ERII Energy Recovery Inc

Energy Recovery, Inc. (Nasdaq:ERII), a leader in the design and development of energy recovery devices for desalination, announced today the results of its first quarter ended March 31, 2010. In the first quarter of 2010, ERI achieved net revenue of $12.6 million, equal to the net revenue for the same period last year and slightly above the Company’s guidance range of $11 to $12 million. For the three months ended March 31, 2010, ERI reported net income on a generally accepted accounting principles (GAAP) basis of $68,000, or $0.00 per diluted share, and non-GAAP net income of $717,000, or $0.01 per share. For the same period last year, ERI reported GAAP net income of $1.6 million, or $0.03 per share.

“Our first quarter results were better than the guidance we provided due to better than expected sales from the OEM sector of our business,” said G.G. Pique, President and CEO of Energy Recovery, Inc. “This was our first full quarter with the consolidated results of Pump Engineering and we are pleased with the progress of the integration of the two companies. We have already submitted a significant number of joint sales proposals for our Pump Engineering high pressure pumps and our PX® devices.”

Non-GAAP Financial Measures

In evaluating the operating performance of Energy Recovery’s business, Energy Recovery management utilizes financial measures described in this press release that exclude certain non-cash charges and charges related to the purchase of Pump Engineering required by U.S. generally accepted accounting principles, or GAAP. Energy Recovery believes this additional information provides investors and management with additional insight into its underlying core operating performance.

For the calculation of Adjusted EBITDA, net income of $68,000 was adjusted for depreciation and amortization expense of $1.1 million, net interest expense of $16,000, taxes of $47,000, stock-based compensation expense of $597,000 and a purchase accounting adjustment for sale of acquired inventory of $422,000 for the first quarter of 2010.

In the guidance estimates below for the second quarter and full year 2010, net income and earnings are adjusted for the purchase accounting required under GAAP for the acquisition of Pump Engineering. For the full year, the estimates assume adjustments of a purchase accounting adjustment for sale of acquired inventory of $870,000, $2.6 million in amortization of intangibles, and offset by a tax benefit of approximately $1.4 million based on the period’s effective tax rate.

A reconciliation of Energy Recovery’s non-GAAP financial measures for the first quarter 2010 to the most directly comparable GAAP measures can be found under the heading “Energy Recovery Non-GAAP Financial Reconciliation” below.

Outlook

ERI provides the following guidance on a GAAP basis for the second quarter of 2010 and the full year:

            Q2 2010 Fiscal Year 2010   Estimated Net Revenue $13 to $15 million $55 to $65 million   Estimated Net Income (Loss) ($0.6) to $0.1 million ($1.5) to $2.5 million   Estimated Earnings (Loss) Per Diluted Share ($0.01) to $0.00 ($0.03) to $0.05  

ERI provides the following non-GAAP guidance for the second quarter of 2010 and the full year:

            Q2 2010 Fiscal Year 2010   Estimated Adjusted Net Income (Loss) (1) $0.1 to $0.5 million $0.5 to $4.5 million  

Estimated Adjusted Earnings (Loss) PerFully Diluted Share (2)

$0.00 to $0.01 $0.01 to $0.08   Estimated Adjusted EBITDA (3) $1.5 to $2.5 million $6 to $13 million

(1) Estimated Adjusted Net Income is defined as GAAP net income adjusted for the purchase accounting for the acquisition of Pump Engineering. The purchase accounting includes a purchase accounting adjustment for sale of acquired inventory, the amortization of intangible assets that were booked as a result of the acquisition, and the tax benefit generated as a result of the purchase accounting expense.

(2) Estimated Adjusted Earnings per Fully Diluted Share is defined as Estimated Adjusted Net Income divided by the fully diluted shares.

(3) Estimated Adjusted EBITDA is defined net income adjusted for interest expense (income), taxes, depreciation, amortization, stock-based compensation, and a purchase accounting adjustment for sale of acquired inventory.

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. Such forward-looking statements include the statements, under the caption “Outlook”, about ERI’s estimated net revenue, GAAP and non-GAAP net income and earnings per diluted share, and estimated adjusted net income, adjusted earnings per fully diluted share and adjusted EBITDA, for the second quarter of 2010 and for the 2010 fiscal year. Because such forward-looking statements involve risks and uncertainties, the Company's actual results may differ materially from the predictions in those forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, delays in, or cancellation of, the construction of desalination plants, the inability of our customers to obtain project financing, delays in governmental approvals, changes in end users’ budgets for desalination plants or the timing of their purchasing decisions, our inability to integrate Pump Engineering’s business into ERI’s operations successfully, our ability to ship new products to meet scheduled delivery times; the world economic crisis and other risks detailed in the Company's filings with the Securities and Exchange Commission (“SEC”). All forward-looking statements are made as of today, and the Company assumes no obligation to update such statements. For more details relating to the risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, please refer to the Company's SEC filings.

Conference Call to Discuss First Quarter 2010 Results

The conference call scheduled today at 1:30 p.m. PDT will be in a "listen-only" mode for all participants other than the investment professionals who regularly follow the Company. The toll-free phone number for the call is 1-888-549-7750 or +1-480-629-9866 and the access code is 4284835. Callers should dial in approximately 15 minutes prior to the scheduled start time. A telephonic replay will be available at 1-800-406-7325 or +1-303-590-3030, Access Code: 4284835, until Thursday, May 20, 2010. Investors may also access the live call or the replay over the internet at www.energyrecovery.com. The replay will be available approximately three hours after the live call concludes.

About ERI®

Energy Recovery, Inc. (NASDAQ:ERII) designs and develops energy recovery devices that help make desalination affordable by significantly reducing energy consumption. Energy Recovery technologies include the PX Pressure Exchanger® device for desalination and the Turbocharger hydraulic turbine energy recovery device and pump for desalination, gas and liquid processing applications. In total, Energy Recovery helps reduce CO2 emissions by more than 4.7 million tons per year and produce 1.6 billion gallons of potable water per day. The company is headquartered in the San Francisco Bay Area with offices near Detroit and in key desalination centers worldwide, including Madrid, Shanghai and Dubai. For more information about Energy Recovery, Inc. please visit www.energyrecovery.com.

Unaudited Financial Results

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

     

 

Three Months Ended

March 31,

  2010       2009   Net revenue $ 12,615 $ 12,646 Cost of revenue   5,257     4,573   Gross profit 7,358 8,073 Operating expenses: General and administrative 4,416 3,154 Sales and marketing 1,960 1,510 Research and development   828     804   Total operating expenses   7,204     5,468   Income from operations 154 2,605 Interest expense (21 ) (14 ) Other non-operating expense, net   (18 )   (88 ) Income before provision for income taxes 115 2,503 Provision for income taxes   47     949   Net income $ 68   $ 1,554   Earnings per share: Basic $ 0.00   $ 0.03   Diluted $ 0.00   $ 0.03   Number of shares used in per share calculations: Basic   51,243     50,052   Diluted   53,652     52,580  

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data and par value)

(unaudited)

      March 31,

2010

   

December 31,

2009

ASSETS Current assets: Cash and cash equivalents $ 50,511 $ 59,115 Restricted cash 5,183 5,271

Accounts receivable, net of allowance for doubtful accounts of$169 and $196 at March 31, 2010 and December 31, 2009,respectively

15,561 12,683 Unbilled receivables, current 6,155 5,544 Inventories 12,695 10,359 Deferred tax assets, net 1,467 1,466 Prepaid expenses and other current assets   2,277         1,741   Total current assets 93,849 96,179 Restricted cash, non-current 5,521 5,555 Property and equipment, net 20,855 16,958 Goodwill 12,790 12,790 Other intangible assets, net 10,303 10,987 Deferred tax assets, non-current, net 447 447 Other assets, non-current   52         53   Total assets $ 143,817       $ 142,969     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,005 $ 1,952 Accrued expenses and other current liabilities 7,959 9,492 Income taxes payable 49 350 Accrued warranty reserve 708 605 Deferred revenue 5,537 4,628 Current portion of long-term debt 128 265 Current portion of capital lease obligations   196         203   Total current liabilities 17,582 17,495 Long-term debt 181 246 Capital lease obligations, non-current 325 369 Other non-current liabilities   3,864         3,890   Total liabilities   21,952         22,000   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;51,311,892 and 51,215,653 shares issued and outstanding atMarch 31, 2010 and December 31, 2009, respectively

51 51 Additional paid-in capital 109,397 108,626 Notes receivable from stockholders (36 ) (90 ) Accumulated other comprehensive loss (63 ) (66 ) Retained earnings   12,516         12,448   Total stockholders’ equity   121,865         120,969   Total liabilities and stockholders’ equity $ 143,817       $ 142,969  

Energy Recovery Non-GAAP Financial Reconciliation

       

Q1 2010

(in thousands) Reconciliation of Adjusted Net Income   Net Income $68 Plus: Purchase Adjustment of Acquired Inventory 422 Amortization of purchased intangible assets 676 Income Tax Effect (1) (449) Adjusted Net Income $717

(1) Represents the application of the period’seffective tax rate to the non-GAAP adjustmentsto income before provision of income taxes.

Q1 2010

(in thousands) Reconciliation of Estimated Adjusted EBITDA   Net Income $68 Plus: Net Interest 16 Taxes 47 Depreciation of property and equipment 443 Amortization of intangible assets 683 Stock-based Compensation 597 Purchase Adjustment of Acquired Inventory 422 Adjusted EBITDA $2,276