

SAN LEANDRO, Calif., July 31, 2013 (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 second quarter of 2013. The Company achieved net revenue of
$8.6 million in the current period, reflecting a decrease of 30% compared to
the same period of last year. Of the total revenue recognized during the
second quarter of 2013, sales from mega-projects represented $1.5 million for
three modestly-sized plants in Ghana, Spain, and Chile. Comparatively, in the
second quarter of 2012, the Company recognized $5.9 million in revenue
associated with mega-project shipments to four customers, with a single
shipment comprising nearly $4.0 million. The unfavorable revenue variance for
the second quarter of 2013 was entirely attributable to the timing of
mega-project shipments, and such shipments are anticipated before the
year-end. Several large projects for which revenue is forecasted in the second
half of the year are pending the final phases of negotiation. In fact, the
Company was pleased to announce its first mega-scale contract award in the
United States, and more specifically in California, with IDE Technologies for
delivery on the vanguard Carlsbad project, which is expected to ship this
year. Offsetting the decline in mega-project shipments were increases in OEM
and Aftermarket sales. Due to the anticipated timing of mega-project awards
and shipments, the Company forecasts strong revenue in the fourth quarter of
this year followed by substantial growth in 2014.

Of the $8.6 million in net revenue in the second quarter of 2013, $6.8
million, or 79%, related to PX^® devices and related products and services,
while $1.8 million, or 21%, pertained to turbochargers, pumps, and related
products and services. By way of comparison, in the second quarter of 2012, PX
devices comprised 85% of net revenue, whereas pumps and turbochargers
represented 15% of net revenue. Insofar as PX devices command higher gross
profit margins compared to turbochargers and pumps, the product mix shift over
the prior-year period was unfavorable and represented a drag on gross profit
margins. The Company drove significant improvement in profitability as
measured by gross profit margin, with 54% in the second quarter of 2012
increasing to 62% in the current period, in spite of lower revenue and a less
favorable product mix. Management was excited to observe the continuingly
improving effects of plant consolidation, vertical integration, targeted
cost-out and efficiency-enhancing initiatives, and better production
yields. In consideration of forecasted revenue levels in the fourth quarter of
2013 and the full year of 2014, the Company can generate meaningful
improvement in profitability due to operating leverage, manufacturing
efficiencies, and other economies of scale.  

Operating expenses in the second quarter of 2013 remained stable at $6.6
million as compared to the prior-year period. In sequential terms, operating
expenses decreased by $0.9 million, or 12%, from $7.5 million in the first
quarter of 2013. During the first quarter of 2013, the Company experienced
elevated general and administrative expense due to IT and accounting
transition costs along with heightened sales and marketing expense due to
increased consulting costs for market research and rebranding. Operating
expenses have returned to normalized, targeted levels even as the Company
sustains its robust investment in the oil & gas initiative.  On this point,
R&D resources remain focused on technical validation and commercialization for
three oil & gas solutions with high-profile companies on different
continents. While the Company recognized no revenue related to oil & gas
shipments in the current quarter, management remains confident in the
technological feasibility of the product portfolio and the economic viability
of the value proposition. In short, the field trials are currently progressing
in line with expectations.      

With lower volume offset by improved gross profit margin, the Company reported
a net loss of $(1.5) million, or $(0.03) per share, in the second quarter of
2013. Comparatively, the Company reported net income of $0.4 million, or $0.01
per share, in the second quarter of 2012, which included a tax benefit of $0.4
million for state tax refunds from prior-year returns. The $(1.5) million net
loss during the second quarter of 2013 was reduced from $(4.5) million, or
$(0.09) per share, during the first quarter of 2013. 

Amid operating losses in the first and second quarters of 2013, the Company's
balance sheet and cash position remain healthy.  Excluding current and
non-current restricted cash of $9.5 million, the Company reported unrestricted
cash of $11.4 million, short-term investments of $7.3 million, and long
term-investments of $8.9 million, all of which represent a combined total of
about $27.6 million as of June 30, 2013. For the current period, the net loss
of $(1.5) million included certain non-cash items totaling roughly $1.6
million, the largest of which were depreciation and amortization of $0.9
million and stock-based compensation of $0.5 million. For the six months ended
June 30, 2013, cash flow from operations was $(2.6) million, caused by
operating losses, changes in accrued expenses, and the build-up of inventory
offset by strong collection activity causing favorable changes to accounts
receivable and unbilled receivables. Capital expenditures were approximately
$0.9 million in the first half of 2013, most of which related to the Company's
investment in a new ERP system. These expenditures are not expected to recur
in future periods, as the Company has largely completed its implementation
efforts; therefore, capital expenditures should become very modest in future
periods. Importantly, the balance sheet remains strong, cash flow is
improving, and the Company possesses ample liquidity to fund its strategic
plan. 

Tom Rooney, President and Chief Executive Officer, commented, "The second
quarter results exceeded expectations, with strong OEM and Aftermarket sales,
compelling gross profit margins, and contained operating expenses combining to
produce better operating results than anticipated. The tepid revenue levels
were forecasted several quarters in advance as we develop evolving
transparency and predictability in our mega-projects pipeline. With that
increased visibility, we are able to discern uniquely strong revenue in the
fourth quarter of 2013, followed by meaningful growth in 2014 reflective of a
resurging market for global desalination and our fiercely competitive position
in that market. As conveyed previously, 2014 should mark a seminal turning
point for Energy Recovery as we transition to positive cash flow and income
profitability. We also anticipate revenue growth in the range of 30% to
40%. Based on significant industry growth expectations, we are very excited
about the potential opportunities this brings to us in the future.  What is
equally impactful is the gross profit margin that we can achieve on such
revenue levels due to operating leverage and manufacturing
efficiencies. Uniquely strong margin performance, which is the byproduct of
two years of hard work, combined with an impending wave of revenue growth,
gives me great confidence in the future earnings power of the company. In
summary, we are very pleased with the results in the second quarter, and we
remain bullish on the prospects for the Company regarding both desalination
and other markets."

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
are based on information currently available to us and on management's
beliefs, assumptions, estimates, or projections and are not guarantees of
future events or results. When used in this document, the words "anticipate,"
"believe," "can," "estimate," "expect," "imply," "intend," "may," "plan,"
"predict," "remain," "should," "will," and similar expressions are intended to
identify forward-looking statements, but are not exclusive means of
identifying such statements. 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 12, 2013 as well as other reports filed
by the Company with the SEC from time to time. 

Conference Call to Discuss Second Quarter Results

The conference call scheduled for tomorrow at 7:30 a.m. PDT 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 877-941-8609 or local 480-629-9771, and the access code is
4627866.  Callers should dial in approximately 15 minutes prior to the
scheduled start time.  A telephonic replay will be available at 800-406-7325
or local 303-590-3030 (access code: 4627866) until August 15, 2013.  Investors
may also access the live call or the replay over the internet at
www.streetevents.com or www.energyrecovery.com.  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, please visit www.energyrecovery.com.

Unaudited Consolidated Financial Results

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
                                    Three Months Ended   Six Months Ended
                                   June 30,              June 30, 
                                    2013       2012      2013       2012 
Net revenue                         $ 8,569    $ 12,296  $ 14,942   $ 17,052
Cost of revenue                      3,293      5,636     6,649      9,140
Gross profit                         5,276      6,660     8,293      7,912
Operating expenses:                                                 
General and administrative          3,326      3,606     7,496      7,074
Sales and marketing                 1,859      1,772     3,870      3,254
Research and development            1,137      866        2,219     1,560
Amortization of intangible assets   231        261       461        523
Restructuring charges                44         79        44         110
Total operating expenses             6,597      6,584     14,090     12,521
(Loss) income from operations       (1,321)    76        (5,797)    (4,609)
Interest expense                    —          (1)       —          (5)
Other non-operating income           25         (9)       52         63
(expense), net
(Loss) income before income taxes   (1,296)    66        (5,745)    (4,551)
Provision (benefit) for income       161        (373)     222        (307)
taxes
Net (loss) income                   $ (1,457)  $ 439     $ (5,967)  $ (4,244)
                                                                    
(Loss) earnings per share:                                          
Basic                               $ (0.03)   $ 0.01    $ (0.12)   $ (0.08)
Diluted                             $ (0.03)   $ 0.01    $ (0.12)   $ (0.08)
                                                                    
Number of shares used in per share                                  
calculation:
Basic                                51,026     51,432    51,004     52,025
Diluted                              51,026     52,070    51,004     52,025

 
 
 
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and par value)
(unaudited)
 
                                                       June 30,    December31,
                                                       2013      2012 
ASSETS                                                            
Current assets:                                                   
Cash and cash equivalents                             $11,350    $16,642
Restricted cash                                        5,385      5,235
Short-term investments                                 7,286      9,497
Accounts receivable, net of allowance for doubtful
accounts of $241 and $217 at June 30, 2013 and         10,486     13,240
December 31, 2012, respectively
Unbilled receivables                                   2,183      5,020
Inventories                                            7,364      5,135
Deferred tax assets, net                               500        500
Land and building held for sale                        1,301      1,345
Prepaid expenses and other current assets               4,203      4,245
Total current assets                                   50,058     60,859
Restricted cash, non-current                           4,097      4,366
Unbilled receivables, non-current                      113        868
Long-term investments                                  8,898      4,773
Property and equipment, net of accumulated
depreciation of $10,657 and $9,306 at June 30, 2013    15,208     15,967
and December 31, 2012, respectively
Goodwill                                               12,790     12,790
Other intangible assets, net                           4,468      4,929
Other assets, non-current                              2           2
Total assets                                           $ 95,634   $ 104,554
LIABILITIES AND STOCKHOLDERS' EQUITY                              
Current liabilities:                                              
Accounts payable                                       $ 1,189    $ 2,154
Accrued expenses and other current liabilities         5,521      8,555
Income taxes payable                                   48         39
Accrued warranty reserve                               1,027      1,172
Deferred revenue                                       827        918
Current portion of capital lease obligations            —          18
Total current liabilities                              8,612      12,856
Deferred tax liabilities, non-current, net             1,817      1,706
Deferred revenue, non-current                          272        411
Other non-current liabilities                           2,142      2,200
Total liabilities                                       12,843     17,173
Commitments and Contingencies (Note 9)                            
Stockholders' equity:                                             
Preferred stock, $0.001 par value; 10,000,000 shares   —          —
authorized; no shares issued or outstanding
Common stock, $0.001 par value; 200,000,000 shares
authorized;  52,814,752 and 51,032,149 shares issued
and outstanding at June 30, 2013, respectively; and    53         53
52,685,129 and 50,902,526 shares issued and
outstanding at December 31, 2012, respectively
Additional paid-in capital                             118,674    117,264
Accumulated other comprehensive loss                   (112)      (79)
Treasury stock, at cost, 1,782,603 shares repurchased  (4,000)    (4,000)
at June 30, 2013 and December 31, 2012
Accumulated deficit                                     (31,824)   (25,857)
Total stockholders' equity                              82,791     87,381
Total liabilities and stockholders' equity             $ 95,634   $ 104,554

                                       

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
                                                            Six Months Ended
                                                           June 30, 
                                                            2013      2012 
Cash Flows From Operating Activities                                  
Net loss                                                   $ (5,967) $ (4,244)
Adjustments to reconcile net loss to net cash used in                 
operating activities:
Depreciation and amortization                               1,829     1,976
Loss on disposal of fixed assets                            19        —
Non-cash restructuring charges                              44        79
Amortization of premiums/discounts on investments           171       287
Interest accrued on notes receivables from stockholders     —         (1)
Share-based compensation                                    1,187     1,508
Loss on foreign currency transactions                       31        7
Deferred income taxes                                       111       118
Provision for doubtful accounts                             134       108
Provision for warranty claims                               138       174
Valuation adjustments for inventory reserves                (60)      4
Other non-cash adjustments                                  (58)      65
Changes in operating assets and liabilities:                          
Accounts receivable                                         2,629     (2,804)
Unbilled receivables                                        3,591     (192)
Inventories                                                 (2,253)   800
Prepaid and other assets                                    41        639
Accounts payable                                            (781)     (128)
Accrued expenses and other liabilities                      (3,190)   (941)
Income taxes payable                                        10        10
Deferred revenue                                            (230)     674
Net cash used in operating activities                       (2,604)   (1,861)
Cash Flows From Investing Activities                                  
Capital expenditures                                        (866)     (1,479)
Purchase of marketable securities                           (8,570)   (861)
Maturities of marketable securities                         6,450     7,011
Restricted cash                                             119       1,646
Net cash (used in) provided by investing activities         (2,867)   6,317
Cash Flows From Financing Activities                                  
Repayment of long-term debt                                 —         (64)
Repayment of capital lease obligation                       (18)      (63)
Net proceeds from issuance of common stock                  230       5
Repurchase of common stock                                  —         (4,000)
Net cash provided by (used in) financing activities         212       (4,122)
Effect of exchange rate differences on cash and cash        (33)      (12)
equivalents
Net change in cash and cash equivalents                     (5,292)   322
Cash and cash equivalents, beginning of period              16,642    18,507
Cash and cash equivalents, end of period                   $ 11,350  $ 18,829

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