On December 2, 2009, Energy Recovery, Inc. (Nasdaq: ERII) entered into a definitive agreement to acquire all of the equity interests of Pump Engineering, L.L.C. (PEI) Under the terms of the agreement, ERI will pay the shareholders of Pump Engineering approximately $20 million in cash plus one million shares of ERI Common Stock. The completion of the transaction, which is subject to satisfaction of customary conditions, is expected to be in the fourth quarter of 2009.
Question: 1. What does Pump Engineering do?
Answer: Pump Engineering (PEI), founded in Monroe, Michigan in 1986, designs, manufactures and sells high quality pumps and hydraulic turbochargers (turbos) used in sea water and brackish water reverse osmosis systems and in gas processing. PEI’s turbochargers and pumps are custom-designed to reduce energy consumption and increase system efficiency. Much like ERI’s line of PX™ energy recovery devices, PEI’s products are simple to operate, durable and require a small installation footprint.
Question: 2. How does the turbocharger work?
Answer: The PEI turbocharger is a hydraulic device designed to transfer high-pressure energy from one liquid stream to a second liquid stream. Each turbo consists of a pump section and a turbine section, both of which contain an impeller or rotor. As liquid from the system's high pressure concentrate stream flows into the turbine section of the turbo, the turbine rotor extracts the hydraulic energy and converts it to mechanical energy. The attached pump impeller then converts the mechanical energy produced by the turbine rotor back to high pressure energy for the feed stream. Similar to the ERI PX Pressure Exchanger device, the PEI turbocharger is entirely powered by the concentrate stream. It has no electrical, external lubrication, or pneumatic requirements.
Question: 3. Why did ERI acquire Pump Engineering?
Answer: ERI’s acquisition of PEI is aligned with our growth strategy of expanding our product offerings and addressing potential new markets. It will allow ERI to offer customers a complete range of complementary energy recovery solutions that are unmatched in the industry. This acquisition underscores ERI’s global commitment to prove that desalination is an affordable, environmentally sound and energy-efficient answer to the growing water crisis.
While both ERI and PEI sell into the growing desalination industry, they primarily focus on different customer segments. PEI offers a centrifugal energy recovery device solution for areas where the cost of power is low and the customer is more sensitive to the up-front capital cost. ERI is the leading, high-quality isobaric energy recovery device solution for areas where the cost of power is higher and the customer is not as sensitive to capital cost. With the acquisition of PEI, ERI can now offer a suite of products to any desalination project in the world with the most appropriate energy recovery device.
Question: 4. How does the acquisition enhance the competitive position of the newly combined companies?
Answer: The acquisition will enhance ERI’s competitive position by:
Question: 5. How does the acquisition broaden ERI’s addressable market?
Answer: ERI has developed a strong presence in seawater reverse osmosis (SWRO) markets where the cost of power is relatively high. PEI has developed a strong presence in both SWRO and especially brackish markets that perceive ERI’s solution to be relatively expensive. The acquisition expands ERI’s reach into markets that have been difficult to penetrate.
PEI’s turbine technology can be applied to new and substantially larger addressable markets outside of the desalination markets such as natural gas and high pressure fluid processing. Similar to the desalination process, these markets also have high-pressure streams where significant energy can be saved; however they are very sensitive to cross-contamination. The turbine technology provides 100 percent isolation of the two process streams making it a good fit for these future applications. PEI has already deployed several turbocharger units in a gas processing plant.
Question: 6. How will Pump Engineering be integrated into ERI?
Answer: PEI will operate as a separate division of ERI.
Question: 7. Are there plans to discontinue any Pump Engineering products?
Answer: ERI plans to continue and evolve Pump Engineering’s line of existing products. In addition, we plan to leverage PEI turbine technology into new market opportunities.
Question: 1. Who will lead the new Pump Engineering division for ERI?
Answer: Borja Blanco, ERI’s Senior Vice President of Sales and Business Development will lead the new business division. Other ERI management will work closely with PEI to insure a smooth and successful transition.
Question: 2. Where does Pump Engineering do business?
Answer: PEI has a global customer base with clients throughout Europe, Asia, the Middle East, the Caribbean and the United States.
Question: 3. Will Pump Engineering remain in its current facility?
Answer: PEI recently moved into a new facility in New Boston, Michigan located near the Detroit airport. This facility improves the workflow and expands the production capacity of PEI while maintaining a local dedicated workforce. There are no plans to move PEI’s operations from that new location.
Question: 4. What will happen to the Pump Engineering corporate brand?
Answer: Upon the close of the acquisition, PEI will be referred to as Pump Engineering, a division of Energy Recovery, Inc. Plans for integrating the company’s operations are in progress.
Question: 5. How many employees does Pump Engineering have prior to the acquisition?
Answer: Approximately 40.
Question: 6. Will www.pumpengineering.com remain active?
Answer: The PEI website will remain active. At some point in the future, PEI product information and content will be integrated into the existing Energy Recovery, Inc. website.
Question: 1. What products does Pump Engineering offer?
Answer: PEI offers a variety of energy recovery devices, high pressure and low pressure pumps in the desalination markets. Outside of desalination, PEI has also sold its products into gas and oil applications.
Question: 2. Where can I learn more about Pump Engineering’s products?
Answer: You can learn more about their products by visiting their website at: www.pumpengineering.com
Question: 3. Do you expect to integrate Pump Engineering’s products with any of ERI’s products?
Answer: In the future, we plan to offer packaged power train solutions that may combine our PX technology with existing and new PEI pump products. Other product plans are still under development.
Question: 4. Are there areas of duplication in product lines? If so, how will that be addressed?
Answer: While some of the products have overlapping capabilities, they address different market niches, and as a result, we plan to continue to manufacture and sell both product lines.
Question: 5. Will there be an increase in Pump Engineering product prices?
Answer: Our goal is to offer high quality energy recovery devices at a complementary range of price/performance points to address the broad spectrum of customer needs.
Question: 6. Who do I go to buy Pump Engineering products?
Answer: All PEI clients should contact their current PEI sales agents or representatives through the established channels or e-mail to sales@pumpengineering.com. Clients may also contact ERI by sending an email to: sales@energyrecovery.com.
Question: 7. Where will Pump Engineering devices be manufactured?
Answer: PEI product manufacturing will remain in New Boston, Michigan.
Question: 1. I am an existing Pump Engineering customer, how does this transaction affect me?
Answer: ERI and PEI are committed to providing a seamless transition for PEI customers. PEI customers will continue to receive the same sales, customer service and technical support. Over time, customers will have access to an integrated global service network including access to ERI technical support centers in California, Madrid, Shanghai and Dubai. Customers should continue to contact their regular PEI sales and support representatives for assistance.
Question: 2. Will existing Pump Engineering customer support agreements continue to be honored?
Answer: Existing PEI support contracts for existing customers will be assigned to or assumed by the new PEI entity without lapse. As a result, those terms and condition will remain unchanged. Any changes in support or other policies going forward will be communicated promptly to customers.
Question: 3. How will customers know if there is a change to their sales account team?
Answer: We are committed to a smooth transition for customers and do not anticipate significant changes. Customers will be notified if there are any changes to their account teams.
Question: 4. Who should Pump Engineering customers call for product support?
Answer: Customers should continue using their existing PEI sales contacts.
Question: 1. When is the acquisition expected to close?
Answer: The acquisition is expected to close during the fourth quarter of 2009, subject to customary terms and conditions.
Question: 2. What were the terms of the acquisition?
Answer: Under the terms of the agreement, ERI will pay the shareholders of PEI approximately $20 million in cash and one million shares of ERI Common Stock.
Question: 3. When will ERI provide financial targets for the combined company?
Answer: We are not providing additional or updated financial target information at this time. As part of ERI’s earnings report for the fourth quarter and year-end 2009 financial results, ERI will provide guidance for the combined company.
Tom Willardson – twillardson@energyrecovery.com
Audrey Bold – abold@energyrecovery.com
This FAQ contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements about ERI’s potential acquisition of Pump Engineering, L.L.C. (“PEI”), ERI’s plans to combine with PEI and offer customers a broader range of products and solutions, ERI’s plan to continue PEI’s product line, and the acquisition’s potential for enhancing ERIs competitive position and for opening up opportunities in new markets. Because such forward-looking statements involve risks and uncertainties, including the risk that the acquisition of Pump Engineering will not be consummated, as the transaction is subject to certain closing conditions, the Company's actual results may differ materially from the predictions in those forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, failure of the acquisition to close, unsuccessful integration of the two companies’ operations, and changes in customer needs or strategic plans. All forward-looking statements are made as of the date of these FAQs, and the Company assumes no obligation to update such statements. For more details relating to the risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, please refer to the Company's SEC filings.