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ETC Announces Fiscal 2017 Second Quarter Results

SOUTHAMPTON, PA, USA, October 10, 2016 – Environmental Tectonics Corporation (OTC Pink: ETCC) (“ETC” or the “Company”) today reported its financial results for the thirteen week period ended August 26, 2016 (the “2017 second quarter”) and the twenty-six week period ended August 26, 2016 (the “2017 first half”).

Fiscal 2017 Second Quarter Results of Operations
Net Loss Attributable to ETC

Net loss attributable to ETC was $0.8 million, or $0.06 diluted loss per share, in the 2017 second quarter, compared to a net loss attributable to ETC of $0.5 million during the 2016 second quarter, equating to $0.04 diluted loss per share. The $0.3 million variance is comprised of a $0.1 million decrease in gross profit and a $0.4 million variance between the income tax provision recorded in the 2017 second quarter and the income tax benefit recorded in the 2016 second quarter, offset in part, by a $0.1 million decrease in operating expenses and a $0.1 million decrease in other expense.
 
Net Sales
Net sales in the 2017 second quarter were $7.5 million, a decrease of $2.5 million, or 25.2%, compared to 2016 second quarter net sales of $10.0 million. The decrease reflects a reduction in overall sales related to ATS products including Chambers and our ADMS line of products within the Aerospace segment, as well as decreased sales of Sterilization Systems to Domestic customers within the CIS segment, offset in part, by increased sales of Environmental Testing and Simulation Systems and monoplace chambers to Domestic customers within the CIS segment.
 
Gross Profit
Gross profit for the 2017 second quarter was $2.4 million compared to $2.5 million in the 2016 second quarter, a decrease of $0.1 million, or 7.4%. Despite the $2.5 million, or 25.2%, decrease in revenue compared to the 2016 second quarter, a similar gross profit was achieved in the 2017 second quarter primarily related to consideration (approximately $0.6 million) realized from the termination of a software license. Gross profit margin as a percentage of net sales increase to 31.6% for the 2017 second quarter compared to 25.5% for the 2016 second quarter.
 
Operating Expenses
Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2017 second quarter were $2.8 million, a slight decrease of $0.1 million, or 2.9%, compared to $2.9 million for the 2016 second quarter. The decrease is due primarily to a reduction in commission expense related to the decrease in revenue and a reduction in research and development expenses, offset in part, by a $0.2 million one-time non-cash expense associated with the winding down of ETC-Europe in an effort to continue to reduce non-revenue generating expenses.
 
Other Expense, Net
Other expense, net, for the 2017 second quarter was $0.1 million compared to $0.2 million in the fiscal 2016 second quarter, a decrease of $0.1 million, or 48.2%, due to the combination of a decrease in realized foreign currency exchange net losses and a decrease in letter of credit fees coupled with the absence of a one-time increase in other expense related to ETC-PZL that occurred in the fiscal 2016 second quarter.
 
Fiscal 2017 First Half Results of Operations
Net Loss Attributable to ETC
Net loss attributable to ETC was $1.3 million, or $0.10 diluted loss per share, in the 2017 first half, compared to a net loss attributable to ETC of $0.8 million during the 2016 first half, equating to $0.06 diluted loss per share. The $0.5 million variance is comprised of a $0.3 million decrease in gross profit and a $0.5 million variance between the income tax provision recorded in the 2017 first half and the income tax benefit recorded in the 2016 first half, offset in part, by a $0.3 million decrease in operating expenses.
 
Net Sales
Net sales in the 2017 first half were $18.2 million, a decrease of $1.3 million, or 6.8%, compared to 2016 first half net sales of $19.5 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 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 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 half was $5.3 million compared to $5.6 million in the 2016 first half, a decrease of $0.3 million, or 5.3%. The decrease in gross profit was due primarily to the decrease in revenue as the gross profit margin as a percentage of net sales of 29.1% for the 2017 first half was comparable to the gross profit margin as a percentage of net sales of 28.7% for the 2016 first half.
 
Operating Expenses
Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2017 first half were $5.8 million, a decrease of $0.4 million, or 5.7%, compared to $6.1 million for the 2016 first half. The decrease is due primarily to a reduction in commission expense related to the decrease in revenue, the on-going effort to reduce non-revenue generating general and administrative expenses, and a reduction in research and development expenses.
 
Other Expense, Net
Other expense, net, for the 2017 first half was $0.4 million compared to $0.3 million in the fiscal 2016 first half, an increase of $0.1 million, or 24.3%, due primarily to an increase in realized foreign currency exchange net losses.
 
Cash Flows from Operating, Investing, and Financing Activities

During the 2017 first half, as a result of a decrease in accounts receivable, a decrease in costs and estimated earnings in excess of billings on uncompleted long-term contracts, and an increase in billings in excess of costs and estimated earnings on uncompleted long-term contracts, offset in part, by a decrease in accounts payable, the Company generated $0.4 million of cash from operating activities compared to the $5.8 million of cash provided by operating activities during the 2016 first half. 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 $0.4 million in the 2017 first half compared to $0.7 million in the 2016 first half.
 
The Company’s financing activities used $0.2 million of cash in the 2017 first half 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 half, the Company’s financing activities used $5.2 million of cash to increase restricted cash and on repayments 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.
 

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.