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ETC Announces Fiscal 2019 Full Year and Fourth Quarter Results and Notice of Annual Meeting of Shareholders

Financial Statement Highlights from Fiscal 2019:

• Operating income of $5.3 million, a $2.2 million, or 72.8%, increase over prior year
• Operating margin of 11.0% compared to 6.4% in the prior year
• Diluted earnings per share of $0.17, an increase of 41.7% compared to $0.12 for the prior year

SOUTHAMPTON, PA, USA, July 24, 2019 – Environmental Tectonics Corporation (OTC Pink: ETCC) (“ETC” or the “Company”) today reported its financial results for the fifty-two week period ended February 22, 2019 (“fiscal 2019”) and the thirteen week period ended February 22, 2019 (the “2019 fourth quarter”) and also announced that the Company’s Annual Meeting of Shareholders (the “Annual Meeting”) will be held at the Company’s headquarters located at 125 James Way, Southampton, PA 18966, USA on Friday, September 6, 2019, at 1:00 p.m.

Robert L. Laurent, Jr., ETC’s Chief Executive Officer and President stated, “This is the fourth consecutive year of both higher sales and higher profitably. The increase in gross profit margins and greater operational efficiencies produced pre-tax income more than twice that of the previous year.”

Fiscal 2019 Results of Operations

Bookings / Sales Backlog

Bookings in fiscal 2019 were $23.1 million, leaving our sales backlog as of February 22, 2019, which represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer, at $42.2 million compared to $67.5 million as of February 23, 2018. We expect to recognize approximately 80% of the total sales backlog as of February 22, 2019 over the next twelve (12) months and approximately 91% over the next twenty-four (24) months as revenue, with the remainder recognized thereafter. Of the February 22, 2019 sales backlog, $23.9 million, or 56.6%, pertains to International contracts within the Aerospace segment.

Net Income Attributable to ETC

Net income attributable to ETC was $3.1 million, or $0.17 diluted earnings per share, in fiscal 2019, compared to $2.4 million during fiscal 2018, equating to $0.12 diluted earnings per share. The $0.8 million increase is due to the combined effect of a $1.3 million increase in gross profit and a $1.0 million decrease in operating expenses, offset, in part, by a $1.4 million variance between the $0.7 million income tax provision recorded in fiscal 2019 compared to the $0.7 million income tax benefit recorded in fiscal 2018 and a $0.1 million increase in interest expense.

Net Sales

Net sales for fiscal 2019 were $48.4 million, an increase of $0.3 million, or 0.7%, compared to fiscal 2018 net sales of $48.1 million. The increase reflects higher International sales within Aeromedical Training Solutions and of monoplace chambers within the Hyperbaric Chambers business unit, offset, in part, by a decrease in Domestic sales, especially within our Aerospace segment and our Environmental business unit of our CIS segment.

Gross Profit

Gross profit for fiscal 2019 was $17.4 million compared to $16.1 million in fiscal 2018, an increase of $1.3 million, or 7.9%. The increase in gross profit was due to a higher blended gross profit margin as a percentage of net sales, which increased to 35.9% in fiscal 2019 compared to 33.5% in fiscal 2018. The increase in gross profit margin as a percentage of net sales was due primarily to a higher concentration of net sales from more mature products requiring less initial design and engineering work. The shift in concentration of net sales from Domestic sales within the CIS segment in fiscal 2018 to International sales within the Aerospace segment in fiscal 2019 also contributed to the increase in gross profit margin as a percentage of net sales.

Operating Expenses

Operating expenses, including sales and marketing, general and administrative, and research and development, for fiscal 2019 were $12.0 million, a decrease of $1.0 million, or 7.5%, compared to $13.0 million for fiscal 2018. The decrease in operating expenses was due primarily to a reduction in general and administrative expenses related to the Company’s process to explore strategic alternatives and the conclusion of a consulting agreement with the Company’s former Chief Executive Officer.

Interest Expense, Net

Interest expense, net, for fiscal 2019 was $1.0 million compared to $0.9 million in fiscal 2018, an increase of $0.1 million, or 17.0%, due to the combination of a higher level of bank borrowing and an increase in interest rates.

Other Expense, Net

Other expense, net, for both fiscal 2019 and fiscal 2018 was $0.4 million. Other expense, net consists primarily of bank and letter of credit fees, as well as realized foreign currency exchange gains and losses.

Income Taxes

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down approximately $2.2 million of our net deferred tax assets as of February 23, 2018 to reflect the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate; however, due to the previously established valuation allowance for such deferred tax assets, the impact was minimal. As of February 22, 2019, the Company reviewed the components of its deferred tax assets and determined, based upon all available information, that it is more likely than not that deferred tax assets relating to its federal and state net operating loss (“NOL”) carryforwards and research and development tax credits will not be realized primarily due to uncertainties related to our ability to utilize them before they expire. Accordingly, we have established a $6.0 million valuation allowance for such deferred tax assets that we do not expect to realize. If there is a change in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax valuation allowance may decrease in the period in which we determine that realization is more likely than not.

An income tax provision of $0.7 million was recorded in fiscal 2019 compared to an income tax benefit of $0.7 million recorded in fiscal 2018. Effective tax rates were 17.9% and 37.5% for fiscal 2019 and fiscal 2018, respectively. The decrease in the effective tax rate for fiscal 2019 as compared to fiscal 2018 was driven primarily by the Tax Act, which among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The income tax benefit recorded in fiscal 2018 was driven primarily by a net one-time benefit of $0.4 million to reflect the estimated impact of the Tax Act. This net one-time benefit of $0.4 million was comprised of a reduction in the valuation allowance related to our alternative minimum tax credit (approximately $0.6 million), offset, in part, by a deemed repatriation tax (approximately $0.2 million, for which we were allowed to net against our federal NOL carryforwards). As of December 22, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and did not identify any material changes to the provisional, net, one-time benefit recorded in fiscal 2018 related to the Tax Act.

Fiscal 2019 Fourth Quarter Results of Operations

Net Income Attributable to ETC

Net income attributable to ETC was $1.2 million, or $0.07 diluted earnings per share, in both the 2019 fourth quarter and the 2018 fourth quarter. The $0.8 million increase in gross profit and $0.6 million decrease in operating expenses was offset by the $1.4 million variance between the income tax provision recorded in the 2019 fourth quarter compared to the income tax benefit recorded in the 2018 fourth quarter.

Net Sales

Net sales for the 2019 fourth quarter were $15.6 million, an increase of $1.0 million, or 7.1%, compared to net sales of $14.6 million for the 2018 fourth quarter. The increase reflects higher sales within Aeromedical Training Solutions and of monoplace chambers to International customers within the Hyperbaric Chambers business unit, offset, in part, by a decrease in sales of Sterilizers to Domestic customers within our CIS segment and a decrease in sales of our ADMS line of products to International customers within our Aerospace segment.

Gross Profit

Gross profit for the 2019 fourth quarter increased by $0.8 million, or 16.3%, compared to the 2018 fourth quarter. The increase in gross profit was due to a combination of higher net sales and a higher gross profit margin as a percentage of net sales, which increased to 36.1% in the 2019 fourth quarter compared to 33.2% in the 2018 fourth quarter. A $1.5 million reserve was established in the 2018 fourth quarter to lower the anticipated transaction price of two contracts, one of which has since been accepted; there was no such reserve needed in the 2019 fourth quarter.

Operating Expenses

Operating expenses, including sales and marketing, general and administrative, and research and development, for the 2019 fourth quarter were $3.4 million, a decrease of $0.6 million, or 14.5%, compared to $4.0 million for the 2018 fourth quarter. The decrease in operating expenses was due primarily to a reduction in general and administrative expenses related to the Company’s process to explore strategic alternatives.

Interest Expense, Net

Interest expense, net, for both the 2019 fourth quarter and the 2018 fourth quarter was $0.2 million.

Other Expense, Net

Other expense, net, which is comprised of primarily realized foreign currency exchange gains and losses and letter of credit fees, was $0.2 million for both the 2019 fourth quarter and the 2018 fourth quarter.

Income Taxes

An income tax provision of $0.7 million was recorded in the 2019 fourth quarter compared to an income tax benefit of $0.7 million recorded in the 2018 fourth quarter. Effective tax rates were 34.1% and 148.1% for the fiscal 2019 fourth quarter and the fiscal 2018 fourth quarter, respectively. The $1.4 million variance and change in effective tax rate were driven primarily by a net one-time benefit of $0.4 million recorded in the 2018 fourth quarter to reflect the estimated impact of the Tax Act. This net one-time benefit of $0.4 million was comprised of a reduction in the valuation allowance related to our alternative minimum tax credit (approximately $0.6 million), offset, in part, by a deemed repatriation tax (approximately $0.2 million, for which we were allowed to net against our federal NOL carryforwards).

Liquidity and Capital Resources

As of February 22, 2019, the Company’s availability under the Revolving Line of Credit was $9.5 million. This reflected cash borrowings of $12.4 million and net outstanding standby letters of credit not covered by the Committed Line of Credit of approximately $3.1 million. As of July 1, 2019, the date of our most current Revolving Line of Credit statement, the Company’s availability under the Revolving Line of Credit was approximately $7.3 million. The Company had working capital of $13.7 million as of February 22, 2019 compared to working capital of $18.3 million as of February 23, 2018. The decrease in working capital was primarily the result of an increase in accrued expenses. With unused availability under the Company’s various current lines of credit, the conversion of contract assets into cash, the collection of milestone payments associated with several International contracts, and expected deposits on fiscal 2020 bookings, the Company anticipates its sources of liquidity will be sufficient to fund its operating activities, anticipated capital expenditures, and debt repayment obligations throughout fiscal 2020.

Cash flows from operating activities

During fiscal 2019, due primarily from the increase in net income, the decrease in accounts receivable and contract assets, and the increase in other accrued liabilities, the Company generated $13.3 million of cash from operating activities compared to using $2.1 million in fiscal 2018.

Cash flows from investing activities

Cash used for investing activities primarily relates to funds used for capital expenditures in property, plant, and equipment and software development. The Company’s fiscal 2019 investing activities used $0.3 million, which consisted primarily of equipment and software enhancements for our ATFS and ADMS technologies, and costs to upgrade existing information technology systems and enhance our manufacturing and ETSS testing capabilities. This is a decrease of $0.2 million from cash used in investing activities in fiscal 2018.

Cash flows from financing activities

During fiscal 2019, the Company’s financing activities used $8.5 million of cash for repayments under the Company’s various lines of credit. During fiscal 2018, the Company’s financing activities provided $3.0 million of cash from borrowings under the Company’s various lines of credit.

Notice of Annual Meeting of Shareholders

The Annual Meeting will be held at the Company’s headquarters located at 125 James Way, Southampton, PA 18966, USA on Friday, September 6, 2019, at 1:00 p.m. for the following purposes:

• To elect five (5) Directors to serve on the Board of Directors until ETC’s 2020 Annual Meeting of Shareholders and until their successors are elected.
• To ratify the appointment of RSM US LLP as the independent registered public accounting firm for ETC for the fiscal year ending February 28, 2020.
• To transact such other business as may properly come before the meeting and any adjournment of the meeting.

The Board of Directors has fixed the close of business on July 8, 2019 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting.

To vote your shares at the Annual Meeting, you or your designated proxy must be present at the Annual Meeting.

A copy of the Company’s 2019 Annual Report is available within the Investors’ section of ETC’s website.

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.