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ETC Announces Fiscal 2014 Third Quarter Results

SOUTHAMPTON, PA, USA, January 13, 2014 – Environmental Tectonics Corporation (OTC Pink: ETCC) (“ETC” or the “Company”) today reported its financial results for its fiscal 2014 third quarter ended November 29, 2013.

Fiscal 2014 Third Quarter Results of Operations:

Net Income Attributable to ETC
Net income attributable to ETC was $136 thousand, or $0.00 diluted earnings per share, in the 2014 third quarter, compared to $1.2 million or $0.05 diluted earnings per share, during the 2013 third quarter, representing a decrease of $1.0 million, or 88.5%. The decrease in net income attributable to ETC reflects a decrease in income before income taxes of $2.0 million due primarily to a $2.9 million decrease in gross profit, resulting from a combination of both lower net sales and lower gross profit margin percentage, offset in part, by a $0.8 million decrease in operating expenses, resulting from an on-going effort to reduce non-revenue generating expenses.
 
Net Sales
Net sales in the 2014 third quarter were $12.3 million, a decrease of $2.8 million, or 18.5%, compared to 2013 third quarter net sales of $15.1 million. The reduction reflects decreased ATS sales to the U.S. Government and decreased sales of Commercial/Industrial products to Domestic customers, offset in part, by increased ATS sales to International customers. Given the current progress made on U.S. Government contracts in the Company’s sales backlog, the Company anticipates the concentration of sales to the U.S. Government will continue to lessen in fiscal 2014.
 
Gross Profit
Gross profit for the 2014 third quarter was $3.6 million compared to $6.5 million in the 2013 third quarter, a decrease of $2.9 million, or 45.2%. The significant decrease in gross profit was a combination of both lower net sales and lower gross profit margin percentage due to inefficiencies as a result of additional work required on several contracts, for which we are currently pursuing recovery.
 
Operating Expenses
Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2014 third quarter were $3.0 million, a decrease of $0.8 million, or 22.3%, compared to $3.8 million for the 2013 third quarter. The decrease is primarily the result of an on-going effort to reduce non-revenue generating expenses, offset in part, by a slight increase in research and development expenses.
 
Interest Expense, Net
Interest expense, net, for the 2014 third quarter was $224 thousand compared to $319 thousand in the 2013 third quarter, a decrease of $95 thousand, or 29.8%, despite a higher level of bank borrowing due primarily to the results of the 2012 Financial Restructuring.
 
Fiscal 2014 First Three Quarters Results of Operations:

Net Income Attributable to ETC
Net income attributable to ETC was $307 thousand, or $0.00 diluted earnings per share, in the 2014 first three quarters, compared to $4.2 million or $0.14 diluted earnings per share, during the 2013 first three quarters, representing a decrease of $3.9 million, or 92.6%. The decrease in net income attributable to ETC reflects a decrease in income before income taxes of $6.7 million due primarily to an $8.1 million decrease in gross profit, resulting from a combination of both lower net sales and lower gross profit margin percentage, offset in part, by a $1.5 million decrease in operating expenses, resulting from an on-going effort to reduce non-revenue generating expenses.
 
Net Sales
Net sales in the 2014 first three quarters were $36.6 million, a decrease of $11.1 million, or 23.2%, compared to 2013 first three quarters net sales of $47.7 million. The reduction reflects decreased ATS sales to the U.S. Government and decreased sales of sterilizers and environmental testing and simulation devices to Domestic customers, offset in part, by increased ATS sales to International customers. Given the current progress made on U.S. Government contracts in the Company’s sales backlog, the Company anticipates the concentration of sales to the U.S. Government will continue to lessen in fiscal 2014.
 
Gross Profit
Gross profit for the 2014 first three quarters was $11.0 million compared to $19.0 million in the 2013 first three quarters, a decrease of $8.1 million, or 42.4%. The significant decrease in gross profit was a combination of both lower net sales and lower gross profit margin percentage due to increased costs as a result of damage to one of our devices associated with a U.S. Government contract during the testing phase and inefficiencies as a result of additional work required on several other contracts, for which we are currently pursuing recovery.
 
Operating Expenses
Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2014 first three quarters were $9.5 million, a decrease of $1.5 million, or 13.3%, compared to $11.0 million for the 2013 first three quarters. The decrease is primarily the result of an on-going effort to reduce non-revenue generating expenses, offset in part, by an increase in research and development expenses.
 
Interest Expense, Net
Interest expense, net, for the 2014 first three quarters was $590 thousand compared to $764 thousand in the 2013 first three quarters, a decrease of $174 thousand, or 22.8%, despite a higher level of bank borrowing due primarily to the results of the 2012 Financial Restructuring.
 
Cash Flows from Operating, Investing, and Financing Activities:
During the 2014 first three quarters, as a result of an increase in costs and estimated earnings in excess of billings on uncompleted long-term percentage of completion (“POC”) contracts and a decrease in accounts payable, the Company used $3.6 million of cash in operating activities compared to $0.3 million of cash provided by operating activities in the 2013 first three quarters. Under POC revenue recognition, these accounts represent the timing differences of spending on production activities versus collecting on long-term contracts.
 
Cash used for investing activities primarily relates to funds used for capital expenditures of equipment and software development. The Company’s investing activities used $1.1 million in the 2014 first three quarters compared to $0.9 million in the 2013 first three quarters.
 
The Company’s financing activities provided $3.0 million of cash in the 2014 first three quarters, which primarily reflected borrowings under the Company’s various lines of credit, and was offset, in part, by payments on the Term Loan. In the 2013 first three quarters, net cash used in financing activities totaled $0.6 million, primarily for repayments under the line of credit and dividends paid on Preferred Stock.
 
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.