ANNUAL
REPORT
FY 2019
NASDAQ: TESS
We remove complexity for customers and suppliers
by offering far more than product and credit lines.
We do this by applying extensive product technology
and industry knowledge, creative problem solving,
unsurpassed program management and efficient
operations to help our suppliers and customers win
new business.
Wireless technology takes an entire community
to make it accessible and usable for companies,
consumers, and first responders. Everything we do
is intended to enable our suppliers and customers
to maximize their growth and optimize profitability.
As a result, we provide our shareholders a unique
and efficient way to invest in this rapidly growing
and dynamic industry.
Tessco, Our Customers, Our Suppliers, Our Investors
R E A C H I N G N E W H E I G H T S
TO GETHER
“
Tessco has the experience, expertise, vision, and proven operational
excellence to enable our customers to effectively and efficiently
deliver wireless solutions to an increasingly connected world.
“
M U R R A Y W R I G H T
CEO & PRESIDENT
TO OUR SHAREHOLDERS,
We are seeing more excitement around wireless technologies than at any time since the initial launch of
the iPhone. We believe we have reached an inflection point with the emergence of technologies, each
with the ability to fundamentally change the industry and the world around us. Whether it is the impact of
5G on the speed of communication, the ability of consumers to instantly download massive amounts of
content, the power of IoT to help manufacturing plants run more efficiently, the potential for homeowners to
monitor security systems remotely, or the capacity for CBRS to enable broader access to wireless spectrum,
advancements in wireless technologies are rapid and pervasive.
While no one knows for certain how fast these technologies will become ubiquitous, Tessco has the
experience and knowledge and is in a unique position to capitalize on the growth of these significant
trends. I am proud of the progress we have made on a number of our strategic initiatives and our improved
customer focus. We are confident this is creating the right framework for long-term success and continued
growth. Some of these initiatives include:
Increased Sales Force Efficiency and Scalability. Re-engineering our salesforce and our go-to-market
strategy provided stronger engagement with our customers, better alignment with our supplier partners, and
greater leverage of each member of our sales team.
Focus on Business Development. As we look to expand into new channels and markets, we added
dedicated resources in both our commercial and retail businesses. We expect these investments to drive
new customer wins and growth in previously unserved or underserved channels.
Deployment of Targeted Technology Tools. We completed or initiated a number of technology
advancements that are expected to have a positive effect on our business. These include improvements
to our network infrastructure and to Tessco.com and OASIS (our proprietary customer project management
tool), initiation of a new data-driven pricing system, the addition of state-of-the-art marketing tools, and
enhancements to our Salesforce.com platform.
Enhanced Supplier Relationships. As we seek to become a more efficient company, our team has worked hard
to enhance our alignment with select suppliers, enabling us to provide better coverage to our customers, while
simultaneously improving our purchasing power, increasing turns and reducing excess inventory.
Improved Product Breadth and Margin. Ventev®, our proprietary brand, extends our product mix by
providing customized wireless infrastructure solutions and leading-edge mobile device accessories. This
enables Tessco to offer solutions tailored to specific customer requirements while improving profit margins.
Investment in Our People and Community. Achieving our plans requires a high-performing team to reach
their potential, and we are investing accordingly. We implemented initiatives to support diversity and
inclusion, professional and leadership development, community involvement, and participation in and
support of charitable causes in FY 2019 and will continue to do so in FY 2020 and in the years to come.
Tessco is Positioned to Capitalize on Future Opportunities
We believe our accomplishments over this past fiscal year will lead to above-market,
top-line growth and provide efficiencies for increased profitability in the future.
Many market forecasts, and our own research, indicate that we are on the cusp of several years of double-
digit wireless ecosystem growth. We expect opportunities in our Commercial segment will remain robust
as 5G, CBRS, and IoT proliferate in the marketplace. Throughout FY 2020, we expect the Public Carrier
business will continue to benefit from FirstNet, the nationwide wireless broadband public safety network.
We also anticipate increased 5G spending to begin later in FY 2020. The VAR and Integrator business
are expected to continue to benefit from the growth in IoT this year and the commencement of CBRS
installations.
Despite ongoing volatility in the retail market, we are focused on taking a greater share of the estimated
$9 billion North American mobile accessory market by aggressively pursuing new channels, introducing
innovative services and technologies, and targeting emerging and top brands to complement our existing
product categories.
Tessco is on a mission – focused on participating in the industry’s growth while continuing to gain market
share. Our team is energized and confident in our plans to capitalize on these exciting opportunities in FY
2020 and beyond.
I would like to thank our shareholders, customers and suppliers for their continued support. I also want
to thank the entire Tessco team for their dedication and commitment to the Company’s success. We look
forward to reaching new heights together in FY 2020.
Sincerely,
M U R R A Y W R I G H T
CEO & PRESIDENT
June 12, 2019
Leadership
Directors
Robert B. Barnhill, Jr.
Chairman of the Board,
TESSCO Technologies Incorporated
Jay G. Baitler
Former Executive Vice President of Staples, Inc.,
Contract Division
John D. Beletic
Former Partner, Oak Capital Partners
Paul J. Gaffney
Executive Vice President & Chief Technology Officer
of Dick’s Sporting Goods
Benn R. Konsynski, Ph.D.
George S. Craft Professor of Business Administration
for Information Systems and Operations Management
at the Goizueta Business School of Emory University
Dennis J. Shaughnessy
Retired Chairman of the Board of FTI Consulting Inc.
Murray Wright
President and Chief Executive Officer
of TESSCO Technologies Incorporated
Morton F. Zifferer, Jr.
Chairman and CEO of New Standard Corporation,
a metal products manufacturer
Officers
Murray Wright
President & Chief Executive Officer
Joseph M. Cawley, Jr.
Senior Vice President & Chief Information Officer
Charles W. Kriete
Senior Vice President of Commercial Sales,
Product Marketing & Supply Chain
Douglas A. Rein
Senior Vice President of Performance Systems
& Operations
Elizabeth S. Robinson
Senior Vice President of Retail Sales & Product
Marketing
Aric M. Spitulnik
Senior Vice President and Chief Financial Officer
Michael J. Chase
Vice President
Jeffrey L. Shockey
Vice President
James R. Gaarder
Vice President
Matthew Simmons
Vice President
Cynthia L. King
Vice President
Mary Beth Smith
Vice President
James B. Markisohn
Vice President
David E. Strauss
Vice President
Tammy S. Ridgely
Vice President
Shareowner Information
Annual Meeting
The Annual Meeting of Shareowners of TESSCO Technologies Incorporated is scheduled
to be held at 9:00 a.m. ET, Thursday, July 25, 2019 at:
TESSCO Technologies Incorporated
375 West Padonia Road
Timonium, MD 21093
Investor Relations
Analysts, investors and shareowners seeking additional information about TESSCO Technologies Incorporated
are invited to contact:
Sharon Merrill
77 Franklin Street
Boston, MA 02110
Telephone: 617.542.5300
Facsimile: 617.423.7272
Internet: www.investors.com
Aric M. Spitulnik
375 West Padonia Road
Timonium, MD 21093
Telephone: 410.229.1419
Facsimile: 410.229.1669
Email: spitulnik@tessco.com
A copy of the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange
Commission is available without charge on the SEC website, www.sec.gov, or upon request to the address above.
TESSCO on NASDAQ
Tessco’s common stock trades
on the NASDAQ Global Market
under the symbol TESS.
Transfer Agent & Registrar
EQ Shareowner Services
P.O. Box 64874
Saint Paul, MN 55164
Corporate Counsel
Ballard Spahr LLP
Baltimore, MD
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Baltimore, MD
Corporate Governance
The highest ethical standards have always been integral to Tessco’s culture and business success. Each director,
officer and team member is expected to observe the highest standards of ethical behavior in the performance of
his or her duties for the Company. The Company’s Code of Business Conduct and Ethics can be found in the
Investors section of our website, www.tessco.com. From a corporate governance perspective, our eight member
Board of Directors includes six independent directors. The four standing committees of the Board of Directors are
comprised of independent directors with the exception of Mr. Barnhill, who is a member of the Risk and Strategy
Committee. In addition, each of the four committees is chaired by an independent director. Tessco is an
Affirmative Action-Equal Opportunity Employer M/F/D/V.
Forward-Looking Statements
This Annual Report contains certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, all of which are based on current expectation. These forward-looking statements
may generally be identified by the use of the words "may," "will," "expects," "anticipates," “targets,” “goals,”
“projects,” “intends,” “plans,” “seeks,” "believes," "estimates," and similar expressions, but the absence of these
words or phrases does not necessarily mean that a statement is not forward-looking. These forward-looking
statements are only predictions and involve a number of risks, uncertainties and assumptions, many of which are
outside of our control. Our actual results may differ materially and adversely from those described in or
contemplated by any such forward-looking statement for a variety of reasons, including those risks identified in
our most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange
Commission (the “SEC”), under the heading "Risk Factors" and otherwise. Consequently, the reader is cautioned
to consider all forward-looking statements in light of the risks to which they are subject.
We are not able to identify or control all circumstances that could occur in the future that may adversely affect our
business and operating results. Without limiting the risks that we describe in our periodic reports and elsewhere,
among the risks that could lead to a materially adverse impact on our business or operating results are the
following: termination or non-renewal of limited duration agreements or arrangements with our suppliers and
affinity partners which are typically terminable by either party upon several months or otherwise relatively short
notice; loss of significant customers, suppliers or relationships, including affinity relationships; loss of customers or
reduction in customer business either directly or indirectly as a result of consolidation among large wireless
service carriers and others within the wireless communications industry; any deterioration in the strength of our
customers', suppliers' or affinity partners' businesses; negative or adverse economic conditions, including those
adversely affecting consumer confidence or consumer or business spending or otherwise adversely affecting our
suppliers or customers, including their access to capital or liquidity, or our customers' demand for, or ability to
fund or pay for, the purchase of our products and services; our dependence on a relatively small number of
suppliers and suppliers, which could hamper our ability to maintain appropriate inventory levels and meet
customer demand; changes in customer and product mix that affect gross margin; effect of “conflict minerals”
regulations on the supply and cost of certain of our products; failure of our information technology system or
distribution system; or our inability to maintain or upgrade our technology or telecommunication systems without
undue cost, incident or delay; exposure to cyber-attacks, and the cost associated with ongoing efforts to maintain
cyber-security measures and to meet applicable compliance standards; damage or destruction of our distribution
or other facilities; prolonged or otherwise unusual quality or performance control problems; technology changes
in the wireless communications industry or technological failures, which could lead to significant inventory
obsolescence or devaluation and/or our inability to offer key products that our customers demand; third-party
freight carrier interruption; increased competition from competitors, including manufacturers or national and
regional distributors of the products we sell and the absence of significant barriers to entry which could result in
pricing and other pressures on profitability and market share; our relative bargaining power and inability to
negotiate favorable terms with our suppliers and customers; our inability to access capital and obtain or retain
financing as and when needed; transitional and other risks associated with acquisitions of companies that we may
undertake in an effort to expand our business; claims against us for breach of the intellectual property rights of
third parties; product liability claims; our inability to protect certain intellectual property, including systems and
technologies on which we rely; our inability to hire or retain for any reason our key professionals, management
and staff; changes in political and regulatory conditions, including tax and trade policies; and the possibility that,
for unforeseen or other reasons, we may be delayed in entering into or performing, or may fail to enter into or
perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or
anticipated savings.
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 2019
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
(State or other jurisdiction of
incorporation or organization)
11126 McCormick Road, Hunt Valley, Maryland
(Address of principal executive offices)
52-0729657
(I.R.S. Employer
Identification No.)
21031
(Zip Code)
Registrant’s telephone number, including area code (410) 229-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, $0.01 par value
Trading Symbol
TESS
Name of each exchange on which registered:
Na sdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Act). Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☒ Emerging growth 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 aggregate market value of Common Stock, $0.01 par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock as quoted on the
Na sdaq Global Market as of September 30, 2018, was $98,115,679.
The number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of May 24, 2019, was 8,513,119.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy Statement for the registrant’s 2019 Annual Meeting of Shareholders, scheduled to be
held July 25, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part
IV
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Schedule II : Valuation and Qualifying Accounts
Signatures
Exhibits, Financial Statement Schedule
2
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3
12
24
24
24
25
26
28
29
40
42
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68
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Table of Contents
Item 1. Business.
General
Part I
TESSCO Technologies Incorporated (which we sometimes refer to as “Tessco”, “we”, or the “Company”) is a value-
added technology distributor, manufacturer, and solutions provider serving commercial and retail customers in the wireless
infrastructure and mobile device accessories markets. The company was founded more than 30 years ago with a commitment to
deliver industry-leading products, knowledge, solutions, and customer service. Tessco supplies over 48,000 products from more
than 400 of the industry’s top manufacturers in mobile communications, Wi-Fi, Internet of Things, wireless backhaul, and more.
Tessco is a single source for outstanding customer experience, expert knowledge, and complete end-to-end solutions for the
wireless industry.
Our customers include a diversified mix of carrier and public network operators, tower owners, program managers,
contractors, integrators, private system operators (including railroads, utilities, mining operators and oil and gas operators),
federal, state and local governments, manufacturers, value-added resellers, retail carrier stores and their independent agents, as
well as other local and national retailers. We currently serve an average of approximately 10,500 different customers per month.
We provide our customers with products, services, and solutions to help them support these primary applications:
First Responder Communications and FirstNet™
IoT (Internet of Things)
· Broadband
· DAS for In-Building Cellular and Public Safety Coverage
·
·
· Microwave
·
·
·
· Wi-Fi Networks
·
· Wireless Backhaul
· Mobile Devices and Accessories
Power Systems
Small Cell and Macro Cell Wireless Base Station Infrastructure
In-Vehicle and Mobile Communications
Test and Maintenance
We source and develop our product offering from leading manufacturers throughout the world, and also offer products
developed and manufactured under our own proprietary brand, Ventev
®
.
Our operational platform removes complexity for customers and suppliers by streamlining the management of the supply
chain and lowering total inventory and cost by providing guaranteed availability and complete, on-time delivery to the point of
use.
We began our “total source” operations in 1982, reincorporated as a Delaware corporation in 1987, and have been listed
on the Nasdaq Market (currently, Nasdaq Global Select) (symbol: TESS), since 1994. We operate under ISO 9001:2015 and TL
9000:2016 R(6) registrations.
For information regarding our website address and regarding material available free of charge through the website, see
the information appearing under the heading “Available Information” included in Item 7 to this Annual Report on Form 10-K for
the fiscal year ended March 31, 2019.
3
Table of Contents
Customers
The Company evaluates its business within two segments: commercial and retail. The commercial segment consists of the
following two customer markets: (1) public carriers that are generally responsible for building and maintaining the infrastructure
system and provide airtime service to individual subscribers; and (2) value-added resellers and integrators, which results from the
consolidation of our previously identified value-added resellers, government channels and private system operator markets, and
reflects implementation over the 2019 fiscal year of an enhanced go-to-market strategy. This go-to-market strategy and the
corresponding consolidation of these customer markets is designed to increase sales opportunities across the consolidated
markets, as well as to provide better coverage to customers and to better align territories with supplier partners. In conjunction
with our identification of the value-added resellers and integrators as a newly identified market, as described above, market
revenue and gross profit as reported for the prior periods reflected in this Annual Report on Form 10-K have been reclassified
accordingly. The retail segment includes retailers, independent dealer agents and carriers. 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.
Sales to the public carrier market accounted for approximately 26% of our fiscal year 2019 revenues, sales to the value-
added resellers and integrator market accounted for 43% of fiscal year 2019 revenues, and sales to our retail market accounted for
31% of fiscal year 2019 revenues.
Our top ten customer relationships totaled 32% of our total revenue for fiscal year 2019, and no customer relationship
accounted for more than 10% of our total revenues.
Approximately 97% of our sales have been made to customers in the United States during each of the past three fiscal
years, although we currently sell to customers in almost 100 countries. Due to our diverse product offering and our wide customer
base, our business is not significantly affected by seasonality in the aggregate. However, sales to our retailers generally peak in
conjunction with significant handset launches and the winter holiday season, and decline significantly in our fourth fiscal quarter.
Also, our base station infrastructure sales are typically affected by weather conditions in the United States, especially in our
fourth fiscal quarter.
Products and Services
We principally offer competitively priced, manufacturer branded products, ranging from simple hardware items to
sophisticated test equipment, with per item prices ranging from less than $1 to over $50,000 and gross profit margins ranging
from less than 5% to 99%. We offer products classified into our four business categories: base station infrastructure; network
systems; installation, test and maintenance products; and mobile devices and accessories, which accounted for approximately
48%, 14%, 6%, and 32% of fiscal year 2019 revenues, respectively. Base station infrastructure products are used to build, repair
and upgrade wireless broadband systems. These products include base station antennas, cable and transmission lines, small
towers, lightning protection devices, connectors, power systems, enclosures, grounding, jumpers, miscellaneous hardware, and
mobile antennas. Products include fixed and mobile broadband radio equipment, wireless networking filtering systems,
distributed antenna systems, two-way radios and security and surveillance products. Installation, test and maintenance products
are used to install, tune, and maintain 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, replacement
and component parts and supplies required by service technicians. Mobile devices and accessory products include cellular, smart
phone and data device accessories such as power supplies, cases, screen protectors, speakers, mobile amplifiers, bluetooth and
corded headsets, mounts, car antennas, music accessories and data and memory cards.
While we principally provide manufacturer branded products, a variety of products are developed, manufactured and
offered under Tessco-owned brand, Ventev
. These products generally consist of mobile device accessories and network
infrastructure products. Sales of these products were 13% of our total sales in fiscal year 2019.
Tessco’s Technical Services and Solutions Development team is a key element of our offerings as a value-added
4
Table of Contents
distributor. This team includes Sales Engineering, Solution Architects, System Designers and Customer Technical Support
(“CTS”). The broad product and supplier knowledge along with the multiple supplier certifications has also been recognized as a
great benefit by our supplier partners and customers. The Sales Engineers provide regional coverage supporting Tessco’s
customers on the total Solution portfolio. Solution Architects are specialists in their area of expertise providing consultation and
system design. The CTS team are product level experts ensuring the correct devices are specified based on the application. This
team can also recommend additional ancillary products (antennas, cables, power, enclosures, etc.) needed to provide a complete
solution for the customer’s application.
These teams provide customer support on over 40,000 calls and 22,000 support ticket-items per year. They have
completed designs covering solutions for DAS (Distributed Antenna Systems), IOT (Internet of Things), WiFi, Networking,
Wireless Broadband, Power Systems and Test Systems. These solutions teams support both existing and emerging markets,
including Smart Cities, Smart Buildings, Small Cell, FirstNet, Utilities, Transportation, Network Service Providers (NSP) and
fortune 500 companies.
As part of our commitment to customer service, we typically allow most customers to return most products for any
reason, for credit, within 30 days of the date of purchase. Total returns and credits have been less than 3% of revenues in each of
the past three fiscal years.
Revenues from sales of products purchased from our largest wireless infrastructure and mobile device and accessories
suppliers accounted for 16% and 8%, respectively, of total fiscal year 2019 revenues. Sales of products purchased from our ten
largest suppliers generated approximately 48% of our total fiscal year 2019 revenues.
The amount of purchases we make from each of our approximately 400 suppliers may significantly increase or decrease
over time. As the level of business changes, we may request, or be requested by our suppliers, to adjust the terms of our
relationships. Therefore, our ability to purchase and re-sell products from each of our suppliers depends on being able to reach
and maintain agreements with these suppliers on acceptable business terms. In addition, the agreements and arrangements on
which most of our larger supplier relationships are based are typically of limited duration and terminable for any or no reason by
either party upon notice of varying lengths, usually between several months or otherwise short notice. Generally, we believe that
alternative sources of supply are available for many of the product types we carry, although we may be unable, or find it more
difficult, to source branded products from other than the manufacturer.
The scope of products available for purchase from a given supplier may fluctuate and is generally limited only by the
scope of the supplier’s catalog and available inventory. Therefore, we often source the same product type from multiple suppliers,
although in some instances branded products are available only from the manufacturer or a particular supplier, and in some
instances, customers might favor one supplier or brand over another. The terms of the supplier contract typically apply to all
products purchased from a particular supplier, whether or not the item is specifically identified in the contract.
When negotiating with suppliers, we seek the most favorable terms available under the circumstances. Our preferred
terms include among others, terms that provide for product warranty and return rights, as well as product liability and intellectual
property indemnification rights, in each case consistent with our preferred business methods and objectives. We have not been
able, nor do we expect in the future to be able, to negotiate the inclusion of all our preferred terms, or our preferred language for
those terms, in every supplier contract. The degree of our success in this regard is largely a function of the parties’ relative
bargaining positions.
We are dedicated to superior performance, quality and consistency of service in an effort to maintain and expand
supplier relationships but there can be no assurance that we will continue to be successful in this regard in the future, or that
competitive pressures or other events beyond our control will not have a negative impact on our ability to maintain these
relationships or to continue to derive revenues from these relationships.
5
Table of Contents
Method of Operation
We believe that we have developed a highly integrated, technologically advanced and efficient method of operation
based on the following key tenets:
· Understanding and anticipating customers' needs and building solutions by cultivating lasting relationships;
·
·
Providing customers with sales, service and technical support, 24 hours a day, 7 days a week, 365 days a year;
Providing customers what they need, when and where they need it by delivering integrated product and supply chain
solutions; and
· Helping customers enhance their operations by providing real-time order tracking and performance measurement.
Market Development and Sales: In order to meet the needs of a dynamic and diverse marketplace, our sales and marketing
activities are focused on our customers across three broad markets: 1) public carriers 2) value-added resellers and integrators, and
3) retailers. This organization allows for the development of unique product and solution offerings to meet the needs of our
diverse customer base.
We understand and anticipate our customers’ needs, resulting in comprehensive solutions and long-lasting relationships.
Our customer base includes more than 150,000 contacts across the full breadth of the wireless industry, with 350,000 additional
contacts in our database, representing potential new customers. We are able to identify each contact’s unique need for information
and the way in which they wish to receive it. This can include targeted marketing materials, including email marketing, web
marketing, advertisements, direct mailers, and trade show marketing, to drive purchases and new business development. For
®
instance, our email publication The Wireless Update is sent to a targeted list of 107,000 contacts each week.
Our dedicated sales team provides customer service and maintains key information about every customer or potential
customer utilizing our Customer Relationship Management (CRM) and marketing automation tools ensuring a positive
experience at every interaction and allowing us to identify promising leads and allocate resources to convert them to customers.
We serve more than 10,500 customers each month and our goal is to create an experience that nurtures loyalty among our
customers and delivers mutually beneficial outcomes in every transaction.
6
Table of Contents
Solutions Development and Engineering and Product Management: We actively monitor advances in technologies and industry
trends, through both market research and continual customer and manufacturer interaction to enhance our product offering as new
wireless communications products and technologies are developed. To complement our broad product portfolio, we provide
technical expertise and consultation to assist our customers in understanding technology and choosing the right products for their
specific application. Our personnel, including those we refer to as “Solution Architects” offer applications engineering to market-
specific needs such as:
IoT (Internet of Things)
· DAS (Distributed Antennae Systems), Cellular and Public Safety
·
· Networking
·
·
· Broadband: microwave, backhaul, etc.
· WiFi
Power Systems
Test Systems
These Solution Architects also offer design services such as:
· DAS
IoT
·
Power
·
Test
·
· WiFi
· Broadband
· Network systems including video surveillance, SCADA
·
Tower design/calculations
In addition to determining the product offering, our Product and Solutions Development and Engineering Teams provide
the technical foundation for both customers and our personnel. Our product management software is continually updated to add
new products and additional technical information in response to manufacturer specification changes and customer inquiries. This
system contains detailed information on each SKU offered, including full product descriptions, category classifications, technical
specifications, illustrations, product cost, pricing and delivery information, alternative and associated products, and purchase and
sales histories. This information is available on a real-time basis to all of our personnel for product development, procurement,
technical support, cataloging and marketing.
Strategic Marketing – As a thought leader in the wireless industry, Tessco’s marketing materials educate the industry and
promote our services and unique value proposition. Through WirelessNow , our retail focused industry publication, we offer
product recommendations, trend reports, and expert market analysis to help thousands of retail customers improve sell through,
drive traffic and sales, and maximize their revenue. Our weekly commercial digital newsletter, The Wireless Update , keeps
107,000 of our customers informed on the latest news in the industry, new products and solutions from our manufacturers,
upcoming events and training opportunities, and more. In addition, strategic marketing supports the organization through the
development of compelling original content, training programs, and other customer and manufacturer programs that solve
business challenges and increase the value Tessco provides to the industry.
Tessco.com
®
is our e-commerce site and the digital gateway to our comprehensive industry expertise, products, and
solutions for wireless. In addition to access to our inventory of products for every solution, Tessco.com features:
·
Powerful parametric product search capabilities;
· Real-time product availability;
· Real-time customer-specific pricing;
·
Easy ordering capabilities that allow for the construction and configuration of complete, end-to-end solution that can
be converted to an order, or saved, copied, shared, uploaded and emailed;
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· A variety of customer service, financial and technical support pages, including account controls which include all of
the tools necessary to track and manage orders, update an account, find the right support, review saved orders,
handle warranty claims, and explore Tessco’s capabilities;
· Order confirmation – specifying the contents, order status, delivery date, tracking number and total cost of an order;
· Order reservations, order status, and order history; and
· Manufacturer portal pages designed to showcase each manufacturer partner’s offer in a custom fashion.
Tessco.com empowers our customers to make better decisions by delivering product knowledge so they are fully
informed. This destination also enables our manufacturers to reach a broad and diverse customer base with their product offer and
brand features.
Customer Support and Order Entry: Our customer support teams are responsible for delivering sales and customer support
services through an effective and efficient transaction system. We also continually monitor our customer service performance
through customer surveys and process auditing. By combining our broad product offering with a commitment to superior
customer service, we seek to reduce a customer's overall procurement costs by enabling the customer to consolidate the number of
suppliers from which it obtains products, while also reducing the customer's need to maintain high inventory levels.
Our information technology system provides detailed information on every customer account, including recent inquiries,
buying and credit histories, separate buying locations within a customer account and contact history for key personnel, as well as
detailed product information, including technical, product availability and pricing information. The information technology
system increases sales productivity by enabling any customer support representative to provide any customer with personalized
service and also allows non-technical personnel to provide a high level of technical product information and order assistance.
We believe that our commitment to providing prompt, professional and efficient customer service before, during and
after the sale enables us to maximize sales, customer satisfaction and customer retention. The monthly average number of non-
consumer customers decreased from approximately 11,600 for fiscal year 2018 to approximately 10,500 in fiscal year 2019,
primarily due to consolidation in both commercial and retail markets. Due in part to this consolidation and the addition of several
larger new relationships, the average monthly purchase per customer increased from $4,200 in fiscal year 2018 to $4,800 in fiscal
year 2019.
Procurement and Inventory Management: Our product management and purchasing system provides customers with a total
source of broad and deep product availability, while maximizing the return on our inventory investment.
We use our information technology system to monitor and manage our inventory. Historical sales results, sales
projections and information regarding supplier lead times are all used to determine appropriate inventory levels. The information
technology system also provides early warning reports regarding upcoming inventory requirements. As of March 31, 2019, and
April 1, 2018, we had an immaterial level of backlog orders. Most backlog orders as of March 31, 2019 are expected to be filled
within 90 days of fiscal year-end. For fiscal years ended March 31, 2019 and April 1, 2018, inventory write-offs were 0.9% and
1.0% of total purchases, respectively. In many cases, we are able to return slow-moving inventory to our suppliers pursuant to
stock rotation agreements. Inventory turns for fiscal years 2019 and 2018 were 6.7 and 6.8, respectively.
Fulfillment and Distribution: Orders are received at our Timonium, Maryland, Reno, Nevada and San Antonio, Texas customer
sales support centers. As orders are received, customer representatives have access to technical information, alternative and
complementary product selections, product availability and pricing information, as well as customer purchasing and credit
histories and recent inquiry summaries. An automated warehouse management system, which is integrated with the product
planning and procurement system, allows us to ensure inventory control, to minimize multiple product shipments to complete an
order and to limit inventory duplication. Bar-coded labels are used on every product, allowing distribution center personnel to
utilize radio frequency scanners to locate products, fill orders and update
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inventory records in real-time, thus reducing overhead associated with the distribution functions. We contract with a variety of
freight line and parcel transportation carrier partners to deliver orders to customers.
Performance and Delivery Guarantee (PDG) charges are generally calculated on the basis of the weight of the products
ordered and on the delivery service requested, rather than on distance to the customer. We believe that this approach emphasizes
on-time delivery instead of shipment dates, enabling customers to minimize their inventories and reduce their overall procurement
costs while guaranteeing date specific delivery, thereby encouraging them to make us their total source supplier.
Information Technology: Our information technology system is critical to the success of our operations. We have made and
continue to make substantial investments in the development of this system, which integrates cataloging, marketing, sales,
fulfillment, inventory control and purchasing, financial control and internal and external communications. The information
technology system includes highly developed customer and product databases and is integrated with our Configuration,
Fulfillment and Delivery system. The information contained in the system is available on a real-time basis to all of our employees
as needed and is utilized in every area of our operations.
We believe that we have been successful to date in pursuing a highly integrated, technologically advanced and efficient
method of operations; however, disruption to our day-to-day operations, including failure of our information technology or
distribution systems, or freight carrier interruption, could impair our ability to receive and process orders or to ship products in a
timely and cost-efficient manner.
Competition
The wireless communications distribution industry is competitive and fragmented, and is comprised of distributors such
as Brightstar, D&H, Superior Communications and VoiceComm in our retail segment and Alliance Corporation, Anixter,
Comstor, Graybar, KGPCo Logistics, Ingram Micro, Talley Communications, Tech Data, Site Pro 1, VAV Wireless, Westcon
and Winncom in our commercial markets. In addition, many manufacturers sell and fulfill directly to customers. Barriers to entry
for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors
entering the market is high. In addition, the agreements or arrangements with our customers or suppliers looking to us for product
and supply chain solutions are typically of limited duration and are often terminable by either party upon several months or
otherwise short notice. Accordingly, our ability to maintain these relationships is subject to competitive pressures and challenges.
Some of our current competitors have substantially greater capital resources and sales and distribution capabilities than we do. In
response to competitive pressures from any of our current or future competitors, we may be required to lower selling prices in
order to maintain or increase market share, and such measures could adversely affect our operating results. We believe, however,
that our strength in service, the breadth and depth of our product offering, our information technology system, our knowledge and
expertise in wireless technologies and the wireless marketplace, and our large customer base and purchasing relationships with
approximately 420 manufacturers, provide us with a significant competitive advantage over new entrants to the market.
Continuing changes in the wireless communications industry, including risks associated with conflicting technology,
changes in technology, inventory obsolescence, and consolidation among wireless carriers, could adversely affect future operating
results.
We believe that the principal competitive factors in supplying products to the wireless communications industry are the
quality and consistency of customer service, particularly timely delivery of complete orders, breadth and quality of products
offered and total procurement costs to the customer. We believe that we compete favorably with respect to each of these factors.
In particular, we believe we differentiate ourselves from our competitors based on the breadth of our product offering, our ability
to quickly provide products and supply chain solutions in response to customer demand and technological advances, our
knowledge and expertise in wireless technologies and the wireless marketplace, the level of our customer service and the
reliability of our order fulfillment process.
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Intellectual Property
We seek to protect our intellectual property through a combination of trademarks, service marks, confidentiality
agreements, trade secret protection and, if and when appropriate, patent protection. Thus far, we have generally sought to protect
our intellectual property, including our product data and information, customer information and information technology systems,
through trademark filings and nondisclosure, confidentiality and trade secret agreements. We typically require our employees,
consultants, and others having access to our intellectual property, to sign confidentiality and nondisclosure agreements. There can
be no assurance that these confidentiality and nondisclosure agreements will be honored, or whether they can be fully enforced, or
that other entities may not independently develop systems, technologies or information similar to that on which we rely.
®
, LinkUPS
TESSCO Communications Incorporated, a wholly-owned subsidiary of TESSCO Technologies Incorporated, maintains
a number of registered trademarks and service marks in connection with our business activities, including: A Simple Way of Doing
,
Business Better
®
,
TESSCO Making Wireless Work
®
Wireless Now
Inventory
trademarks and trade names and to enforce our rights against any infringement.
, among many others. Our general policy is to file for trademark and service mark protection for each of our
, TerraWave Solutions
, TESSCO
®
, The Vital Link to a Wireless World
®
, Solutions That Make Wireless Work
, Ventev
, TESSCO Technologies
, The Wireless Update
, Your Total Source
, W ireless Solutions
, and Your Virtual
, Chargesync
, ORDERflow
, Tessco.com
®
®
®
®
®
®
®
®
®
®
®
®
We currently hold one patent related to our online order entry system and seven patents related to our Ventev products.
We intend, if and when appropriate, to seek patent protection for any additional patentable technology. The ability to obtain
patent protection involves complex legal and factual questions. Others may obtain patent protection for technologies that are
important to our business, and as a result, our business may be adversely affected. In response to patents of others, we may need
to license the right to use technology patented by others, or in the event that a license cannot be obtained, to design our systems
around the patents of others.
®
Environmental Regulation
We are subject to various laws and governmental regulations concerning environmental matters and employee safety and
health in the United States. We are also subject to regulation by the Occupational Safety and Health Administration concerning
employee safety and health matters. Compliance with these federal, state and local laws and regulations related to protection of
the environment and employee safety and health has had no material effect on our business. There were no material capital
expenditures for environmental projects in fiscal year 2019, and there are no material expenditures planned for such purposes in
fiscal year 2020.
Employees
As of March 31, 2019, we had 796 full-time equivalent employees. Of our full-time equivalent employees, 360 were
engaged in customer and supplier service, marketing, sales and product management, 327 were engaged in fulfillment and
distribution operations and 109 were engaged in administration and technology systems services. No employees are covered by
collective bargaining agreements. We consider our employee relations to be excellent.
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Executive Officers
Executive officers are appointed annually by the Board of Directors and, subject to the terms of any applicable
employment agreement, serve at the discretion of the Board of Directors. Information regarding our named executive officers is
as follows:
Name
Murray Wright
Age
63
Position
President and Chief
Executive Officer
Aric M. Spitulnik
47
Senior Vice President,
Secretary, and Chief
Financial Officer
Douglas A. Rein
59
Senior Vice President of
Performance Systems and
Operations
Elizabeth S. Robinson
52
Senior Vice President,
Retail Sales and Product
Marketing
Murray Wright joined the Company in September
2016. Mr. Wright served as Chief Executive Officer
of Zones, Inc. from 2013 to 2015. At Tech Data
Corporation, Mr. Wright served as Senior Vice
President, US Sales from 2006 to 2010 and as
President, the Americas, from 2011 to 2013.
Aric Spitulnik joined the Company in 2000. Mr.
Spitulnik was appointed Controller in 2005 and Vice
President in 2006. In 2012, he was appointed
Corporate Secretary, and in 2014 he was appointed
Senior Vice President. Since October 2013, Mr.
Spitulnik has served as the Company’s Chief
Financial Officer.
Douglas Rein joined the Company in July 1999 as
Senior Vice President of Performance Systems and
Operations. Previously, he was director of operations
for
Corporation and Vice
President, distribution and logistics operations for
Intelligent Electronics.
Compaq Computer
Elizabeth Robinson joined the Company in 1998.
Ms. Robinson was appointed Director of Sales in
2001, and Vice President in 2004. In 2011, she was
appointed Vice President of Mobile Devices and
Accessories, and then for the Mobility Group in
2016. In 2017, she was appointed Senior Vice
and Product
President,
Management.
leading Retail
Sales
Charles W. Kriete
41
Senior Vice President,
Commercial Sales, Product
Marketing and Supply
Chain
Charles Kriete joined the company in January 2017.
Mr. Kriete served as Chief Marketing Officer of
Kore Wireless Group in 2016 and was Chief
Revenue Officer of Wyless from 2013 to 2016.
Previously, he served as Executive Vice President of
TD Mobility at Tech Data from 2010 to 2013.
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Item 1A. Risk Factors.
We are not able to identify or control all circumstances that could occur in the future that may adversely affect our
business and operating results. The following are certain risk factors that could adversely affect our business, financial position
and results of operations. These risk factors and others described in this Annual Report on Form 10-K should be considered in
connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors
could cause the actual results and conditions to differ materially from those projected in the forward-looking statements.
Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial
may also adversely affect our business, financial position and results of operations. If our business, financial position and results
of operations are adversely affected by any of these or other adverse events, our stock price would also likely be adversely
affected.
RISKS RELATING TO OUR BUSINESS
We face significant competition in the wireless communications distribution industry.
The wireless communications distribution industry is competitive and fragmented, and is comprised of several national
distributors, as well as numerous regional distributors. In addition, many manufacturers sell and fulfill directly to customers.
Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new
competitors entering the market is high. Some of our current competitors have substantially greater capital resources and sales
and distribution capabilities than we do. In response to competitive pressures from any of our current or future competitors, we
may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect
our operating results. We are also seeing increased competition in the form of e-commerce sites as consumers and business are
increasingly looking to the internet to purchase goods.
We offer no assurance that we will not lose market share, or that we will not be forced in the future to reduce our prices
in response to the actions of our competitors, thereby reducing our gross margins. Furthermore, to remain competitive we may be
forced to offer more credit or extended payment terms to our customers. This could increase our required capital, financing costs,
and the amount of our bad debt expenses.
We typically purchase and sell our products and services on the basis of individual sales or purchase orders, and even in those
cases where we have standing agreements or arrangements with our customers and suppliers, those agreements and
arrangements typically contain no purchase or sale obligations and are otherwise terminable by either party upon several
months or otherwise short notice.
Our sales to customers and our purchases from suppliers are largely governed by individual sales or purchase orders, so
there is no guarantee of future business. In some cases, we have formal agreements or arrangements with significant customers or
suppliers, but they are largely administrative in nature and are terminable by either party upon several months or otherwise short
notice, and they typically contain no purchase or sale obligations. Many of our customer and supplier contracts contain
“evergreen” clauses, although this too is largely a matter of administrative convenience, because the contracts are nevertheless
typically terminable on short notice, and because no purchase and sale obligation in any event arises other than pursuant to an
accepted purchase order. When negotiating with customers and suppliers, we seek the most favorable terms available under the
circumstances. Our preferred supplier terms include, among others, terms that provide for product warranty and return rights, as
well as product liability and intellectual property indemnification rights, in each case consistent with our preferred business
methods and objectives. We have not been able, nor do we expect in the future to be able to negotiate the inclusion of all our
preferred terms, or our preferred language for those terms, in every contract. The degree of our success in this regard is largely a
function of the parties’ relative bargaining positions.
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When unable to negotiate the inclusion of our preferred terms or preferred language in a particular supplier contract, we
assess any increased risk presented, as well as mitigating factors, analyze our overall business objectives, and then proceed
accordingly. In some instances, we refuse the contract and seek other sources for the product, and in other instances business
objectives and circumstances are determined to outweigh or mitigate any increased risk, or otherwise dictate that we proceed with
the contract, notwithstanding. We consistently seek to manage contractual risks resulting from supplier contracts not including
our preferred terms or language. However, these risks persist, and even when we are successful in negotiating our preferred terms,
performance of these terms is not assured.
If our suppliers refuse to, or for any reason are unable to, supply products to us in sufficient quantities to meet demand,
or at all, and if we are not able to procure those products from alternative sources, we may not be able to maintain appropriate
inventory levels to meet customer demand and our financial position and results of operations would be adversely affected.
Similarly, if customers decide to purchase from other sources, instead of from us, or experience significant changes in demand
internally or from their own customer bases, become financially unstable, or are acquired by another company, our ability to
generate revenues from these customers may, or in some cases would, be significantly affected, resulting in an adverse effect on
our financial position and results of operations.
The loss or any change in the business habits of key customers or suppliers may have a material adverse effect on our
financial position and results of operations.
Because our standing arrangements and agreements with our customers and suppliers typically contain no purchase or
sale obligations and are terminable by either party upon several months or otherwise relatively short notice, we are subject to
significant risks associated with the loss or change at any time in the business habits and financial condition of key customers or
suppliers. We have experienced the loss and changes in the business habits of key customer and supplier relationships in the past
and expect to do so again in the future. It is the nature of our business.
Sales of products purchased from our largest wireless infrastructure (16%) and mobile device and accessories (8%)
suppliers , generated approximately 24% of our total revenues in fiscal year 2019, and sales of products purchased from our
largest ten suppliers generated approximately 48% of fiscal year 2019 total revenues. As is the case with many of our supplier
and customer relationships, our contractual arrangements with these large suppliers are terminable by either party upon several
months’ notice. If these contracts or our relationships with these suppliers terminate for any reason, or if any of our other
significant supplier relationships terminate for any reason, and we are not able to sell or procure a sufficient supply of those
products from alternative sources, or at all, our financial position and results of operations would be adversely affected. Our
suppliers are subject to many if not all of the same (or similar) risks and uncertainties to which we are subject, as well as other
risks and uncertainties, and we compete with others for their business. Accordingly, we are at a continual risk of loss of their
business on account of a number of factors and forces, many of which are largely beyond our control.
In fiscal year 2019, no customer accounted for more than 10% of our total revenues. However, in the retail market, 42%
of our sales in fiscal 2019 were made to five customers. One of these customers was recently acquired, and we expect the
surviving entity to significantly reduce its purchases from us going forward. Also, customer mix can change rapidly, and we may
see changes in customer concentrations in the future. If or when any of our significant customer relationships terminate for any
reason, and we are not able to replace those customers and associated revenues, our financial position and results of operations
would be adversely affected.
The loss of customer relationships and the corresponding reduction in the volume of product sales identified to those
relationships, can also affect our negotiating ability with suppliers supplying those products. This can affect our margins in sales
of those products to other customers. If we are unable to replace those products at favorable pricing and terms, or if we are
unable to acquire those products from suppliers or offer those products to our customers on favorable terms, our competitiveness
may suffer and result in reduced revenues and profits. Like our suppliers, our customers are subject to many if not all of the same
(or similar) risks and uncertainties to which we are subject, as well as other risks and uncertainties, and we compete with others
for their business. Accordingly, we are at continual risk of loss of their business on account of a number of factors and forces,
many of which are largely beyond our control.
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There can be no assurance that we will be successful in replacing any of our past, present or future supplier or customer
relationships if and when lost, or that we will not suffer a substantial reduction in revenues as a result of loss of any such
relationship. As such, supplier, customer, or revenue loss would adversely affect our financial position and results of operations.
Changes in customer or product mix could cause our gross margin percentage to decline.
We continually experience changes in customer and product mix that affects gross margin. Changes in customer and
product mix result primarily from changes in customer demand, customer acquisitions or losses, selling and marketing activities
and competition.
Our business depends on the continued tendency of wireless equipment manufacturers and network operators to outsource
aspects of their business to us in the future.
We provide functions such as distribution, inventory management, fulfillment, customized packaging, e-commerce
solutions, and other outsourced services for many wireless manufacturers and network operators. Certain wireless equipment
manufacturers and network operators have elected, and others may elect, to undertake these services internally. Additionally, our
customer service levels, industry consolidation, competition, deregulation, technological changes or other developments could
reduce the degree to which members of the global wireless industry rely on outsourced logistic services such as the services we
provide. Any significant change in the market for our outsourced services could have a material adverse effect on our business.
Our outsourced services are generally provided under short-term contractual arrangements. The failure to obtain renewals or
otherwise maintain these agreements on terms, including price, consistent with our current terms could have an adverse effect on
our business.
We require substantial capital to operate, and the inability to obtain financing on favorable terms will adversely impact our
business, financial position and results of operations.
Our business requires substantial capital to operate and to finance accounts receivable and product inventory that are not
financed by trade creditors. We have historically relied upon cash generated from operations, revolving credit facilities and trade
credit from our suppliers to satisfy our capital needs and finance growth. As the financial markets change and new regulations
come into effect, the cost of acquiring financing and the methods of financing may change. Changes in our credit rating or other
market factors may increase our interest expense or other costs of capital, or capital may not be available to us on competitive
terms to fund our working capital needs. Our existing secured revolving credit facility contains various financial and other
covenants that may limit our ability to borrow or limit our flexibility in responding to business conditions. The inability to
maintain or when necessary obtain adequate sources of financing could have an adverse effect on our business. Our existing
secured revolving credit facility includes variable rate debt, thus exposing us to risk of fluctuations in interest rates. Such
fluctuations in interest rates could have an adverse effect on our business, financial position and results of operations. We may in
the future use interest rate swaps in an effort to achieve a desired proportion of fixed and variable rate debt. We would utilize
these derivative financial instruments to enhance our ability to manage risk, including interest rate exposures that exist as part of
our ongoing business operations. However, our use of these instruments may not effectively limit or eliminate our exposure to a
decline in operating results due to changes in interest rates.
Our ability to maintain and borrow under our revolving credit agreement could be constrained by the level of eligible
receivables and by any failure to meet certain financial and other covenants in our revolving credit agreement.
Our borrowing availability under our secured revolving credit facility is determined in part by a borrowing base and is
limited to certain amounts of eligible accounts receivable. If the value of these accounts receivable were to decrease significantly,
the amount available for borrowing under the facility would decrease and our ability to borrow under the facility could be
significantly impacted. Borrowing under the facility is also conditioned upon compliance with financial and other covenants
included in the revolving credit agreement and a related guaranty and security agreement. Among these is a covenant to maintain
a fixed charge coverage ratio at any time during which the borrowing availability is otherwise less than $10 million. There are no
assurances that we will be able to comply with all applicable covenants in these agreements, and in the event that we do not, our
ability to borrow under our secured revolving credit facility could
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be limited or suspended, or could terminate.
If we fail to meet our payment or other obligations under our secured revolving credit facility, our lenders could foreclose on,
and acquire control of, a significant portion of our assets.
Indebtedness under our secured revolving credit facility is secured by continuing first priority security interests in our
inventory, accounts receivable, and deposit accounts, and on all documents, instruments, general intangibles, letter of credit
rights, and chattel paper relating to inventory and accounts, and to all proceeds of the foregoing. If we fail to meet our payment
or other obligations under our secured revolving credit facility, our lenders could foreclose on these assets, which would have a
material adverse effect on our business, results of operations and financial condition.
Compliance with regulations regarding the use of “conflict minerals” could limit the supply and increase the cost of certain of
our products, and customers may seek other sources if we are unable to demonstrate to their satisfaction that our products are
conflict free.
Increased focus on environmental protection and social responsibility initiatives led to the passage of Section 1502 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), and its implementing SEC
regulations. The Dodd-Frank Act imposes supply chain diligence and disclosure requirements for certain manufacturers of
products containing specific minerals that may originate in or near the Democratic Republic of the Congo (the "DRC") and
finance or benefit local armed groups. These "conflict minerals" are commonly found in certain of the products that we acquire
from suppliers and distribute to customers and are also found in certain products in our Ventev product line that we contract to
be manufactured by others or that we assemble. The implementation of these regulations may limit the sourcing and availability
of some of the raw materials used in certain of these products. This in turn may affect our ability to obtain sufficient quantities of
our products and may affect related pricing. Because we are considered a manufacturer of certain of our Ventev products, we are
subject to additional “conflict minerals” diligence and disclosure requirements with regard to these products. Some of our
customers may elect to disqualify us as a supplier if we are unable to verify that the products we sell to them are DRC conflict
free.
®
®
Weakness in the global economic environment may have significant effects on our customers and suppliers that could result in
material adverse effects on our business, operating results, and stock price.
Weakness in the global economic environment – may include, among other things, significant reductions in available
capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency
values worldwide, significant decreases in consumer confidence and consumer and business spending, high rates of
unemployment and concerns that the worldwide economy experience other significant challenges – could materially adversely
affect our customers’ access to capital or willingness to spend capital on our products, and/or their levels of cash liquidity with
which to pay for our products. In addition, our suppliers’ access to capital and liquidity could be affected, which may in turn
adversely impact their ability to maintain inventories, production levels, and/or product quality, or cause them to raise prices or
lower production levels, or result in their ceasing operation.
The potential effects of weakness in the global economic environment are difficult to forecast and mitigate. As a
consequence, our operating results for a particular period may be more difficult to predict. Any of the foregoing effects could
have a material adverse effect on our results of operations and financial condition, and could adversely affect our stock price.
We may be unable to successfully execute our merchandising and marketing strategic initiatives.
We are focusing our sales and marketing efforts and initiatives to maximize sales. If we fail to successfully execute these
initiatives, our business, financial position and results of operations could be adversely affected.
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The telecommunications products marketplace is dynamic and challenging because of the continued introduction of new
products and services.
We must constantly introduce new products, services and product features to meet competitive pressures. We may be
unable to timely change our existing merchandise sales mix in order to meet these competitive pressures, which may result in
increased inventory costs, inventory write-offs or loss of market share.
Additionally, our inventory may also lose value due to price changes made by our significant suppliers, in cases where
our arrangements with these suppliers do not provide for inventory price protection, or in cases where the supplier is unable or
unwilling to provide these protections.
Consolidation among wireless service carriers could result in the loss of significant customers.
The wireless service carrier industry has experienced significant consolidation in recent years. If any of our significant
customers or partners are acquired or consolidate with other carriers, or are otherwise involved in any significant transaction that
results in them ceasing to do business with us, or significantly reducing the level of business that they do with us, our revenues
from those customers could be affected, resulting in an adverse effect on our financial position and results of operations.
The failure of our information technology or telecommunication systems, or our inability to maintain or upgrade our
information technology or telecommunication systems without incident or delay, or undue cost, could have a material adverse
effect on our business, financial position and results of operations.
We are highly dependent upon our internal information technology and telecommunication systems, many of which are
proprietary, to operate our business. These systems support all aspects of our business operations, including means of internal and
external communication, inventory and order management, shipping, receiving and accounting. Most of our information
technology systems contain a number of internally developed applications. In addition, all of these systems require continued
maintenance and also require upgrading or replacement from time to time. There can be no assurance that these systems will not
fail or experience disruptions, that we will be able to attract and retain qualified personnel necessary for the operation of such
systems, that we will be able to expand and improve our systems, that we will be able to convert to new systems efficiently as and
when necessary, or that we will be able to integrate new programs effectively with our existing programs, in each case without
incident or delay, or undue cost.
We, like most businesses, are subject to risk of cyber-attack and incur significant costs in efforts to defend these attacks.
We like most businesses are continually subject to risk of cyber-attack and are continually engaged in an effort to defend
against and to ward off attacks from hackers and others. We have experienced cyber-attacks from time to time. Any of such
problems, or any significant damage or destruction of these systems, including pursuant to or as a result of system security
breaches, data protection breaches or other cyber-attacks, could result in significant disruption in our business and operations,
harm our relationship with our customers or suppliers, and result in significant losses in revenues. Corrective action and
compliance with applicable privacy and data protection laws could be costly. Any of these or similar events or occurrences could
have an adverse effect on our business, financial position and results of operations.
We depend heavily on e-commerce, and website security breaches or internet disruptions could have a material adverse effect
on our business, financial position and results of operations.
®
We rely on the internet (including Tessco.com ) for a significant percentage of our orders and information exchanges
with our customers. The internet and individual websites have experienced a number of disruptions and slowdowns, some of
which were caused by organized attacks. In addition, some websites have experienced security breakdowns. There can be no
assurances that our website will not experience any material breakdowns, disruptions or breaches in security. If we were to
experience a security breakdown, disruption or breach that compromised sensitive information, this could harm our relationship
with our customers or suppliers. Disruption of our website or the internet in general could impair our order processing or more
generally prevent our customers and suppliers from accessing
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information or placing orders. This could have an adverse effect on our business, financial position and results of operations.
System security breaches or data protection breaches could adversely disrupt our business and harm our reputation, financial
position and results of operations.
We manage and store various proprietary information and sensitive or confidential data relating to our business. In
addition, we routinely process, store and transmit large amounts of data, including sensitive and personally identifiable
information, including customer credit card data and other information. Breaches of our security measures or the accidental loss,
inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our
customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other
forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information,
result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the
cost and operational consequences of implementing further data protection measures could be significant. Such breaches, costs
and consequences could adversely affect our business, results of operations or cash flows.
We are also subject to payment card association operating rules, certification requirements and rules governing
electronic funds transfers, including the Payment Card Industry Data Security Standard (PCI DSS), a security standard applicable
to companies that collect, store or transmit certain data regarding credit and debit cards, holders and transactions. From time to
time we may not be fully or materially compliant with PCI DSS or other payment card operating rules. Any failure to comply
fully or materially with the PCI DSS now or at any point in the future may violate payment card association operating rules and
the terms of our contracts with payment processors and merchant banks, and could subject us to fines, penalties, damages and
civil liability, and could result in the loss of our ability to accept credit and debit card payments. Maintaining compliance with
these regulations is costly and there is no guarantee that we will be successful or avoid fines, penalties, damages or civil liability,
and even if successful, there is no guarantee that PCI DSS compliance will prevent illegal or improper use of our payment
systems or the theft, loss or misuse of data pertaining to credit and debit cards, credit and debit card holders and credit and debit
card transactions.
The inability to hire or retain certain key professionals, management and staff could adversely affect our business, financial
condition and results of operations.
The nature of our business includes (but is not limited to) a high volume of transactions, business complexity, wide
geographical coverage, and broad scope of products, suppliers, and customers. In order to compete, we must attract, retain and
motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions.
Hiring and retaining qualified executives, information technology and business generation personnel are critical to our
business. Most of the members of our senior management team are parties to employment contracts or arrangements with us that
provide for, among other things, various severance payments or benefits upon termination of their employment under certain
circumstances, including termination by the Company without “cause” or for “good reason”, and those contracts generally renew
from year to year, except for the employment contract with Mr. Wright, our CEO, which commenced in September 2016 and
expires in March 2020. The loss of any of the members of our senior management team, could have an adverse effect on our
business, financial position and results of operations.
To attract, retain and motivate qualified employees, we rely heavily on stock-based incentive awards such as
Performance Stock Units (PSUs) and stock options. If performance targets associated with PSUs are not met, or the value of such
awards does not appreciate as measured by the performance of the price of our common stock and/or if our other stock-based
compensation, such as stock options, otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate
our employees could be adversely impacted, which could negatively affect our business, financial position and results of
operations and/or require us to increase the amount we spend on cash and other forms of compensation. Our ability to issue PSUs,
stock options and other equity instruments is also limited by the provisions of and our available shares under our current and/or
future stock incentive plans, which may be subject to shareholder approval. We may currently issue awards under our incentive
plan only through July 21, 2021, and as of May 10, 2019, the most recent date when PSUs were issued, there were 67,450 shares
available for future awards. Therefore, our ability to offer stock-based incentive awards may be limited, which may have an
adverse effect on our continued ability to attract
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and retain, and motivate, our employees, and, subsequently, on our business, financial position and results of operations. In
addition, an increase in the number of shares for future awards, under either current or future compensation or incentive plans or
arrangements could lead to dilution of our other stockholders.
The damage or destruction of any of our principal distribution or administrative facilities could materially adversely impact
our business, financial position and results of operations.
If either of our distribution centers in Hunt Valley, Maryland or Reno, Nevada, were to be significantly damaged or
destroyed, we could suffer a loss of product inventory and our ability to conduct our business in the ordinary course could be
materially and adversely affected. Similarly, if our office locations in Maryland, Nevada or Texas were to be significantly
damaged or destroyed, our ability to conduct marketing, sales and other corporate activities in the ordinary course could be
adversely affected.
We depend on third parties to manufacture products that we distribute and, accordingly, rely on their quality control
procedures.
Product manufacturers typically provide limited warranties directly to the end consumer or to us, which we generally
pass through to our customers. If a product we distribute for a manufacturer has quality or performance problems, our ability to
provide products to our customers could be disrupted, which could adversely affect our operations.
We are subject to potential declines in inventory value.
We are subject to the risk that the value of our inventory will decline as a result of price reductions by suppliers or
technological obsolescence or failure. It is the policy of many of our suppliers to protect distributors like us from the loss in value
of inventory due to technological change or failure, or the suppliers’ price reductions. Some suppliers (including those who
manufacture our proprietary products), however, may be unwilling or unable to pay us for price protection claims or products
returned to them under purchase agreements. No assurance can be given that such practices to protect distributors like us will
continue, that unforeseen new product developments, product failure or product obsolescence will not adversely affect us, or that
we will be able to successfully manage our existing and future inventories.
Our future operating results depend on our ability to purchase a sufficient amount of finished goods and bulk inventory to
meet the demands of our customers.
Our ability to meet our customers' demands depends, in part, on our ability to obtain timely and adequate delivery of
inventory from our suppliers. We have experienced shortages in the past that have negatively impacted our operations. Although
we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these
problems in the future. Furthermore, certain of our products or components are available only from a single source or limited
sources. We may not be able to diversify sources in a timely manner. A reduction or interruption in supplies or a significant
increase in the price of supplies could have a negative impact on our results of operations or financial condition.
If our business does not perform well, or if we otherwise experience a decline in the fair values of a portion or all of our
business, we may be required to recognize impairments of our intangible or other long-lived assets, which could adversely
affect our results of operations or financial condition.
Goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed
for impairment at least annually or more frequently if impairment indicators are present.
In assessing the recoverability of goodwill and indefinite lived intangible assets, we make estimates and assumptions
about sales, operating margin, growth rates and discount rates based on our budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s
judgment in applying these factors. We first perform a qualitative analysis to determine if it is more likely than not that goodwill
or indefinite lived intangible assets are impaired. This analysis includes assumptions and estimates related to macroeconomic,
industry and company specific events and trends. In the event that we find it is more
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likely than not that an impairment has occurred a quantitative analysis is performed. We could be required to evaluate the
recoverability of goodwill and indefinite lived assets prior to the annual assessment if we experience disruptions to the business,
unexpected significant declines in operating results, divestiture of a significant component of our business or sustained market
capitalization declines. These types of events and the resulting analyses could result in goodwill and indefinite lived asset
impairment charges in the future. Impairment charges could substantially affect our financial results in the periods of such
charges. In addition, impairment charges would negatively impact our financial ratios and could limit our ability to obtain
financing in the future. As of March 31, 2019, we had $12.5 million of goodwill and indefinite lived intangible assets, which
represented approximately 6.0% of total assets.
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities.
Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s
determination include the performance of the business, projections of future taxable income, and the feasibility of ongoing tax
planning strategies. If based on available information, it is more likely than not that the deferred income tax asset will not be
realized then a valuation allowance must be established with a corresponding charge to net income. Such charges could have an
adverse effect on our results of operations or financial condition.
Our future results of operations may be impacted by prolonged weakness in the economic environment which may result
in an impairment of any goodwill recorded and/or other long-lived assets or the recording of a valuation allowance on our
deferred tax assets, which could adversely affect our results of operations or financial condition.
We primarily rely on trademark filings and confidentiality agreements to protect our intellectual property rights.
In an effort to protect our intellectual property, including our product data, customer information and information
technology systems, through trademark filings and nondisclosure, confidentiality and trade secret agreements, we typically
require our employees, consultants and others having access to this information or our technology to execute confidentiality and
non-disclosure agreements. These agreements, however, may not provide us with adequate protection against improper use or
disclosure of confidential information, and these agreements may be breached. A breach of confidentiality could adversely affect
our business. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with
whom our employees, consultants and others have previous employment or consulting relationships. Also, others may
independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade
secrets. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The
disclosure of our proprietary information or trade secrets could impair our competitive position and could have an adverse effect
on our business, financial condition and results of operations. Others may obtain patent protection for technologies that are
important to our business, and as a result, our business, financial position and results of operations may be adversely affected. In
response to patents of others, we may need to license the rights to use the technology patented by others, or in the event that a
license cannot be obtained, design our systems around the patents of others. There can be no assurances as to our ability to obtain
any such licenses or to design around the patents of others, and our inability to do so could have an adverse effect on our business,
financial position and results of operations.
We offer credit to our customers and, therefore, are subject to significant credit risk.
We sell our products to a large and diverse customer base. We finance a significant portion of such sales through trade
credit, typically by providing 30-day payment terms. As a result, our business could be adversely affected in the event of a
deterioration of the financial condition of our customers, resulting in the customers’ inability to repay us. This risk may increase if
there is a general economic downturn affecting a large number of our customers and in the event our customers do not adequately
manage their business or properly disclose their financial condition. Also, several of our larger customers, including tier 1 public
carrier customers, require greater than 30-day payment terms which could increase our credit risk and decrease our operating cash
flow.
We may explore additional growth through acquisitions.
As part of our growth strategy, we may continue to pursue the acquisition of companies that either complement or
expand our existing business. As a result, we from time to time evaluate potential acquisition opportunities, which may be
material in size and scope. In addition to those risks to which our business and the acquired businesses are generally
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subject to, the acquisition of these businesses gives rise to transactional and transitional risks, and the risk that the anticipated
benefits will not be realized.
Risks associated with the foreign suppliers from whom our products are sourced could adversely affect our financial
performance.
The products we sell are sourced from a wide variety of domestic and international suppliers. Global sourcing of many
of the products we sell is an important factor in our financial performance. Since the onset of the weakness in the global economic
environment in 2008, certain of our suppliers, particularly those in the far-east, have experienced financial difficulties and we
believe it is possible that a limited number of suppliers may either cease operations or require increased prices in order to fulfill
their obligations. Changes in our relationships with suppliers or increases in the costs of purchased raw materials, component
parts or finished goods could result in delays, inefficiencies or our inability to market products. In addition, our profit margins
would decrease if prices of purchased raw materials, component parts, or finished goods increase and we are unable to pass on
those increases to our customers. The adoption or expansion of trade restrictions or the occurrence of trade wars could have a
material adverse effect on our business, financial position and results of operation.
We rely on independent shipping companies to deliver inventory to us and to ship products to customers.
We rely on arrangements with independent shipping companies, for the delivery of our products from suppliers and to
customers. The failure or inability of these shipping companies to deliver products, or the unavailability of their shipping services,
even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in
freight surcharges due to rising fuel costs and added security. This could adversely impact our selling, general and administrative
expenses or lead to price increases to our customers which could decrease customer demand for our products.
Changes in accounting rules could have a material adverse impact on our results of operations.
We prepare our financial statements in conformity with accounting principles generally accepted in the United States.
These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company
Accounting Oversight Board, the United States Securities and Exchange Commission (SEC), the American Institute of Certified
Public Accountants and various other bodies formed to interpret and create appropriate accounting policies. A change in these
policies or a new interpretation of an existing policy could have a significant effect on our reported results and may affect our
reporting of transactions.
Changes in income tax and other regulatory legislation.
We operate in compliance with applicable laws and regulations and make plans for our structure and operations based
upon existing laws and anticipated future changes in the law. When new legislation is enacted with minimal advance notice, or
when new interpretations or applications of existing laws are made, we may need to implement changes in our policies or
structure. We are susceptible to unanticipated changes in legislation, especially relating to income and other taxes, import/export
laws, hazardous materials and other laws related to trade, accounting and business activities. Such changes in legislation may
have an adverse effect on our business.
We may be subject to litigation.
We may be subject to legal claims or regulatory matters involving stockholder, consumer, antitrust, intellectual property
and other issues. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could
include monetary damages or other adverse effects. Were an unfavorable ruling to occur, there exists the possibility of a material
adverse impact on our business, financial position and results of operations for the period in which the ruling occurred or future
periods.
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We may incur product liability claims which could be costly and could harm our reputation.
The sale of our products subjects us to the risk of product liability claims. We have also been increasing our focus on
sales of our proprietary Ventev® products and on providing an increased level of support services, including product and network
designs, which also subjects us to risk of product liability and performance claim risk. We seek to allocate product liability risk to
our suppliers where available, but may not be successful in doing so. We currently maintain product liability insurance, but our
product liability insurance coverage is subject to various coverage exclusions and limits and may not be obtainable in the future
on terms acceptable to us, or at all. We do not know whether claims against us with respect to our products and services, if any,
would be successfully defended or whether we might be successful in allocating that risk to others, or whether our insurance
would be sufficient to cover liabilities resulting from such claims. Any claims successfully brought against us could adversely
affect our financial condition, and if substantial and relating to our products or industry generally, could adversely affect our
business as a whole.
Our expanding offering of private labeled products may have a negative impact on our relationship with our manufacturer
partners.
Our product offering includes a growing number of our own proprietary products, which represented approximately 12%
of our sales in fiscal year 2019. Our proprietary products often compete with other manufacturers' branded items that we offer. A
manufacturer may choose to not sell its products to us, or may substantially increase the price of products to us, in response to the
competition created by the sales of our proprietary branded products. Either could have an adverse effect on our business and
financial performance.
A significant portion of our product offerings, including a majority of our private label Ventev products and products we
acquire from our suppliers, are manufactured in foreign countries, making the price and availability of these products
susceptible to international trade risks and other international conditions.
A significant portion of our products are manufactured in foreign countries, including Mexico and China. The countries,
specifically Mexico and China, in which many of our products currently are manufactured or may be manufactured in the future
are or could become subject to trade restrictions imposed by the U.S., including increased tariffs or quotas, embargoes and
customs restrictions, which would increase the cost or could reduce the supply of products available to us, and could have a
material adverse effect on our business, financial condition and results of operations. Recently, uncertainty has increased
regarding tax and trade policies, border adjustments, tariffs and government regulations affecting trade between the U.S. and
other countries, such as Mexico and China. This includes the imposition of tariffs or penalties on products manufactured outside
the United States, including the May 9, 2019 announcement of the United States government’s imposition of a 25% tariff on a
range of products exported from China to the U.S. on or after May 10, 2019. China thereafter announced a plan to impose tariffs
on imports to China of a wide range of American products, in retaliation for the American tariffs. There is also a concern that the
imposition of additional tariffs by the United States could result in the adoption of tariffs by other countries as well. Such tariffs
on imports from foreign countries, as well as changes in tax and trade policies, such as a border adjustment tax or disallowance of
certain tax deductions for imported product, could materially increase our manufacturing costs, the costs of our imported products
or our income tax expense, which would have a material adverse effect on our financial condition and results of operations.
Tariffs imposed by China or other foreign countries on imports of our products could also adversely affect our international e-
commerce sales. Any increase in manufacturing costs, the cost of our products or limitation on the amount of products we are
able to purchase, could have a material adverse effect on our financial condition and results of operations.
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Legislative or regulatory action could be taken that could limit our ability to use certain foreign suppliers to supply us with
products.
Members of the U.S. Congress and certain regulatory agencies have raised concerns about American companies
purchasing equipment and software from Chinese telecommunications companies, including concerns relating to alleged
violations of intellectual property rights by Chinese companies and potential security risks posed by U.S. companies purchasing
technical equipment and software from Chinese companies. In October 2012, the U.S. House of Representatives Permanent Select
Committee on Intelligence issued a report asserting that network equipment manufactured by Chinese telecommunications
companies poses a security threat to the United States and recommending the use of other network suppliers. The report also
recommends that Congress consider adopting legislation to address these and other purported risks. Any such legislative or
regulatory requirement that restricts us from purchasing or utilizing equipment or software from Chinese or other foreign
companies with which we do or seek to do business, any determination by foreign companies upon which we rely to cease doing
business in the United States, any determination by any of our suppliers or customers not to do business with us on account of
actual or perceived business relationships that we may have with these suspect Chinese or other foreign companies, or any
determination that we otherwise make that it is either necessary or advantageous for us to cease doing business with such foreign
companies, could limit our product offerings, result in increased costs of goods and have a material adverse effect on our financial
condition and results of operations.
Claims that our products infringe the proprietary rights of others could harm our business and cause us to incur significant
costs.
Our industry has increasingly been subject to patent and other intellectual property rights litigation. We expect this trend
to continue and accelerate and expect that we may be required to defend against this type of litigation, not only asserted against
our own intellectual property rights, but also against the intellectual property of products which we have purchased for resale.
Further, we may be obligated to indemnify and defend our customers if the products or services we supply to them are alleged to
infringe a third party’s intellectual property rights. While we may be able to seek indemnification from our suppliers to protect
our customers and us from such claims, there is no assurance that we will be successful in negotiating contractual terms with our
suppliers to provide for such indemnification, or that we will otherwise be successful in obtaining such indemnification or that we
will be protected from such claims. We may also be prohibited from marketing products, could be forced to market products
without desirable features, or could incur substantial costs to defend legal actions, including where third parties claim that we or
suppliers who may or may not have indemnified us are infringing upon their intellectual property rights. In recent years,
individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement
and attempting to extract settlements from target companies. Even if we believe that such infringement claims are without merit,
the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business.
Claims of intellectual property infringement may require us to enter into costly settlements or pay costly damage awards, or face a
temporary or permanent injunction prohibiting us from marketing or selling certain products or services, which could affect our
ability to compete effectively. If an infringement claim is successful, we may be required to pay damages or seek royalty or
license arrangements, which may not be available on commercially reasonable terms. Even if we have an agreement that
indemnifies us against such costs, the indemnifying party may be unable or unwilling to uphold its contractual obligations to us.
We may be adversely affected by laws or regulations.
We are subject to various U.S. Federal, state and local, and non-U.S. laws and regulations. We cannot predict the
substance or impact of pending or future legislation or regulations, or the application thereof. The introduction of new laws or
regulations or changes in existing laws or regulations, or the interpretations thereof, could increase the cost of doing business for
us or our customers or suppliers or restrict our actions and adversely affect our financial condition, operating results and cash
flows. For example, annual disclosure and reporting requirements relating to the SEC’s conflict minerals rule require us to
perform a reasonable country of origin inquiry and conduct further due diligence measures on our supply chain. There are costs
and uncertainties associated with complying with these disclosure requirements, including for diligence to determine the sources
of conflict minerals that we may find to be used in our products.
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RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
A significant portion of our voting stock is controlled by our executive officers, directors and beneficial owners of 5% or more
of our common stock.
Our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates, in the
aggregate, beneficially owned approximately 43% of our outstanding common stock as of March 31, 2019. Robert B. Barnhill,
Jr., our Chairman of the Board, beneficially owned approximately 20% of our outstanding common stock as of March 31, 2019.
These shareholders, and particularly if they decide to act together, have or would have the ability to significantly influence all
matters requiring shareholder approval, including the election of directors and any significant corporate transaction requiring
shareholder approval.
We may not be able to continue to pay dividends on our common stock in the future, which could impair the value of our
common stock.
We have paid a quarterly dividend on our common stock since the second quarter of fiscal year 2010. Any future
declaration of dividends remains subject to further determination from time to time by our Board of Directors. Our ability to pay
dividends in the future will depend on our financial results, liquidity and financial condition. Under Delaware law, dividends to
shareholders may be made only from the surplus of a company, or, in certain situations, from the net profits for the current fiscal
year or the fiscal year before which the dividend is declared. Our secured revolving credit facility restricts our ability to pay cash
dividends upon a default, and when our borrowing availability is below $15.0 million, or in certain more limited circumstances
$11.3 million, and contains other financial covenants and ratios that could restrict future dividend payments. There is no
assurance that we will be able to pay dividends in the future, or if we are able to, that our Board of Directors will continue to
declare dividends in the future, at current rates or at all. If we discontinue or reduce the amount or frequency of dividends, the
value of our common stock may be impaired.
Our quarterly financial results may fluctuate, which could lead to volatility in our stock price.
Our revenue and operating results have fluctuated from quarter to quarter in the past and may continue to do so in the
future. As a result, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future
performance. Fluctuations in our revenue and operating results could negatively affect the trading price of our stock. Most of our
operating expenses, such as compensation expenses, do not vary directly with the amount of sales and are difficult to adjust in the
short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce
operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income for
the quarter. Therefore, our revenue and results of operations may, in the future, be below the expectations of analysts and
investors, which could cause our stock price to decline. Factors that are likely to cause our revenue and operating results to
fluctuate include the risk factors discussed throughout this section.
Without approval of our Board of Directors, it may be difficult for a third party to acquire control of the Company. This could
affect the price of our common stock.
Certain provisions of our certificate of incorporation and bylaws, including advance notice bylaws, certain arrangements
to which we are party, and applicable provisions of the Delaware General Corporation Law (DGCL) may each make it more
difficult for or may prevent a third party from acquiring control of us or changing our Board of Directors and management. We
are afforded the protections of Section 203 of the DGCL, which will prevent us from engaging in a business combination with a
person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such
common stock, unless Board of Director or shareholder approval were obtained. Some believe that the provisions described
above, as well as any resulting delay or prevention of a change of control transaction or changes in our Board of Directors or
management, could deter potential acquirers or prevent the completion of a transaction in which our shareholders could receive a
substantial premium over the then current market price for their shares. We, on the other hand, believe that these provisions serve
to protect our shareholders against abusive takeover tactics, to preserve and maximize the value of the Company for all
shareholders, and to better ensure that each shareholder will be treated fairly in the event of an unsolicited offer to acquire the
Company.
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Potential uncertainty resulting from unsolicited acquisition proposals and related matters may adversely affect our business.
In the past we have received, and in the future, we may receive, unsolicited proposals to acquire our company or our
assets. For example, in September 2010, the Board of Directors received an unsolicited non-binding proposal for the acquisition
of all of our stock. The review and consideration of acquisition proposals and related matters could require the expenditure of
significant management time and personnel resources. Such proposals may also create uncertainty for our employees, customers
and suppliers. Any such uncertainty could make it more difficult for us to retain key employees and hire new talent, and could
cause our customers and suppliers to not enter into new arrangements with us or to terminate existing arrangements. Additionally,
we and members of our Board of Directors could be subject to future lawsuits related to unsolicited proposals to acquire us. Any
such future lawsuits could become time consuming and expensive.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters and primary distribution center, known as the Global Logistics Center (GLC), is located in a
Company-owned 184,000 square-foot facility north of Baltimore, in Hunt Valley, Maryland.
Our sales, marketing and administrative offices are located in 102,200 square feet of leased office space near the GLC,
in Timonium, Maryland. The monthly rent payments range from $174,500 to $185,100 throughout the remaining lease term,
which expires on December 31, 2020.
In addition, we lease 66,000 square feet of office and warehouse space adjacent to the GLC in Hunt Valley, Maryland.
The monthly rent for this facility ranges from $38,200 to $39,300 throughout the remaining lease term, which expires on July 31,
2020, subject to our annual option to terminate.
Additional sales and marketing offices are located in 13,100 square feet of leased office space in San Antonio, Texas.
Monthly rent payments range from $18,000 to $19,100 and the lease expires October 31, 2021.
West coast sales and fulfillment are facilitated by our Company-owned 115,000 square-foot Americas Sales & Logistics
Center (ALC) located in Reno, Nevada. The ALC is used to configure and fulfill product and supply chain solutions, provide
disaster backup for the GLC, and allow for future growth of staffing and increased fulfillment capabilities.
While we anticipate the need for additional space, we believe our existing facilities are generally adequate for our
current requirements and that suitable additional space will be available as needed to accommodate future expansion of our
operations.
Item 3. Legal Proceedings.
Lawsuits and claims are filed against us from time to time in the ordinary course of business. We do not believe that any
lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material
adverse effect on our financial condition or results of operations. In addition, from time to time, we are also subject to review
from federal and state taxing authorities in order to validate the amounts of income, sales and/or use taxes which have been
claimed and remitted. Currently, our New York income tax return for tax year 2016 and California sales tax returns for the period
January 1, 2016 through December 31, 2018 are under examination by applicable taxing authorities.
As we are routinely audited by state taxing authorities, we have estimated exposure and established reserves for our
estimated sales tax audit liability.
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Item 4. Mine Safety Disclosures
Not applicable.
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Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been publicly traded since September 28, 1994, on the Nasdaq Market (currently Nasdaq Global
Select), under the symbol "TESS."
As of May 28, 2019, the number of shareholders of record of the Company was 170. We estimate that the number of
beneficial owners as of that date was approximately 4,383.
On July 28, 2009, we announced that our Board of Directors decided to commence a dividend program and we have
since declared dividends on a quarterly basis. Any future declaration of dividends and the establishment of any corresponding
record and payment dates remains subject to further determination from time to time by the Board of Directors. Additional
information with respect to the quarterly dividends declared in fiscal years 2019 and 2018 is contained in our Selected Financial
Data. The declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings,
financial condition, business development needs and regulatory considerations, and is at the discretion of our Board of Directors.
Our revolving credit facility may limit the amount of cash dividends that we may pay based on financial covenants and ratios that
may restrict the future payment of dividends.
We also withhold shares from our employees and directors from time to time to facilitate employees’ minimum federal
and state tax withholdings related to vested performance stock units, restricted stock and exercised stock options. For fiscal years
2019 and 2018 the total value of shares withheld for taxes were $111,000 and $65,400, respectively.
Our secured revolving credit facility with SunTrust Bank restricts our ability to pay dividends and to repurchase our
shares, either upon a default or when our borrowing availability is below $15.0 million, or in certain more limited circumstances
$11.3 million, and also limits to $2.0 million the aggregate dollar value of shares that may be withheld or repurchased in
connection with satisfaction of tax withholding obligations related to vested equity grants during any 12 month period. This
revolving credit facility also contains other financial covenants and ratios that could restrict dividends and repurchases. At March
31, 2019 we had the ability to withhold or repurchase $1.9 million in additional shares of our common stock during fiscal 2019,
without violating this covenant.
The information required by Item 201(d) of Regulation S-K, pursuant to paragraph (a) of Item 5 of Form 10-K, is
incorporated by reference to the information set forth under the caption “Equity Compensation Plan Information” in the
Company’s Proxy Statement for the 2019 Annual Meeting of Shareholders, which is anticipated to be filed pursuant to Regulation
14A no later than one hundred twenty (120) days following the end of the fiscal year reported on.
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Stock Performance Graph
The graph set forth below shows the value of an investment of $100 on March 31, 2014 in each of the Company’s
common stock, the Russell 2000 Index and a peer group for the period of March 31, 2014 to March 31, 2019. The graph assumes
that all dividends, if any, were reinvested.
3/30/2014 3/29/2015 3/27/2016 3/26/2017 4/1/2018 3/31/2019
Technologies
TESSCO
Incorporated
Russell 2000
(1)
Peer Group
$ 100.00 $ 74.53 $ 52.39 $ 48.72 $ 79.15 $ 55.78
143.20
123.54
109.10
93.51
140.32
116.54
122.61
104.05
100.00
100.00
96.28
92.87
(1)
– The Peer Group consists of the following: Anixter International Inc., Cool Holdings Inc., ScanSource Inc., Tech Data Corp and W. W. Grainger Inc.
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Table of Contents
The peer group was selected based on a review of publicly available information about these companies and the
Company’s determination that they are engaged in business similar to that of the Company.
Item 6. Selected Financial Data.
STATEMENT OF
INCOME DATA
Revenues
Cost of goods sold
Gross profit
Selling, general and administrative
expenses
Restructuring charge
Operating expenses
Income from operations
Interest, net
Income before provision for income
taxes
Provision for income taxes
Net income
Diluted earnings per share
Cash dividends declared per common
share
Percentage of Revenues
Revenues
Cost of goods sold
Gross profit
Selling, general and administrative
expenses
Restructuring charge
Operating expenses
Income from operations
Interest, net
Income before provision for income
taxes
Provision for income taxes
Net income
SELECTED OPERATING DATA
Average non-consumer buyers per month
Return on assets
Return on equity
(1)
(2)
Fiscal Years Ended
March 31, 2019 April 1, 2018 March 26, 2017 March 27, 2016 March 29, 2015
$ 606,813,800 $ 580,274,700 $ 533,295,100
421,527,300
460,046,300
111,767,800
120,228,400
485,455,100
121,358,700
$ 530,682,100
418,716,200
111,965,900
$ 549,619,000
431,980,500
117,638,500
113,213,700
—
113,213,700
8,145,000
853,800
112,326,700
—
112,326,700
7,901,700
429,100
108,416,300
806,600
109,222,900
2,544,900
58,600
102,932,300
—
102,932,300
9,033,600
161,300
102,686,700
573,400
103,260,100
14,378,400
167,300
7,291,200
1,745,400
5,545,800 $
0.65 $
7,472,600
2,277,200
5,195,400 $
0.61 $
2,486,300
1,041,200
1,445,100
0.17
0.80 $
0.80 $
0.80
8,872,300
3,531,800
5,340,500
0.65
14,211,100
5,576,800
8,634,300
1.04
$
$
0.80
$
0.80
$
$
$
$
$
$
100.0 %
80.0
20.0
100.0 %
79.3
20.7
18.7
—
18.7
1.3
0.1
1.2
0.3
0.9 %
19.4
—
19.4
1.4
0.1
1.3
0.4
0.9 %
100.0 %
79.0
21.0
20.3
0.2
20.5
0.5
—
100.0 %
78.9
21.1
19.4
—
19.4
1.7
—
0.5
0.2
0.3 %
1.7
0.7
1.0 %
100.0 %
78.6
21.4
18.7
0.1
18.8
2.6
—
2.6
1.0
1.6 %
March 31,
2019
April 1,
2018
Fiscal Years Ended
March 26,
2017
March 27, 2016 March 29, 2015
10,500
11,600
12,500
12,200
12,400
2.7 %
5.1 %
2.8 %
4.8 %
0.8 %
1.3 %
3.0 %
4.7 %
4.6 %
7.6 %
28
Table of Contents
BALANCE SHEET DATA
Working capital
Total assets
Short-term debt
Long-term debt
Shareholders' equity
As of Fiscal Years Ended
March 31, 2019 April 1, 2018 March 26, 2017 March 27, 2016 March 29, 2015
$ 74,636,000
206,495,800
14,380,400
—
108,787,200
$ 74,789,400
199,423,700
10,862,700
2,300
108,051,600
$ 77,194,500
173,980,500
26,500
29,800
108,016,300
$ 82,523,600
169,416,000
251,100
1,706,500
112,527,300
$ 82,220,900
186,240,600
250,700
1,957,500
113,142,100
(1)
(2)
Net income divided by the average total assets.
Net income divided by the average total equity.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This Management’s Discussion and Analysis of Results of Operations and Financial Condition (MD&A) should be read
in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, “Item 1: Business,” Part II, “Item 6:
Selected Financial Data,” and Part II, “Item 8: Financial Statements and Supplementary Data.” The various sections of this
MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected
by the uncertainties and risk factors described throughout this filing, including Part I, “Item 1A: Risk Factors.” Our actual results
may differ materially from those described in any such forward-looking statement.
Business Overview and Environment
TESSCO Technologies Incorporated (“Tessco”, “we”, “our”, “us”, or the “Company”) architects and delivers innovative
product and value chain solutions to support wireless systems. Although we sell products to customers in almost 100 countries,
approximately 97% of our sales are to customers in the United States. We have operations and office facilities in Timonium and
Hunt Valley, Maryland, Reno, Nevada and San Antonio, Texas.
The Company 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) value-added resellers and integrators, which results from the
consolidation of our previously identified value-added resellers, government channels and private system operator markets, and
reflects implementation over the 2019 fiscal year of an enhanced go-to-market strategy. This new strategy and the corresponding
consolidation of these customer markets is expected to increase sales opportunities across the consolidated group as well as
provide better coverage to customers and better align territories with supplier partners. In conjunction with our identification of
the value-added resellers and integrators as a newly identified market, as described above, market revenue and gross profit as
reported for the prior periods reflected in this Annual Report on Form 10-K have been reclassified accordingly. The retail
segment includes retailers, independent dealer agents and carriers. 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.
We offer a wide range of products that are classified into four business categories: base station infrastructure; network
systems; installation, test and maintenance; and mobile devices and accessories. Base infrastructure products are used to build,
repair and upgrade wireless telecommunications. Sales of traditional base station infrastructure products, such as base station
radios, cable and transmission lines and antennas are in part dependent on capital spending in the wireless communications
industry. Network systems products are used to build and upgrade computing and internet networks. We have also been growing
our offering of wireless broadband, network equipment, security and surveillance products, which are not as dependent on the
overall capital spending of the industry. Installation, test and maintenance products are used to install, tune, and maintain wireless
communications equipment. This category is made up of sophisticated analysis equipment and various frequency-, voltage- and
power-measuring devices, replacement parts and components as well as an assortment of tools, hardware and supplies required by
service technicians. Mobile devices and accessory products include cellular phone and data device accessories. Our customers
generally have the ability to purchase from any of our product categories.
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Table of Contents
The wireless communications distribution industry is competitive and fragmented, and is comprised of several national
distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the
mobile devices and accessory market, and the risk of new competitors entering the market is high. Consolidation of larger
wireless carriers has and will most likely continue to impact our current and potential customer base. In addition, the agreements
or arrangements with our customers or suppliers looking to us for product and supply chain solutions are typically of limited
duration and are terminable by either party upon several months or otherwise short notice . Our ability to maintain these
relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and
depth of our product offering, our information technology system, our large customer base and our purchasing relationships with
approximately 420 manufacturers provide us with a significant competitive advantage over new entrants to the market.
Results of Operations
The following tables summarize the results of our operations for fiscal years 2019, 2018 and 2017:
(Dollars in thousands, except per share data)
2018 to 2019
2017 to 2018
2019
2018
$ Change
% Change
2017
$ Change
% Change
Segment Revenues
Commercial Segment:
Public Carriers
Value-added resellers and integrators
Total Commercial Revenues
Retail Segment:
Retail
Total Revenues
$ 156,983
262,062
419,045
$ 115,061
270,615
385,676
$
41,922
(8,553)
33,369
36.4 % $
82,015
(3.2)% 249,670
331,685
8.7 %
$
33,046
20,945
53,991
187,769
$ 606,814
194,599
$ 580,275
$
(6,830)
26,539
(3.5)% 201,610
4.6 % $ 533,295
$
(7,011)
46,980
40.3 %
8.4 %
16.3 %
(3.5)%
8.8 %
2019
2018
$ Change
% Change
2017
2018 to 2019
2017 to 2018
$ Change % Change
Segment Gross Profit
Commercial Segment:
Public Carriers
Value-added resellers and integrators
Total Commercial Gross Profit
Retail Segment:
Retail
Total Gross Profit
$
20,275
64,130
84,405
$
16,707
64,620
81,327
$
36,954
121,359
38,901
120,228
Selling, general and administrative expenses
Restructuring Charge
Operating Expenses
Income from operations
Interest, net
Income before provision for income taxes
Provision for income taxes
Net income
113,214
—
113,214
8,145
854
7,291
1,745
5,545
$
112,327
—
112,327
7,901
429
7,472
2,277
5,195
$
3,568
(490)
3,078
(1,947)
1,131
887
—
887
244
425
(182)
(532)
350
21.4 % $
(0.8)%
3.8 %
13,706
61,838
75,544
$
(5.0)%
36,224
0.9 % 111,768
0.8 % 108,416
807
—
0.8 % 109,223
2,545
3.1 %
59
99.0 %
2,486
(2.4)%
1,041
(23.4)%
1,445
6.7 % $
3,001
2,782
5,783
2,677
8,460
3,910
(807)
3,104
5,356
371
4,986
1,236
3,750
21.9 %
4.5 %
7.7 %
7.4 %
7.6 %
3.6 %
—
2.8 %
210.5 %
632.3 %
200.5 %
118.7 %
259.4 %
Diluted earnings per share
$
0.65
$
0.61
$
0.04
6.6 % $
0.17
0.44
258.8 %
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Fiscal Year 2019 Compared to Fiscal Year 2018
Revenues. Revenue for fiscal year 2019 increased by 4.6% as compared to fiscal year 2018. In the commercial segment,
revenue increased by 8.7%. Revenue in our public carrier market increased by 36.4%, largely due to increased spending among
our Tier 1 public carrier and contractors customers, and also due in part to better execution of our selling strategy in this market.
The growth was partially offset by a decline in the value-added resellers and integrators market by 3.2%. The revenue growth
within our commercial segment was partially offset by a 3.5% decrease in our retail segment revenue for fiscal year 2019 as
compared to fiscal year 2018. This decrease was due in part to lower sales of key phone launches and less retail store traffic.
Gross Profit. Gross profit increased by 0.9% in fiscal year 2019 as compared to fiscal year 2018. In the commercial
segment, gross profit increased by 3.8%. This increase was primarily driven by increases in our public carriers market of 21.4%
and was offset by a decrease in value-added resellers and integrators market of 0.8%. We experienced margin compression within
our public carrier market primarily due to a change in customer mix, with increased sales going to larger customers which
required better pricing. Within the retail segment, gross profit decreased by 5.0% in fiscal year 2019 as compared to fiscal year
2018. This decrease in gross margin was a result of product mix and the decrease in sales. Overall gross profit margin decreased
to 20.0% in fiscal year 2019, compared to 20.7% in fiscal year 2018, primarily due to changes in customer mix, including the
increase in lower margin sales in the public carrier market.
Our ongoing ability to earn revenues and gross profits from customers and suppliers looking to us for product and supply
chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each relationship
often differ. Among these factors are the strength of the customer’s or supplier’s business, the supply and demand for the product
or service, including price stability, changing customer or supplier requirements, and our ability to support the customer or
supplier and to continually demonstrate that we can improve the way they do business. In addition, the agreements or
arrangements on which our customer and supplier relationships are based are typically of limited duration, typically do not
include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months
or otherwise short notice. Our customer relationships could also be affected by wireless carrier consolidation or global financial
crisis.
A significant portion of our products are manufactured in foreign countries, including Mexico and China. On May 9,
2019, the United States government announced a 25% tariff on a range of products from China that are exported to the U.S..
China thereafter announced a plan to impose tariffs on a wide range of American products in retaliation for such American tariffs.
The imposition of tariffs on products that we import would increase the costs of those products and could adversely affect our
gross profits and overall financial performance. We continue to monitor tariff developments and seek methods to mitigate their
effect, but are still likely to incur additional costs resulting from any additional or continuing tariffs and our mitigation efforts.
We account for inventory at the lower of cost or net realizable value and as a result write-offs/write-downs occur due to
damage, deterioration, obsolescence, changes in prices and other causes. These expenses have been less than 1% of overall
purchases for each of the last three fiscal years.
Selling, General, Administrative and Restructuring Expenses. Total selling, general, administrative and restructuring
expenses increased 0.8% during fiscal year 2019 as compared to fiscal year 2018. Total selling, general, administrative and
restructuring expenses as a percentage of revenues decreased from 19.4% in fiscal year 2018 to 18.7% in fiscal year 2019. The
following are descriptions of changes in significant components of selling, general, administrative and restructuring expenses:
·
Performance bonus expense (including both cash and equity plans) decreased by $1.1 million in fiscal year 2019 as
compared to fiscal year 2018. Our bonus programs are typically based on achieving annual performance targets.
The relationship between expected performance and actual performance led to lower bonus accruals in fiscal 2019,
as compared to fiscal 2018.
· Compensation and benefits expenses decreased by $0.9 million in fiscal year 2019 as compared to fiscal year 2018,
mainly due to $0.8 million in severance costs related to a restructuring of our sales and product teams in fiscal year
2018.
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·
·
Freight out expense increased by $1.7 million in fiscal year 2019 as compared to fiscal year 2018, due to our
increased sales and higher freight costs from freight service providers.
Expenses related to information technology increased by $1.3 million in fiscal year 2019 as compared to fiscal year
2018 primarily due to increased cost to support our sales initiatives and to build more efficient and effective
systems.
We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate
reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions
regarding extension of credit terms to such customers based on this evaluation. Accordingly, we recorded a provision for bad
debts of $1,721,200 and $797,100 for fiscal year 2019 and fiscal year 2018, respectively.
Interest, Net. Net interest expense increased from $429,100 in fiscal year 2018 to $853,800 in fiscal year 2019. The
increase is primarily related to higher borrowing levels on our secured revolving credit facility. Refer to Note 6 the financial
statements included as part of this Annual Report on Form 10-K for additional information on our borrowings.
Income
Taxes,
Net
Income
and
Diluted
Earnings
Per
Share.
The effective tax rates in fiscal year 2019 and 2018 were
23.9% and 30.5%, respectively. The effective tax rate was lower for fiscal 2019, primarily due to the Tax Cuts & Jobs Act which
was signed into law in December 2017 (the “2017 Tax Act”) and went into effect in the third quarter of fiscal 2018. As a result of
the factors discussed above, net income and diluted earnings per share for fiscal year 2018 increased 6.7% and 6.6%, respectively,
compared with fiscal year 2017.
Fiscal Year 2018 Compared to Fiscal Year 2017
Revenues. Revenue for fiscal year 2018 increased by 8.8% as compared to fiscal year 2017. In the commercial segment,
revenue increased by 16.3% with growth in both markets. The public carriers market revenue for fiscal year 2018 increased by
40.3%, as compared to fiscal year 2017, due to increased spending among our tower owner and program manager customers, and
also due in part to better execution of our selling strategy in this market. We increased sales with our current customers and
cultivated new significant customer relationships. This revenue growth was echoed in our value-added resellers and integrators
market, with growth of 8.4%. The revenue growth within our commercial segment was partially offset by a 3.5% decrease in our
retail segment revenue for fiscal year 2018 as compared to fiscal year 2017. This decrease was due in part to consolidation of our
customer base within the retail market and due to a shift in customer behavior where customers are keeping the same phone for
longer periods of time, resulting in lower accessories purchases.
Gross Profit. Gross profit increased by 7.6% in fiscal year 2018 as compared to fiscal year 2017. In the commercial
segment, gross profit increased by 7.7%. This increase was primarily driven by increases in our public carriers market of 21.9%.
We experienced margin compression within our public carriers market primarily due to a change in customer mix, with increased
sales going to larger customers which required better pricing. Gross profit within our value-added resellers and integrators market
increased by 4.5% in fiscal year 2018 as compared to fiscal year 2017. Within the retail segment, gross profit increased by 7.4%
in fiscal year 2018 as compared to fiscal year 2017, despite a decline in revenue. This increase in gross margin was a result of
product mix and increased support from our suppliers. Overall gross profit margin decreased slightly to 20.7% in fiscal year 2018,
compared to 21.0% in fiscal year 2017, primarily due to changes in customer and product mix.
Our ongoing ability to earn revenues and gross profits from customers and suppliers looking to us for product and supply
chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each relationship
often differ. Among these factors are the strength of the customer’s or supplier’s business, the supply and demand for the product
or service, including price stability, changing customer or supplier requirements, and our ability to support the customer or
supplier and to continually demonstrate that we can improve the way they do business. In addition, the agreements or
arrangements on which our customer and supplier relationships are based are typically of limited duration, typically do not
include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months
or otherwise short notice. Our customer relationships could also be affected by wireless carrier consolidation or global financial
crisis.
We account for inventory at the lower of cost or net realizable value and as a result write-offs/write-downs occur
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Table of Contents
due to damage, deterioration, obsolescence, changes in prices and other causes. These expenses have been less than 1% of overall
purchases for each of the last three fiscal years.
Selling, General, Administrative and Restructuring Expenses. Total selling, general, administrative and restructuring
expenses increased 2.8% during fiscal year 2018 as compared to fiscal year 2017. Total selling, general, administrative and
restructuring expenses as a percentage of revenues decreased from 20.5% in fiscal year 2017 to 19.4% in fiscal year 2018. The
following are descriptions of changes in significant components of selling, general, administrative and restructuring expenses:
·
·
·
Performance bonus expense (including both cash and equity plans) increased by $3.0 million in fiscal year 2018 as
compared to fiscal year 2017. Our bonus programs are typically based on achieving annual performance targets.
The relationship between expected performance and actual performance led to higher bonus accruals in fiscal 2018,
as compared to fiscal 2017.
Freight out expense increased by $0.7 million in fiscal year 2018 as compared to fiscal year 2017, due to our
increased sales.
Expenses related to information technology increased by $0.7 million in fiscal year 2018 as compared to fiscal year
2017 primarily due to increased cost relating to Tessco.com improvements.
®
· During fiscal year 2017 we incurred corporate support expenses including both recruiting and professional service
fees relating to the transition to our new CEO. As the transition was completed during fiscal 2017, corporate support
expense decreased by $0.9 million in fiscal year 2018 as compared to fiscal year 2017.
We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate
reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions
regarding extension of credit terms to such customers based on this evaluation. Accordingly, we recorded a provision for bad
debts of $797,100 and $674,200 for fiscal year 2018 and fiscal year 2017, respectively.
Interest, Net. Net interest expense increased, from $58,600 in fiscal year 2017 to $429,100 in fiscal year 2018. The
increase is primarily related to higher borrowing levels on our secured revolving credit facility. Refer to Note 6 to the financial
statements included as part of this Annual Report on Form 10-K for additional information on our borrowings.
Income Taxes, Net Income and Diluted Earnings Per Share. The effective tax rates in fiscal year 2018 and 2017 were
30.5% and 41.9%, respectively. The effective tax rate was lower for fiscal 2018, primarily due to the 2017 Tax Act that went into
effect in the third quarter of fiscal 2018, as well as a change in treatment of a deferred tax liability relating to our accounting for a
key man life insurance policy. The 2017 Tax Act required fiscal year companies to blend their federal tax rates during our fiscal
year 2018. Our annual federal rate for fiscal 2018 was based on 9 months at the old rate of approximately 35% rate and 3 months
at the new 21% rate. We were also able to take a benefit on our net deferred tax liabilities in fiscal 2018, which now reflect the
lower federal rate. See Note 11 “Income Taxes” to the financial statements included as part of this Annual Report on Form 10-K
for additional information on the effect of the 2017 Tax Act and the change in treatment of the deferred tax liability. As a result of
the factors discussed above, net income and diluted earnings per share for fiscal year 2018 increased 259.5% and 258.8%,
respectively, compared with fiscal year 2017.
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Table of Contents
Liquidity and Capital Resources
In summary, our cash flows were as follows:
Cash flow provided by (used in) operating activities
Cash flow used in investing activities
Cash flow (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
2019
2018
$ 8,246,700 $ (9,247,100) $ 3,051,300
(2,563,000)
(3,539,400)
(8,831,000)
4,265,800
10,900 $ (8,520,700) $ (8,342,700)
(5,164,700)
(3,071,100)
$
2017
We generated $8.2 million of net cash from operating activities during fiscal year 2019. This inflow was driven by net
income (net of depreciation and amortization and non-cash stock compensation expense), an increase in accounts payable and a
decrease in inventory, partially offset by an increase in accounts receivable. Accounts payable increased due to strategic purchase
of inventory during the fourth quarter with extended terms to support our public carriers business. Inventory decreased due to an
intentional reduction of overall inventory in line with our efforts to manage working capital. Accounts receivable increased due to
the timing of sales at the end of the fourth quarter of fiscal year 2019 as compared to the fourth quarter of fiscal year 2018.
We used $9.2 million of net cash from operating activities during fiscal year 2018. This outflow was driven by increases
in accounts receivable and inventory, partially offset by net income (net of depreciation and amortization and non-cash stock
compensation expense), and an increase in accounts payable. Increasing sales to our public carrier customers required significant
investments in inventory and at times has resulted in larger accounts receivable balances. Accounts payable also increased in
response to our higher inventory levels. Both current and potential opportunities within our public carrier business have required
an increase in working capital investments. As such, on October 19, 2017 we entered into the Amended and Restated Credit
Agreement, as discussed below, based upon our anticipated borrowing and cash needs.
We generated $3.1 million of net cash from operating activities during fiscal year 2017. This inflow was driven by net
income (net of depreciation and amortization and non-cash stock compensation expense), an increase in accounts payable and a
decrease in prepaid expenses and other current assets partially offset by an increase in accounts receivable and product inventory.
Accounts receivable increased due to higher sales in the fourth quarter of fiscal 2017 as compared to the fourth quarter of fiscal
2016. Inventory and accounts payable increased as a result of strategic purchases combined with a general increase in base station
infrastructure inventory for our public system operators, contractors, and program managers market. Additionally, our inventory
levels for certain Ventev product lines have also increased. The reduction in prepaid expenses and other assets as well as the
decrease in accrued expense and other liabilities are both primarily related to a tower owner customer whose inventory we have
held on its behalf since fiscal year 2015. Because we held the inventory on the tower owner’s behalf, the cost of these goods was
recorded in prepaid expenses and other current assets, and we were unable to recognize the revenue and related cost of goods sold
associated with the transaction until the product physically shipped. During fiscal year 2017, most of the remaining inventory
was shipped and therefore the corresponding portion of the deferred revenue and cost of goods sold were partially recognized.
®
Capital expenditures of $5.2 million in fiscal year 2019 were up from $3.5 million in fiscal year 2018 and from $2.6
million in fiscal year 2017. Fiscal year 2019, 2018 and 2017 capital expenditures were largely comprised of investments in
information technology of $4.4 million, $2.8 million, and $2.4 million, respectively.
Cash flows used in financing in fiscal year 2019 were primarily related to cash dividends paid to shareholders partially
offset by borrowings from our line of credit. Cash flows generated from financing in fiscal year 2018 were primarily related to
borrowings from our line of credit partially offset by cash dividends paid to shareholders. Cash flows used in financing activities
in fiscal year 2017 were primarily related to cash dividends paid to shareholders and the repayment of our term loan which was
secured by a first position deed of trust encumbering Company-owned real property
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Table of Contents
in Hunt Valley, Maryland.
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 our 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 to be maintained at any
time during which the borrowing availability, as determined in accordance with the Credit Agreement, falls below $10 million, as
well as terms that could limit our ability to engage in specified transactions or activities, including (but not limited to) investments
and acquisitions, sales of assets, payment of dividends, issuance of additional debt and other matters.
Pursuant to a related Guaranty and Security Agreement by and among the Company, the other Company affiliate
borrowers under the Credit Agreement and other subsidiaries of the Company, 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, were guaranteed by those Loan Parties 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 all proceeds of the foregoing. The security interests were 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, we entered into a First Amendment to Credit Agreement, pursuant to which, 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 provide
for any increase in 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. Capitalized terms used but not otherwise defined in this and the preceding
three paragraphs have the meanings ascribed to each in the Credit Agreement or First Amendment, as applicable.
On October 19, 2017, the Company and its primary operating subsidiaries, as co-borrowers, entered into an Amended
and Restated Credit Agreement with SunTrust Bank, as Administrative Agent and Lender, and Wells Fargo Bank, National
Association, as a Lender (the "Amended and Restated Credit Agreement"). Pursuant to the Amended and Restated Credit
Agreement, the Credit Agreement for the secured Revolving Credit Facility, as previously established in June 2016, 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.
Capitalized terms used but not otherwise defined in this and the following three paragraphs have the meanings ascribed to each in
the Amended and Restated Credit Agreement.
In addition to expanding the borrowing limit, the Amended and Restated Credit Facility extends the applicable maturity
date to October 19, 2021. The Amended and Restated Credit Agreement otherwise includes representations, warranties,
affirmative and negative covenants (including restrictions) and other terms 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
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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 is 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 the execution and delivery of the Amended and Restated
Credit Agreement, borrowings under the secured Revolving Credit Facility as now evidenced by 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. In any event, 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%. As of March 31, 2019, we had a
$14.4 million balance on the Revolving Credit Facility; therefore, we had $60.6 million available, subject to the Borrowing Base
limitations and compliance with the other applicable terms of the Credit Agreement, including the covenants referenced above.
In connection with the entering into of the Amended and Restated Credit Agreement, the Company and the 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 the Loan Parties 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.
At the end of fiscal year 2019, we were in compliance with the financial covenants applicable under our revolving credit
facility with SunTrust Bank.
On March 31, 2009, we entered into a term loan with the Baltimore County Economic Development Revolving Loan
Fund for an aggregate principal amount of $250,000. The term loan is payable in equal monthly installments of principal and
interest of $2,300, with the balance due at maturity on April 1, 2019. The term loan bears interest at 2.00% per annum and is
secured by a subordinate position on our Hunt Valley, Maryland facility. At March 31, 2019, the principal balance of this term
loan was approximately $2,300.
Working capital (current assets less current liabilities) was flat at $74.6 million as of March 31, 2019, and $74.8 million
as of April 1, 2018. Shareholders' equity was flat at $108.8 million as of March 31, 2019, and $108.1 million as of April 1, 2018.
We believe that our existing cash, payments from customers, and availability under our revolving credit facility
(including any amendment or replacement thereof), or if needed, financing we believe would be available to us from other
sources, will be sufficient to support our operations for at least the next twelve months. We expect to meet short-term liquidity
needs through cash on our balance sheet and operating cash flow, supplemented by our revolving credit facility; and we expect to
meet long-term liquidity needs through these same resources. If we were to undertake an acquisition or other major capital
purchases that require funds in excess of our existing sources of liquidity, we would look to sources of
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funding from additional credit facilities, debt and/or equity issuances. There can be no assurances that such additional future
sources of funding, either to fund an acquisition or major capital purchase, or to support our cash flow needs in the event of the
termination of our existing revolving credit facility before it can be replaced with an asset based facility, would be available on
terms acceptable to us, if at all.
In addition, our liquidity could be negatively impacted by decreasing revenues and profits resulting from a decrease in
demand for our products or a reduction in capital expenditures by our customers, or by the weakened financial conditions of our
customers or suppliers, in each case as a result of a possible downturn in the global economy, among other factors.
Contractual Obligations
The following tables reflect a summary of our contractual cash obligations and other commercial commitments as of March 31,
2019:
Revolving credit facility
Lease Obligations
Other Long-Term Liabilities
(1)
(2)
Total contractual cash obligations
Payment Due by Fiscal Year
Total
Less Than
1 Year
Years 1-3
Years 4-5
More Than
5 Years
$ 14,858,300
5,326,400
1,060,275
$ 21,244,975
$ 14,565,600
2,996,700
63,300
$ 17,625,600
292,700
$
2,314,800
126,600
$ 2,734,100
$
$
—
14,900
126,600
141,500
$
—
—
743,775
$ 743,775
(1) We are subject to a 0.25% fee on the unused portion of our revolving credit facility. This balance includes both the unused
fees and current balance on our revolving credit facility.
(2) Other Long-Term Liabilities reflected on the Consolidated Balance Sheet include amounts owed under a Supplemental
Executive Retirement Plan.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of our operations are based on our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of
assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and the understanding of our results of
operations:
Revenue Recognition. We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers,
which we adopted on April 2, 2018, using the modified retrospective method. We recognize revenue when control of promised
goods is transferred to the customer. The amount of revenue recognized reflects the consideration to which the Company expects
to be entitled in exchange for transferring the goods.
During fiscal 2018 and 2017, we complied with ASC 605, Revenue Recognition. We recorded revenues when 1)
persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) price to the buyer is
fixed or determinable, and 4) collectability is reasonably assured.
In most cases, shipments are made using FOB shipping terms. FOB destination terms are used for a portion of sales, and
revenue for these sales is recorded when the product is received by the customer. Prices are always fixed at the time of sale.
Historically, there have not been any material concessions provided to or by customers, future discounts provided by the
Company, or other incentives subsequent to a sale. The Company sells under normal commercial terms
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and, therefore, only records sales on transactions where collectability is reasonably assured. The Company recognizes revenues
net of sales tax.
We recognize revenues from sales transactions containing sales returns provisions at the time of the sale. The potential
for customer returns are considered a component of variable consideration under ASC 606 and it is therefore considered when
estimating the transaction price for a sale. We use the most likely amount method to determine the amount of expected returns.
The amount of expected returns is recognized as a refund liability, representing the obligation to return the customer’s
consideration. The return asset is measured at the former carrying amount of the inventory, less any expected costs to recover the
goods.
Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total
costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service. Some of
these companies have turned to us to implement supply chain solutions, including purchasing inventory, assisting in demand
forecasting, configuring, packaging, kitting and delivering products and managing customer and supplier relations, from order
taking through cash collections. In performing these solutions, we assume varying levels of involvement in the transactions and
varying levels of credit and inventory risk. As our offerings continually evolve to meet the needs of our customers, we constantly
evaluate our revenue accounting based on the guidance set forth in accounting standards generally accepted in the United States.
When applying this guidance in accordance with the FASB standard regarding revenue recognition for principal-agent
considerations, we look at the following indicators: whether we are the primary obligor in the transaction; whether we have
general inventory risk; whether we have latitude in establishing price; whether the customer holds us responsible for the
acceptability of the product; whether the product returns are handled by us; and whether an obligation exists between the other
parties and our customer. Each of our customer relationships is independently evaluated based on the above guidance and
revenues are recorded on the appropriate basis. Based on a review of the factors above, in the majority of our sales relationships,
we have concluded that we are the principal in the transaction and we record revenues based upon the gross amounts earned and
booked. However, we do have certain relationships where we are not the principal and we record revenues on a net fee basis,
regardless of amounts billed (less than 1% of our total revenues for fiscal year 2019).
Allowance for Doubtful Accounts. We use estimates to determine the amount of the allowance for doubtful accounts
necessary to reduce accounts receivable and unbilled receivables to their expected net realizable value. We estimate the amount of
the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection
experience has not varied significantly from estimates, due primarily to credit policies, collection experience and our stability as it
relates to our current customer base. Typical payments from commercial customers are due 30 days from the date of the invoice.
We charge-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are
not collateralized.
Inventory Reserves. We establish inventory reserves for excess and obsolete inventory. We regularly review inventory to
evaluate continued demand and identify any obsolete or excess quantities of inventory. We record a provision for the difference
between excess and obsolete inventory and its estimated realizable value. Estimated realizable value is based on anticipated future
product demand, market conditions and liquidation values. Actual results differing from these projections could have a material
effect on our results of operations.
Impairment of Long-Lived and Indefinite-Lived Assets. Our Consolidated Balance Sheet as of March 31, 2019, includes
goodwill of approximately $11.7 million and other indefinite lived intangible assets of $0.8 million. We perform annual
impairment tests for goodwill and other indefinite lived assets on the first day of our fourth quarter. We also periodically evaluate
our long-lived assets for potential impairment indicators. The goodwill and intangible assets impairment test involves an initial
qualitative analysis to determine if it is more likely than not that an intangible asset’s fair value is less than its carrying amount. If
qualitative factors suggest a possible impairment the company then performs an additional two-step approach. Our judgments
regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational
performance and legal factors. The key assumptions used to determine the fair value of our goodwill reporting units include (a) a
cash flow period; (b) a terminal value based on a growth rate; and (c) a discount rate, which is based on our weighted average cost
of capital adjusted for risks associated with our operations. Based on the Company’s qualitative assessment for fiscal year 2019,
we have concluded that it is not more likely than not that the carrying value of our reporting units with goodwill or intangible
assets is above the fair value of
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the related reporting unit. Due to the change in segment reporting in fiscal year 2018, we performed a quantitative impairment
test for goodwill on the annual impairment testing date in fiscal year 2018. Based on this quantitative testing we have concluded
that it is not more likely than not that the carrying value of our reporting units with goodwill is above the fair value of the related
reporting unit. Future events, such as significant changes in cash flow assumptions, could cause us to conclude that impairment
indicators exist and that the net book value of goodwill, long-lived assets or intangible assets are impaired. We will continue to
monitor our market capitalization as a potential impairment indicator considering overall market conditions and specific industry
events. Had the determination been made that the goodwill and other indefinite lived intangible assets were impaired, the value of
these assets would have been reduced by an amount up to $12.5 million, resulting in a corresponding charge to operations.
The methods of assessing fair value for reporting units with goodwill as well as for indefinite lived assets require
significant judgments to be made by management, including future revenues, expenses, cash flows and discount rates. Changes in
such estimates or the application of alternative assumptions could produce significantly different results.
Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability. This
review is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing
temporary differences. Based on this review, we have established a valuation allowance on the deferred tax assets that are not
more likely than not realizable. If we are unable to generate sufficient taxable income, or if there is a material change in the
actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we
could be required to establish additional valuation allowance against all or a significant portion of our deferred tax assets that are
not more likely than not realizable, resulting in a substantial increase in our effective tax rate and a material adverse impact on our
operating results.
We account for income taxes under the FASB’s ASC No. 740 on accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides
guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition.
Stock-Based Compensation. We record stock-based compensation in accordance with the FASB standard regarding
stock compensation and share-based payments. We account for forfeitures as they occur rather than estimate expected forfeitures.
The standard also requires stock awards granted or modified after the adoption of the standard that include both performance
conditions and graded vesting to be amortized by an accelerated method rather than the straight-line method.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Recent Accounting Pronouncements
A description of recently issued and adopted accounting pronouncements is contained in Note 2 to our Consolidated
Financial Statements.
Forward‑‑Looking Statements
This Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of
historical facts contained herein, including statements regarding our future results of operations and financial position, strategy
and plans, and our expectations for future operations, are forward-looking statements. These forward-looking statements may
generally be identified by the use of the words “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” and similar
expressions, but the absence of these words or phrases does not necessarily mean that a statement is not forward looking.
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We have based these forward-looking statements on our current expectations and projections about future events and
trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations
and objectives, and financial needs. Forward looking statements involve a number of risks and uncertainties. Our actual results
may differ materially from those described in or contemplated by any such forward-looking statement for a variety of reasons,
including those described in Part I, Item IA “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-
looking events and circumstances included herein may not occur, and actual results could differ materially and adversely from
those anticipated or implied in the forward-looking statements. Consequently, the reader is cautioned to consider all forward-
looking statements in light of the risks to which they are subject. Forward-looking statements include, but are not limited to,
statements about:
·
·
·
·
·
·
·
·
·
·
·
our ability to sustain or grow our customer base and market share;
our ability to sustain and grow our supplier relationships;
our expectations regarding the size and growth in markets;
the needs and demands of our customers and the production capacity of our suppliers;
trends in the wireless communications industry, our competitors and competing business models;
the execution of our business plans and strategies;
our liquidity and working capital requirements and ability to access capital;
our ability to secure, maintain and upgrade our information technology, telecommunications and e-commerce
systems;
our ability to anticipate and navigate existing and changes in laws or regulations, including tariffs and trade
restrictions, applicable to our business;
our ability to enter into and perform contracts and to realize anticipated revenues or anticipated savings; and
our expectations regarding future revenues, expenses and profitability, and financial results generally
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes
responsibility for the accuracy and completeness of any of these forward-looking statements. Any forward-looking statement
made by us in this Annual Report speaks only as of the date on which it is made. We disclaim any duty to update any of these
forward-looking statements after the date of this Annual Report to confirm these statements to actual results or revised
expectations.
The above list should not be construed as exhaustive and should be read in conjunction with our other disclosures,
including but not limited to the risk factors described in Part I, Item 1A of this Annual Report. Other risks may be described from
time to time in our filings made under the securities laws. New risks emerge from time to time. It is not possible for our
management to predict all risks. All forward-looking statements in this Annual Report speak only as of the date made and are
based on our current beliefs and expectations. We undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
Available Information
Our internet web site address is: www.tessco.com. We make available free of charge through our website, our Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the Securities and Exchange Commission. Also available on our website is our Code of
Business Conduct and Ethics. We have not incorporated herein by reference the information on our website, and it should not be
considered a part of this filing.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk:
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We are exposed to an immaterial level of market risk from changes in interest rates. We have from time to time
previously used interest rate swap agreements to modify variable rate obligations to fixed rate obligations, thereby reducing our
exposure to interest rate fluctuations. We had no long-term variable rate debt obligations as of March 31, 2019. Based on March
31, 2019 borrowing levels, a 1.0% increase or decrease in current market interest rates would have no material effect on our
statement of income.
Foreign Currency Exchange Rate Risk:
We are exposed to an immaterial level of market risk from changes in foreign currency rates. Almost all of our sales are
made in U.S. Dollars so we have an immaterial amount of foreign currency risk. Those sales not made in U.S. Dollars are made
in Canadian Dollars.
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Item 8. Financial Statements and Supplementary Data.
TESSCO TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
Current assets:
Cash and cash equivalents
Trade accounts receivable, net of allowance for doubtful accounts of $2,137,900 and
$1,094,900, respectively
Product inventory, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax assets
Other long-term assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable
Payroll, benefits and taxes
Income and sales tax liabilities
Accrued expenses and other current liabilities
Revolving line of credit
Total current liabilities
Long-term liabilities
Total liabilities
Shareholders’ equity:
March 31,
2019
April 1,
2018
$
30,300 $
19,400
93,966,200
71,845,400
5,562,800
171,404,700
87,862,300
72,323,000
4,489,100
164,693,800
15,003,500
11,677,700
55,300
8,354,600
13,662,800
11,677,700
710,500
8,678,900
$ 206,495,800 $ 199,423,700
$
73,059,700 $
5,929,500
749,000
2,652,400
14,378,100
96,768,700
67,041,100
8,291,100
2,339,200
1,397,600
10,835,400
89,904,400
939,900
97,708,600
1,467,700
91,372,100
Preferred stock, $0.01 par value per share, 500,000 shares authorized and no shares
issued and outstanding
Common stock, $0.01 par value per share, 15,000,000 shares authorized, 14,190,027
shares issued and 8,468,529 shares outstanding as of March 31, 2019, and 14,111,703
shares issued and 8,396,537 shares outstanding as of April 1, 2018
Additional paid-in capital
Treasury stock, at cost, 5,721,498 shares as of March 31, 2019 and 5,715,166 shares as
of April 1, 2018
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
—
—
99,800
62,666,400
99,000
60,611,900
(57,614,100)
103,635,100
108,787,200
(57,503,000)
104,843,700
108,051,600
$ 206,495,800 $ 199,423,700
The accompanying Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.
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TESSCO TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income
Revenues
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Restructuring Charge
Income from operations
Interest expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Basic weighted-average common shares outstanding
Effect of dilutive options and other equity instruments
Diluted weighted-average common shares outstanding
Cash dividends declared per common share
March 31, 2019
Fiscal Years Ended
April 1, 2018
March 26, 2017
$
$
$
$
$
606,813,800 $
485,455,100
121,358,700
113,213,700
—
8,145,000
853,800
7,291,200
1,745,400
5,545,800 $
0.66 $
0.65 $
8,436,796
130,163
8,566,959
580,274,700 $
460,046,300
120,228,400
112,326,700
—
7,901,700
429,100
7,472,600
2,277,200
5,195,400 $
0.62 $
0.61 $
8,370,742
100,263
8,471,005
0.80 $
0.80 $
533,295,100
421,527,300
111,767,800
108,416,300
806,600
2,544,900
58,600
2,486,300
1,041,200
1,445,100
0.17
0.17
8,312,731
27,686
8,340,417
0.80
The accompanying Notes to these Consolidated Financial Statements are an integral part of these consolidated statements.
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TESSCO TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Balance at March 27, 2016
Proceeds from issuance of stock
Treasury stock purchases
Non-cash stock compensation expense
Excess tax benefit from stock-based compensation
Cash dividends paid
Net income
Balance at March 26, 2017
Proceeds from issuance of stock
Treasury stock purchases
Non-cash stock compensation expense
Excess tax benefit from stock-based compensation
Cash dividends paid
Net income
Balance at April 1, 2018
Proceeds from issuance of stock
Treasury stock purchases
Non-cash stock compensation expense
Cash dividends paid
Net income
Balance at March 31, 2019
Treasury
Common Stock
434,000
—
—
—
59,006,000
Additional
Paid-in
Capital
58,113,800
458,200
Amount
97,600
400
—
400
—
—
—
98,400
Stock
(57,245,200)
—
(192,400)
—
—
—
—
(57,437,600)
Shares
8,272,124
37,432
(12,453)
40,566
—
—
—
8,337,669
44,458
(4,443)
18,853
—
—
—
Retained
Earnings
111,561,100
—
—
—
—
(6,656,700)
1,445,100
106,349,500
Total
Shareholders’
Equity
112,527,300
458,600
(192,400)
434,400
—
(6,656,700)
1,445,100
108,016,300
604,400
(65,400)
1,002,100
—
(6,701,200)
5,195,400
108,051,600
811,300
(111,100)
1,244,000
(6,754,400)
5,545,800
8,468,529 $ 99,800 $ 62,666,400 $ (57,614,100) $ 103,635,100 $ 108,787,200
—
—
—
—
(6,701,200)
5,195,400
(57,503,000) 104,843,700
—
—
—
(6,754,400)
5,545,800
—
—
8,396,537 99,000 60,611,900
500
810,800
—
300
—
—
—
(65,400)
—
—
—
—
—
(111,100)
—
—
—
1,243,700
—
—
52,067
(6,332)
26,257
—
—
400
—
200
—
—
—
1,001,900
604,000
The accompanying Notes to these Consolidated Financial Statements are an integral part of these consolidated statements.
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TESSCO TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization
Loss on sale of property and equipment
Non-cash stock-based compensation expense
Deferred income taxes and other
Change in trade accounts receivable
Change in product inventory
Change in prepaid expenses and other current assets
Change in trade accounts payable
Change in payroll, benefits and taxes
Change in income and sales tax liabilities
Change in accrued expenses and other current liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment
Purchases of internal use software licenses
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from revolving line of credit
Proceeds from note receivable
Payments of debt issuance costs
Payments on long-term debt
Proceeds from issuance of common stock
Cash dividends paid
Excess tax benefit from stock-based compensation
Purchases of treasury stock and repurchases of stock from employees
Net cash (used in) provided by financing activities
Year Ended
March 31, 2019 April 1, 2018
March 26, 2017
$
5,545,800 $
5,195,400 $
1,445,100
3,618,900
—
1,244,000
1,604,100
(6,103,900)
477,600
(1,073,700)
5,073,600
(2,361,600)
(1,590,200)
1,812,100
8,246,700
3,992,600
—
1,002,100
(2,866,100)
(23,158,400)
(8,338,700)
(625,000)
13,459,700
1,519,000
974,500
(402,200)
(9,247,100)
4,238,900
114,500
434,400
(788,600)
(6,388,200)
(10,080,400)
2,053,000
11,595,400
1,844,200
(107,700)
(1,309,300)
3,051,300
(2,855,200)
(2,309,500)
(5,164,700)
(1,646,600)
(1,892,800)
(3,539,400)
(730,200)
(1,832,800)
(2,563,000)
3,542,700
—
—
(27,300)
279,000
(6,754,400)
—
(111,100)
(3,071,100)
10,835,400
75,000
—
(26,700)
148,700
(6,701,200)
—
(65,400)
4,265,800
—
—
(218,200)
(1,901,300)
137,600
(6,656,700)
—
(192,400)
(8,831,000)
Net increase (decrease) in cash and cash equivalents
10,900
(8,520,700)
(8,342,700)
CASH AND CASH EQUIVALENTS, beginning of period
19,400
8,540,100
16,882,800
CASH AND CASH EQUIVALENTS, end of period
$
30,300 $
19,400 $
8,540,100
The accompanying Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.
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Note 1. Organization
TESSCO Technologies Incorporated, a Delaware corporation (“Tessco”, “we”, “our”, 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 97% 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.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending on the Sunday falling on or between March 26 and April 1 to
allow the financial year to better reflect the Company's natural weekly accounting and business cycle. The fiscal year ended
March 31, 2019 contained 52 weeks and the fiscal years ended April 1, 2018 and March 26, 2017 contained 53 weeks and 52
weeks, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with an original maturity of 90 days or less.
Allowance for Doubtful Accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts necessary to reduce
accounts receivable to their expected net realizable value. The Company estimates the amount of the required allowance by
reviewing the status of past-due receivables and analyzing historical bad debt trends and current economic conditions. Actual
collection experience has not varied significantly from estimates, due primarily to consistent credit policies, collection experience,
as well as the Company’s stability as it relates to its current customer base. Typical payments from a large majority of commercial
customers are due 30 days from the date of the invoice. The Company charges-off receivables deemed to be uncollectible to the
allowance for doubtful accounts. Accounts receivable balances are not collateralized.
Product Inventory
Product inventory, consisting primarily of finished goods, is stated at the lower of cost or net realizable value, cost being
determined on the first-in, first-out (“FIFO”) method and includes certain charges directly and indirectly incurred in bringing
product inventories to the point of sale. Inventory is written down for estimated obsolescence equal to the difference between the
cost of inventory and the estimated net realizable value, based upon specifically known inventory-related risks (such as
technological obsolescence and the nature of supplier terms surrounding price protection and product returns), and assumptions
about future demand. At March 31, 2019 and April 1, 2018, the Company had a reserve for excess and obsolete inventory of
$5,870,600 and $5,739,700, respectively.
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Property and Equipment
Property and equipment is stated at cost. Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets as follows:
Information technology equipment
Furniture, telephone system, equipment and tooling
Building, building improvements and leasehold improvements
Useful lives
1 - 3 years
3 - 10 years
2 - 40 years
Leasehold improvements are amortized over the shorter of their useful lives or the remaining lease term.
Other Long-Term Assets
The Company capitalizes computer software costs incurred in connection with developing or obtaining computer
software for internal use when both the preliminary project stage is completed and when management authorizes and commits to
funding the project and it is probable that the project will be completed. Development and acquisition costs are capitalized when
the focus of the software project is either to develop new software, to increase the life of existing software or to add significantly
to the functionality of existing software. Capitalization ceases when the software project is substantially complete and ready for
its intended use.
Impairment of Long-Lived Assets
Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or
changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in
anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the
carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at
the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset
groups. If future undiscounted cash flows are less than the carrying value of the asset group, the Company calculates the fair
value of the asset group. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The
discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. There
were no impairment charges in fiscal years 2019, 2018, or 2017.
Assets to be disposed of are reported at the lower of carrying value or fair values, less estimated costs of disposal.
Goodwill and Other Intangible Assets
Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are
not individually identified and separately recognized. Goodwill amounts and indefinite lived intangible assets are not amortized,
but rather are tested for impairment at least annually or whenever an impairment indicator is identified. The Company performs
its annual impairment test on the first day of its fourth quarter. Intangible assets other than goodwill are recorded within other
long-term assets in the Company’s Consolidated Balance Sheets. The goodwill impairment test involves an initial qualitative
analysis to determine if it is more likely than not that an intangible asset’s fair value is less than its carrying amount. If qualitative
factors suggest a possible impairment, the Company then performs an additional two-step approach. Under the first step, the
Company determines the fair value of each reporting unit to which goodwill has been assigned. The Company then compares the
fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of each reporting
unit using various valuation techniques, with the primary technique being a discounted cash flow or income approach, under
which the Company estimates the present value of the reporting unit’s future cash flows. Key assumptions used to determine the
present value of a reporting unit’s future cash flows include (a) a cash flow period; (b) a terminal value based on a growth rate;
and (c) a discount rate, which is based
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on the Company’s weighted average cost of capital adjusted for risks associated with our operations. If the fair value exceeds the
carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is
considered potentially impaired and the second step is completed in order to measure the impairment loss. Under the second step,
the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets,
including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit as determined in the
first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair
value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.
The indefinite lived intangible asset impairment test involves an initial qualitative analysis to determine if it is more
likely than not that an intangible asset’s fair value is less than its carrying amount. If qualitative factors suggest a possible
impairment, the Company then determines the fair value of the intangible asset. If the fair value of the intangible asset is less than
its carrying value, an impairment loss is recognized for an amount equal to the difference. The intangible asset is then carried at
its new fair value. Fair value is determined using estimates of discounted cash flows. These estimates of discounted cash flows
will likely change over time as impairment tests are performed. Estimates of fair value are also adversely affected by increases in
interest rates and the applicable discount rate.
Based on the Company’s qualitative and/or quantitative impairment testing performed, the Company did not recognize
an impairment loss on goodwill or other indefinite lived intangible assets in fiscal years 2019, 2018, or 2017.
The methods of assessing fair value for our reporting units with goodwill as well as for indefinite lived assets require
significant judgments to be made by management, including future revenues, expenses, cash flows and discount rates. Changes in
such estimates or the application of alternative assumptions could produce significantly different results.
Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, which we adopted on
April 2, 2018, using the modified retrospective method. We recognize revenue when control of promised goods is transferred to
the customer. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in
exchange for transferring the goods.
During fiscal 2018 and 2017, we complied with ASC 605, Revenue Recognition. We recorded revenues when 1)
persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) price to the buyer is
fixed or determinable, and 4) collectability is reasonably assured.
In most cases, shipments are made using FOB shipping terms. FOB destination terms are used for a portion of sales, and
revenue for these sales is recorded when the product is received by the customer. Prices are always fixed at the time of sale.
Historically, there have not been any material concessions provided to or by customers, future discounts provided by the
Company, or other incentives subsequent to a sale. The Company sells under normal commercial terms and, therefore, only
records sales on transactions where collectability is reasonably assured. The Company recognized revenues net of sales tax.
We recognize revenues from sales transactions containing sales returns provisions at the time of the sale. The potential
for customer returns are considered a component of variable consideration under ASC 606 and it is therefore considered when
estimating the transaction price for a sale. We use the most likely amount method to determine the amount of expected returns.
The amount of expected returns is recognized as a refund liability, representing the obligation to return the customer’s
consideration. The return asset is measured at the former carrying amount of the inventory, less any expected costs to recover the
goods .
Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total
costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service. Some of
these companies have turned to us to implement supply chain solutions, including purchasing inventory, assisting in demand
forecasting, configuring, packaging, kitting and delivering products and managing customer and supplier relations, from order
taking through cash collections. In performing these solutions, we assume varying levels of
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involvement in the transactions and varying levels of credit and inventory risk. As our offerings continually evolve to meet the
needs of our customers, the Company constantly evaluates its revenue accounting based on the guidance set forth in accounting
standards generally accepted in the United States. When applying this guidance in accordance with the ASC No. 606, the
Company looks at the following indicators: whether we are the primary obligor in the transaction; whether we have general
inventory risk; whether we have latitude in establishing price; whether the customer holds us responsible for the acceptability of
the product; whether the product returns are handled by us; and whether obligation exists between the other parties and our
customer . Each of the Company’s customer relationships is independently evaluated based on the above guidance and revenues
are recorded on the appropriate basis. Based on a review of the factors above, in the majority of the Company’s sales
relationships, the Company has concluded that it is the principal in the transaction and records revenues based upon the gross
amounts earned and booked. However, the Company does have relationships where it is not the principal and records revenues on
a net fee basis, regardless of amounts billed (less than 1% of total revenues for fiscal year 2019). If applying this revenue
recognition guidance resulted in recording revenues on a different basis from which the Company has previously concluded, or if
the factors above change significantly, revenues could increase or decrease; however, gross profit and net income would remain
constant.
Service revenue associated with training and other services is recognized when the training or work is complete and the
criteria discussed above have been met. Service revenues have represented less than 1% of total revenues for fiscal years 2019,
2018 and 2017.
Other than sales relating to the Company’s private brands, we offer no product warranties in excess of original
equipment manufacturers’ warranties. The Company’s warranty expense is estimated and accrued at the time of sale. Warranty
expense was immaterial for fiscal years 2019, 2018, and 2017.
Supplier Programs
Funds received from suppliers for price protection, product rebates and marketing/promotion are recorded as a reduction
in cost of goods sold in accordance with ASC 705-20: Cost of Sales and Services — Accounting for Consideration Received from
a Vendor.
Shipping and Handling Costs
Shipping costs incurred to ship products from our distribution centers to our customers’ sites are included in selling,
general and administrative expenses in the Consolidated Statements of Income and totaled $16,534,200, $14,875,100, and
$14,179,700 for fiscal years 2019, 2018, and 2017, respectively.
Stock Compensation Awards Granted to Team Members
The Company records stock compensation expense for awards in accordance with ASC No. 718. The Company accounts
for forfeitures as they occur rather than estimate expected forfeitures. The standard also requires stock awards granted or modified
after the adoption of the standard that include both performance conditions and graded vesting based on service to the Company
to be amortized by an accelerated method rather than the straight-line method.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC No. 740. Under
this method, deferred income tax assets and liabilities arise from differences between the tax basis of assets or liabilities and their
reported amounts in the financial statements. Deferred tax balances are determined by using the enacted tax rate to be in effect
when the taxes are paid or refunds received. A valuation allowance related to deferred tax assets is recorded when it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
In accordance with ASC No. 740, the Company recognizes a provision for tax uncertainties in its financial statements for
the year ended April 1, 2018. See Note 11 for further discussion of the standard and its impact on the Company’s consolidated
financial statements.
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Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, the Company reviews and evaluates its estimates and assumptions, including
but not limited to, those that relate to tax reserves, stock-based compensation, accounts receivable reserves, inventory reserves
and future cash flows associated with impairment testing for goodwill and other long-lived assets. Actual results could
significantly differ from those estimates.
Recently issued accounting pronouncements not yet adopted:
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 December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company has identified the full population of leases. The Company expects to record a right-of-use
asset and lease liability on its consolidated balance sheet, of approximately $5.1 million each. The standard will be adopted on the
first day of the Company’s 2020 fiscal year.
In August 2016, the FASB issued Accounting Standards Update 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, on the first day of the Company’s 2020 fiscal year, will have a material impact on its Consolidated Financial
Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments which amends the impairment model by requiring entities to use a forward-looking
approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments,
including trade receivables. This may result in the earlier recognition of allowances for losses. This ASU is effective for periods
beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of this new standard will have
on its Consolidated Financial Statements and will adopt the standard on the first day of the Company’s 2021 fiscal year.
Recently issued accounting pronouncements adopted:
Effective April 2, 2018, the Company adopted the FASB ASU 2014-09, Revenue from Contracts with Customers
(Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and is based on
the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional
disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including
significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The
adoption of ASU 2014-09, using the modified retrospective approach, did not have a significant impact on the timing of revenue
recognition, our results of operations, cash flows, or financial position. Revenue continues to be recognized at a point in time for
our product sales when products are shipped to or received by the customer depending on the shipping terms.
The Company has changed the presentation of its returns reserve. The amount of expected returns are now recognized as
a refund liability within the Accrued Expenses line item of the balance sheet. This liability represents the obligation to return
customer consideration. The value of the expected goods returned by customers is now recognized as
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a return asset within the Prepaid expense and other current assets line item of the balance sheet. The return asset value is initially
measured at the former carrying amount in inventory, less any expected costs to recover the goods. The Company expects
products returned by customers to be in new and salable condition, as required by our standard terms and conditions, and
therefore impairment of the return asset is unlikely. Changes to the return liability are recorded as revenue adjustments and
changes to the inventory asset are recorded as cost of goods sold. As of March 31, 2019, the return asset and return liability
amounts were $1.5 million and $2.0 million, respectively. Prior periods were not adjusted to reflect this change.
On December 22, 2017 President Trump signed into law the “Tax Cut and Jobs Act” (the “Tax Act”). In December
2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), in response to the Tax Act. SAB 118 allows registrants to include a provisional amount to account for the
implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than
one year from the date of enactment of the Tax Act or December 22, 2018. We completed our accounting for the Tax Act in the
third quarter of fiscal 2019 and recorded an immaterial adjustment to the provisional tax benefit amount. Additional tax impacts
from the Tax Act may be recorded, if and as appropriate, due to, among other things, changes in the Company’s interpretation of
the Tax Act and legislative or administrative actions to clarify the intent of the statutory language in a manner that differs from
the our current interpretation.
Note 3. Property and Equipment
All of the Company’s property and equipment is located in the United States and is summarized as follows:
Land
Building, building improvements and leasehold
improvements
Information technology equipment
Furniture, telephone system, equipment and tooling
Less accumulated depreciation and amortization
Property and equipment, net
$
2019
2018
$
4,740,800
$
4,740,800
20,926,500
6,026,300
8,582,800
40,276,400
(25,272,900)
15,003,500
$
20,896,300
4,988,600
7,569,400
38,195,100
(24,532,300)
13,662,800
Depreciation and amortization of property and equipment was $3,618,900, $3,992,600, and $4,238,900 for fiscal years
2019, 2018 and 2017, respectively.
Note 4. Goodwill and Other Intangible Assets
Other intangible assets, which are included in other long-term assets on the accompanying Consolidated Balance Sheets
as of March 31, 2019 and April 1, 2018, consists of indefinite lived intangible assets in the amount of $795,400. There were no
changes in the carrying amount of goodwill for the fiscal years ended March 31, 2019 and April 1, 2018.
Capitalized internally developed computer software, net of accumulated amortization, as of March 31, 2019 and April 1,
2018 was $2,598,000 and $2,379,100, respectively. Amortization expense of capitalized internally developed computer software
was $1,620,800, $1,721,000, and $1,355,000 for fiscal years 2019, 2018, and 2017.
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Note 5. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
Returns Reserve
Other Accrued Expenses
Total Accrued Expenses
March 31, 2019
April 1, 2018
$
$
1,985,700
666,700
2,652,400
$
$
625,700
771,900
1,397,600
Note 6. Borrowings Under Revolving Credit Facility
Fiscal Year 2018 Revolving Credit Facility Activity
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. Capitalized terms used but not
otherwise defined in this and the immediately following three paragraphs have the meanings ascribed to each in the Amended and
Restated Credit Agreement.
In addition to expanding the Company’s borrowing limit, the Amended and Restated Credit Agreement extends the
applicable maturity date to October 19, 2021. The Amended and Restated Credit Agreement otherwise includes representations,
warranties, affirmative and negative covenants (including restrictions) and other terms 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 swing line 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 secured Revolving Credit Facility as now evidenced by 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. On April 1,
2018, the interest rate applicable to borrowings under the replacement Revolving Credit Facility was 3.17%. The weighted
average interest rate on borrowings under the Company’s revolving credit facilities during fiscal year 2018 was 2.89%. 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%.
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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.
Interest expense on this Revolving Credit Facility for fiscal year 2018 totaled $444,200. Average borrowings under this
Revolving Credit Facility totaled $14,938,800 and maximum borrowings totaled $28,596,600 for fiscal year 2018. In addition to
the interest charged on borrowings, the Company is subject to a 0.25% fee on the unused portion of the Revolving Credit Facility,
which is included in interest expense, net on the consolidated statements of income.
Borrowings under the Revolving Credit Facility 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 April 1, 2018, borrowings under
this Revolving Credit Facility totaled $10.8 million and, therefore, the Company had $64.2 million available for borrowing as of
April 1, 2018, subject to the Borrowing Base limitation and compliance with the other applicable terms of the Amended and
Restated 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.
Fiscal Year 2019 Revolving Credit Facility Activity
On March 31, 2019, the interest rate applicable to borrowings under the replacement Revolving Credit Facility was
3.99%. The weighted average interest rate on borrowings under the Company’s revolving credit facilities during fiscal year 2019
was 3.71%. 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.
Interest expense on this Revolving Credit Facility for fiscal year 2019 totaled $836,300. Average borrowings under this
Revolving Credit Facility totaled $22,360,200 and maximum borrowings totaled $33,639,500 for fiscal year 2019. In addition to
the interest charged on borrowings, the Company is subject to a 0.25% fee on the unused portion of the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility 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 March 31, 2019, borrowings under
this Revolving Credit Facility totaled $14.4 million and, therefore, the Company had $60.6 million available for borrowing as of
March 31, 2019, subject to the Borrowing Base limitation and compliance with the other applicable terms of the Amended and
Restated 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.
The Company was in compliance with the terms and financial covenants applicable to the revolving credit facility at the
end of fiscal year 2019 and through the date that these financial statements were issued.
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Note 7. Commitments and Contingencies
The Company is committed to making rental payments under non-cancelable operating leases covering various facilities
and equipment. Rent expense for fiscal years 2019, 2018 and 2017 totaled $3,001,800, $3,041,700, and $3,047,500, respectively.
The Company leases office space in Timonium, Maryland, where the Company’s sales, marketing and administrative
offices are located. This space is nearby to the Company’s Global Logistics Center in Hunt Valley, Maryland. The Agreement of
Lease expires on December 31, 2020. Monthly rent payments now range from $174,500 to $185,100 through the remaining lease
term.
The Company also leases office and warehouse space in Hunt Valley, Maryland, adjacent to the Company’s Global
Logistics Center, expiring on July 31, 2020; however, the Company has an ongoing annual option to terminate the lease. The
monthly rental fee ranges from $38,200 to $39,300 through the remaining lease term.
Additional sales and marketing offices are located in additional leased office space in San Antonio, Texas. This space is
leased pursuant to a lease agreement expiring on October 31, 2021. Monthly rent payments range from $18,000 to $19,100
through the remaining lease term.
The Company’s minimum future obligations as of March 31, 2019 under existing operating leases are as follows:
Fiscal year:
2020
2021
2022
2023
2024
Thereafter
$ 2,996,700
2,111,600
203,200
14,900
—
—
$ 5,326,400
Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. The Company
does not believe that any lawsuits or claims pending against the Company, individually or in the aggregate, are material, or will
have a material adverse effect on the Company’s financial condition or results of operations. In addition, from time to time, the
Company is also subject to review from federal and state taxing authorities in order to validate the amounts of income, sales
and/or use taxes which have been claimed and remitted. Currently, our New York income tax return for tax year 2016 and
California sales tax returns for the period January 1, 2016 through December 31, 2018 are under examination.
As the Company is routinely audited by state taxing authorities, the Company has estimated exposure and established
reserves for its estimated sales tax audit liability.
Note 8. Operating 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 each now report to either a retail or commercial leader. The Company concluded
that corresponding changes to its reportable segments were 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; and (2)
value-added resellers and integrators, which is a newly identified market within our internal structure resulting from the
Company’s recent implementation of an enhanced go-to-market strategy and the consolidation of our previously identified value-
added resellers, government channels and private
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system operator markets. This new strategy and the corresponding consolidation of these customer markets is expected to increase
sales opportunities across the consolidated group as well as provide better coverage to customers and better align territories with
supplier partners. In conjunction with our identification of the value-added resellers and integrators as a newly identified market,
as described above, market revenue and gross profit as reported for the periods prior to the first quarter of fiscal 2018 have been
restated to reflect this change.
The retail segment consists of the market which includes retailers, independent dealer agents and carriers.
The Company evaluates revenue, gross profit and net profit contribution, and income before provision for income taxes
in the in the aggregate for both the commercial and retail segments. Net profit contribution is defined as gross profit less any
expenses that can be directly attributed. This includes sales, product management, purchasing, credit and collections and
distribution team expenses, plus freight out and internal and external marketing costs. Corporate support expenses include
administrative costs – finance, human resources, information technology, operating facility occupancy expenses, depreciation,
amortization and interest, plus the company-wide pay on performance bonus expense.
Certain cost of sales and other applicable expenses have been allocated to each market based on a percentage of
revenues and/or gross profit, where appropriate.
Segment activity for the fiscal years ended 2019, 2018 and 2017 is as follows (in thousands):
Revenues
Public Carrier
Value-added resellers and Integrators
Retail
Total revenues
Gross Profit
Public Carrier
Value-added resellers and Integrators
Retail
Total gross profit
Directly allocable expenses
Segment net profit contribution
Corporate support expenses
Income before provision for income taxes
Year Ended
March 31, 2019
Commercial
Segment
Retail
Segment
156,983 $
262,062
—
419,045 $
— $
—
187,769
187,769 $
20,275 $
64,130
—
84,405 $
— $
—
36,954
36,954 $
33,475
50,930 $
16,152
20,802
$
$
$
$
$
$
Total
156,983
262,062
187,769
606,814
20,275
64,130
36,954
121,359
49,627
71,732
64,441
7,291
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Revenues
Public Carrier
Value-added resellers and Integrators
Retail
Total revenues
Gross Profit
Public Carrier
Value-added resellers and Integrators
Retail
Total gross profit
Directly allocable expenses
Segment net profit contribution
Corporate support expenses
Income before provision for income taxes
Year Ended
April 1, 2018
Retail
Segment
Commercial
Segment
115,061 $
270,615
—
385,676 $
— $
—
194,599
194,599 $
16,707 $
64,620
—
81,327 $
— $
—
38,901
38,901 $
32,592
48,735 $
15,535
23,366
$
$
$
$
$
$
Total
115,061
270,615
194,599
580,275
16,707
64,620
38,901
120,228
48,127
72,101
64,628
7,473
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Revenues
Public Carrier
Value-added resellers and Integrators
Retail
Total revenues
Gross Profit
Public Carrier
Value-added resellers and Integrators
Retail
Total gross profit
Directly allocable expenses
Segment net profit contribution
Corporate support expenses
Income before provision for income taxes
Year Ended
March 26, 2017
Commercial
Segment
Retail
Segment
82,015 $
249,670
—
331,685 $
— $
—
201,610
201,610 $
13,706 $
61,838
—
75,544 $
— $
—
36,224
36,224 $
32,455
43,089 $
16,399
19,825
$
$
$
$
$
$
Total
82,015
249,670
201,610
533,295
13,706
61,838
36,224
111,768
48,854
62,914
60,428
2,486
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 products 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.
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Supplemental revenue and gross profit information by product category for the fiscal years 2019, 2018 and 2017 are as
follows (in thousands):
Revenues
Base station infrastructure
Network systems
Installation, test and maintenance
Mobile device accessories
Total revenues
Gross Profit
Base station infrastructure
Network systems
Installation, test and maintenance
Mobile device accessories
Total gross profit
Note 9. Restructuring Charge
March 31, 2019
April 1, 2018
March 26, 2017
$
$
$
292,787 $
86,555
32,595
194,877
606,814 $
61,458
13,604
6,433
39,864
121,359 $
248,949 $
98,642
33,200
199,484
580,275 $
58,015
14,649
6,266
41,298
120,228 $
209,869
87,222
31,851
204,353
533,295
54,280
11,897
5,921
39,670
111,768
In the fourth quarter of fiscal year 2017, in an effort to streamline the organization, the Company took actions to
restructure its operations thereby reducing costs, resulting in a $0.8 million pre-tax charge, which is included in our Consolidated
Statements of Income for fiscal year 2017. The restructuring charge primarily consisted of severance-related expenses associated
with a reduction in headcount paid in the fourth quarter of fiscal year 2017 through the first quarter of fiscal year 2018.
Note 10. Stock Buyback
The Company withholds shares of common stock from its employees and directors, at their request, equal to the
minimum federal and state tax withholdings related to vested performance stock units, stock option exercises and restricted stock
awards. For fiscal years 2019, 2018, and 2017 the total value of shares withheld for taxes was $111,100, $65,400, and $192,400,
respectively.
Note 11. Income Taxes
A reconciliation of the difference between the provision for income taxes computed at statutory rates and the provision
for income taxes provided in the consolidated statements of income is as follows:
Statutory federal rate
State taxes, net of federal benefit
Non-deductible expenses
Change in uncertain tax positions
Change in valuation allowance
Change in deferred tax related to key man life insurance
Other
Effective rate
2019
2018
2017
21.0 %
3.5
2.1
(4.6)
1.9
—
—
23.9 %
31.3 %
4.0
4.4
—
—
(7.3)
(1.9)
30.5 %
34.0 %
4.6
5.4
—
—
—
(2.1)
41.9 %
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The provision for income taxes was comprised of the following:
Federal: Current
Deferred
State: Current
Deferred
Provision for income taxes
2019
2018
2017
$
$
1,037,600
576,200
52,600
79,000
1,745,400
$
$
3,073,400
(1,081,600)
433,400
(148,000)
2,277,200
$
$
1,083,600
(69,100)
53,100
(26,400)
1,041,200
Total net deferred tax assets (liabilities) as of March 31, 2019 and April 1, 2018, and the sources of the differences
between financial accounting and tax basis of the Company's assets and liabilities which give rise to the deferred tax assets, are as
follows:
2019
2018
Deferred tax assets :
Deferred compensation
Accrued vacation
Deferred rent
Allowance for doubtful accounts
Inventory reserves
Sales tax reserves
Sales return assets
Other liabilities
Net operating loss
Tax contingency reserve
Other assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities :
Depreciation and amortization
Sales return liabilities
Prepaid expenses
Total deferred tax liabilities
Net Deferred Tax Assets
$
$
267,300
312,300
34,500
488,000
1,406,100
192,900
478,600
205,700
141,600
—
652,800
4,179,800
(141,600)
4,038,200
(3,094,000)
(365,200)
(523,700)
(3,982,900)
55,300
$
$
160,600
340,200
37,200
249,700
1,414,600
217,500
—
—
—
83,400
1,364,900
3,868,100
—
3,868,100
(2,542,800)
—
(614,800)
(3,157,600)
710,500
The Company has reviewed its deferred tax assets realization and has determined that a valuation allowance on certain
separate company state net operating losses are required as of March 31, 2019. No valuation allowance was required as of April
1, 2018.
The Company has net operating loss carryforwards of 141,600 which will generally begin to expire in fiscal year 2030
through fiscal year 2048. Certain net operating loss carryovers do not expire.
As of March 31, 2019, the Company had no unrecognized tax benefits. As of April 1, 2018, the Company had a gross
amount of unrecognized tax benefits of $112,700 ($87,200 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 fiscal year 2019 was a benefit of $250,500 (net of federal benefit). The
cumulative amount included in the consolidated balance sheet as of March 31, 2019 was $0. The total amount of interest and
penalties related to tax uncertainties recognized in the consolidated statement of income for fiscal year 2018 was a benefit of
$38,100 (net of federal expense) and the cumulative amount included as a liability in
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the consolidated balance sheet as of April 1, 2018 was $250,500 (net of federal benefit). The total amount of interest and penalties
related to tax uncertainties recognized in the consolidated statement of income for fiscal year 2017 was a benefit of $10,000 (net
of federal expense).
A reconciliation of the changes in the gross balance of unrecognized tax benefit amounts, net of interest, is as follows:
Beginning balance of unrecognized tax benefit
Increases related to current period tax positions
Reductions as a result of a lapse in the applicable statute of limitations
Ending balance of unrecognized tax benefits
$
$
2017
2018
2019
112,700 $ 204,500 $ 290,400
3,100
(89,000)
— $ 112,700 $ 204,500
—
(91,800)
3,500
(116,200)
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which we refer to herein as the
2017 Tax Act. While the changes from the Tax Act were generally effective for tax years beginning after December 31, 2017,
ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of
enactment. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which
allowed registrants to record provisional amounts in earnings for the year ended April 1, 2018. The Company was required to
complete its tax accounting for the 2017 Tax Act when it had obtained, prepared and analyzed the information to complete the
income tax accounting but no later than December 22, 2018. Accordingly, during fiscal year 2019, the Company completed its
accounting for the tax effects of the enactment of the 2017 Tax Act based on the Company’s interpretation on the new tax
regulations and related guidance issued by the U.S. Department of the Treasury and the IRS. The Company did not record
material adjustment to the previously provided provisional amount of $0.2 million.
The Company files income tax returns in U.S. federal, state and local jurisdictions. Certain income tax returns for fiscal
years 2015 through 2018 remain open to examination by U.S. federal, state and local tax authorities. Currently, our New York
income tax return for tax year 2016 are under examination.
Note 12. Retirement Plans
The Company has a 401(k) plan that covers all eligible employees. Contributions to the plan can be made by employees
and the Company may make matching contributions at its discretion. Expense related to this matching contribution was $957,100,
$928,100, and $621,600 during fiscal years 2019, 2018, and 2017, respectively. As of March 31, 2019, plan assets included
171,300 shares of common stock of the Company.
The Company maintains a Supplemental Executive Retirement Plan for Robert B. Barnhill, Jr., the Company’s
Chairman of the Board. This plan is funded through life insurance policies for which the Company is the sole beneficiary. The
cash surrender value of the life insurance policies and the net present value of the benefit obligation of approximately $2,326,800
and $853,400, respectively, as of March 31, 2019 and $2,204,500 and $901,400, respectively, as of April 1, 2018, are included in
other long-term assets and other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets.
Note 13. 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. Shares of common stock are excluded from the calculation if they are determined to be anti-dilutive.
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The following table presents the calculation of basic and diluted earnings per common share:
Amounts in thousands, except per share amounts
Earnings per share – Basic:
Net earnings
Less: Distributed and undistributed earnings allocated to nonvested stock
Earnings available to common shareholders – Basic
Weighted average common shares outstanding – Basic
Earnings per common share – Basic
Earnings per share – Diluted:
Net earnings
Less: Distributed and undistributed earnings allocated to nonvested stock
Earnings available to common shareholders – Diluted
Weighted average common shares outstanding – Basic
Effect of dilutive options
Weighted average common shares outstanding – Diluted
Amounts in thousands, except per share amounts
2019
2018
2017
$
$
$
$
$
5,546 $
—
5,546 $
5,195 $
—
5,195 $
1,445
—
1,445
8,437
8,371
8,313
0.66 $
0.62 $
0.17
5,546 $
—
5,546 $
5,195 $
—
5,195 $
8,437
130
8,567
8,371
100
8,471
1,445
—
1,445
8,313
27
8,340
Earnings per common share – Diluted
$
0.65 $
0.61 $
0.17
Anti-dilutive equity awards not included above
94
40
60
At March 31, 2019, April 1, 2018, and March 26, 2017 stock options with respect to 591,500, 540,000 and 420,000
shares of common stock were outstanding, respectively. The anti-dilutive stock options outstanding at March 31, 2019, April 1,
2018 and March 26, 2017 total 94,000, 40,000 and 60,000, respectively. There were no anti-dilutive Performance Stock Units or
Restricted Stock outstanding as of March 31, 2019, April 1, 2018 or March 26, 2017.
Note 14. Stock‑‑Based Compensation
The Company’s selling, general and administrative expenses for the fiscal years ended March 31, 2019, April 1, 2018,
and March 26, 2017 includes $1,244,000, $1,002,100, and $434,400, respectively, of stock compensation expense. Provision for
income taxes for the fiscal years ended March 31, 2019, April 1, 2018, and March 26, 2017 includes $297,300, $305,400, and
$181,900, respectively, of income tax benefits related to our stock-based compensation arrangements. Stock compensation
expense is primarily related to our Performance Stock Units (PSUs), Restricted Stock Units (RSUs) and Stock Options, granted or
outstanding under the Company’s Third Amended and Restated Stock and Incentive Plan (the “1994 Plan”).
As of March 31, 2019, 247,200 shares were available for issue in respect of future awards under the 1994 Plan.
Subsequent to the Company’s 2019 fiscal year end, on May 10, 2019, based on fiscal year 2019 results, 21,750 shares related to
PSUs were canceled, and as a result, these shares were made available for future grants. On May 10, 2019, additional PSUs and
restricted stock awards were made providing recipients with the opportunity to earn up to an aggregate of 45,500 and 21,000
additional shares, respectively of the Company’s common stock. Also, on May 10, 2019, the Compensation Committee of the
Board of Directors with concurrence of the full Board of Directors, granted stock options to select key employees to purchase an
aggregate of 135,000 shares of the Company’s common stock. Accordingly, as of May 10, 2019, an aggregate of 67,450 shares
were available for issue pursuant to future awards.
No additional awards can be made under the 1994 Plan after July 21, 2021, without or unless made subject to
shareholder approval of an extension of the plan term. Stock Options, restricted stock and PSU awards have historically been
granted as awards under the 1994 Plan. Shares which are subject to outstanding PSU or other awards under the 1994
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Plan, and which are not earned, are returned to the 1994 Plan and become available for future issuance in accordance with and
otherwise subject to the terms of the 1994 Plan.
Performance Stock Units: Under a program established by the Board of Directors, PSUs have been granted under the
1994 Plan to selected employees. Each PSU entitles the participant to earn TESSCO common stock, but only after earnings per
share and, for non-director employee participants, individual performance targets are met over a defined performance cycle.
Performance cycles, which are fixed for each grant at the date of grant, are one year. Once earned, shares vest and are issued over
a specified period of time determined at the time of the grant, provided that the participant remains employed by or associated
with the Company at the time of share issuance. Earnings per share targets, which take into account the earnings impact of this
program, are set by the Board of Directors in advance for the complete performance cycle at levels designed to grow shareholder
value. If actual performance does not reach the minimum annual or threshold targets, no shares are issued. In accordance with
ASC No. 718, the Company records compensation expense on its PSUs over the service period, based on the number of shares
management estimates will ultimately be issued. Accordingly, the Company determines the periodic financial statement
compensation expense based upon the stock price at the PSU grant date, net of the present value of dividends expected to be paid
on TESSCO common stock before the PSU vests, management’s projections of future EPS performance over the performance
period, and the resulting amount of estimated share issuances. As discussed in Note 2 above, the Company now accounts 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.
The following table summarizes the activity under the Company’s PSU program for fiscal years 2019, 2018 and 2017:
Unvested shares available for issue under
outstanding PSUs, beginning of period
PSU’s Granted
PSU’s Vested
PSU’s Forfeited/Cancelled
Unvested shares available for issue under
outstanding PSUs, end of period
2019
Weighted
Average Fair
Value at Grant
2018
Weighted
Average Fair
Value at Grant
Shares
2017
Weighted
Average Fair
Value at Grant
Shares
Shares
67,000 $
71,000
(14,257)
(25,437)
12.65
15.58
12.66
13.46
170,100 $
86,000
(7,600)
(181,500)
11.17 138,925 $
12.67 207,000
(27,671)
19.58
10.99 (148,154)
21.46
10.77
19.40
18.72
98,306 $
14.55
67,000 $
12.65 170,100 $
11.17
As of March 31, 2019, there was $0.3 million unrecognized compensation cost, related to fiscal year 2019 PSUs earned.
Total fair value of shares vested during fiscal years 2019, 2018 and 2017 was $460,800, $277,600 and $628,200, respectively.
The PSUs canceled during fiscal year 2019 primarily related to the fiscal year 2018 grant of PSUs which had a one-year
measurement period (fiscal 2018). The PSUs were canceled because the minimum applicable fiscal 2018 performance targets
were not fully satisfied. Per the provisions of the 1994 Plan, the shares related to these forfeited and canceled PSUs were added
back to the 1994 Plan and became available for future issuance under the 1994 Plan.
Of the PSUs outstanding at the end of fiscal year 2019 covering 98,306 non-vested shares, PSUs covering 24,000 shares
were subsequently canceled in May 2019, based on fiscal year 2019 performance. These PSUs were canceled because fiscal year
2019 earnings per share did not fully reach the target performance set forth in the PSU award agreements. The remaining 74,300
shares covered by PSUs outstanding at the end of fiscal year 2019 were earned based on fiscal year 2019 and 2018 performance,
but were not yet vested as of March 31, 2019. Assuming the respective
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participants remain employed by, or affiliated with the Company, these shares will vest on or about May 1 of 2019, 2020, 2021,
and 2022 as follows:
2019
2020
2021
2022
Number of Shares
21,446
21,446
21,446
9,994
74,332
Subsequent to the Company’s 2019 fiscal year end, on May 10, 2019, the Compensation Committee, with the
concurrence of the full Board of Directors, granted additional PSUs to selected key employees, providing them with the
opportunity to earn up to 45,500 additional shares of the Company’s common stock in the aggregate, depending upon whether
certain threshold or goal earnings per share targets are met and individual performance metrics are satisfied in fiscal year 2020.
These PSUs have only one measurement year (fiscal year 2020), with any shares earned at the end of fiscal year 2020 to vest 25%
on or about each of May 1 of 2020, 2021, 2022 and 2023. Pursuant to the typical PSU award agreement, however, performance
metrics are deemed met upon the occurrence of a change in control, and shares earned are issued earlier upon the occurrence of a
change in control, or death or disability of the participant, or upon termination of the participant’s employment without cause or
by the participant for good reason, as those terms are defined in the agreement.
Restricted Stock/Restricted Stock Units: On May 11, 2016, the Compensation Committee, with the concurrence of the
full Board of Directors, granted an aggregate of 10,000 RSU awards to non-employee directors of the Company. These awards
provide for the issuance of the shares of the Company’s common stock in accordance with a vesting schedule. These awards have
vested or will vest, and shares have been or will be issued 25% on or about each of May 1 of 2017, 2018, 2019 and 2020,
provided that the participant remains associated with the Company (or meets other criteria as prescribed in the agreement) on
each such date. As of March 31, 2019, there was less than $0.7 million of total unrecognized compensation costs related to these
awards. Unrecognized compensation costs related to these awards are expected to be recognized ratably over a period of
approximately one year.
On May 10, 2017, the Compensation Committee, with the concurrence of the full Board of Directors, granted an
aggregate of 18,000 RSU awards to non-employee directors of the Company and to the Executive Chairman. These awards
provide for the issuance of shares of the Company’s common stock in accordance with a vesting schedule. These awards have
vested or will vest, and shares have been or will be issued, 25% on or about each of May 1 of 2018, 2019, 2020 and 2021,
provided that the participant remains associated with the Company (or meets other criteria as prescribed in the agreement) on
each such date. As of March 31, 2019, there was approximately $0.1 million of total unrecognized compensation costs related to
these awards. Unrecognized compensation costs related to these awards are expected to be recognized ratably over a period of
approximately two years.
On May 10, 2018 and June 6, 2018, the Compensation Committee, with the concurrence of the full Board of Directors,
granted an aggregate of 21,000 RSU awards to non-employee directors of the Company and to the Executive Chairman. These
awards provide for the issuance of shares of the Company’s common stock in accordance with a vesting schedule. These awards
have vested or will vest, and shares have been or will be issued, 25% on or about each of May 1 of 2019, 2020, 2021 and 2022,
provided that the participant remains associated with the Company (or meets other criteria as prescribed in the agreement) on
each such date. As of March 31, 2019, there was approximately $0.2 million of total unrecognized compensation costs related to
these awards. Unrecognized compensation costs related to these awards are expected to be recognized ratably over a period of
approximately three years.
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, 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
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to the recipient upon the fourth anniversary of the award date. As of April 1, 2018, 8,000 of these 56,000 RSUs have been
canceled due to employee departures, leaving 48,000 of these RSUs outstanding. An additional 2,000 RSU’s with similar terms
were awarded in fiscal 2019.
As of March 31, 2019, there was approximately $0.6 million of total unrecognized compensation cost related to all
outstanding RSUs noted above, assuming all shares are earned. Unrecognized compensation costs are expected to be recognized
ratably over a weighted average period of approximately two years.
Subsequent to the Company’s 2019 fiscal year end, on May 10, 2019, the Compensation Committee, with the
concurrence of the full Board of Directors, granted an aggregate of 21,000 RSU awards to non-employee directors and the
Executive Chairman of the Company. These awards provide for the issuance of shares of the Company’s common stock in
accordance with a vesting schedule. These awards will vest and shares will be issued 25% on or about each of May 1 of 2020,
2021, 2022 and 2023, provided that the participant remains associated with the Company (or meets other criteria as prescribed in
the agreement) on each such date.
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.
The Company now accounts 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: The grant date value of the Company’s stock options has been determined using the Black-Scholes-
Merton pricing model, based upon facts and assumptions existing at the date of grant. Stock options granted have exercise prices
equal to the market price of the Company’s stock on the grant date. The stock options vest 25% after one year and then 1/36 per
month for the following three years. During fiscal 2019, stock options for 15,000 shares were forfeited due to an employee
departure.
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. The following tables summarize the pertinent information for outstanding options.
Unvested options, beginning of period
Options Granted
Options Vested
Options Forfeited/Cancelled
Unvested options, end of period
2019
Weighted
Average Fair
Value at Grant
Shares
392,500 $
66,500
(162,708)
(15,000)
281,292 $
2.21
3.38
2.20
4.26
2.39
2018
Weighted
Average Fair
Value at Grant
1.96
2.57
1.87
2.42
2.21
Shares
395,000
230,000
(122,500)
(110,000)
392,500 $
Grant
Fiscal Year
2019
2018
2017
2016
Total
Options
Granted
66,500
230,000
410,000
100,000
Option
Exercise Price
16.31
15.12
12.57
22.42
$
$
$
$
March 31, 2019
Options
Outstanding
61,500
160,000
330,000
40,000
591,500
Options
Exercisable
-
71,458
202,083
36,667
310,208
64
Table of Contents
Grant Fiscal
Year
2019
2018
2017
Expected Stock Price
Volatility
Risk-Free Interest
rate
Expected Dividend
Yield
Average
Expected Term
Resulting Black
Scholes Value
35.59 %
32.63 %
32.85 %
3.11 %
1.96 %
1.32 %
4.99 %
5.34 %
6.30 %
4.0
4.0
4.0
$
$
$
3.38
2.57
1.85
As of March 31, 2019, there was approximately $0.6 million of total unrecognized compensation costs related to these
awards. Unrecognized compensation costs related to these awards are expected to be recognized ratably over a period of
approximately three years. No options were exercised during fiscal 2019, 2018, or 2017.
Team Member Stock Purchase Plan: The Company has a Team Member Stock Purchase Plan that permits eligible
employees to purchase up to an aggregate of 450,000 shares of the Company's common stock at 85% of the lower of the market
price on the first day of a six-month period or the market price on the last day of that same six-month period. Expenses incurred
for the Team Member Stock Purchase Plan during the fiscal years ended March 31, 2019, April 1, 2018, and March 26, 2017 were
$82,600, $49,700, and $47,300, respectively. During the fiscal years ended March 31, 2019, April 1, 2018, and March 26, 2017,
19,183, 13,423, and 12,901 shares were sold to employees under this plan, having a weighted average market value of $14.54,
$11.08, and $10.68, respectively.
Note 15. 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.
·
As of March 31, 2019 and April 1, 2018, the Company has no assets or liabilities recorded at fair value.
The carrying amounts of cash and cash equivalents, trade accounts receivable, product inventory, trade accounts
payable, accrued expenses, our term loan, life insurance policies and other current liabilities approximate their fair values as of
March 31, 2019 and April 1, 2018 due to their short-term nature.
Note 16. Supplemental Cash Flow Information
Cash paid for income taxes net of refunds, for fiscal years 2019, 2018, and 2017 totaled $1,835,400, $2,440,000, and
$55,600, respectively. Cash paid for interest during fiscal years 2019, 2018, and 2017 totaled $809,000, $406,200, and $60,600,
respectively. No interest was capitalized during fiscal years 2019, 2018 and 2017.
Note 17. Concentration of Risk
Sales to customers and purchases from suppliers are largely governed by individual sales or purchase orders, so there is
no guarantee of future business. In some cases, the Company has more formal agreements with significant customers or suppliers,
but they are largely administrative in nature and are terminable by either party upon several months or otherwise short notice and
they typically contain no obligation to make purchases from TESSCO. In the event a significant customer decides to make its
purchases from another source, experiences a significant change in demand internally or from its own customer base, becomes
financially unstable, or is acquired by another company, the Company’s ability to generate revenues from these customers may be
significantly affected, resulting in an adverse effect on its financial position and results of operations.
65
Table of Contents
The Company is dependent on third-party equipment manufacturers, distributors and dealers for all of its supply of
wireless communications equipment. For fiscal years 2019, 2018, and 2017, sales of products purchased from the Company's top
ten suppliers accounted for 48%, 43%, and 41% of total revenues, respectively. Products purchased from the Company’s largest
commercial supplier accounted for approximately 16%, 11%, and 10% of total revenues in fiscal years 2019, 2018, and 2017,
respectively. Products purchased from the Company’s largest retail supplier accounted for approximately 8%, 10%, and 11% of
total revenues in fiscal years 2019, 2018, and 2017, respectively. The Company is dependent on the ability of its suppliers to
provide products on a timely basis and on favorable pricing terms. The Company believes that alternative sources of supply are
available for many of the product types it carries, but not for all products offered by the Company. The loss of certain principal
suppliers, including the suppliers referenced above, or of other suppliers whose products may be difficult to source on comparable
terms elsewhere, or the loss of one or more of certain ongoing affinity relationships, would have a material adverse effect on the
Company.
As noted, the Company's future results could also be negatively impacted by the loss of certain customers, and/or
supplier relationships. For fiscal years 2019, 2018, and 2017, sales of products to the Company's top ten customer relationships
accounted for 32%, 28%, and 26% of total revenues, respectively. No customer accounted for more than 10% of total revenues in
fiscal year 2019, 2018 and 2017.
Note 18. Quarterly Results of Operations (Unaudited)
Summarized quarterly financial data for the fiscal years ended March 31, 2019 and April 1, 2018 is presented in the table
below. For comparison purposes, fiscal quarter ended April 1, 2018 has fourteen weeks, all other quarters have thirteen weeks.
March 31,
2019
Fiscal Year 2019 Quarters Ended
December 30,
2018
September 30,
2018
July 1,
2018
April 1,
2018
Fiscal Year 2018 Quarters Ended
September 24,
December 24,
2017
2017
June 25,
2017
$ 144,963,800 $ 152,294,500 $ 158,636,100 $ 150,919,400 $ 148,920,100 $ 146,260,300 $ 145,083,500 $ 140,010,800
116,696,600
28,267,200
121,295,800
30,998,700
127,241,400
31,394,700
120,221,300
30,698,100
117,381,400
31,538,700
116,660,500
29,599,800
115,160,400
29,923,100
110,844,000
29,166,800
27,280,300
27,494,800
29,477,300
28,961,300
30,357,600
27,413,200
26,674,400
27,881,500
986,900
186,700
3,503,900
247,900
1,917,400
244,800
1,736,800
174,400
1,181,100
89,500
2,186,600
114,500
3,248,700
156,500
1,285,300
68,600
800,200
3,256,000
1,672,600
1,562,400
1,091,600
2,072,100
3,092,200
1,216,700
308,200
492,000 $
551,400
2,704,600 $
481,800
1,190,800 $
404,000
1,158,400 $
(76,800)
1,168,400 $
501,900
1,570,200 $
1,318,300
1,773,900 $
533,800
682,900
0.06 $
0.32 $
0.14 $
0.13 $
0.14
$
0.19 $
0.21 $
0.08
0.20 $
0.20 $
0.20 $
0.20 $
0.20
$
0.20 $
0.20 $
0.20
66
Revenues
Cost of goods
sold
Gross profit
Selling,
general and
administrative
expenses
Income from
operations
Interest, net
Income before
provision for
income taxes
Provision for
income taxes
Net income
Diluted
earnings per
share
Cash
dividends
declared per
common
share
$
$
$
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of TESSCO Technologies Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TESSCO Technologies Incorporated and subsidiaries (the
Company) as of March 31, 2019 and April 1, 2018, the related consolidated statements of comprehensive income, shareholders'
equity and cash flows for each of the three fiscal years in the period ended March 31, 2019, and the related notes and financial
statement schedules listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
March 31, 2019 and April 1, 2018, and the results of its operations and its cash flows for each of the three years in the period
ended March 31, 2019, in conformity with U.S generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of March 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated June 11, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2002.
Baltimore, Maryland
June 11, 2019
67
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that
information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely
manner. Our chief executive officer and chief financial officer have evaluated our disclosure controls and procedures as of the end
of the period covered by this annual report, and have concluded that our disclosure controls and procedures are effective at the
reasonable assurance level.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13(a)-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our system of internal control
is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles.
Any system of internal control over financial reporting, no matter how well designed, has inherent limitations and may
not prevent or detect misstatements. Therefore, internal control systems determined to be effective can only provide reasonable
assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may be inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our President and Chief Executive
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework
in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls, and the conclusion of this evaluation. Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of March 31, 2019.
The effectiveness of our internal control over financial reporting as of March 31, 2019 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report which is included within this Item 9A of
Part II of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting during the fourth quarter of fiscal year
2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
68
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of TESSCO Technologies Incorporated
Opinion on Internal Control over Financial Reporting
We have audited TESSCO Technologies Incorporated and subsidiaries’ internal control over financial reporting as of March 31,
2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, TESSCO Technologies
Incorporated and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of TESSCO Technologies Incorporated and subsidiaries as of March 31, 2019 and
April 1, 2018, the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the
period ended March 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 and our
report dated June 11, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal
Control Over Financial Reporting, appearing in Item 9A. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
June 11, 2019
69
Table of Contents
Item 9B. Other Information.
None.
Part III
Items 10, 11, 12, 13 and 14.
The information with respect to the identity and business experience of executive officers of the Company as required to
be included in Item 10 to this Form 10-K is set forth in Part I of this Form 10-K. The information otherwise required by Items 10
through 14 will be contained in a definitive proxy statement for our Annual Meeting of Shareholders, which we anticipate will be
filed no later than 120 days after the end of our fiscal year pursuant to Regulation 14A, and accordingly, these items have been
omitted in accordance with General Instruction G (3) to Form 10-K.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements are included in Item 8 of this report:
Consolidated Balance Sheets as of March 31, 2019 and April 1, 2018
Consolidated Statements of Income for the fiscal years ended March 31, 2019, April 1, 2018 and March 26, 2017
Consolidated Statements of Changes in Shareholders' Equity for the fiscal years ended March 31, 2019, April 1, 2018
and March 26, 2017
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2019, April 1, 2018 and March 26, 2017
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. The following financial statement schedules are required to be filed by Item 8 and paragraph (b) of this Item 15 included
herewith:
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required to be set forth therein is not
applicable.
70
Table of Contents
3.
Exhibits
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.2.1
3.2.2
3.2.3
10.1.1
10.2.1
10.2.2
10.2.3
10.2.4
10.2.5
10.3.1
10.3.2
10.3.3
10.4.1
Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on
September 29, 1993 (incorporated by reference to Exhibit 3.1.1 to the Company's Registration Statement on Form
S‑1 (No. 33‑81834)).
Certificate of Retirement of the Company filed with the Secretary of State of Delaware on January 13, 1994
(incorporated by reference to Exhibit 3.1.2 to the Company's Registration Statement on Form S‑1 (No. 33‑81834)).
Certificate of Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of
Delaware on July 20, 1994 (incorporated by reference to Exhibit 3.1.3 to the Company's Registration Statement on
Form S‑1 (No. 33‑81834)).
Certificate of Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of
Delaware on September 6, 1996 (incorporated by reference to Exhibit 3.1.4 to the Company's Annual Report on
Form 10‑K filed for the fiscal year ended March 28, 1997).
Certificate of Correction filed with the Secretary of State of Delaware on February 7, 2007 to Certificate of
Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on
September 6, 1996 (incorporated by reference to Exhibit 3.1.5 to the Company’s Quarterly Report on Form 10-Q
filed for the fiscal quarter ended December 24, 2006).
Sixth Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 28, 2011).
First Amendment to Sixth Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1
to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 22,
2011).
Second Amendment to Sixth Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March
29, 2016).
Amended and Restated Employment Agreement, dated March 26, 2016, by and between the Company and Robert
B. Barnhill, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 31, 2016).
Team Member Stock Purchase Plan (incorporated by reference to Appendix No. 2 to the Company's Definitive
Proxy Statement filed with the Securities and Exchange Commission on July 15, 1999).
Form of Restricted Stock Award under t he TESSCO Technologies Incorporated Third Amended and Restated 1994
Stock and Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q filed for the fiscal quarter ended June 26, 2011).
Form of Restricted Stock Unit Award (incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed with the Securities and Exchange Commission on July 30, 2013).
Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 10, 2017).
Form of Stock Option (incorporated herein by reference to Exhibit 10.1.1 to the Company’s Quarterly Report on
Form 10-Q filed for the fiscal quarter ended Ju ly 1, 2018 ).
Form of TESSCO Technologies Incorporated Performance Share Unit Agreement – Officers and Employees
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed for the fiscal
quarter ended June 27, 2004).
Form of TESSCO Technologies Incorporated Performance Share Unit Agreement – Non-Employee Directors
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed for the fiscal
quarter ended June 27, 2004).
TESSCO Technologies Incorporated Third Amended and Restated 1994 Stock and Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on June 27, 2016).
Agreement of Lease by and between Atrium Building, LLC and TESSCO Technologies Incorporated (incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed for the fiscal quarter ended
September 28, 2003).
71
Table of Contents
10.4.2
10.5.1
10.5.2
10.5.3
10.5.4
10.5.5
10.6.1
10.6.2
10.7.1
10.7.2
10.7.3
10.7.4
10.7.5
10.7.6
21.1.1*
23.1.1*
31.1.1*
31.2.1*
32.1.1*
32.2.1*
Third Amendment to Agreement of Lease by and between Atrium Building, LLC and TESSCO Technologies
Incorporated (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with
the Securities and Exchange Commission on February 18, 2011).
Credit Agreement dated as of June 24, 2016, among TESSCO Technologies Incorporated, the additional borrowers
party thereto, the Lenders party thereto, and SunTrust Bank, as administrative agent, swingline lender and an issuing
bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on June 29, 2016).
Guaranty and Security Agreement dated as of June 24, 2016, among TESSCO Technologies Incorporated and its
subsidiaries, the Lenders party thereto, and SunTrust Bank, as administrative agent (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on
June 29, 2016).
First Amendment to Credit Agreement, dated as of July 13, 2017, by and among the Company and certain
subsidiaries, as co-borrowers, and SunTrust Bank, as administrative agent and lender, and Wells Fargo Bank NA, as
lender (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 18, 2017).
Amended and Restated Credit Agreement dated as of October 19, 2017, among TESSCO Technologies
Incorporated, the additional borrowers party thereto, the Lenders party thereto, and SunTrust Bank, as
administrative agent, swingline lender and an issuing bank, together with exhibits and schedules thereto
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 23, 2017).
Reaffirmation Agreement dated as of October 19, 2017, among TESSCO Technologies Incorporated, its
subsidiaries, the Lenders party thereto, and SunTrust Bank, as administrative agent (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
October 23, 2017).
Supplemental Executive Retirement Plan, dated as of March 31, 1994, between the Company and Robert B.
Barnhill, Jr., (originally filed as Exhibit C to Exhibit 10.2 to the Company’s Registration Statement on Form S-1
(No. 33-81834)) (incorporated by reference to Exhibit 10.9.1 to the Company’s Annual Report on Form 10-K filed
for the fiscal year ended March 29, 2009).
Amendment No. 1 to Supplemental Executive Retirement Plan, effective as of January 1, 2005, between the
Company and Robert B. Barnhill, Jr. (incorporated by reference to Exhibit 10.9.2 to the Company’s Annual Report
on Form 10-K filed for the fiscal year ended March 29, 2009).
Form of Severance and Restrictive Covenant Agreement entered into between the Company and Douglas A. Rein
(incorporated by reference to Exhibit 10.10.1 to the Company's Annual Report on Form 10-K filed for the fiscal
year ended March 29, 2009).
Form of Severance and Restrictive Covenant Agreement, entered into between the Company and Aric Spitulnik
(incorporated by reference to Exhibit 10.8.2 to the Company’s Annual Report on Form 10-K filed for the fiscal year
ended March 30, 2014).
Form of Severance and Restrictive Covenant Agreement entered into between the Company and Elizabeth S.
Robinson (incorporated by reference to Exhibit 10.7.3 to the Company’s Annual Report on Form 10-K filed for the
fiscal year ended April 1, 2018).
Form of Performance Stock Unit Agreement – Officers and Employees (incorporated by reference to Exhibit 10.5.1
to the Company’s Quarterly Report on Form 10-Q filed for the fiscal quarter ended June 26, 2016).
Employment Agreement, dated as of August 29, 2016, by and between the Company and Murray Wright
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities
and Exchange Commission on September 1, 2016).
Form of Stock Option to Murray Wright (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, filed with the Securities and Exchange Commission on September 1, 2016).
Subsidiaries of the Company.
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Rule 15d-14(a) Certification of Murray Wright, Chief Executive Officer.
Rule 15d-14(a) Certification of Aric Spitulnik, Chief Financial Officer.
Section 1350 Certification of Murray Wright, Chief Executive Officer.
Section 1350 Certification of Aric Spitulnik, Chief Financial Officer.
72
Table of Contents
101.1*
The following financial information from TESSCO Technologies Incorporated’s Annual Report on Form 10-K for
the year ended March 31, 2019 formatted in XBRL: (i) Consolidated Statement of Income for the years ended
March 31, 2019 , April 1, 2018 and March 26, 2017 ; (ii) Consolidated Balance Sheet at March 31, 2019 and April
1, 2018; (iii) Consolidated Statement of Cash Flows for the years March 31, 2019 and April 1, 2018; and (iv) Notes
to Consolidated Financial Statements.
*
Filed herewith
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For the fiscal years ended:
Allowance for doubtful accounts:
Balance, beginning of period
Provision for bad debts
Write-offs and other adjustments
Balance, end of period
Inventory Reserve:
Balance, beginning of period
Inventory reserve expense
Write-offs and other adjustments
Balance, end of period
Allowance for deferred tax asset:
Balance, beginning of period
Income tax expense
Write-offs and other adjustments
Balance, end of period
Schedule II: Valuation and Qualifying Accounts
2019
2018
2017
$ 1,094,900 $
1,721,200
(678,200)
782,200 $
797,100
(484,400)
$ 2,137,900 $ 1,094,900 $
841,400
674,200
(733,400)
782,200
2019
2018
2017
$ 5,739,700 $ 6,360,600 $ 6,071,100
3,193,200
(2,903,700)
$ 5,870,600 $ 5,739,700 $ 6,360,600
4,361,400
(4,982,300)
4,863,100
(4,732,200)
2019
2018
2017
$
— $
141,600
—
$ 141,600 $
— $
—
—
— $
—
—
—
—
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Murray Wright
Murray Wright, President and Chief Executive Officer
June 11, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Murray Wright
Murray Wright
/s/ Aric Spitulnik
Aric Spitulnik
President and Chief Executive Officer (principal executive officer)
June 11, 2019
Senior Vice President, Chief Financial Officer, and Corporate
June 11, 2019
Secretary (principal financial and accounting officer)
/s/ Robert B. Barnhill, Jr.
Robert B. Barnhill, Jr.
Chairman of the Board
/s/ Jay G. Baitler
Jay G. Baitler
/s/ John D. Beletic
John D. Beletic
/s/ Paul J. Gaffney
Paul J. Gaffney
/s/ Benn R. Konsynski
Benn R. Konsynski
/s/ Dennis J. Shaughnessy
Dennis J. Shaughnessy
/s/ Morton F. Zifferer
Morton F. Zifferer
Director
Director
Director
Director
Director
Director
75
June 11, 2019
June 11, 2019
June 11, 2019
June 11, 2019
June 11, 2019
June 11, 2019
June 11, 2019
Exhibit 21.1.1
Exhibit 21.1.1
Subsidiaries of the Registrant
Subsidiary
TESSCO Incorporated
Wireless Solutions Incorporated
TESSCO Service Solutions, Inc.
TESSCO Communications Incorporated
TESSCO Financial Corporation
TESSCO Business Services, LLC
TESSCO Integrated Solutions, LLC
GW Service Solutions, Inc.
TCPM, Inc.
State of Incorporation
Delaware
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Exhibit 23.1.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements of TESSCO Technologies
Incorporated of our reports dated June 11, 2019, with respect to the consolidated financial statements and
schedule of TESSCO Technologies Incorporated, and the effectiveness of internal control over financial
reporting of TESSCO Technologies Incorporated, included in this Annual Report (Form 10-K) of TESSCO
Technologies Incorporated for the year ended March 31, 2019:
Registration Statements on Form S-8:
Name
1994 Stock and Incentive Plan
Team Member Stock Purchase Plan
Amended and Restated 1994 Stock and Incentive Plan
Second Amended and Restated 1994 Stock and Incentive
Plan
Second Amended and Restated 1994 Stock and Incentive
Plan
Third Amended and Restated 1994 Stock and Incentive Plan
Registration Number
33-87178
333-95249
333-118177
333-158758
333-179819
333-214457
Date Filed
December 7,1994
January 24, 2000
August 12, 2004
April 24, 2009
February 29, 2012
November 4, 2016
Baltimore, Maryland
June 11, 2019
/s/ ERNST & YOUNG LLP
1
Exhibit 31.1.1
CERTIFICATION
I, Murray Wright, certify that:
1. I have reviewed this annual report on Form 10-K for the period ended March 31,
2019 of TESSCO Technologies Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
employees who have a significant role in the registrant’s internal control over financial reporting.
b) Any fraud, whether or not material, that involves management or other
Date:
June 11, 2019
By:
/s/ Murray Wright
Murray Wright
President and Chief Executive Officer
Exhibit 31.2.1
CERTIFICATION
I, Aric Spitulnik, certify that:
1. I have reviewed this annual report on Form 10-K for the period ended March 31,
2019 of TESSCO Technologies Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
employees who have a significant role in the registrant’s internal control over financial reporting.
b) Any fraud, whether or not material, that involves management or other
Date:
June 11, 2019
By:
/s/ Aric Spitulnik
Aric Spitulnik
Senior Vice President, Corporate Secretary and
Chief Financial Officer
Exhibit 32.1.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Murray Wright, Chief Executive Officer of TESSCO Technologies Incorporated
(the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that:
1. The Annual Report on Form 10-K of the Company for the year ended March 31,
2019 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m); and
the financial condition and results of operations of the Company.
2. The information contained in the Report fairly presents, in all material respects,
Date:
June 11, 2019
By:
/s/ Murray Wright
Murray Wright
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350,
and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is
not to be incorporated by reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Aric Spitulnik, Chief Financial Officer of TESSCO Technologies Incorporated (the
“Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, that:
1. The Annual Report on Form 10-K of the Company for the year ended March 31,
2019 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m); and
the financial condition and results of operations of the Company.
2. The information contained in the Report fairly presents, in all material respects,
Date:
June 11, 2019
By:
/s/ Aric Spitulnik
Aric Spitulnik
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350,
and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is
not to be incorporated by reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing.