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ETC Announces Fiscal 2017 Third Quarter Results

Financial Statement Highlights from the Fiscal 2017 Third Quarter:

• Net income increased 225% to $0.3 million
• Operating expenses decreased $0.4 million, or 13.6%

 
SOUTHAMPTON, PA, USA, January 9, 2017 – Environmental Tectonics Corporation (OTC Pink: ETCC) (“ETC” or the “Company”) today reported its financial results for the thirteen week period ended November 25, 2016 (the “2017 third quarter”) and the thirty-nine week period ended November 25, 2016 (the “2017 first three quarters”).
 
Fiscal 2017 Third Quarter Results of Operations
Bookings / Sales Backlog
Bookings in the 2017 third quarter were $15.2 million, leaving our sales backlog as of November 25, 2016, for work to be performed and revenue to be recognized under written agreements after such date, at $50.9 million compared to $45.1 million as of February 26, 2016. The combined bookings by ETC-PZL and the Environmental Testing and Simulation Systems business unit represented nearly 75.0% of 2017 third quarter bookings.
 
Net Income (Loss) Attributable to ETC
Net income attributable to ETC was $0.3 million, or $0.01 diluted earnings per share, in the 2017 third quarter compared to a net loss attributable to ETC of $0.3 million during the 2016 third quarter, equating to $0.03 diluted loss per share. The $0.6 million variance is comprised of a $0.4 million decrease in operating expenses, a $0.3 million decrease in interest expense, net, and a $0.1 million decrease in other expense, net, offset in part, by the $0.2 million variance between the income tax provision recorded in the 2017 third quarter and the income tax benefit recorded in the 2016 third quarter.
 
Net Sales
Net sales in the 2017 third quarter were $10.3 million, a decrease of $1.6 million, or 13.8%, compared to 2016 third quarter net sales of $11.9 million. The decrease reflects a reduction in sales related to ATS products including Chambers to the U.S. Government and overall sales of our ADMS line of products within the Aerospace segment, as well as decreased sales of Sterilization Systems, Environmental Testing and Simulation Systems, and monoplace chambers to Domestic customers within the CIS segment, offset in part, by increase Service and Spares related sales of to Domestic customers within the CIS segment.
 
Gross Profit
Gross profit for both the 2017 third quarter and the 2016 third quarter was $3.4 million. Despite the $1.6 million, or 13.8%, decrease in net sales compared to the 2016 third quarter, a similar gross profit was achieved in the 2017 third quarter primarily related to efficiencies realized on certain International contracts. Gross profit margin as a percentage of net sales increased to 33.6% for the 2017 third quarter compared to 28.9% for the 2016 third quarter.
 
Operating Expenses
Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2017 third quarter were $3.0 million, a decrease of $0.4 million, or 13.6%, compared to $3.4 million for the 2016 third quarter. The decrease is due primarily to a decrease in the allowance for doubtful accounts related to the recovery of a long overdue International receivable, cost savings associated with the winding down of ETC-Europe, a reduction in research and development expenses, and the continued effort to reduce non-revenue generating expenses, offset in part, by a slight increase in commission expense related to the higher concentration of International sales.
 
Interest (Income) Expense, Net
Interest income for the 2017 third quarter was $0.1 million compared to $0.2 million of interest expense in the fiscal 2016 third quarter, a variance of $0.3 million, or 121.4%, due to the combination of an increase in interest income associated with the aforementioned two decade old receivable and a decrease in interest expense due to the combination of a lower level of bank borrowing throughout the 2017 third quarter as a whole compared to the 2016 third quarter and a decreased interest rate.
 
Other Expense, Net
Other expense, net, for the 2017 third quarter was $0.1 million compared to $0.2 million in the fiscal 2016 third quarter, a decrease of $0.1 million, or 22.5%, due primarily to the decrease in letter of credit fees.
 
Fiscal 2017 First Three Quarters Results of Operations
Bookings / Sales Backlog
Bookings in the 2017 first three quarters were $34.3 million, leaving our sales backlog as of November 25, 2016, for work to be performed and revenue to be recognized under written agreements after such date, at $50.9 million compared to $45.1 million as of February 26, 2016. ETC-PZL and our Environmental Testing and Simulation Systems, ILS, and Service and Spares business units have each seen the largest increases in year-over-year bookings.
 
Net Loss Attributable to ETC
Net loss attributable to ETC was $1.0 million, or $0.09 diluted loss per share, for both the 2017 first three quarters and the 2017 first three quarters. The $0.8 million decrease in operating expenses and a $0.3 million decrease in interest expense, net, was offset by the $0.8 million variance between the income tax provision recorded in the 2017 first three quarters and the income tax benefit recorded in the 2016 first three quarters and a $0.3 million decrease in gross profit.
 
Net Sales
Net sales in the 2017 first three quarters were $28.4 million, a decrease of $3.0 million, or 9.4%, compared to 2016 first three quarters net sales of $31.4 million. The decrease reflects a reduction in sales related to ATS products including Chambers to the U.S. Government and overall sales of our ADMS line of products within the Aerospace segment, as well as decreased sales of Sterilization Systems and Environmental Testing and Simulation Systems to Domestic customers within the CIS segment, offset in part, by increased sales related to ATS products including Chambers to International customers within the Aerospace segment and increased overall sales of monoplace chambers and Service and Spares related sales within the CIS segment. Given the current progress made on U.S. Government contracts in the Company’s sales backlog, coupled with significant fiscal 2016 International bookings, the Company anticipates that the concentration of sales to the U.S. Government will decrease in fiscal 2017 as International sales increase.
 
Gross Profit
Gross profit for the 2017 first three quarters was $8.7 million compared to $9.0 million in the 2016 first three quarters, a decrease of $0.3 million, or 3.2%. Despite the $3.0 million, or 9.4%, decrease in net sales compared to the 2016 first three quarters, only a slightly less gross profit was achieved in the 2017 first three quarters primarily related to efficiencies realized on certain International contracts and consideration realized from the termination of a software license. Gross profit margin as a percentage of net sales increased to 30.7% for the 2017 first three quarters compared to 28.8% for the 2016 first three quarters.
 
Operating Expenses
Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2017 first three quarters were $8.7 million, a decrease of $0.8 million, or 8.6%, compared to $9.5 million for the 2016 first three quarters. The decrease is due primarily to a decrease in the allowance for doubtful accounts related to the recovery of a long overdue International receivable, a reduction in research and development expenses, and the continued effort to reduce non-revenue generating expenses.
 
Interest Expense, Net
Interest expense, net for the 2017 first three quarters was $0.4 million compared to $0.7 million of interest expense in the fiscal 2016 first three quarters, a decrease of $0.3 million, or 43.8%, due to the combination of an increase in interest income associated with the aforementioned two decade old receivable and a decrease in interest expense due to the combination of a lower level of bank borrowing throughout the 2017 first three quarters as a whole compared to the 2016 first three quarters and a decreased interest rate.
 
Other Expense, Net
Other expense, net, for both the 2017 first three quarters and the 2016 first three quarters was $0.5 million. A slight increase in realized foreign currency exchange net losses was offset by an equally slight decrease in letter of credit fees.
 
Cash Flows from Operating, Investing, and Financing Activities
During the 2017 first three quarters, as a result of an increase in billings in excess of costs and estimated earnings on uncompleted long-term contracts and a decrease in costs and estimated earnings in excess of billings on uncompleted long-term contracts, offset in part, by an increase in prepaid expenses and other assets and a decrease in accounts payable, the Company generated $3.1 million of cash from operating activities compared to the $3.4 million of cash provided by operating activities during the 2016 first three quarters. Under percentage-of-completion (“POC”) revenue recognition, these accounts represent the timing differences of spending on production activities versus the billing and collecting of customer payments.
 
Cash used for investing activities primarily relates to funds used for capital expenditures of equipment and software development. The Company’s investing activities used $0.6 million in the 2017 first three quarters compared to $1.0 million in the 2016 first three quarters.
 
The Company’s financing activities used $2.8 million of cash in the 2017 first three quarters on payments on the Term Loan, offset in part, by borrowings under the Company’s various lines of credit and a decrease in restricted cash. In the 2016 first three quarters, the Company’s financing activities used $2.5 million of cash to increase restricted cash, offset in part, by borrowings under the Company’s various lines of credit.
 
About ETC
ETC was incorporated in 1969 in Pennsylvania. For over four decades, we have provided our customers with products, service, and support. Innovation, continuous technological improvement and enhancement, and product quality are core values that are critical to our success. We are a significant supplier and innovator in the following areas: (i) software driven products and services used to create and monitor the physiological effects of flight, including high performance jet tactical flight simulation, upset recovery and spatial disorientation, and both suborbital and orbital commercial human spaceflight, collectively, Aircrew Training Systems (“ATS”); (ii) altitude (hypobaric) chambers; (iii) hyperbaric chambers for multiple persons (multiplace chambers); (iv) Advanced Disaster Management Simulators (“ADMS”); (v) steam and gas (ethylene oxide) sterilizers; (vi) environmental testing and simulation devices; and (vii) hyperbaric (100% oxygen) chambers for one person (monoplace chambers).
 
We operate in two primary business segments, Aerospace Solutions (“Aerospace”) and Commercial/ Industrial Systems (“CIS”). Aerospace encompasses the design, manufacture, and sale of: (i) ATS products; (ii) altitude (hypobaric) chambers; (iii) hyperbaric chambers for multiple persons (multiplace chambers); and (iv) ADMS, as well as integrated logistics support (“ILS”) for customers who purchase these products or similar products manufactured by other parties. These products and services provide customers with an offering of comprehensive solutions for improved readiness and reduced operational costs. Sales of our Aerospace products are made principally to U.S. and foreign government agencies and to civil aviation organizations. CIS encompasses the design, manufacture, and sale of: (i) steam and gas (ethylene oxide) sterilizers; (ii) environmental testing and simulation devices; and (iii) hyperbaric (100% oxygen) chambers for one person (monoplace chambers), as well as parts and service support for customers who purchase these products or similar products manufactured by other parties. Sales of our CIS products are made principally to the healthcare, pharmaceutical, and automotive industries.
 
We presently have two operating subsidiaries. ETC-PZL Aerospace Industries Sp. z o.o. (“ETC-PZL”), our 95%-owned subsidiary in Warsaw, Poland, manufactures certain simulators and provides software to support products manufactured domestically within our Aerospace segment. Environmental Tectonics Corporation (Europe) Limited (“ETC-Europe”), our 99%-owned subsidiary, which we are winding down, functioned as a sales office in the United Kingdom.
 
ETC’s unique ability to offer complete systems, designed and produced to high technical standards, sets it apart from its competition. ETC is headquartered in Southampton, PA. For more information about ETC, visit http://www.etcusa.com/.

Financial Tables Follow
 

Forward-looking Statements
This news release contains forward-looking statements, which are based on management's expectations and are subject to uncertainties and changes in circumstances. Words and expressions reflecting something other than historical fact are intended to identify forward-looking statements, and these statements may include terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "future", "predict", "potential", "intend", or "continue", and similar expressions. We base our forward-looking statements on our current expectations and projections about future events or future financial performance. Our forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about ETC and its subsidiaries that may cause actual results to be materially different from any future results implied by these forward-looking statements. We caution you not to place undue reliance on these forward-looking statements.