Energy Recovery, Inc. - Annual Report: 2011 (Form 10-K)

(Mark One)
R	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2011
	or
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from            to        .

Delaware	01-0616867
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

Title of Each Class	Name of Exchange on Which Registered
Common stock, $0.001 par value	The NASDAQ Stock Market LLC

 

Large accelerated filer £

Accelerated filer R

Non-accelerated filer £

Smaller reporting company £

(Do not check if a smaller reporting company)

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Mine Safety Disclosures	16
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	65
Item 9A.	Controls and Procedures	65
Item 9B.	Other Information	67
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	67
Item 11.	Executive Compensation	67
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	67
Item 13.	Certain Relationships and Related Transactions and Director Independence	67
Item 14.	Principal Accountant Fees and Services	67
PART IV
Item 15.	Exhibits and Financial Statement Schedules	68
SIGNATURES		70

 

 

 

 

 

 

 

 

 

 

	•	fluctuations in demand, sales cycles and pricing levels for our products and services;
	•	the cyclical nature of equipment purchasing for planned reverse osmosis desalination plants,
	•	changes in customers' budgets for desalination plants and the timing of their purchasing decisions;
	•	adverse changes in the local or global financing conditions facing our customers;
	•	delays or postponements in the construction of desalination plants;
	•	our ability to develop, introduce and timely ship new products and product enhancements that meet customer demand and contractual and technical requirements, including scheduled delivery dates, performance guarantees, product certifications and warranty terms;

	•	the ability of our customers to obtain other critical plant components such as high-pressure pumps or membranes;
	•	our ability to implement scalable internal systems for reporting, order processing, product delivery, purchasing, billing and general accounting, among other functions;
	•	our ability to maintain efficient factory throughput in our new facility and minimize overhead given significant variability in orders from quarter to quarter and year to year;
	•	unpredictability of governmental regulations and political decision-making as to the approval or building of a desalination plant;
	•	our ability to control costs, including our operating expenses;
	•	our ability to purchase critical raw materials from third-party suppliers;
	•	our ability to compete against other companies that offer energy recovery solutions;
	•	our ability to attract and retain highly skilled employees, particularly those with relevant industry experience; and
	•	general economic conditions in our domestic and international markets, including conditions that affect the valuation of the U.S. dollar against other currencies.

 

	•	political and economic uncertainties, which the current global economic crisis may exacerbate;
	•	uncertainties related to the application of local contract and other laws, including reduced protection for intellectual property rights;
	•	trade barriers and other regulatory or contractual limitations on our ability to sell and service our products in certain foreign markets;
	•	difficulties in enforcing contracts, beginning operations as scheduled and collecting accounts receivable, especially in emerging markets;
	•	increased travel, infrastructure and legal compliance costs associated with multiple international locations;
	•	competing with non-U.S. companies not subject to the U.S. Foreign Corrupt Practices Act;
	•	difficulty in attracting, hiring and retaining qualified personnel; and
	•	increasing instability in the capital markets and banking systems worldwide, especially in developing countries, which may limit project financing availability for the construction of desalination plants.

	•	authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;
	•	require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
	•	specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board, the chief executive officer or the president;
	•	establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
	•	establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;
	•	provide that our directors may be removed only for cause;
	•	provide that vacancies on our board of directors may be filled only by a majority vote of directors then in office, even though less than a quorum;

 

	•	specify that no stockholder is permitted to cumulate votes at any election of directors; and
	•	require a super-majority of votes to amend certain of the above-mentioned provisions.

None.

 

 

		High				Low
2010
First Quarter		$	7.25			$	5.75
Second Quarter		$	6.40			$	3.15
Third Quarter		$	4.23			$	3.08
Fourth Quarter		$	3.99			$	3.30
2011
First Quarter		$	4.36			$	2.88
Second Quarter		$	3.40			$	2.35
Third Quarter		$	3.30			$	2.09
Fourth Quarter		$	3.50			$	2.25

 

 

---

*	$100 invested on 7/2/08 in stock or 6/30/08 in index, including reinvestment of dividends. Fiscal year ending December 31.

		6/30/08 or 7/2/08(1)				12/31/08				12/31/09				12/31/10				12/31/11
Energy Recovery, Inc.			100.00				77.11				69.99				37.23				26.25
NASDAQ Composite			100.00				68.98				100.02				117.78				116.43
Peer Group			100.00				62.14				89.14				100.52				84.60

(1)	The index measurement date is 6/30/08; stock measurement dates are 7/2/08

 

 

		Years Ended December 31,
		2011				2010				2009				2008				2007
Consolidated Statement of Income Data:
Net revenue		$	28,047			$	45,853			$	47,014			$	52,119			$	35,414
Cost of revenue			20,248				23,781				17,595				18,933				14,852
Gross profit			7,799				22,072				29,419				33,186				20,562
Operating expenses:
General and administrative			16,745				14,471				13,515				11,291				4,280
Sales and marketing			7,997				8,205				6,472				6,549				5,230
Research and development			3,526				3,943				3,041				2,415				1,705
Amortization of intangible assets			1,360				2,624				241				30				19
Loss (gain) on fair value remeasurement			171				(2,147	)			—				—				—
Restructuring charges			3,294				—				—				—				—
Total operating expenses			33,093				27,096				23,269				20,285				11,234
Income (loss) from operations			(25,294	)			(5,024	)			6,150				12,901				9,328
Other income (expense):
Interest expense			(34	)			(73	)			(46	)			(79	)			(105	)
Other non-operating income (expense), net			184				(137	)			54				873				517
Income (loss) before provision for (benefit from) income taxes			(25,144	)			(5,234	)			6,158				13,695				9,740
Provision for (benefit from) income taxes			1,299				(1,626	)			2,472				5,032				3,947
Net income (loss)		$	(26,443	)		$	(3,608	)		$	3,686			$	8,663			$	5,793
Earnings (loss) per share - basic		$	(0.50	)		$	(0.07	)		$	0.07			$	0.19			$	0.15
Earnings (loss) per share - diluted		$	(0.50	)		$	(0.07	)		$	0.07			$	0.18			$	0.14
Number of shares used in per share calculations:
Basic			52,612				52,072				50,166				44,848				39,060
Diluted			52,612				52,072				52,644				47,392				41,433

		As of December 31,
		2011				2010				2009				2008				2007(1)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	18,507			$	55,338			$	59,115			$	79,287			$	240
Total assets			110,713				133,917				142,969				120,612				28,227
Long-term liabilities			3,880				2,770				4,505				420				620
Total liabilities			13,759				13,117				22,000				13,613				8,166
Total stockholders’ equity			96,954				120,800				120,969				106,999				20,061

(1)	Certain prior period balances have been reclassified to conform to the current period presentation.

•

our plan to enhance our existing energy recovery devices and to develop and manufacture new and enhanced versions of these devices;

 

 

•

Our belief that sales of our PX-300 and PX-Q300 devices will represent a higher percentage of our net revenue in 2012;

•

our belief that the ceramics components of our PX device will result in low life cycle maintenance costs and that our turbocharger devices have long operating lives;

•

our objective of finding new applications for our technology and developing new products for use outside of desalination;

•

our belief that our products are the most cost effective energy recovery devices over time;

•

our plan to manufacture all or most of our ceramics components internally and our expectation that in-house production of ceramics will reduce production costs;

•

our expectation that our expenditures for research and development will increase;

•

our expectation that we will continue to rely on sales of our energy recovery devices for a substantial portion of our revenue;

•

our belief that our current facilities will be adequate through 2012;

•

our expectation that sales outside of the United States will remain a significant portion of our revenue;

•

our expectation that future sales and marketing expense will increase as revenues increase;

•

our belief that our existing cash and investment balances and cash generated from our operations will be sufficient to meet our anticipated capital requirements for at least the next 12 months; and

•

our expectation that, as we expand our international sales, a small portion of our revenue could continue to be denominated in foreign currencies.

 

 

 

 

 

 

 

•

an advance payment due upon execution of the contract, typically 10% to 20% of the total contract amount;

•

a payment upon delivery of the product due on average between 90 and 150 days from product delivery, and in some cases up to 180 days, typically in the range of 50% to 70% of the total contract amount; and

•

a retention payment due subsequent to product delivery as described further below, typically in the range of 10% to 20%, and in some cases up to 30%, of the total contract amount.

 

 

 

 

 

 

		For the Year Ended December 31,
		2011								2010								Change Increase (Decrease)
Results of Operations: **
Net revenue		$	28,047				100	%		$	45,853				100	%		$	(17,806	)			(39	)%
Cost of revenue			20,248				72	%			23,781				52	%			(3,533	)			(15	)%
Gross profit			7,799				28	%			22,072				48	%			(14,273	)			(65	)%
Operating expenses:
General and administrative			16,745				60	%			14,471				32	%			2,274				16	%
Sales and marketing			7,997				29	%			8,205				18	%			(208	)			(3	)%
Research and development			3,526				13	%			3,943				9	%			(417	)			(11	)%
Amortization of intangible assets			1,360				5	%			2,624				6	%			(1,264	)			(48	)%
Loss (gain) on fair value remeasurement			171				1	%			(2,147	)			(5	)%			(2,318	)			(108	)%
Restructuring charges			3,294				12	%			—				*				3,294				*
Total operating expenses			33,093				118	%			27,096				59	%			5,997				22	%
Loss from operations			(25,294	)			(90	)%			(5,024	)			(11	)%			20,270				403	%
Other income (expense):
Interest expense & finance charges			(34	)			*				(73	)			*				(39	)			(53	)%
Other non-operating income (expense), net			184				1	%			(137	)			*				321				234	%
Net loss before provision for income tax			(25,144	)			(90	)%			(5,234	)			(11	)%			19,910				380	%
Provision for (benefit from) income tax expense			1,299				5	%			(1,626	)			(4	)%			(2,925	)			(180	)%
Net loss		$	(26,443	)			(94	)%		$	(3,608	)			(8	)%		$	22,835				633	%

 

 

		Years Ended December 31,
		2011				2010
Domestic net revenue		$	2,798			$	3,334
International net revenue			25,249				42,519
Total net revenue		$	28,047			$	45,853
Revenue by country:
India			18	%			3	%
United States			10				7
Australia			2				31
Algeria			1				12
Others			69				47
Total			100	%			100	%

 

 

 

 

		For the Year Ended December 31,
		2010								2009								Change Increase (Decrease)
Results of Operations: **
Net revenue		$	45,853				100	%		$	47,014				100	%		$	(1,161	)			(2	)%
Cost of revenue			23,781				52	%			17,595				37	%			6,186				35	%
Gross profit			22,072				48	%			29,419				63	%			(7,347	)			(25	)%
Operating expenses:
General and administrative			14,471				32	%			13,515				29	%			956				7	%
Sales and marketing			8,205				18	%			6,472				14	%			1,733				27	%
Research and development			3,943				9	%			3,041				6	%			902				30	%
Amortization of intangible assets			2,624				6	%			241				1	%			2,383				*
Gain on fair value remeasurement			(2,147	)			(5	)%			—				0	%			2,147				*
Total Operating Expenses			27,096				59	%			23,269				49	%			3,827				16	%
Income (loss) from operations			(5,024	)			(11	)%			6,150				13	%			(11,174	)			(182	)%
Other income (expense):
Interest expense & finance charges			(73	)			*				(46	)			*				27				59	%
Other non-operating income (expense), net			(137	)			*				54				*				(191	)			(354	)%
Net income (loss) before provision for income tax			(5,234	)			(11	)%			6,158				13	%			(11,392	)			(185	)%
Provision for (benefit from) income tax expense			(1,626	)			(4	)%			2,472				5	%			(4,098	)			(166	)%
Net Income (Loss)		$	(3,608	)			(8	)%		$	3,686				8	%		$	(7,294	)			(198	)%

 

 

		Years Ended December 31,
		2010				2009
Domestic net revenue		$	3,334			$	3,022
International net revenue			42,519				43,992
Total net revenue		$	45,853			$	47,014
Revenue by country:
Australia			31	%			19	%
Algeria			12				24
Israel			2				21
Others			55				36
Total			100	%			100	%

 

 

 

 

 

 

 

 

 

		Payments Due by Period
Payments Due During Year Ending December 31,		Operating Leases				Capital Leases(1)				Notes Payable				Purchase Obligations(2)				Total
2012		$	1,504			$	85			$	85			$	1,673			$	3,347
2013			1,474				18				—				—				1,492
2014			1,560				—				—				—				1,560
2015			1,477				—				—				—				1,477
2016			1,514				—				—				—				1,514
Thereafter			4,476				—				—				—				4,476
		$	12,005			$	103			$	85			$	1,673			$	13,866