Energy Recovery (ERII) reported a third-quarter loss of $0.12 per share, well short of the consensus estimate of a $0.04 loss. That is a 200.0% negative surprise. Revenue of $11.2 million missed the $17.69 million consensus by 36.7% and fell 65.0% from a year ago. Earnings fell 271.4% year over year, a swing from a $0.07 GAAP profit to a loss. The revenue decline was steeper than the 52% year-to-date drop, so the top line was still deteriorating rather than stabilizing. Yet the quarter's most important number was not on the income statement. Backlog more than doubled to over $60 million, from $27 million at the end of the second quarter. That is the central tension: the reported quarter was close to a worst case, while forward indicators improved sharply.
The miss came almost entirely from the megaproject channel. Megaproject revenue collapsed to $934,000 from $18.4 million a year earlier, which management attributed to disruption from the war in Iran. The core business offered little cover. OEM revenue fell 31% and aftermarket revenue fell 13%. Wastewater revenue shrank to $476,000 from $2.8 million. Lower volume drove gross margin down to 37.5% from 64.2%, with product mix and indirect manufacturing costs adding pressure. Cost control was real: operating expenses fell 17.2% to $14.0 million. That was not nearly enough to offset the gross-profit shortfall, and the operating loss reached $9.8 million. On an adjusted basis, ERII lost $0.10 per share versus a $0.12 profit a year ago, and adjusted EBITDA was a $7.8 million loss. A $2.9 million tax benefit cushioned the GAAP net loss.
The balance sheet deserves a closer look. Year-to-date free cash flow of $25.9 million looks healthy, but it was driven by collecting receivables, which fell from $78.3 million to $10.7 million. It did not come from operations. Third-quarter free cash flow alone was negative $10.1 million. Inventory, meanwhile, rose to $44.1 million from $24.3 million at year-end. That build is consistent with delayed shipments, but it ties up working capital until those projects ship. Liquidity is not a concern. Cash and investments stand at $85.6 million with no debt, even after $23.2 million of buybacks this year.
The call made a credible case that the second-quarter disruption is easing. Management said Middle East contracting and construction have resumed, and the company signed more than $30 million of megaproject contracts in the past 30 days. Management cited line of sight to at least $50 million of 2027 megaproject revenue and described $17 million of fourth-quarter megaproject backlog as a floor. The pipeline reached a record of roughly $525 million and is diversifying into North Africa, Asia and South America. Management also said no customer has changed a long-term investment decision and that it knows of no cancelled projects. On competitive position, the new PX-Q650 won its first contract at the 600,000 m3/day Jubail plant. ERII says it won every 2026 megaproject above 100,000 m3/day. The Dammam, Saudi Arabia facility remains on track to begin manufacturing in 2027.
Bears still have legitimate ammunition. Guidance withdrawn in the first quarter remains suspended because management cannot pin down which quarters shipments will land in. That leaves investors to trust backlog commentary rather than a formal outlook. Aftermarket destocking by budget-constrained customers emerged as a new headwind. Management also called wastewater results unsatisfactory, though it expects a fourth-quarter uptick after merging the desal and wastewater sales teams. Both the CEO and CFO roles are filled on an interim basis. Management framed the margin benefits from the Saudi plant and the Q650 as gradual through 2027-28.
The market had already priced in much of the pain. Shares closed at $7.17 heading into the report, down 14.1% from the $8.35 open after the August release and 24.9% below the 200-day moving average of $9.55. The stock set a 52-week low of $6.55 on October 23 and was trading about 9.5% above that level, far closer to the bottom of its inter-earnings range than to the $8.92 high. Investor sentiment remained negative but improved modestly, rising to -0.20 from -0.26. The Earnings Whispers trend signals are mixed. Sequential growth reads positive, while momentum and AVWAP remain negative.
The bottom line is that ERII delivered a deeply disappointing quarter on every headline measure. However, the megaproject collapse looks like a timing problem rather than lost demand. A backlog above $60 million, a record pipeline and stated visibility into 2027 give the recovery story real substance. Without reinstated guidance, steadier core channels and permanent leadership, investors are being asked to look past a severe miss on management's word.