ERII Energy Recovery Inc

Energy Recovery Inc (NASDAQ: ERII), a leader in the design and development of energy recovery devices for desalination and other industrial processes, announced today the results of its third quarter ended September 30, 2011. With no shipments for mega projects and delayed OEM deliveries, the Company achieved net revenue of $4.9 million for the quarter, reflecting a 29% decrease as compared to the same period of last year. Low production volume in manufacturing, coupled with a mix shift that favored smaller devices, resulted in a gross margin of 15% in the current period as compared to 34% in the third quarter of 2010. The progressive qualification of ceramics production in California and the plant disruption associated with the closure in Michigan, both scheduled for completion by the end of this year, compounded the effects of negative operating leverage and unfavorable product mix, all of which combined to create a significant drag on margins in the current period. The Company’s restructuring and integration activities, however, are expected to generate significant cost savings in 2012 and thereafter.

In the third quarter of 2011, the Company exhausted its potential to carry-back net operating losses within the required look-back period of three years. Accordingly, net operating losses can no longer be applied on a look-back basis; rather, these losses must be carried forward to offset taxable income in future periods. Consequently, the Company recorded a valuation allowance against deferred tax assets and other adjustments in the current period, with a combined value of $4.5 million, in accordance with the accounting guidance and related interpretations regarding accounting for income taxes. Although management clearly believes in the long-term strategic direction of the Company and its future earnings potential, projected revenue and profit in subsequent years do not outweigh prior cumulative losses when assessing the need for a valuation allowance under accounting standards.

With tax adjustments of $4.5 million and restructuring costs of $0.5 million, the Company reported a net loss of $11.3 million, or ($0.22) per share, for the three months ended September 30, 2011 compared to a net loss of $3.9 million, or ($0.07) per share, for the same period of last year. For the nine-month period in 2011, the Company reported a net loss of $16.4 million, or ($0.31) per share, compared to a net loss of $4.1 million, or ($0.08) per share for the same period of last year.

Tom Rooney, president and chief executive officer, commented, “The quarterly results reflect continued sluggishness in the desalination industry, manifested plainly through decreased revenue levels and compressed margins caused by poor utilization in manufacturing along with an unfavorable product mix. Moreover, results were further undermined by tax adjustments and restructuring costs, together totaling $5.0 million. While the financial results, albeit anticipated, leave much room for improvement, we are making meaningful progress with respect to our strategic priorities. Restructuring and plant consolidation are on target, vertical integration of production for all ceramic components is nearing completion, and three product development managers are in place to diversify our revenue mix. Moreover, we are actively pursuing acquisition candidates that meet our financial and strategic criteria, we successfully expanded the product portfolio through the launch of the new PX-Q300 in Australia, and the sales pipeline is shaping up to enable improved performance in 2012. In summary, even in the context of challenging results in the third quarter of 2011, we remain highly confident in the future prospects of the Company as we conduct disciplined execution of our strategic plan.”

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 our expectations or goals relating to the completion of vertical integration for our ceramic products in 2011, anticipated cost savings, penetration of new markets, product diversification, future M&A efforts, strategic direction, future earnings potential, and other future prospects. 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; risks that our product diversification, M&A, and other strategic efforts will not yield intended benefits; political unrest; 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 ability to ship new products to meet scheduled delivery times; the global economic crisis; our ability to develop other energy recovery solutions for markets outside of desalination; 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 Third Quarter 2011 Results

The conference call scheduled today at 1:30 p.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 888-549-7880 or local 480-629-9644, and the access code is 4481254. 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: 4481254) until November 17, 2011. Investors may also access the live call or the replay over the internet at www.streetevents.com or tinyurl.com/earningscall-Nov2011. The replay will be available approximately three hours after the live call concludes.

About Energy Recovery Inc

Energy Recovery Inc (NASDAQ: ERII) designs and develops energy recovery devices that significantly reduce energy consumption in desalination and other industrial processes. Energy Recovery’s portfolio includes notable technologies such as the PX Pressure Exchanger™ (PX™) device, the ERI™ TurboCharger hydraulic turbine energy recovery device, and the ERI™ AquaBold™ and ERI™ AquaSpire™ high-pressure pump. In total, Energy Recovery has more than 12,000 devices installed, helping to save an estimated 10 billion kilowatt hours of energy per year. The company is headquartered in the San Francisco Bay Area with offices in key centers worldwide, including Madrid, Shanghai, and Dubai. For more information about Energy Recovery, Inc., 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 Nine Months Ended September 30, September 30, 2011   2010 2011   2010 Net revenue $ 4,933 $ 6,921 $ 21,932 $ 32,840 Cost of revenue   4,214     4,537     14,221     16,470   Gross profit   719     2,384     7,711     16,370   Operating expenses: General and administrative 3,571 3,335 11,953 10,724 Sales and marketing 2,291 1,860 6,370 5,962 Research and development 726 1,252 2,626 2,943 Amortization of intangible assets 346 683 1,037 2,049 Restructuring charges   470     —     470     —   Total operating expenses   7,404     7,130     22,456     21,678   Loss from operations (6,685 ) (4,746 ) (14,745 ) (5,308 ) Interest expense (5 ) (15 ) (30 ) (53 ) Other non-operating income (expense), net   (127 )   78     128     (21 ) Loss before income taxes (6,817 ) (4,683 ) (14,647 ) (5,382 ) Provision for (benefit from) income taxes   4,509     (833 )   1,775     (1,278 ) Net loss $ (11,326 ) $ (3,850 ) $ (16,422 ) $ (4,104 )   Basic and diluted net loss per share $ (0.22 ) $ (0.07 ) $ (0.31 ) $ (0.08 )   Shares used in computing basic and diluted net loss per share   52,636     52,447     52,602     51,923     ENERGY RECOVERY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data and par value) (unaudited)     September 30, December 31, 2011 2010 ASSETS Current assets:

Cash and cash equivalents

$ 45,430 $ 55,338 Restricted cash 6,674 4,636 Accounts receivable, net of allowance for doubtful accounts of $48 and $44 at September 30, 2011 and December 31, 2010, respectively 3,795 9,649 Unbilled receivables, current 2,173 2,278 Inventories 9,917 9,772 Deferred income taxes 580 2,097 Prepaid expenses and other current assets   4,694     4,428   Total current assets 73,263 88,198 Restricted cash, non-current 3,952 2,244 Property and equipment, net 20,787 22,314 Goodwill 12,790 12,790 Other intangible assets, net 7,314 8,352 Other assets, non-current   2     19   Total assets $ 118,108   $ 133,917   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,508 $ 1,429 Accrued expenses and other current liabilities 4,642 5,248 Income taxes payable 21 13 Accrued warranty reserve 744 1,028 Deferred revenue, current 520 2,341 Current portion of long-term debt 117 128 Current portion of capital lease obligations   98     160   Total current liabilities 7,650 10,347 Long-term debt — 85 Capital lease obligations, non-current 24 144 Deferred income taxes 1,647 317 Deferred revenue, non-current 238 157 Other non-current liabilities   2,085     2,067   Total liabilities   11,644     13,117   Commitments and Contingencies 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; 52,643,129 and 52,596,170 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively 53 53 Additional paid-in capital 114,103 112,025 Notes receivable from stockholders (23 ) (38 ) Accumulated other comprehensive loss (87 ) (80 ) Retained earnings (accumulated deficit)   (7,582 )   8,840   Total stockholders’ equity   106,464     120,800   Total liabilities and stockholders’ equity $ 118,108   $ 133,917