ERI Diversifies Beyond Water

A recent report by BCC Research estimates the worldwide seawater and brackish water desalination market to be worth $4.1 billion this year. The researcher estimates the industry to grow at an annual rate of more than 11.9% to be worth $7.2 billion by 2018. The report attributes the increasing demand for desalination projects to the rise in population, which is spurring the need for an increased drinking water supply and the continuous technical improvements in the reverse osmosis markets that are helping drive down desalination costs.

ERI’s Financials

Meanwhile, water desalination expert Energy Recovery (Nasdaq: ERII) maintained its outlook of a 20% compounded annual growth rate over the next five years. For now though, revenues have taken a tumble due to the timing of mega-project shipments. For Q2, ERI saw revenues fall 30% over the year to $8.56 million. The company expects to compensate for the declines in the fourth quarter of the year. Over the past year, ERII has focused on increasing gross margins, with significant success. Q2 gross margins were just above 60%, returning to  levels they had achieved in 2009. ERI is confident of maintaining these margins. Despite the increase in gross margins, overall loss per share widened from an income of $0.01 per share a year ago to a loss of $0.03 per share for the quarter. Increased losses were due to investment in R&D and sales and marketing efforts, coupled with the steep decline in revenues.

During the quarter, ERI earned $6.8 million from PX devices and related products and services and $1.8 million from turbochargers, pumps, and related products and services.

By region, ERI has seen a significant diversification of portfolio. Domestic revenues for the quarter were $468,000, compared with $1.2 million a year ago. The contribution of international revenues increased to 94% of the quarter’s revenues at $8.1 million compared with 90% a year ago. ERI has seen significant growth in the new markets of India, Spain, Ghana, and China. All together, these countries accounted for 50% of revenues compared with a mere 8% share a year ago.

ERI’s Diversification

ERI continues to diversify operations while remaining focused on alternative energy resources. Recently, it entered into an agreement to work together with Seoul-based GS Engineering & Construction Corporation to develop advanced osmotic power generation solutions using Energy Recovery’s PX Pressure Exchanger technology. The Pressure Retarded Osmosis solution generates electricity by mixing seawater and freshwater to create osmotic power. A pilot program for this technology is already underway in the Korean counterpart’s center. It is estimated that successful implementation of this technology has the capacity to produce more than 1,600 terawatt hours in power generation.

Last year, it began operations in the oil & gas industry with field trials. ERI is pleased with the field trials where it is now deploying new energy recovery devices.

ERI’s stock is trading at $5.80 with a market capitalization of $296 million. It was at a 52-week high of $7.75 in September 2013.