Energy Recovery Q2 2026 earnings: Megaproject weakness drives a 57% revenue decline

Energy Recovery (Nasdaq: ERII) reported Q2 2026 revenue of $12.0 million, down 57% from $28.1 million a year earlier, while diluted EPS fell to a loss of $0.06 from earnings of $0.04. Gross margin increased to 74.7%, but the sharp reduction in revenue pushed the company to a $5.9 million operating loss. Operating cash flow nevertheless rose to $16.3 million, creating a notable divergence between reported earnings and cash generation.

Core earnings data

Lower sales volume was the central pressure on the quarter. Gross profit fell to $9.0 million despite the higher gross margin, while a 10% reduction in operating expenses was not enough to prevent a swing from operating profit to loss.

The company attributed the revenue decline primarily to the war in Iran. It linked the gross-margin increase to indirect manufacturing costs and channel mix, with lower volume acting as a partial offset.

Adjusted EPS, adjusted EBITDA and free cash flow are company-defined non-GAAP measures.

Business and segment performance

Megaproject revenue drove most of the contraction

All three sales channels declined, but megaproject revenue was the main source of weakness. It fell by $12.1 million, accounting for roughly three-quarters of the company’s total year-over-year revenue decline.

Desalination remained the largest segment, generating $11.5 million of revenue versus $25.5 million a year earlier. Its operating profit declined to $2.8 million from $11.9 million. Wastewater revenue fell to $0.5 million from $2.3 million, while its operating loss widened to $2.1 million from $0.2 million.

This segment performance shows that the revenue decline was not limited to a single smaller business. The core desalination operation remained profitable at the segment level, but its reduced contribution could not absorb wastewater losses and $6.6 million of Corporate and Other operating costs.

Profitability, cash flow and balance sheet

Operating expenses declined 10% to $14.8 million, primarily because of lower employee compensation, stock-based compensation and consulting costs. These savings were partially offset by $0.9 million of restructuring charges. Stock-based compensation declined to $1.4 million from $1.9 million.

The expense reduction was meaningful but smaller than the decline in gross profit. As a result, adjusted operating margin also deteriorated to negative 30.4% from positive 12.2%, indicating that restructuring and stock-based compensation were not the only reasons for the loss.

Working-capital inflows supported cash despite the net loss

Energy Recovery generated $16.3 million of operating cash flow and $15.4 million of free cash flow during the quarter despite reporting a $3.2 million net loss. For the first six months of 2026, operating cash flow was $37.3 million, supported by $47.8 million of net cash from operating assets and liabilities.

Accounts receivable and contract assets declined to $14.2 million at June 30 from $78.3 million at the end of 2025. Inventory moved in the opposite direction, increasing to $38.2 million from $24.3 million. Cash, cash equivalents and investments rose to $98.1 million from $83.3 million over the same period, even after $20.4 million of share repurchases during the first half.

Recent insider transactions

The supplied insider data show 412,508 shares purchased across 15 transactions and 288,146 shares sold across 11 transactions during the last six months, resulting in net purchases of 124,362 shares. The latest reported transactions include sales, a purchase, stock awards and a derivative-security conversion; awards and conversions should be distinguished from open-market purchases.

All 10 transactions were reported as direct holdings. The records alone do not establish insiders’ views about the company’s prospects.

Risks investors need to watch

• Geopolitical disruption and revenue timing: Energy Recovery attributed the quarter’s lower revenue primarily to the war in Iran. Continued disruption could affect the timing and recognition of project revenue.
• Dependence on megaproject sales: Megaproject revenue declined 82% and represented roughly three-quarters of the total revenue contraction, demonstrating the potential volatility created by large projects.
• Negative operating leverage: A 10% reduction in operating expenses could not offset the loss of gross profit, leaving the company with a negative 49.0% operating margin.
• Wastewater losses: Wastewater revenue declined sharply while the segment’s operating loss widened to $2.1 million, increasing its drag on consolidated profitability.
• Higher inventory: Inventory increased to $38.2 million from $24.3 million at year-end 2025. Its conversion into sales and cash will be important if revenue remains uneven.

Summary

Energy Recovery’s Q2 2026 results were shaped by a severe decline in megaproject and desalination revenue, which outweighed higher gross margin and lower operating expenses. Working-capital movements supported cash generation and lifted cash and investments, but the company remained unprofitable on both GAAP and adjusted operating measures. The main issues to monitor are the recovery of project revenue, the wastewater segment’s losses, inventory conversion and whether operating cash flow remains resilient as working-capital balances normalize.