Energy Recovery Inc (Nasdaq: ERII), a leader in the design and development of energy recovery devices for desalination and industrial processes, announced today the results of its second quarter ended June 30, 2011. ERI achieved net revenue of $6.6 million for the quarter, reflecting a 50% decrease over the same period last year. The revenue decline was caused by decreased shipments of PX devices, turbochargers and pumps, and to a lesser extent, parts and services associated with aftermarket sales. Sales of PX devices and related products and services accounted for approximately 46% of our revenue compared to 69% in the second quarter of 2010, while turbochargers and pumps comprised approximately 54% of our revenue compared to 31% in the same quarter of the prior year. The shift in product mix favoring turbochargers and pumps, along with increased underutilization of our manufacturing facilities, resulted in decreased gross margin of 35% compared to 50% in the second quarter of 2010.

General and administrative expenses increased by $669,000, or 18%, to $4.3 million for the three months ended June 30, 2011 from $3.7 million for the same period in 2010. The increase in general and administrative expenses was caused by costs associated with the CFO transition, recruiting costs to fill other strategic positions, and other compensation expenses. The amortization of intangible assets decreased by $338,000, or 49%, to $345,000 in the current quarter from $683,000 in the same period of 2010 due to the full amortization of backlog acquired in connection with the purchase of Pump Engineering LLC. Non-operating income changed favorably by $154,000 for the three months ended June 30, 2011 primarily due to $58,000 in net foreign currency gains recorded during the second quarter of 2011 compared to ($85,000) in net foreign currency losses recorded during the second quarter of 2010 along with a minor decrease in interest expense.

ERI reported a net loss of $3.3 million, or ($0.06) per share, for the three months ended June 30, 2011 compared to a net loss of $0.3 million, or ($0.01) per share, for the same period last year. For the six-month period in 2011, ERI reported a net loss of $5.1 million, or ($0.10) per share, compared to a net loss of $0.3 million, or ($0.00) per share for the same period last year.

Thomas S. Rooney, Jr., ERI’s president and chief executive officer, commented, “The desalination industry continues to suffer from a lack of new plant construction—a ‘hangover’ effect from the global economic crisis. We see little mega-project activity in the current year,” says Rooney, “although 2012 is showing some signs of life. To compensate for this temporary lull in sales activity, we are focused on cost reduction initiatives, the first of which includes the consolidation of manufacturing operations at our corporate headquarters in California. Moreover, we are evaluating investment opportunities to achieve strategic diversification in other addressable markets such as oil and gas.”

Conference Call to Discuss Second Quarter 2011 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 sell-side investment professionals who regularly follow the Company. The toll-free phone number for the call is 1-888-549-7750 or local 480-629-9866, and the access code is 4454707. 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: 4454707) until Thursday, August 18, 2011. 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) 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, reducing the carbon footprint of desalination by saving 1 GW of energy and offsetting CO 2 emissions by more than 5.2 million tons 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

June 30,
Six Months Ended

June 30,
  2011         2010     2011         2010  
Net revenue $ 6,632 $ 13,304 $ 16,999 $ 25,919
Cost of revenue   4,304     6,676     10,007     11,933  
Gross profit   2,328     6,628     6,992     13,986  
Operating expenses:
General and administrative 4,325 3,656 8,382 7,389
Sales and marketing 2,009 2,142 4,079 4,102
Research and development 871 863 1,900 1,691
Amortization of intangible assets   345     683     691     1,366  
Total operating expenses   7,550     7,344     15,052     14,548  
Loss from operations (5,222 ) (716 ) (8,060 ) (562 )
Interest expense (5 ) (17 ) (25 ) (38 )
Other non-operating income (expense), net   61     (81 )   255     (99 )
Loss before provision from income taxes (5,166 ) (814 ) (7,830 ) (699 )
Benefit from income taxes   (1,828 )   (492 )   (2,734 )   (445 )
Net loss $ (3,338 ) $ (322 ) $ (5,096 ) $ (254 )
 
Basic and diluted net loss per share $ (0.06 ) $ (0.01 ) $ (0.10 ) $ (0.00 )
 
Shares used in computing basic and diluted net loss per share   52,605     52,078     52,592     51,661  
 

ENERGY RECOVERY INC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data and par value)

(unaudited)
 

 
        June 30,

2011
      December 31,

2010
ASSETS

Current assets:

Cash and cash equivalents
$ 50,396 $ 55,338
Restricted cash 4,465 4,636
Accounts receivable, net of allowance for doubtful accounts of $89 and $44 at June 30, 2011 and December 31, 2010, respectively 8,375 9,649
Unbilled receivables, current 4,211 2,278
Inventories 9,704 9,772
Deferred tax assets, net 2,097 2,097
Prepaid expenses and other current assets   6,528     4,428  
Total current assets 85,776 88,198
Restricted cash, non-current 1,067 2,244
Property and equipment, net 21,382 22,314
Goodwill 12,790 12,790
Other intangible assets, net 7,660 8,352
Other assets, non-current   2     19  
Total assets $ 128,677   $ 133,917  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 1,741 $ 1,429
Accrued expenses and other current liabilities 5,836 5,248
Income taxes payable 26 13
Accrued warranty reserve 763 1,028
Deferred revenue 330 2,341
Current portion of long-term debt 128 128
Current portion of capital lease obligations   119     160  
Total current liabilities 8,943 10,347
Long-term debt 21 85
Capital lease obligations, non-current 37 144
Deferred tax liabilities, non-current, net 317 317
Deferred revenue, non-current 216 157
Other non-current liabilities   2,079     2,067  
Total liabilities   11,613     13,117  
 
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; 52,636,004 and 52,596,170 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively 53 53
Additional paid-in capital 113,387 112,025
Notes receivable from stockholders (23 ) (38 )
Accumulated other comprehensive loss (97 ) (80 )
Retained earnings   3,744     8,840  
Total stockholders’ equity   117,064     120,800  
Total liabilities and stockholders’ equity $ 128,677   $ 133,917  

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