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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended December 26, 1997
OR
[ ] 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
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(Exact name of registrant as specified in its charter)
Delaware 52-0729657
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
11126 McCormick Road Hunt Valley, Maryland 21031
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 229-1000
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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 report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 6, 1997:
Class: Common Stock, $.01 par value Number of Shares: 4,393,431
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Part I
Item 1. Financial Statements
TESSCO Technologies Incorporated
Balance Sheets
ASSETS
December 26, March 28,
1997 1997
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(unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivelents $ 5,374,900 $ -
Trade accounts receivable, net 14,828,000 16,907,100
Product inventory 14,615,600 16,942,400
Deferred tax asset 370,200 376,100
Prepaid expenses and other current assets 1,193,300 861,500
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Total current assets 36,382,000 35,087,100
PROPERTY AND EQUIPMENT, net 14,115,400 11,363,100
DEFERRED TAX ASSET 208,300 212,400
GOODWILL 4,032,000 4,252,700
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Total assets $54,737,700 $50,915,300
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $11,878,600 $10,771,700
Accrued expenses and other current liabilities 2,840,300 2,086,700
Current portion of long-term debt 289,500 331,900
Current portion of capital lease obligation 4,400 85,000
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Total current liabilities 15,012,800 13,275,300
Borrowings under credit facility - 630,500
Long-term debt 7,516,600 7,637,900
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Total liabilities 22,529,400 21,543,700
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - -
Common stock 46,300 46,000
Additional paid-in capital 19,933,200 19,346,200
Treasury stock, at cost (2,831,500) (2,591,500)
Retained earnings 15,060,300 12,570,900
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Total shareholders' equity 32,208,300 29,371,600
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Total liabilities and shareholders' equity $54,737,700 $50,915,300
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TESSCO Technologies Incorporated
Statements of Income
(unaudited)
Fiscal Quarters Ended Nine Months Ended
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December 26, December 27, December 26, December 27,
1997 1996 1997 1996
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Revenues $32,484,300 $38,901,700 $99,819,700 $113,727,600
Cost of goods sold 23,544,000 29,002,700 73,293,600 85,268,400
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Gross profit 8,940,300 9,899,000 26,526,100 28,459,200
Selling, general and administrative expenses 7,314,000 7,690,200 21,934,900 21,439,400
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Income from operations 1,626,300 2,208,800 4,591,200 7,019,800
Interest income (expense), net (165,000) (292,100) (569,200) (721,900)
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Income before provision for income taxes 1,461,300 1,916,700 4,022,000 6,297,900
Provision for income taxes 555,300 735,400 1,532,600 2,426,800
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Net income $ 906,000 $ 1,181,300 $ 2,489,400 $ 3,871,100
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Primary earnings per share $ 0.20 $ 0.25 $ 0.54 $ 0.82
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Fully diluted earnings per share 0.20 0.25 0.54 0.82
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Primary weighted average shares outstanding 4,645,100 4,728,200 4,635,200 4,709,400
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Fully diluted weighted average shares outstanding 4,645,100 4,728,200 4,646,600 4,729,900
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TESSCO Technologies Incorporated
Statements of Cash Flows
(unaudited)
Nine Months Ended
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December 26, December 27,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,489,400 $3,871,100
Adjustments to reconcile net income to net cash
provided by operating activities, net of effects
of business acquired in fiscal 1997
Depreciation and amortization 1,479,500 957,600
Provision for bad debts 87,500 362,900
Deferred income taxes 10,000 (30,400)
Decrease (increase) in trade accounts receivable 1,991,600 (3,612,000)
Decrease (increase) in product inventory 2,326,800 (6,672,900)
Increase in prepaid expenses and other current assets (331,800) (499,400)
Increase in trade accounts payable 1,106,900 3,085,200
Increase in accrued expenses and other current liabilities 753,600 236,100
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Net cash provided by (used in) operating activities 9,913,500 (2,301,800)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired business - (6,688,600)
Acquisition of property and equipment (4,011,100) (5,024,200)
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Net cash used in investing activities (4,011,100) (11,712,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under credit facility (630,500) 5,319,800
Payments on long-term debt (163,700) -
Proceeds from long-term debt - 7,996,200
Proceeds from exercise of stock options 347,300 355,400
Payment of capital lease obligations (80,600) (96,200)
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Net cash (used in) provided by financing activities (527,500) 13,575,200
Net increase (decrease) in cash and cash equivalents 5,374,900 (439,400)
CASH AND CASH EQUIVALENTS, beginning of period - 439,400
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CASH AND CASH EQUIVALENTS, end of period $ 5,374,900 $ -
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TESSCO Technologies Incorporated
Notes to Unaudited Financial Statements
December 26, 1997
1. Description of Business and Basis of Presentation
TESSCO Technologies Incorporated is a leading distributor of products to the
wireless communications industry. The Company serves almost 7,000 customers per
month in the cellular telephone, personal communications services (PCS), paging
and mobile radio-dispatch markets, including a diversified mix of dealers,
cellular and paging carriers and self-maintained users. The Company offers a
wide selection of nearly 17,500 SKUs which are broadly classified as
infrastructure, mobile and portable accessory and test and maintenance.
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 at December 26, 1997 and December 27, 1996 and the results of its
operations and its cash flows for the nine months ended December 26, 1997 and
December 27, 1996. 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. Readers of these statements should refer to
the Company's annual financial statements and notes thereto as of March 28, 1997
and for the year then ended. The results of operations presented in the
accompanying interim financial statements are not necessarily representative of
operations for an entire year.
2. Earnings per Share
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS 128 simplifies the standards for computing earnings
per share previously found in APB No. 15, "Earnings per Share." It replaces the
presentation of primary and fully diluted EPS with a presentation of basic and
diluted EPS and requires a reconciliation of the numerator and denominator of
the basic EPS calculation to the numerator and denominator of the diluted EPS
calculation. 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 similarly to primary EPS
pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and
early adoption is not permitted. When adopted, it will require restatement of
prior years' EPS. When adopted for the year ended March 27, 1998, the Company
will report basic EPS and diluted EPS instead of primary EPS and fully diluted
EPS. Basic EPS for the quarters ended December 26, 1997 and December 27, 1996 is
$0.21 and $0.27, respectively. Basic EPS for the nine months ended December 26,
1997 and December 27, 1996 is $0.57 and $0.91, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Third Quarter of Fiscal 1998 Compared to Third Quarter of Fiscal 1997
Revenues decreased by $6.4 million, or 16.5%, to $32.5 million for the
third quarter of fiscal 1998 compared to $38.9 million for the third quarter of
fiscal 1997. The overall decrease in revenues was primarily due to the
renegotiation of, and accounting for, one of the Company's fulfillment services
contracts. In February 1997, the Company successfully renegotiated an existing
fulfillment services contract resulting in the elimination of any future
accounts receivable exposure. With this change, the Company now reports revenues
representing only fees realized. Revenues increased in only one of the Company's
three major product categories -- test and maintenance products. Revenues
decreased in the mobile and portable accessory product category primarily due to
the renegotiation and accounting treatment for one of the Company's fulfillment
services contracts. Revenues also decreased in the infrastructure product
category primarily from the slower than expected transition of cable sales and
general industry softness. Infrastructure, mobile and portable accessory and
test and maintenance products accounted for approximately 54%, 31%, and 15%,
respectively, of product revenues during the third quarter of fiscal 1998.
Revenues decreased in each of the three major customer classifications, with the
largest decrease experienced in cellular, paging and PCS carriers. Cellular,
paging and PCS carriers, dealers and self-maintained users accounted for
approximately 39%, 41%, and 20%, respectively, of product revenues during the
third quarter of fiscal 1998.
Gross profit decreased by $959,000, or 9.7%, to $8.9 million for the
third quarter of fiscal 1998 compared to $9.9 million for the third quarter of
fiscal 1997, while the gross profit margin increased to 27.5% from 25.4%. The
gross profit decrease resulted primarily from reduced gross profit dollars from
the company's infrastructure products. The increase in gross profit margin
primarily resulted from product and service mix changes, as well as the effect
of the renegotiation of one of the company's fulfillment services contracts and
the accounting treatment of that contract.
Selling, general and administrative expenses decreased by $376,000, or
4.9%, to $7.3 million during the third quarter of fiscal 1998 compared to $7.7
million for the third quarter of fiscal 1997. The decrease in these expenses was
primarily attributable to lower marketing costs due to a reduction of the
company's concentrated marketing campaign to transition customers to competitive
infrastructure products that began in the third quarter of fiscal 1997. As a
percentage of revenues, selling, general and administrative expenses increased
to 22.5% for the third quarter of fiscal 1998 compared to 19.8% for the third
quarter of fiscal 1997.
Income from operations decreased by $583,000, or 26.4%, to $1.6
million for the third quarter of fiscal 1998 compared to $2.2 million for the
third quarter of fiscal 1997. The operating income margin was 5.0% compared to
the corresponding prior year's 5.7% as a result of increased operating expenses,
and a lower revenue base.
Net interest expense for the third quarter of fiscal 1998 was $165,000
compared to $292,000 for the third quarter of fiscal 1997. This change is a
direct result of positive cash flow and the attendant decrease in the amount
outstanding under the company's revolving line of credit during the third
quarter of fiscal 1998 when compared with the amount outstanding under the
company's revolving line of credit in connection with the Company's acquisition
of Cartwright Communications Company, the funding of the Company's global
logistics center, and increased working capital requirements during the third
quarter of fiscal 1997.
First Nine Months of Fiscal 1998 Compared to First Nine Months of Fiscal 1997
Revenues decreased by $13.9 million, or 12.2%, to $99.8 million for
the first nine months of fiscal 1998 compared to $113.7 million for the first
nine months of fiscal 1997. Although there was an increase in unit volume, an
expanded product offering, and the inclusion of Cartwright Communications
Company's revenues for the entire nine month period of fiscal 1998 compared to
seven months in the first nine months of fiscal 1997, there was an overall
decrease in revenues primarily due to the renegotiation of, and accounting for,
one of the Company's fulfillment services contracts. In February 1997, the
Company successfully renegotiated an existing fulfillment services contract
resulting in the elimination of any future accounts receivable exposure. With
this change, the Company now reports revenues representing only fees realized.
Revenues increased in only one of the Company's three major product categories
- -- test and maintenance products. Revenues decreased in the mobile and portable
accessory product category primarily due to the renegotiation and accounting
treatment for one of the Company's fulfillment services contracts. Revenues also
decreased in the infrastructure product category primarily from the slower than
expected transition of cable sales and general industry softness.
Infrastructure, mobile and portable accessory and test and maintenance products
accounted for approximately 53%, 32%, and 15%, respectively, of product revenues
during the first nine months of fiscal 1998. Revenues decreased in each of the
three major customer classifications, with the largest decrease experienced in
cellular, paging and PCS carriers. Cellular, paging and PCS carriers, dealers
and self-maintained users accounted for approximately 42%, 39%, and 19%,
respectively, of product revenues during the first nine months of fiscal 1998.
Gross profit decreased by $1.9 million, or 6.8%, to $26.5 million for
the first nine months of fiscal 1998 compared to $28.5 million for the first
nine months of fiscal 1997, while the gross profit margin increased to 26.6%
from 25.0%. The gross profit decrease resulted primarily from reduced fees
associated with fulfillment services contracts and from reduced gross profit
dollars from the company's cable conversion process and general industry
softness. The increase in gross profit margin primarily resulted from product
and service mix changes, as well as the effect of the renegotiation of one of
the company's fulfillment services contracts and the accounting treatment of
that contract.
Selling, general and administrative expenses increased by $496,000, or
2.3%, to $21.9 million during the first nine months of fiscal 1998 compared to
$21.4 million for the first nine months of fiscal 1997. The increase in these
expenses was primarily attributable to the continued investment in personnel to
build and support future revenue and gross profit growth, increased marketing
costs associated with the transition of customers to competitive infrastructure
products, and Cartwright Communications Company's expenses being included for
the entire nine months of fiscal 1998 compared to seven months in fiscal 1997.
As a percentage of revenues, selling, general and administrative expenses
increased to 22.0% for the first nine months of fiscal 1998 compared to 18.9%
for the first nine months of fiscal 1997.
Income from operations decreased by $2.4 million, or 34.6%, to $4.6
million for the first nine months of fiscal 1998 compared to $7.0 million for
the first nine months of fiscal 1997. The operating income margin was 4.6%
compared to the corresponding prior year's 6.2% as a result of increased
operating expenses and a lower revenue base.
Net interest expense for the first nine months of fiscal 1998 was
$569,000 compared to $722,000 for the first nine months of fiscal 1997. This
change is a direct result of positive cash flow during the first nine months of
fiscal 1998 and attendant decrease in the amount outstanding under the company's
revolving line of credit when compared with the amount outstanding under the
company's revolving line of credit in connection with the Company's acquisition
of Cartwright Communications Company, the funding of the Company's global
logistics center, and increased working capital requirements during the first
nine months of fiscal 1997.
Liquidity and Capital Resources
Net cash provided by operating activities was $9.9 million for the
first nine months of fiscal 1998, compared to net cash used in operating
activities of $2.3 million for the first nine months of fiscal 1997. This change
was primarily the result of a decrease in net income offset by changes in
operating assets and liabilities, particularly large changes in accounts
receivable, inventory and accounts payable Net cash used in investing activities
decreased to $4.0 million for the first nine months of fiscal 1998 compared to
$11.7 million for the first nine months of fiscal 1997. This decrease was
primarily due to the Company's acquisition of Cartwright Communications Company
during the first nine months of fiscal 1997 and decreasing expenditures related
to the company's global logistics center in fiscal 1998 when compared to fiscal
1997. Net cash used in financing activities was $528,000 in the first nine
months of fiscal 1998 compared to net cash provided by financing activities of
$13.6 million for the first nine months of fiscal 1997. This change is primarily
a result of the Company's borrowing under its credit facilities and proceeds
from long-term debt to finance the Cartwright acquisition and the global
logistics center in the first nine months of fiscal 1997.
Part II - Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibit 11 - Earnings per share computation
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter covered
by this report.
SIGNATURES
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
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(Registrant)
Date: February 6, 1998
By: Gerald T. Garland
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Gerald T. Garland
Treasurer and Chief Financial Officer
(principal financial officer)
EXHIBIT INDEX
The following exhibits are filed herewith:
11. Earnings per share computation
27. Financial Data Schedule