tess_Current folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 24, 2017

 

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: 001-33938

TESSCO Technologies Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

52-0729657

(State or other jurisdiction of

incorporation or organization)

(I.R.S Employer

Identification No.)

 

 

 

 

11126 McCormick Road, Hunt Valley, Maryland

21031

(Address of principal executive offices)

(Zip Code)

 

 

(410) 229-1000

(Registrant’s telephone number, including area code)

 

 

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 such filing requirements for the past 90 days.

Yes ☑       No ☐

 

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑       No ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐       No ☑

 

The number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of October 27, 2017, was 8,378,159.

 

 

 

 


 

Table of Contents

TESSCO Technologies Incorporated

Index to Form 10-Q

 

 

 

 

 

 

Part I 

FINANCIAL INFORMATION

Page

 

 

 

 

 

Item 1.

Financial Statements.

3

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

20

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk.

29

 

 

 

 

 

Item 4.

Controls and Procedures.

30

 

 

 

 

Part II 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings.

31

 

 

 

 

 

Item 1A.

Risk Factors.

31

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

31

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities.

31

 

 

 

 

 

Item 4.

Mine Safety Disclosures.

31

 

 

 

 

 

Item 5.

Other Information.

31

 

 

 

 

 

Item 6.

Exhibits.

32

 

 

 

 

 

Signature

 

33

 

 

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

TESSCO Technologies Incorporated

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

    

September 24,

    

March 26,

 

 

 

 

2017

 

2017

 

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

245,700

 

$

8,540,100

 

 

Trade accounts receivable, net of allowance for doubtful accounts of $866,900 and $782,200, respectively

 

 

92,945,900

 

 

64,778,900

 

 

Product inventory, net

 

 

73,229,000

 

 

63,984,300

 

 

Prepaid expenses and other current assets

 

 

4,429,200

 

 

3,864,100

 

 

Total current assets

 

 

170,849,800

 

 

141,167,400

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

13,091,100

 

 

13,830,900

 

 

Goodwill, net

 

 

11,677,700

 

 

11,677,700

 

 

Other long-term assets

 

 

7,419,300

 

 

7,304,500

 

 

Total assets

 

$

203,037,900

 

$

173,980,500

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

69,170,600

 

$

53,581,400

 

 

Payroll, benefits and taxes

 

 

6,836,000

 

 

6,772,100

 

 

Income and sales tax liabilities

 

 

1,756,100

 

 

1,364,700

 

 

Accrued expenses and other current liabilities

 

 

1,973,000

 

 

2,228,200

 

 

Revolving line of credit

 

 

13,278,600

 

 

 

 

Current portion of long-term debt

 

 

26,900

 

 

26,500

 

 

Total current liabilities

 

 

93,041,200

 

 

63,972,900

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

373,600

 

 

386,800

 

 

Long-term debt, net of current portion

 

 

16,100

 

 

29,800

 

 

Other long-term liabilities

 

 

1,749,600

 

 

1,574,700

 

 

Total liabilities

 

 

95,180,500

 

 

65,964,200

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 500,000 shares authorized and no shares issued and outstanding

 

 

 —

 

 

 

 

Common stock $0.01 par value, 15,000,000 shares authorized, 14,088,701 shares issued and 8,373,585 shares outstanding as of September 24, 2017, and 14,048,392 shares issued and 8,337,669 shares outstanding as of March 26, 2017

 

 

98,800

 

 

98,400

 

 

Additional paid-in capital

 

 

59,801,300

 

 

59,006,000

 

 

Treasury stock, at cost, 5,715,116 shares as of September 24, 2017 and 5,710,723 shares as of March 26, 2017

 

 

(57,502,400)

 

 

(57,437,600)

 

 

Retained earnings

 

 

105,459,700

 

 

106,349,500

 

 

Total shareholders’ equity

 

 

107,857,400

 

 

108,016,300

 

 

Total liabilities and shareholders’ equity

 

$

203,037,900

 

$

173,980,500

 

 

 

See accompanying notes.

 

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Quarters Ended

 

Six Months Ended

 

 

    

September 24, 2017

    

September 25, 2016

 

September 24, 2017

    

September 25, 2016

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

145,083,500

 

$

134,633,800

 

$

285,094,300

 

$

263,493,800

 

Cost of goods sold

 

 

115,160,400

 

 

105,878,200

 

 

226,004,400

 

 

207,632,200

 

Gross profit

 

 

29,923,100

 

 

28,755,600

 

 

59,089,900

 

 

55,861,600

 

Selling, general and administrative expenses

 

 

26,674,400

 

 

26,709,500

 

 

54,555,900

 

 

53,665,200

 

Income from operations

 

 

3,248,700

 

 

2,046,100

 

 

4,534,000

 

 

2,196,400

 

Interest expense, net

 

 

156,500

 

 

17,200

 

 

225,100

 

 

28,600

 

Income before provision for income taxes

 

 

3,092,200

 

 

2,028,900

 

 

4,308,900

 

 

2,167,800

 

Provision for income taxes

 

 

1,318,300

 

 

1,034,700

 

 

1,852,100

 

 

1,093,100

 

Net income

 

$

1,773,900

 

$

994,200

 

$

2,456,800

 

$

1,074,700

 

Basic earnings per share

 

$

0.21

 

$

0.12

 

$

0.29

 

$

0.13

 

Diluted earnings per share

 

$

0.21

 

$

0.12

 

$

0.29

 

$

0.13

 

Basic weighted-average common shares outstanding

 

 

8,365,383

 

 

8,310,300

 

 

8,357,213

 

 

8,300,000

 

Effect of dilutive options

 

 

27,614

 

 

13,900

 

 

40,643

 

 

20,900

 

Diluted weighted-average common shares outstanding

 

 

8,392,997

 

 

8,324,200

 

 

8,397,856

 

 

8,320,900

 

Cash dividends declared per common share

 

$

0.20

 

$

0.20

 

$

0.40

 

$

0.40

 

 

See accompanying notes.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

September 24, 2017

 

September 25, 2016

    

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

    

    

 

    

 

Net income

 

$

2,456,800

 

$

1,074,700

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,031,000

 

 

2,275,600

 

Non-cash stock-based compensation expense

 

 

501,900

 

 

192,400

 

Deferred income taxes and other

 

 

218,800

 

 

(370,300)

 

Change in trade accounts receivable

 

 

(28,205,250)

 

 

(12,279,300)

 

Change in product inventory

 

 

(9,244,700)

 

 

(18,348,000)

 

Change in prepaid expenses and other current assets

 

 

(565,100)

 

 

322,400

 

Change in trade accounts payable

 

 

15,589,200

 

 

27,857,600

 

Change in payroll, benefits and taxes

 

 

63,900

 

 

166,500

 

Change in income and sales tax liabilities

 

 

391,400

 

 

(338,800)

 

Change in accrued expenses and other current liabilities

 

 

(37,800)

 

 

(45,700)

 

Net cash (used in) provided by operating activities

 

 

(16,799,850)

 

 

507,100

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(284,100)

 

 

(382,300)

 

Purchases of internal use software licenses eligible for capitalization

 

 

(1,179,000)

 

 

(808,300)

 

Net cash used in investing activities

 

 

(1,463,100)

 

 

(1,190,600)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net borrowings from revolving line of credit

 

 

13,278,600

 

 

 —

 

Proceeds from note receivable

 

 

38,250

 

 

 —

 

Payments of debt issuance costs

 

 

 —

 

 

(113,400)

 

Payments on long-term debt

 

 

(13,300)

 

 

(1,888,100)

 

Proceeds from issuance of common stock

 

 

76,400

 

 

68,300

 

Cash dividends paid

 

 

(3,346,600)

 

 

(3,323,700)

 

Purchases of treasury stock and repurchases of stock from employees

 

 

(64,800)

 

 

(187,600)

 

Net cash provided by (used in) financing activities

 

 

9,968,550

 

 

(5,444,500)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(8,294,400)

 

 

(6,128,000)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

8,540,100

 

 

16,882,800

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$

245,700

 

$

10,754,800

 

 

See accompanying notes.

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TESSCO Technologies Incorporated 

Notes to Unaudited Consolidated Financial Statements

 

Note 1. Description of Business and Basis of Presentation

 

TESSCO Technologies Incorporated, a Delaware corporation (TESSCO, we, or the Company), architects and delivers innovative product and value chain solutions to support wireless 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. Approximately 98% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange. Almost all of the Company’s sales are made in United States Dollars.

 

In management’s opinion, the accompanying interim consolidated 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 United States Securities and Exchange Commission (“SEC”). 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 consolidated 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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 26, 2017.

 

 

 

Note 2. Recently Issued Accounting Pronouncements

 

Recently issued accounting pronouncements not yet adopted:

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede Topic 605, Revenue Recognition, in addition to other industry specific guidance, once effective. The new standard requires a company to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which revised the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not prior to periods beginning after December 15, 2016 (i.e. the original adoption date per ASU 2014-09). In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects of the principal-versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. The Company continues to assess the impact this new

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standard may have on its ongoing financial reporting. The Company has identified its revenue streams both by contract and product type and is assessing each for potential impacts. For the revenue streams assessed, the Company does not anticipate a material impact in the timing or amount of revenue recognized.  The Company may be required to adjust its accounting for its returns reserve. However, as the Company’s returns have historically been less than 3% of revenue and this change would only affect the balance sheet, the Company does not expect this to have a material impact on the Financial Statements. Based on this ongoing assessment, the Company intends to adopt the standard on a modified retrospective basis on April 1, 2018, the first day of fiscal 2019.

 

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.

 

In August 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard will change the classification of certain cash payments and receipts within the cash flow statement. Specifically, payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums paid, and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued interest, will now be classified as financing activities. Previously, these payments were classified as operating expenses. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted, and will be applied retrospectively. The Company does not expect that the adoption of this new standard will have a material impact on its Consolidated Financial Statements.

 

 

Recently issued accounting pronouncements adopted:

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation. The new standard modified several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. One provision within this pronouncement requires that excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of income, rather than within additional paid-in capital on the balance sheet. The Company adopted this provision in the first quarter of fiscal 2018. The adoption of this provision was applied prospectively. The impact to the Company's results of operations related to this provision in the first six months of fiscal 2018 was an increase in the provision for income taxes of $0.04 million, and a 0.9% higher effective tax rate than if the standard had not been adopted. There was no impact on the second quarter of fiscal 2018, as we had no stock issuances this quarter. The impact of this provision on the Company's future results of operations will depend in part on the market prices for the Company's shares on the dates there are taxable events related to share awards, but is not expected to be material. In connection with another provision within this pronouncement, the Company has elected to account for forfeitures as they occur rather than estimate expected forfeitures, with the change being applied prospectively. The Company does not expect this or other provisions within the pronouncement to have a material impact on its financial statements.

 

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In December 2016, the FASB issued ASU No. 2016-19, “Technical Corrections and Improvements”. Among other things, the ASU provides clarification on the presentation of the costs of computer software developed or obtained for internal use. The Company retrospectively adopted the ASU in the three months ended June 25, 2017 and reclassified the carrying value of internal-use computer software from Property, plant and equipment, net to Intangible assets, net. The net carrying value of internal-use computer software was $4.4 million and $4.3 million, respectively, as of September 24, 2017 and March 26, 2017.

 

 

Note 3. Stock-Based Compensation

 

The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 24, 2017 includes $254,300 and $501,900, respectively, of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 25, 2016 include $76,600 and $192,400, respectively, of non-cash stock-based compensation expense. Stock-based compensation expense is primarily related to our Performance Stock Units (PSUs), Restricted Stock Units (RSUs) and Stock Options, granted or outstanding under our Third Amended and Restated Stock and Incentive Plan (the “1994 Plan”).

 

Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the 1994 Plan, for the first six months of fiscal 2018:

 

 

 

 

 

 

 

 

 

 

    

Six Months

    

Weighted

 

 

 

 

Ended 

 

Average Fair

 

 

 

 

September 24,

 

Value at Grant

 

 

 

 

2017

 

Date (per unit)

 

 

Unvested shares available for issue under outstanding PSUs, beginning of period

 

170,100

 

$

11.17

 

 

PSU’s Granted

 

86,000

 

 

12.67

 

 

PSU’s Vested

 

(7,600)

 

 

19.58

 

 

PSU’s Forfeited/Cancelled

 

(168,500)

 

 

10.85

 

 

Unvested shares available for issue under outstanding PSUs, end of period

 

80,000

 

$

12.67

 

 

 

During fiscal 2018, the Compensation Committee of our Board of Directors, with concurrence of the full Board of Directors, granted PSUs to select key employees, providing them with the opportunity to earn up to 86,000 shares of the Company’s common stock in the aggregate, depending upon whether and to the extent which certain earnings per share targets and other Company and individual performance metrics are met. These not-yet-earned PSUs have a one-year measurement period (fiscal 2018), and assuming the performance metrics are met to a sufficient extent, any shares earned at the end of fiscal 2018 will vest and be issued ratably on or about May 1 of 2018, 2019, 2020 and 2021, provided that the respective employees remain employed by or associated with the Company on each such date.

 

The PSUs cancelled during fiscal 2018 primarily related to the fiscal 2017 grant of PSUs, which had a one year measurement period (fiscal 2017). The PSUs were cancelled because the minimum applicable fiscal 2017 performance targets were not attained. Per the 1994 Plan, the shares related to these forfeited and cancelled PSUs were added back to the 1994 Plan and became available for future issuance under the 1994 Plan.

 

If all PSUs granted thus far in fiscal 2018 are assumed to be earned on account of the applicable performance metrics being fully met, total unrecognized compensation costs on these PSUs would be approximately $0.8 million, as of September 24, 2017, and would be expensed through fiscal 2021. To the extent the maximum number of PSUs granted in fiscal 2018 is not earned, stock-based compensation related to these awards will differ from this amount.

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Restricted Stock Units: The Company has made annual restricted stock unit (RSU) awards under the 1994 Plan to its non-employee directors over recent years. On May 10, 2017, the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of 18,000 RSUs, ratably to the five non-employee directors of the Company, and to Mr. Barnhill. These awards provide for the issuance of shares of the Company’s common stock in accordance with a four-year annual vesting schedule, following the date of grant, provided that the director remains associated with the Company (or meets other criteria as prescribed in the applicable award agreement) on each anniversary date.

 

On August 8, 2017, the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of up to 56,000 RSUs to several senior executives. The number of shares earned by a recipient will be determined by multiplying the number of RSUs covered by the award by a fraction, the numerator of which is the cumulative amount of dividends (regular, ordinary and special) declared and paid, per share, on the Common Stock, if any, over an earnings period of up to four years, and the denominator of which is $3.20. Subject to earlier issuance upon the occurrence of certain events (as described in the applicable award agreement), any earned shares are issued and distributed to the recipient upon the fourth anniversary of the award date.

 

As of September 24, 2017, there was approximately $1.0 million of total unrecognized compensation cost related to all outstanding RSUs, assuming all shares are earned. Unrecognized compensation costs are expected to be recognized ratably over a weighted average period of approximately three years.

 

PSUs and RSUs are expensed based on the grant date fair value, calculated as the closing price of TESSCO common stock as reported by NASDAQ on the date of grant minus the present value of dividends expected to be paid on the common stock before the award vests, because dividends or dividend-equivalent amounts do not accrue and are not paid on unvested PSUs and RSUs.

 

As discussed in Note 2, the Company will now account for forfeitures as they occur rather than estimate expected forfeitures. To the extent that forfeitures occur, stock based compensation related to the restricted awards may be different from the Company’s expectations.

 

Stock Options: Following the initiation of our PSU award program for fiscal 2005, our Compensation Committee only occasionally employed stock options as an element of incentive compensation, but after more recently reevaluating its approach to executive compensation, has concluded that grants or awards of stock options are appropriate as a retention and recruiting tool, and beginning in fiscal 2016 has increased the number and frequency of stock option awards, primarily to senior management.  As summarized below, in the first six months of fiscal 2018, stock options for an aggregate of 210,000 shares of common stock were awarded, all under the 1994 Plan. These stock options have exercise prices equal to the market price of the Company’s stock on the grant date, and the terms thereof provide for 25% vesting after one year and then 1/36 per month over the following three years. The grant date value of the Company’s stock options is determined using the Black-Scholes-Merton pricing model, based upon facts and assumptions existing at the date of grant.

 

The value of each option at the date of grant is amortized as compensation expense over the service period. This occurs without regard to subsequent changes in stock price, volatility, or interest rates over time, provided the option remains outstanding.

 

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The following tables summarize pertinent information for outstanding options.

 

 

 

 

 

 

 

 

 

    

Six Months

    

Weighted

 

 

 

Ended 

 

Average Fair

 

 

 

September 24,

 

Value at Grant

 

 

 

2017

 

Date (per unit)

 

Unvested options, beginning of period

 

395,000

 

$

1.96

 

Options Granted

 

210,000

 

 

2.38

 

Options Vested

 

(70,000)

 

 

2.03

 

Options Forfeited/Cancelled

 

 —

 

 

 —

 

Unvested options, end of period

 

535,000

 

$

2.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 24, 2017

Grant Fiscal Year

 

Options Granted

 

 

Option Exercise Price

 

Options Outstanding

 

Options Exercisable

2018

 

210,000

 

$

14.62

 

210,000

 

 -

2017

 

410,000

 

$

12.57

 

360,000

 

62,500

2016

 

100,000

 

$

22.42

 

60,000

 

32,500

Total

 

 

 

 

 

 

630,000

 

95,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant Fiscal Year

 

Expected Stock Price Volatility

 

Risk-Free Interest rate

 

Expected Dividend Yield

 

Average Expected Term

 

Resulting Black Scholes Value

2018

 

32.34

%

 

1.92

%

 

5.47

%

 

4.0

 

$

2.38

2017

 

32.85

%

 

1.32

%

 

6.30

%

 

4.0

 

$

1.85

2016

 

26.40

%

 

1.67

%

 

3.50

%

 

4.0

 

$

3.43

 

As of September 24, 2017, there was approximately $1.0 million of total unrecognized compensation costs, related to these awards. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately four years. 

 

 

Note 4. Borrowings Under Revolving Credit Facility

 

On June 24, 2016, the Company and its primary operating subsidiaries entered into a Credit Agreement (the “Credit Agreement”) with SunTrust Bank, as Administrative Agent and Lender, and Wells Fargo Bank, National Association, as a Lender, for a senior asset based secured revolving credit facility of up to $35 million (the “Revolving Credit Facility”). This replaced the Company’s previously existing $35 million unsecured revolving credit facility with both SunTrust Bank and Wells Fargo Bank, National Association, which had no outstanding principal balance at the time of replacement. The replacement Revolving Credit Facility included terms providing for its maturity after five years, on June 24, 2021, and for a $5.0 million sublimit for the issuance of standby letters of credit and a $10.0 million sublimit for swing line loans. Borrowing Availability under the replacement Revolving Credit Facility as it was initially established is determined in part in accordance with a Borrowing Base, defined in the Credit Agreement, generally, as 85% of Eligible Receivables minus Reserves. The Credit Agreement also set forth financial covenants, including a fixed charge coverage ratio that must be maintained at any time during which the borrowing availability, as determined in accordance with and subject to the terms of the Credit Agreement, falls below $10 million, as well as terms that could limit the Company’s ability to engage in specified transactions or activities, including (but not limited to) investments

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and acquisitions, sales of assets, payment of dividends, issuance of additional debt and other matters. Capitalized terms used but not otherwise defined in this Note have the meanings ascribed to each in the Credit Agreement or in the Amended and Restated Credit Agreement (discussed below), as applicable.

 

Borrowings initially accrue interest from the applicable borrowing date, generally at the Eurodollar Rate plus an Applicable Margin ranging from 1.5% to 1.75%.  On September 24, 2017, the interest rate applicable to borrowings under the replacement Revolving Credit Facility was 2.99%. Under certain circumstances, the applicable interest rate may change from the Eurodollar Rate plus the Applicable Margin to the Base Rate plus the Applicable Margin. Borrowings may be used for working capital and other general corporate purposes, and as further provided in, and subject to the applicable terms of, the Credit Agreement. As of September 24, 2017, borrowings under this Revolving Credit Facility totaled $13.3 million and, therefore, the Company had $21.7 million available, subject to the Borrowing Base limitation and compliance with the other applicable terms of the Credit Agreement, including the covenants referenced above. The line of credit has a lockbox arrangement associated with it and therefore the outstanding balance is classified as a current liability on our balance sheet.  As of March 26, 2017, the Company had a zero balance on the Revolving Credit Facility.

 

Pursuant to a related Guaranty and Security Agreement by and among the Company, the other borrowers under the Credit Agreement and other subsidiaries of the Company, who are referred to collectively as the Loan Parties, and SunTrust Bank, as Administrative Agent, the Loan Parties’ obligations, which include the obligations under the Credit Agreement, are guaranteed by those Loan Parties which are not otherwise borrowers, and secured by continuing first priority security interests in the Company’s and the other Loan Parties’ (including both borrowers and guarantors) inventory, accounts receivable and deposit accounts, and in all documents, instruments, general intangibles, letter of credit rights and chattel paper, in each case to the extent relating to inventory and accounts, and in all proceeds of the foregoing. The security interests are granted in favor of the Administrative Agent, for the benefit of the Lenders party to the Credit Agreement from time to time.  The obligations secured also include certain other obligations of the Loan Parties to the Lenders and their affiliates arising from time to time, relating to swaps, hedges and cash management and other bank products.

 

Effective July 13, 2017, the Company and its primary operating subsidiaries, as co-borrowers, and SunTrust Bank, as Administrative Agent and Lender, and Wells Fargo Bank, National Association, as a Lender, entered into a First Amendment to Credit Agreement (the “First Amendment”), to amend select terms of the Credit Agreement. Pursuant to the First Amendment, the term “Availability” as used in the Credit Agreement was amended for a period of time ending no later than October 31, 2017, to allow for the inclusion of an additional sum when calculating Availability for certain limited purposes. This additional sum equals the lesser of $10 million, and the amount by which the Borrowing Base exceeds $35 million. This First Amendment did not increase the $35 million Aggregate Revolving Commitment Amount, but allowed the Company greater flexibility under the Credit Agreement for a limited period of time, until October 31, 2017, and was sought by the Company in response to business opportunities identified by the Company.

 

On October 19, 2017, the Company and its primary operating subsidiaries, as co-borrowers, and SunTrust Bank, as Administrative Agent and Lender, and Wells Fargo Bank, National Association, as a Lender, entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”). Pursuant to the Amended and Restated Credit Agreement, the Credit Agreement for the secured Revolving Credit Facility was amended and restated in order to, among other things, increase the Company’s borrowing limit from up to $35 million to up to $75 million.

In addition to expanding the Company’s borrowing limit, the Revolving Credit Facility maturity date was extended to October 19, 2021. The Amended and Restated Credit Agreement otherwise includes representations, warranties, affirmative and negative covenants (including restrictions) and other terms

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generally consistent with those applicable to the facility as existing prior to the execution and delivery of the Amended and Restated Credit Agreement, but with certain modifications. The Amended and Restated Credit Agreement provides for a $5.0 million sublimit for the issuance of standby letters of credit, a $12.5 million sublimit for swingline loans, and an accordion feature which, subject to certain conditions, could increase the aggregate amount of the commitments to up to $125 million, with the optional commitments being provided by existing Lenders or new lenders reasonably acceptable to the Administrative Agent. No Lender is obligated to increase its commitment. Availability continues to be determined in accordance with a Borrowing Base, which has been expanded to include not only Eligible Receivables but also Eligible Inventory and is generally: (A) the sum of (i) 85% of Eligible Receivables; (ii) the Inventory Formula Amount for all Eligible Inventory which is aged less than 181 days; and (iii) the lesser of (x) $4 million and (y) the Inventory Formula Amount for all Eligible Inventory which is aged at least 181 days; minus (B) Reserves. Upon closing, there was $23.4 million outstanding under the Amended and Restated Credit Agreement.

Like the secured Revolving Credit Facility as existing prior to execution and delivery of the Amended and Restated Credit Agreement, borrowings under the Amended and Restated Credit Agreement initially accrue interest from the applicable borrowing date at an Applicable Rate equal to the Eurodollar Rate plus the Applicable Margin. The Eurodollar Rate is the rate per annum obtained by dividing (i) LIBOR by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage. When the Applicable Rate is the Eurodollar Rate plus the Applicable Margin, the Applicable Margin is 1.50% if Average Availability is greater than or equal to $15 million, and 1.75% otherwise.  Under certain circumstances, the Applicable Rate is subject to change at the Lenders’ option from the Eurodollar Rate plus the Applicable Margin to the Base Rate plus the Applicable Margin.  Following an Event of Default, in addition to changing the Applicable Rate to the Base Rate plus the Applicable Margin, the Lenders’ may at their option set the Applicable Margin at 0.50% if the Base Rate applies or 1.75% if the Eurodollar Rate applies, and increase the Applicable Rate by an additional 200 basis points. The Applicable Rate adjusts on the first Business Day of each calendar month.  The Company is required to pay a monthly Commitment Fee on the average daily unused portion of the Revolving Credit Facility provided for pursuant to the Amended and Restated Credit Agreement, at a per annum rate equal to 0.25%.

In connection with the entering into of the Amended and Restated Credit Agreement, the Company and other Loan Parties executed and delivered to SunTrust Bank, as Administrative Agent, a Reaffirmation Agreement, pursuant to which the obligations of the Loan Parties under the Guaranty and Security Agreement delivered by them in connection with the secured credit facility as previously existing (including the previously existing guaranty by the Loan Parties not otherwise Borrowers and the previously existing grant by the Company and the other Loan Parties of a continuing first priority security interest in inventory, accounts receivable and deposit accounts, and on all documents, instruments, general intangibles, letter of credit rights, and all proceeds) were ratified and confirmed as respects the Obligations arising under the Amended and Restated Credit Facility from time to time. 

 

 

 

 

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Note 5. Fair Value Disclosure

 

Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

 

·

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

·

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, and quoted prices for identical or similar assets or liabilities in markets that are not active.

·

Level 3: Unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions about the inputs used in pricing the asset or liability.

 

The Company had no assets or liabilities required to be measured at fair value as of June 25, 2017, or as of March 26, 2017.

 

The carrying amounts of cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses and other current liabilities approximate their fair values as of June 25, 2017, or as of March 26, 2017, due to their short-term nature.    

 

 

Note 6. Income Taxes

 

As of September 24, 2017, the Company had a gross amount of unrecognized tax benefits of $206,300 ($133,800 net of federal benefit).  As of March 26, 2017, the Company had a gross amount of unrecognized tax benefits of $204,500 ($147,800 net of federal benefit).

 

The Company’s accounting policy with respect to interest and penalties related to tax uncertainties is to classify these amounts as part of the provision for income taxes. The total amount of interest and penalties related to tax uncertainties recognized in the consolidated statement of income for the first six months of fiscal 2018 was an expense of $24,200 (net of federal benefit). The cumulative amount included in the consolidated balance sheet as of September 24, 2017 was $353,900 (net of federal benefit). The total amount of interest and penalties related to tax uncertainties recognized in the consolidated statement of income for the first six months of fiscal 2017 was an expense of $27,000 (net of federal benefit). The cumulative amount of interest and penalties included in the consolidated balance sheet as of March 26, 2017 was $314,300 (net of federal benefit).

 

A reconciliation of the changes in the gross balance of unrecognized tax benefits, excluding interest, is as follows:

 

 

 

 

 

 

 

    

 

    

 

Beginning balance at March 26, 2017 of unrecognized tax benefit

 

$

204,500

 

Increases related to current period tax positions

 

 

1,800

 

Reductions as a result of a lapse in the applicable statute of limitations

 

 

 —

 

Ending balance at September 24, 2017 of unrecognized tax benefits

 

$

206,300

 

 

The Company has adopted Accounting Standards Updated No. 2016-09 Topic 718, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), effective as of March 27, 2017.  The new guidance requires all of the tax effects related to share-based payments to be recognized through the income statement and is effective for public entities for annual and interim reporting periods beginning after December 15,

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2016.  We will treat the tax effects of share-based compensation awards as discrete items in the interim reporting periods in which the windfalls or shortfalls occurred.  As a result of the adoption of the ASU 2016-09, the effective rate is 0.9% higher than if the ASU 2016-09 was not adopted for the six months ended September 24, 2017.  

 

 

Note 7. Earnings Per Share

 

The Company presents the computation of earnings per share (“EPS”) on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted earnings per share are computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common shares are excluded from the calculation if they are determined to be anti-dilutive. At September 24, 2017, stock options with respect to 630,000 shares of common stock were outstanding, of which 290,000 were anti-dilutive. At September 25, 2016, stock options with respect to 330,000 shares of common stock were outstanding, all of which were anti-dilutive. There were no anti-dilutive PSUs or RSUs outstanding as of September 24, 2017 or September 25, 2016, respectively.

 

Note 8. Business Segments

 

Beginning with the first quarter of fiscal year 2018, the Company modified the structure of its internal organization in an effort to better serve the market place. Retail inventory typically has a shorter more defined life cycle and is, typically, ultimately used by individual end users. Commercial inventory typically has a life cycle that tends to be tied to changes in regulation or technology and includes products typically used by business entities or governments. Reflective of these differences, our sales and product teams have been reorganized and will each now report to either a retail or commercial leader. The Company concluded that corresponding changes to its reportable segments are warranted and now evaluates its business within two segments: commercial and retail. The commercial segment consists of the following customer markets:  (1) public carriers, that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; (2) government including federal agencies and state and local governments that run wireless networks for their own use as well as value-added resellers who specialize in selling to the government;  (3) private system operators including commercial entities such as enterprise customers, major utilities and transportation companies; and (4) value-added resellers that sell, install and/or service cellular telephone, wireless networking, broadband and two-way radio communications equipment primarily for the enterprise market. The retail segment consists of the market which includes retailers, independent dealer agents and carriers. All prior financial periods presented in this Quarterly Report on Form 10-Q reflect this change.

 

During the first quarter of fiscal year 2018, in conjunction with the, modification of the structure of the internal organization of the Company, as described above, the Company reviewed several customer types, including a large repair center customer, and reclassified them from the private system operators market to either the value-added resellers market or the retail market, based on their purchase history. The Company has restated prior periods reflected in this Quarterly Report on Form 10-Q to reflect these changes.

 

The Company evaluates goodwill at the reporting unit level. In conjunction with the change in segments, the Company evaluated its goodwill using Level 3 fair value input, and no impairment indicators were identified.

 

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To provide investors with better visibility, the Company also discloses revenue and gross profit by its four product categories:

 

·

Base station infrastructure products are used to build, repair and upgrade wireless telecommunications systems. Products include base station antennas, cable and transmission lines, small towers, lightning protection devices, connectors, power systems, miscellaneous hardware, and mobile antennas. Base station infrastructure service offerings include connector installation, custom jumper assembly, site kitting and logistics integration.

 

·

Network systems products are used to build and upgrade computing and internet networks.  Products include fixed and mobile broadband equipment, distributed antenna systems (DAS), wireless networking, filtering systems, two-way radios and security and surveillance products.  This product category also includes training classes, technical support and engineering design services. 

 

·

Installation, test and maintenance products are used to install, tune, maintain and repair wireless communications equipment. Products include sophisticated analysis equipment and various

frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware, GPS, safety and replacement and component parts and supplies required by service technicians.  

 

·

Mobile device accessories include cellular phone and data device accessories such as replacement batteries, cases, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas, music accessories and data and memory cards. Retail merchandising displays, promotional programs, customized order fulfillment services and affinity-marketing programs, including private label internet sites, complement our mobile devices and accessory product offering.

 

The Company evaluates revenue, gross profit, and income before provision for income taxes at the segment level.  Certain cost of sales and other applicable expenses have been allocated to each segment based on a percentage of revenues and/or gross profit, where appropriate.

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Segment activity for the second quarter and first six months of fiscal years 2018 and 2017 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 24, 2017

 

September 25, 2016

 

 

 

Commercial

 

Retail

 

 

 

 

Commercial

 

Retail

 

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

Revenues

    

 

    

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

Public Carrier

 

$

27,423

 

$

 —

 

$

27,423

 

$

18,532

 

$

 

 

$

18,532

 

Government

 

 

11,025

 

 

 —

 

 

11,025

 

 

8,990

 

 

 

 

 

8,990

 

Private System Operators

 

 

24,207

 

 

 —

 

 

24,207

 

 

20,990

 

 

 

 

 

20,990

 

Value-Added Resellers

 

 

34,951

 

 

 —

 

 

34,951

 

 

33,409

 

 

 

 

 

33,409

 

Retail

 

 

 —

 

 

47,478

 

 

47,478

 

 

 

 

 

52,713

 

 

52,713

 

Total revenues

 

$

97,606

 

$

47,478

 

$

145,084

 

$

81,921

 

$

52,713

 

$

134,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public Carrier

 

$

3,777

 

$

 —

 

$

3,777

 

$

3,236

 

$

 

 

$

3,236

 

Government

 

 

2,412

 

 

 —

 

 

2,412

 

 

2,092

 

 

 

 

 

2,092

 

Private System Operators

 

 

5,054

 

 

 —

 

 

5,054

 

 

4,613

 

 

 

 

 

4,613

 

Value-Added Resellers

 

 

8,942

 

 

 —

 

 

8,942

 

 

9,223

 

 

 

 

 

9,223

 

Retail

 

 

 —

 

 

9,738

 

 

9,738

 

 

 

 

 

9,592

 

 

9,592

 

Total gross profit

 

$

20,185

 

$

9,738

 

$

29,923

 

$

19,164

 

$

9,592

 

$

28,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directly allocable expenses

 

 

7,796

 

 

3,716

 

 

11,512

 

 

7,910

 

 

4,240

 

 

12,150

 

Segment net profit contribution

 

$

12,389

 

$

6,022

 

 

18,411

 

$

11,254

 

$

5,352

 

 

16,606

 

Corporate support expenses

 

 

 

 

 

 

 

 

15,319

 

 

 

 

 

 

 

 

14,577

 

Income before provision for income taxes

 

 

 

 

 

 

 

$

3,092

 

 

 

 

 

 

 

$

2,029

 

 

16


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

September 24, 2017

 

September 25, 2016

 

 

 

 

 

Commercial

 

Retail

 

 

 

Commercial

 

Retail

 

 

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

 

 

Revenues

    

 

    

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

 

 

Public Carrier

 

$

54,021

 

$

 —

 

$

54,021

 

$

35,110

 

$

 —

 

$

35,110

 

 

 

Government

 

 

19,470

 

 

 —

 

 

19,470

 

 

18,842

 

 

 —

 

 

18,842

 

 

 

Private System Operators

 

 

45,249

 

 

 —

 

 

45,249

 

 

41,295

 

 

 —

 

 

41,295

 

 

 

Value-Added Resellers

 

 

69,990

 

 

 —

 

 

69,990

 

 

67,700

 

 

 —

 

 

67,700

 

 

 

Retail

 

 

 —

 

 

96,364

 

 

96,364

 

 

 —

 

 

100,547

 

 

100,547

 

 

 

Total revenues

 

$

188,730

 

$

96,364

 

$

285,094

 

$

162,947

 

$

100,547

 

$

263,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public Carrier

 

$

7,905

 

$

 —

 

$

7,905

 

$

6,253

 

$

 —

 

$

6,253

 

 

 

Government

 

 

4,416

 

 

 —

 

 

4,416

 

 

4,232

 

 

 —

 

 

4,232

 

 

 

Private System Operators

 

 

9,661

 

 

 —

 

 

9,661

 

 

9,179

 

 

 —

 

 

9,179

 

 

 

Value-Added Resellers

 

 

17,903

 

 

 —

 

 

17,903

 

 

18,506

 

 

 —

 

 

18,506

 

 

 

Retail

 

 

 —

 

 

19,205

 

 

19,205

 

 

 —

 

 

17,692

 

 

17,692

 

 

 

Total gross profit

 

$

39,885

 

$

19,205

 

$

59,090

 

$

38,170

 

$

17,692

 

$

55,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directly allocable expenses

 

 

16,318

 

 

7,466

 

 

23,784

 

 

16,245

 

 

7,758

 

 

24,003

 

 

 

Segment net profit contribution

 

$

23,567

 

$

11,739

 

 

35,306

 

$

21,925

 

$

9,934

 

 

31,859

 

 

 

Corporate support expenses

 

 

 

 

 

 

 

 

30,997

 

 

 

 

 

 

 

 

29,691

 

 

 

Income before provision for income taxes

 

 

 

 

 

 

 

$

4,309

 

 

 

 

 

 

 

$

2,168

 

 

 

 

Supplemental revenue and gross profit information by product category for the second quarter and first six months of fiscal years 2018 and 2017 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

September 24, 2017