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UNITED STATES
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 27, 1998
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 charter)
Delaware 52-0729657
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
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 |X| No |_|
The number of shares of the registrant's Common Stock, $ .01 par value,
outstanding as of February 8, 1999 was 4,433,577.
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Part I. Financial Information
Item 1. Financial Statements
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Balance Sheets
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December 27, March 29,
1998 1998
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(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and marketable securities $ - $ 4,459,200
Trade accounts receivable, net 19,067,700 15,757,100
Product inventory 20,713,600 18,872,100
Deferred tax asset 523,900 523,900
Prepaid expenses and other current assets 1,981,800 1,609,400
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Total current assets 42,287,000 41,221,700
PROPERTY AND EQUIPMENT, net 15,714,900 14,755,200
GOODWILL 3,704,100 3,950,000
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Total assets $61,706,000 $59,926,900
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $14,576,900 $16,394,200
Accrued expenses and other current liabilities 2,427,300 2,363,400
Current portion of long-term debt 308,700 294,000
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Total current liabilities 17,312,900 19,051,600
DEFERRED TAX LIABILITY 42,400 42,400
REVOLVING LINE OF CREDIT 2,230,200 -
LONG-TERM DEBT, net of current portion 7,182,600 7,441,400
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Total liabilities 26,768,100 26,535,400
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - -
Common stock 46,900 46,700
Additional paid-in capital 20,439,800 20,241,800
Treasury stock, at cost (2,999,500) (2,843,500)
Retained earnings 17,450,700 15,946,500
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Total shareholders' equity 34,937,900 33,391,500
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Total liabilities and shareholders' equity $61,706,000 $59,926,900
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See accompanying notes.
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TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Income
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Fiscal Quarters Ended Nine Months Ended
December 27, December 26, December 27, December 26,
1998 1997 1998 1997
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(unaudited) (unaudited) (unaudited) (unaudited)
Revenues $40,661,200 $32,484,300 $120,278,800 $99,819,700
Cost of goods sold 29,621,500 23,544,000 89,432,600 73,293,600
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Gross profit 11,039,700 8,940,300 30,846,200 26,526,100
Selling, general and
administrative expenses
9,658,100 7,314,000 27,544,700 21,934,900
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Income from operations 1,381,600 1,626,300 3,301,500 4,591,200
Interest expense, net (322,100) (165,000) (875,200) (569,200)
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Income before provision
for income taxes 1,059,500 1,461,300 2,426,300 4,022,000
Provision for income taxes 402,600 555,300 922,100 1,532,600
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Net income $ 656,900 $ 906,000 $ 1,504,200 $ 2,489,400
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Basic earnings per share $ 0.15 $ 0.21 $ 0.34 $ 0.57
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Diluted earnings per share $ 0.14 $ 0.20 $ 0.33 $ 0.54
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Basic weighted average shares
outstanding 4,420,100 4,392,800 4,416,400 4,371,000
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Diluted weighted average
shares outstanding 4,627,500 4,640,200 4,596,000 4,633,500
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See accompanying notes.
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TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Cash Flows
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Nine Months Ended
December 27, December 26,
1998 1997
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,504,200 $ 2,489,400
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,497,600 1,479,500
Provision for bad debts 283,100 87,500
Deferred income taxes - 10,000
(Increase) decrease in trade accounts receivable (3,593,700) 1,991,600
(Increase) decrease in product inventory (1,841,500) 2,326,800
Increase in prepaid expenses and other current assets (372,400) (331,800)
(Decrease) increase in trade accounts payable (1,817,300) 1,106,900
Increase in accrued expenses & other current liabilities 63,900 753,600
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Net cash (used in) provided by operating activities (4,276,100) 9,913,500
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,211,400) (4,011,100)
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Net cash used in investing activities (2,211,400) (4,011,100)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 2,230,200 -
Repayments of revolving line of credit - (630,500)
Payments on long-term debt (244,100) (163,700)
Proceeds from exercise of stock options 42,200 347,300
Payment of capital lease obligations - (80,600)
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Net cash provided by (used in) financing activities 2,028,300 (527,500)
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Net (decrease) increase in cash and marketable securities (4,459,200) 5,374,900
CASH AND MARKETABLE SECURITIES, beginning of period 4,459,200 -
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CASH AND MARKETABLE SECURITIES, end of period $ - $ 5,374,900
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See accompanying notes.
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TESSCO TECHNOLOGIES INCORPORATED
Notes to Consolidated Financial Statements
December 27, 1998
(Unaudited)
Note 1. Description of Business and Basis of Presentation
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TESSCO Technologies Incorporated (the Company) is a leading provider of products
and value-added services in the wireless communications industry. The Company
serves customers in the cellular telephone, personal communications services
(PCS), paging and mobile radio-dispatch markets, including a diversified mix of
cellular, PCS and paging carriers, dealers and self-maintained users. The
Company offers a wide selection of over 18,000 stock keeping units, which are
broadly classified as base site infrastructure, subscriber 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 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 March 29, 1998.
Note 2. Earnings Per Share
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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:
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Fiscal Quarters Ended Nine Months Ended
December 27, December 26, December 27, December 26,
1998 1997 1998 1997
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Basic weighted average common
shares outstanding 4,420,100 4,392,800 4,416,400 4,371,000
Effect of dilutive common
equivalent shares 207,400 247,400 179,600 262,500
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Diluted weighted average
shares outstanding 4,627,500 4,640,200 4,596,000 4,633,500
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Options to purchase 139,500 shares of common stock at a weighted average
exercise price of $30.74 per share were outstanding as of December 27, 1998, but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
Note 3. Contingency
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In connection with the relocation of its corporate headquarters, the Company
received a $1,000,000 grant from the Maryland Department of Business and
Economic Development. At the time this grant was made, it was subject to
repayment if the Company failed to achieve defined employment levels. The
Company has since been notified that the required employment levels have been
achieved and that the grant is no longer subject to any contingent repayment
obligation.
Note 4. New Accounting Pronouncements
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999 and will be adopted as a cumulative catch-up. The Company has not
used derivative financial instruments, and management does not expect the
adoption of this statement to have a material impact on the Company's financial
position or results of operations.
During March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
that computer software costs that are incurred in the preliminary project stage
should be expensed as incurred. Once the capitalization criteria of SOP 98-1
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and
payroll-related costs for employees who are directly associated with and who
devoted time to the internal-use computer software project (to the extent of the
time spent directly on the project); and the interest costs incurred when
developing computer software for internal use should be capitalized.
Under SOP 98-1, training costs, data conversion costs and internal costs
incurred for upgrades, enhancements and maintenance should be expensed as
incurred. Impairment of capitalized software should be recognized in accordance
with the provision of FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The SOP is
effective for fiscal years beginning after December 15, 1998 and is to be
adopted prospectively. Management does not believe that the adoption of SOP 98-1
will have a material effect on the Company's financial position or results of
operations.
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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 March 29, 1998.
Third Quarter of Fiscal 1999 Compared to Third Quarter of Fiscal 1998
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Revenues increased by $8.2 million, or 25.2%, to $40.7 million for the third
quarter of fiscal 1999 compared to $32.5 million for the third quarter of fiscal
1998. The overall increase was primarily a result of increased unit volume.
Revenues from the Company's base site infrastructure and subscriber accessory
products and services increased, while sales of test and maintenance products
declined slightly. The largest percentage increase was experienced in the sale
of subscriber accessory products and services, primarily attributable to growth
in affinity marketing programs. Base site infrastructure, subscriber accessory
and test and maintenance products and services accounted for approximately 52%,
37% and 11%, respectively, of revenues during the third quarter of fiscal 1999.
Revenues increased from cellular, PCS and paging carriers and self-maintained
users. Revenues from dealers decreased from prior year levels. Dealers,
cellular, PCS and paging carriers and self-maintained users accounted for
approximately 28%, 45% and 27%, respectively, of revenues during the third
quarter of fiscal 1999.
Gross profit increased by $2.1 million, or 23.5%, to $11.0 million for the third
quarter of fiscal 1999 compared to $8.9 million for the third quarter of fiscal
1998 due to the increase in revenues between quarters. The gross profit margin
remained approximately the same at 27.2% for the third quarter of fiscal 1999
compared to 27.5% for the third quarter of fiscal 1998.
Total operating expenses increased by $2.3 million, or 32.0%, to $9.7 million
for the third quarter of fiscal 1999 compared to $7.3 million for the third
quarter of fiscal 1998. Total operating expenses increased as a percentage of
revenues to 23.8% for the third quarter of fiscal 1999 from 22.5% for the third
quarter of fiscal 1998. The increase in these expenses is primarily attributable
to a continued investment in personnel and marketing expenses to support future
revenue and gross profit growth.
Income from operations decreased by $244,700, or 15.0%, to $1.4 million for the
third quarter of fiscal 1999 compared to $1.6 million for the third quarter of
fiscal 1998. The operating income margin decreased to 3.4% for the third quarter
of fiscal 1999 compared to 5.0% for the third quarter of fiscal 1998.
Net interest expense increased by $157,100, or 95.2%, to $322,100 for the third
quarter of fiscal 1999 compared to $165,000 for the third quarter of fiscal
1998. This increase is due to increased levels of borrowing under the Company's
revolving line of credit to finance working capital requirements.
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First Nine Months of Fiscal 1999 Compared to First Nine Months of Fiscal 1998
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Revenues increased by $20.5 million, or 20.5%, to $120.3 million for the first
nine months of fiscal 1999 compared to $99.8 million for the first nine months
of fiscal 1998. The overall increase was primarily a result of increased unit
volume. Revenues increased in each of the Company's major categories, with the
largest percentage increase experienced in the sale of subscriber accessory
products and services, primarily attributable to growth in affinity marketing
programs. Base site infrastructure, subscriber accessory and test and
maintenance products and services accounted for approximately 54%, 34% and 12%,
respectively, of revenues during the first nine months of fiscal 1999. Revenues
also increased in each of the major customer classifications, with the largest
percentage growth experienced in self-maintained users. Dealers, cellular, PCS
and paging carriers and self-maintained users accounted for approximately 38%,
41% and 21%, respectively, of revenues during the first nine months of fiscal
1999.
Gross profit increased by $4.3 million, or 16.3%, to $30.8 million for the first
nine months of fiscal 1999 compared to $26.5 million for the first nine months
of fiscal 1998 due to the increase in revenues. The gross profit margin declined
to 25.6% for the first nine months of fiscal 1999 compared to 26.6% for the
first nine months of fiscal 1998. The reduction in gross profit margin was
principally attributable to the effect of more competitive pricing on base site
infrastructure and subscriber accessory products and product mix changes.
Total operating expenses increased by $5.6 million, or 25.6%, to $27.5 million
for the first nine months of fiscal 1999 compared to $21.9 million for the first
nine months of fiscal 1998. Total operating expenses increased as a percentage
of revenues to 22.9% for the first nine months of fiscal 1999 from 22.0% for the
first nine months of fiscal 1998. The increase in these expenses is primarily
attributable to a continued investment in personnel and marketing expenses to
support future revenue and gross profit growth.
Income from operations decreased by $1.3 million, or 28.1%, to $3.3 million for
the first nine months of fiscal 1999 compared to $4.6 million for the first nine
months of fiscal 1998. The operating income margin decreased to 2.7% for the
first nine months of fiscal 1999 compared to 4.6% for the first nine months of
fiscal 1998.
Net interest expense increased by $306,000, or 53.8%, to $875,200 for the first
nine months of fiscal 1999 compared to $569,200 for the first nine months of
fiscal 1998. This increase is due to increased levels of borrowing under the
Company's revolving line of credit to finance working capital requirements.
Liquidity and Capital Resources
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Net cash used in operating activities was $4.3 million for the first nine months
of fiscal 1999, compared to net cash provided by operating activities of $9.9
million for the first nine months of fiscal 1998. This change was primarily the
result of significant increases in trade accounts receivable and product
inventory to support increased sales activity, as well as a significant decrease
in trade accounts payable. Net cash used in investing activities decreased to
$2.2 million for the first nine months of fiscal 1999 compared to $4.0 million
for the first nine months of fiscal 1998, primarily due to a reduction in
capital expenditures attributable to the newly opened Global Logistics Center.
Net cash provided by financing activities was $2.0 million for the first nine
months of fiscal 1999 compared to net cash used in financing activities of
$527,500 for the first nine months of fiscal 1998, primarily a result of the
Company's borrowings under its revolving credit facility.
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Year 2000 Issue
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The Year 2000 issue is the result of computer programs using only two digits to
identify a year within date fields. Date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on its assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
currently believes that with modifications to existing software and conversions
to new software, the effects of the Year 2000 issue will be mitigated and that
such efforts are well underway. The Company is utilizing both internal and
external resources to reprogram, or replace, and test the software for Year 2000
modifications. The cost of new software purchased will be capitalized; all other
costs will be expensed as incurred. The cost of the project is not expected to
have a material effect on the results of operations.
In addition, the Company is assessing the readiness of its significant suppliers
and large customers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issues. The
Company's total Year 2000 costs include the estimated costs associated with the
impact on the Company of the Year 2000 issue and on the Company's suppliers and
customers, and are based on currently available information. However, there can
be no guarantee that the systems of other companies will be timely converted, or
that a failure to convert by another company would not have a material adverse
effect on the Company. The Company has determined that it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.
Forward-Looking Statements
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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. 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 provide prompt and efficient service to its customers;
the possibility of unforeseen delays in entering into or performing under
anticipated contracts or in otherwise realizing 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 technology and inventory obsolescence.
Consequently, the reader is cautioned to consider all forward-looking statements
in light of the risks 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.
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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) Exhibits
11. Statement re: computation of per share earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this
report.
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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: February 8, 1999 By: /s/ Gerald T. Garland
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Gerald T. Garland
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
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EXHIBIT INDEX
The following exhibits are filed herewith:
11. Statement re: Computation of Per Share Earnings
27. Financial Data Schedule -- FDS