UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-24746
TESSCO TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in charter)
| | |
Delaware | | 52-0729657 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
| | |
11126 McCormick Road, Hunt Valley, Maryland | | 21031 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number including area code: (410) 229-1000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes ý No o
The number of shares of the registrant’s Common Stock, $ .01 par value per share, outstanding as of
November 8, 2001 was 4,507,225.
TESSCO Technologies Incorporated
Index to Form 10-Q
Part I – Financial Information
TESSCO Technologies Incorporated | | | |
| | | |
| | September 30,
2001 | | April 1,
2001 | |
| | (unaudited) | | (audited) | |
ASSETS | | | | | |
| | | | | |
CURRENT ASSETS: | | | | | |
Cash and cash equivalents | | $ | - | | $ | - | |
Trade accounts receivable, net | | 28,693,100 | | 25,557,800 | |
Product inventory | | 32,553,600 | | 32,566,400 | |
Deferred tax asset | | 1,531,600 | | 1,531,600 | |
Prepaid expenses and other current assets | | 1,588,300 | | 2,689,600 | |
Total current assets | | 64,366,600 | | 62,345,400 | |
| | | | | |
PROPERTY AND EQUIPMENT, net | | 21,273,700 | | 21,640,400 | |
GOODWILL | | 2,842,100 | | 3,002,400 | |
OTHER LONG TERM ASSETS | | 503,200 | | 425,300 | |
Total assets | | $ | 88,985,600 | | $ | 87,413,500 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
| | | | | |
CURRENT LIABILITIES: | | | | | |
Trade accounts payable | | $ | 24,692,000 | | $ | 16,744,600 | |
Accrued expenses and other current liabilities | | 5,807,200 | | 4,409,200 | |
Revolving line of credit | | 1,064,000 | | 10,011,000 | |
Current portion of long-term debt | | 366,800 | | 354,500 | |
Total current liabilities | | 31,930,000 | | 31,519,300 | |
| | | | | |
DEFERRED TAX LIABILITY | | 2,274,900 | | 2,274,900 | |
LONG-TERM DEBT, net of current portion | | 6,227,000 | | 6,441,200 | |
OTHER LONG TERM LIABILITIES | | 549,300 | | 438,900 | |
Total liabilities | | 40,981,200 | | 40,674,300 | |
| | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | |
| | | | | |
SHAREHOLDERS' EQUITY: | | | | | |
Preferred stock | | - | | - | |
Common stock | | 48,100 | | 48,000 | |
Additional paid-in capital | | 21,830,400 | | 21,748,300 | |
Treasury stock, at cost | | (3,792,600 | ) | (3,792,600 | ) |
Retained earnings | | 29,918,500 | | 28,735,500 | |
Total shareholders' equity | | 48,004,400 | | 46,739,200 | |
Total liabilities and shareholders' equity | | $ | 88,985,600 | | $ | 87,413,500 | |
See accompanying notes.
| | Fiscal Quarters Ended | | Six Months Ended | |
| | September 30,
2001 | | September 24,
2000 | | September 30,
2001 | | September 24,
2000 | |
| | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | |
| | | | | | | | | |
Revenues | | $ | 62,040,000 | | $ | 66,602,100 | | $ | 121,934,200 | | $ | 129,124,600 | |
Cost of goods sold | | 45,282,600 | | 48,622,000 | | 88,994,300 | | 94,321,100 | |
| | | | | | | | | |
Gross profit | | 16,757,400 | | 17,980,100 | | 32,939,900 | | 34,803,500 | |
| | | | | | | | | |
Selling, general and administrative
expenses | | 14,895,500 | | 14,629,700 | | 30,163,800 | | 28,399,900 | |
| | | | | | | | | |
Income from operations | | 1,861,900 | | 3,350,400 | | 2,776,100 | | 6,403,600 | |
| | | | | | | | | |
Interest and other expense, net | | 362,400 | | 480,900 | | 819,700 | | 962,900 | |
| | | | | | | | | |
Income before provision for income
taxes | | 1,499,500 | | 2,869,500 | | 1,956,400 | | 5,440,700 | |
| | | | | | | | | |
Provision for income taxes | | 599,800 | | 1,090,400 | | 773,400 | | 2,067,500 | |
| | | | | | | | | |
Net income | | $ | 899,700 | | 1,779,100 | | $ | 1,183,000 | | $ | 3,373,200 | |
| | | | | | | | | |
| | | | | | | | | |
Basic earnings per share | | $ | 0.20 | | $ | 0.40 | | $ | 0.26 | | $ | 0.75 | |
| | | | | | | | | |
Diluted earnings per share | | $ | 0.20 | | $ | 0.37 | | $ | 0.26 | | $ | 0.71 | |
| | | | | | | | | |
Basic weighted average shares
outstanding | | 4,518,700 | | 4,492,600 | | 4,508,900 | | 4,490,600 | |
| | | | | | | | | |
Diluted weighted average shares
outstanding | | 4,556,500 | | 4,828,400 | | 4,532,300 | | 4,732,800 | |
See accompanying notes.
| | Six Months Ended | |
| | September 30,
2001 | | September 24,
2000 | |
| | (unaudited) | | (unaudited) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | | $ | 1,183,000 | | $ | 3,373,200 | |
Adjustments to reconcile net income to net cash | | | | | |
provided by operating activities |
Depreciation and amortization | | 2,251,800 | | 1,706,100 | |
Provision for bad debts | | 355,200 | | 273,200 | |
Deferred income taxes and other | | 32,500 | | - | |
Increase in trade accounts receivable | | (3,490,500 | ) | (2,730,200 | ) |
Decrease (increase) in product inventory | | 12,800 | | (6,046,400 | ) |
Decrease in prepaid expenses and other current assets | | 1,101,300 | | 368,800 | |
Increase in trade accounts payable | | 7,947,400 | | 5,385,400 | |
Increase in accrued expenses and other current liabilities | | 1,398,000 | | 396,100 | |
Net cash provided by operating activities | | 10,791,500 | | 2,726,200 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Acquisition of property and equipment | | (1,724,800 | ) | (2,879,000 | ) |
Net cash used in investing activities | | (1,724,800 | ) | (2,879,000 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net borrowings under revolving credit facility | | (8,947,000 | ) | (734,000 | ) |
Payments on long-term debt | | (201,900 | ) | (190,600 | ) |
Proceeds from exercise of stock options | | 82,200 | | 259,300 | |
Net cash used in financing activities | | (9,066,700 | ) | (665,300 | ) |
| | | | | |
Net decrease in cash and cash equivalents | | - | | (818,100 | ) |
| | | | | |
CASH AND CASH EQUIVALENTS, beginning of period | | - | | 818,100 | |
| | | | | |
CASH AND CASH EQUIVALENTS, end of period | | $ | - | | $ | - | |
See accompanying notes.
TESSCO Technologies Incorporated
September 30, 2001
(Unaudited)
Note 1. Description of Business and Basis of Presentation
TESSCO Technologies Incorporated (the “Company”) is a leading supplier of the product and supply chain solutions required to build, operate, maintain and use wireless voice, data, messaging, tracking and Internet systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery, and control systems utilizing extensive Internet and information technology. Although the Company conducts business selling various products to different customer groups, these products and customers all fall within the telecommunications industry; therefore, the Company reports operating results as one reportable segment.
In management’s opinion, the accompanying interim financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim financial statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended April 1, 2001.
Note 2. Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128 “Earnings per Share.” SFAS No. 128 simplifies the standards for computing earnings per share previously found in Accounting Principles Board (APB) Opinion No. 15 “Earnings per Share” by replacing the presentation of primary earnings per share (EPS) with basic EPS and replacing fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing income available to common shareholders by the weighted average number of common shares and the dilutive common equivalent shares outstanding for the period.
The dilutive effect of all options outstanding has been determined by using the treasury stock method. The weighted average shares outstanding is calculated as follows:
| | Fiscal Quarters Ended | | Six Months Ended | |
| | September 30,
2001 | | September 24,
2000 | | September 30,
2001 | | September 24,
2000 | |
Basic weighted average
common shares
outstanding | | 4,518,700 | | 4,492,600 | | 4,508,900 | | 4,490,600 | |
Effect of dilutive common
equivalent shares | | 37,800 | | 335,800 | | 23,400 | | 242,200 | |
Diluted weighted average
shares outstanding | | 4,556,500 | | 4,828,400 | | 4,532,300 | | 4,732,800 | |
Options to purchase 878,500 shares of common stock at a weighted average exercise price of $22.36 per share were outstanding as of September 30, 2001, but the common equivalent shares were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect of including such shares would be antidilutive.
Note 3. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142.
Note 4. Related Party Transactions
In August 2001, the Company guaranteed a personal revolving line of credit to the Company's chief executive officer from a commercial bank in the principal amount of $2,500,000. In connection therewith, the Company's chief executive officer and his spouse entered into a Reimbursement and Security Agreement which obligates them to reimburse the Company for any amounts paid by the Company under its guaranty. These obligations to the Company under the Reimbursement and Security Agreement are secured by certain assets of the chief executive officer and are fully recourse to the chief executive officer and his spouse.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Form 10-K for the fiscal year ended April 1, 2001.
Second Quarter of Fiscal 2002 Compared to Second Quarter of Fiscal 2001
Revenues decreased by $4.6 million, or 6.8%, to $62.0 million for the second quarter of fiscal 2002 compared to $66.6 million for the second quarter of fiscal 2001. Revenues from base site infrastructure and subscriber accessory products decreased but were partially offset by an increase in test and maintenance equipment revenues. Base site infrastructure, subscriber accessory, and test and maintenance products and services accounted for approximately 44%, 31% and 25%, respectively, of revenues during the second quarter of fiscal 2002. We experienced revenue growth in our reseller market, but this growth was offset by revenue decreases in our systems operators, international and consumer services markets. System operators, resellers, consumer services and international users accounted for approximately 51%, 39%, 6% and 4%, respectively, of revenues during the second quarter of fiscal 2002.
Gross profit decreased by $1.2 million, or 6.8%, to $16.8 million for the second quarter of fiscal 2002 compared to $18.0 million for the second quarter of fiscal 2001 due to decreased revenues and increases in inventory reserve levels. We account for inventory at the lower of cost or market, and as a result, write-offs/reserves occur due to damage, deterioration, obsolescence, changes in prices and other causes. The gross profit margin remained at 27.0% for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001.
Total selling, general and administrative expenses increased by $265,800, or 1.8%, to $14.9 million for the second quarter of fiscal 2002 compared to $14.6 million for the second quarter of fiscal 2001. The increase in these expenses is primarily attributable to continued investment in personnel, as well as increased depreciation and amortization related to information system enhancements. During the second quarter of fiscal year 2002, we recorded a $121,400 provision for bad debts compared to $115,100 in the second quarter of fiscal year 2001. We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve, based on this evaluation. Total selling, general and administrative expenses increased as a percentage of revenues to 24.0% for the second quarter of fiscal 2002 from 22.0% for the second quarter of fiscal 2001.
Income from operations decreased by $1.5 million, or 44.4%, to $1.9 million for the second quarter of fiscal 2002 compared to $3.4 million for the second quarter of fiscal 2001. The operating income margin decreased to 3.0% for the second quarter of fiscal 2002 compared to 5.0% for the second quarter of fiscal 2001.
Net interest and other expense decreased by $118,500, or 24.6%, to $362,400 for the second quarter of fiscal 2002 compared to $480,900 for the second quarter of fiscal 2001. This decrease is due to decreased levels of borrowing under our revolving credit facility as well as lower interest rates.
Income before provision for income taxes decreased $1.4 million, or 47.7%, to $1.5 million for the second quarter of fiscal 2002 compared to $2.9 million for the second quarter of fiscal 2001. The effective tax rate for fiscal 2002 and 2001 was 40.0% and 38.0%, respectively. The effective tax rate for the quarter increased due to changes in the relationship between non-deductible expenses and taxable income, as well as state apportionment factors. Net income and earnings per share (diluted) for the second quarter of fiscal 2002 decreased 49.4% and 45.9%, respectively, compared to the second quarter of fiscal 2001.
First Six Months of Fiscal 2002 Compared to First Six Months of Fiscal 2001
Revenues decreased by $7.2 million, or 5.6%, to $121.9 million for the first six months of fiscal 2002 compared to $129.1 million for the first six months of fiscal 2001. Revenues from base site infrastructure products decreased but were partially offset by increases in subscriber accessory and test and maintenance products. Base site infrastructure, subscriber accessory, and test and maintenance products and services accounted for approximately 45%, 32% and 23%, respectively, of revenues during the first six months of fiscal 2002. We experienced revenue growth in our reseller market, but this growth was offset by revenue decreases in our systems operators, international and consumer services markets. System operators, resellers, consumer services and international users accounted for approximately 52%, 38%, 4% and 6%, respectively, of revenues during the first six months of fiscal 2002.
Gross profit decreased by $1.9 million, or 5.4%, to $32.9 million for the first six months of fiscal 2002 compared to $34.8 million for the first six months of fiscal 2001 due to decreased revenues and increases in inventory reserve levels. We account for inventory at the lower of cost or market, and as a result, write-offs/reserves occur due to damage, deterioration, obsolescence, changes in prices and other causes. The gross profit margin remained at 27.0% for the first six months of fiscal 2002 compared to the first six months of fiscal 2001.
Total selling, general and administrative expenses increased by $1.8 million, or 6.2%, to $30.2 million for the first six months of fiscal 2002 compared to $28.4 million for the first six months of fiscal 2001. The increase in these expenses is primarily attributable to continued investment in personnel, increased depreciation and amortization related to information system enhancements and increases to the provision for bad debts. For the first six months of fiscal 2002, we recorded a $355,200 provision for bad debts compared to $273,200 for the first six months of fiscal 2001. We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve, based on this evaluation. Total operating expenses increased as a percentage of revenues to 24.7% for the first six months of fiscal 2002 from 22.0% for the first six months of fiscal 2001.
Income from operations decreased by $3.6 million, or 56.6%, to $2.8 million for the first six months of fiscal 2002 compared to $6.4 million for the first six months of fiscal 2001. The operating income margin decreased to 2.3% for the first six months of fiscal 2002 compared to 5.0% for the first six months of fiscal 2001.
Net interest and other expense decreased by $143,200, or 14.9%, to $819,700 for the first six months of fiscal 2002 compared to $962,900 for the first six months of fiscal 2001. This decrease is due to decreased levels of borrowing under our revolving credit facility and lower interest rates.
Income before provision for income taxes decreased $3.5 million or 64.0%, to $2.0 million for the first six months of fiscal 2002 compared to $5.4 million for the first six months of fiscal 2001. The effective tax rate for fiscal 2002 and 2001 was 39.5% and 38.0%, respectively. The effective tax rate for this period increased due to changes in the relationship between non-deductible expenses and taxable income, as well as state apportionment factors. Net income and earnings per share (diluted) for the first six months of fiscal 2002 decreased 64.9% and 63.4%, respectively, compared to the first six months of fiscal 2001.
Liquidity and Capital Resources
Net cash provided by operating activities was $10.8 million for the first six months of fiscal 2002, compared to $2.7 million for the first six months of fiscal 2001. This increase was primarily the result of a decrease in product inventory, and increases in trade accounts payable and accrued expenses and other current liabilities, in the first six months of fiscal 2002 as compared to the first six months of fiscal 2001, and occurred notwithstanding a decrease in net income. Net cash used in investing activities decreased to $1.7 million for the first six months of fiscal 2002 compared to $2.9 million for the first six months of fiscal 2001, due to lower acquisitions of property and equipment. Net cash used by financing activities was $9.1 million for the first six months of fiscal 2002 compared to $665,300 for the first six months of fiscal 2001. This increase is primarily the result of increased repayments of our revolving line of credit during the first six months of fiscal 2002 compared to the first six months of fiscal 2001.
Forward-Looking Statements
This report contains a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, all of which are based on current expectations. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “expects,” “anticipates,” “estimates,” and similar expressions. The Company’s future results of operations and other forward-looking statements contained in this report involve a number of risks and uncertainties. For a variety of reasons, actual results may differ materially from those described in any such forward-looking statement. Such factors include but are not limited to, the following: the Company’s dependence on a relatively small number of suppliers and vendors, which could hamper the Company’s ability to maintain appropriate inventory levels and meet customer demand; the effect that the loss of certain customers or vendors could have on the Company’s net profits; the possibility that unforeseen events could impair the Company’s ability to service its customers promptly and efficiently, if at all; the possibility that, for unforeseen reasons, the Company may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings; existing competition from national and regional distributors and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; and continuing changes in the wireless communications industry, including risks associated with conflicting technologies, changes in technologies, inventory obsolescence and evolving Internet business models and the resulting competition. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risk to which they are subject.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
The Company has not used derivative financial instruments. Management of the Company believes its exposure to market risks, including exchange rate risk, interest rate risk and commodity price risk, is not material at the present time.
Part II – Other Information
Item 1 – Legal Proceedings
No material legal proceedings.
None
None
Item 4 – Submission of Matters to a Vote of Security Holders
See the Company’s Form 10-Q for the three months ended July 1, 2001, filed August 14, 2001, which is
incorporated herein by reference.
None
(a) Exhibits
11. Statement re: computation of per share earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this report.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TESSCO Technologies Incorporated
| | | |
Date: | November 14 , 2001 | By: | /s/Robert C. Singer |
| | | Robert C. Singer |
| | | Senior Vice President and Chief Financial |
| | | Officer |
| | | (principal financial and accounting officer) |
