0001558370-18-009183.txt : 20181109 0001558370-18-009183.hdr.sgml : 20181109 20181109163620 ACCESSION NUMBER: 0001558370-18-009183 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 48 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TESSCO TECHNOLOGIES INC CENTRAL INDEX KEY: 0000927355 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 520729657 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33938 FILM NUMBER: 181173582 BUSINESS ADDRESS: STREET 1: 11126 MCCORMICK ROAD CITY: HUNT VALLEY STATE: MD ZIP: 21031 BUSINESS PHONE: 4102291000 MAIL ADDRESS: STREET 1: 11126 MCCORMICK ROAD CITY: HUNT VALLEY STATE: MD ZIP: 2121031 10-Q 1 tess-20180930x10q.htm 10-Q tess_Current folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

 

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

 

 

 

 

 

For the quarterly period ended September 30, 2018

 

or

 

 

 

 

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

 

 

 

 

 

For the transition period from        to

 

 

 

Commission File Number: 001-33938

TESSCO Technologies Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

52-0729657

(State or other jurisdiction of

incorporation or organization)

(I.R.S Employer

Identification No.)

 

 

 

 

11126 McCormick Road, Hunt Valley, Maryland

21031

(Address of principal executive offices)

(Zip Code)

 

 

(410) 229-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑       No ☐

 

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

 

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

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☑

 

Non-accelerated filer ☐

Smaller reporting company ☑

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 number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of November 2, 2018, was 8,453,098.

 

 

 

 


 

TESSCO Technologies Incorporated

Index to Form 10-Q

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

TESSCO Technologies Incorporated

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

April 1,

 

 

 

 

2018

 

2018

 

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

19,400

 

 

Trade accounts receivable, net of allowance for doubtful accounts of $1,912,800 and $1,094,900, respectively

 

 

97,895,300

 

 

87,862,300

 

 

Product inventory, net

 

 

89,669,300

 

 

72,323,000

 

 

Prepaid expenses and other current assets

 

 

4,918,000

 

 

4,489,100

 

 

Total current assets

 

 

192,482,600

 

 

164,693,800

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

13,775,200

 

 

13,662,800

 

 

Goodwill, net

 

 

11,677,700

 

 

11,677,700

 

 

Deferred tax assets

 

 

715,800

 

 

710,500

 

 

Other long-term assets

 

 

8,377,300

 

 

8,678,900

 

 

Total assets

 

$

227,028,600

 

$

199,423,700

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

87,662,400

 

$

67,041,100

 

 

Payroll, benefits and taxes

 

 

6,027,700

 

 

8,291,100

 

 

Income and sales tax liabilities

 

 

1,139,400

 

 

2,339,200

 

 

Accrued expenses and other current liabilities

 

 

2,935,100

 

 

1,370,300

 

 

Revolving line of credit

 

 

19,741,400

 

 

10,835,400

 

 

Current portion of long-term debt

 

 

16,000

 

 

27,300

 

 

Total current liabilities

 

 

117,522,000

 

 

89,904,400

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

 —

 

 

2,300

 

 

Other long-term liabilities

 

 

1,470,100

 

 

1,465,400

 

 

Total liabilities

 

 

118,992,100

 

 

91,372,100

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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, 14,161,026 shares issued and 8,439,528 shares outstanding as of September 30, 2018, and 14,111,703 shares issued and 8,396,537 shares outstanding as of April 1, 2018

 

 

99,500

 

 

99,000

 

 

Additional paid-in capital

 

 

61,729,400

 

 

60,611,900

 

 

Treasury stock, at cost, 5,721,498 shares as of September 30, 2018 and 5,715,166 shares as of April 1, 2018

 

 

(57,614,100)

 

 

(57,503,000)

 

 

Retained earnings

 

 

103,821,700

 

 

104,843,700

 

 

Total shareholders’ equity

 

 

108,036,500

 

 

108,051,600

 

 

Total liabilities and shareholders’ equity

 

$

227,028,600

 

$

199,423,700

 

 

 

See accompanying notes.

 

3


 

TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Quarters Ended

 

Six Months Ended

 

 

    

September 30, 2018

    

September 24, 2017

 

September 30, 2018

    

September 24, 2017

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

158,636,100

 

$

145,083,500

 

$

309,555,500

 

$

285,094,300

 

Cost of goods sold

 

 

127,241,400

 

 

115,160,400

 

 

247,462,700

 

 

226,004,400

 

Gross profit

 

 

31,394,700

 

 

29,923,100

 

 

62,092,800

 

 

59,089,900

 

Selling, general and administrative expenses

 

 

29,477,300

 

 

26,674,400

 

 

58,438,600

 

 

54,555,900

 

Income from operations

 

 

1,917,400

 

 

3,248,700

 

 

3,654,200

 

 

4,534,000

 

Interest expense, net

 

 

244,800

 

 

156,500

 

 

419,200

 

 

225,100

 

Income before provision for income taxes

 

 

1,672,600

 

 

3,092,200

 

 

3,235,000

 

 

4,308,900

 

Provision for income taxes

 

 

481,800

 

 

1,318,300

 

 

885,800

 

 

1,852,100

 

Net income

 

$

1,190,800

 

$

1,773,900

 

$

2,349,200

 

$

2,456,800

 

Basic earnings per share

 

$

0.14

 

$

0.21

 

$

0.28

 

$

0.29

 

Diluted earnings per share

 

$

0.14

 

$

0.21

 

$

0.27

 

$

0.29

 

Basic weighted-average common shares outstanding

 

 

8,429,678

 

 

8,365,383

 

 

8,420,293

 

 

8,357,213

 

Effect of dilutive options and other equity instruments

 

 

166,571

 

 

27,614

 

 

180,182

 

 

40,643

 

Diluted weighted-average common shares outstanding

 

 

8,596,249

 

 

8,392,997

 

 

8,600,475

 

 

8,397,856

 

Cash dividends declared per common share

 

$

0.20

 

$

0.20

 

$

0.40

 

$

0.40

 

 

See accompanying notes.

4


 

TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

September 30, 2018

 

September 24, 2017

    

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

    

    

 

    

 

Net income

 

$

2,349,200

 

$

2,456,800

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,838,000

 

 

2,031,000

 

Non-cash stock-based compensation expense

 

 

705,300

 

 

501,900

 

Deferred income taxes and other

 

 

666,400

 

 

218,800

 

Change in trade accounts receivable

 

 

(10,033,000)

 

 

(28,205,300)

 

Change in product inventory

 

 

(17,346,300)

 

 

(9,244,700)

 

Change in prepaid expenses and other current assets

 

 

(428,900)

 

 

(565,100)

 

Change in trade accounts payable

 

 

20,621,300

 

 

15,589,200

 

Change in payroll, benefits and taxes

 

 

(2,263,400)

 

 

63,900

 

Change in income and sales tax liabilities

 

 

(1,199,800)

 

 

391,400

 

Change in accrued expenses and other current liabilities

 

 

1,840,300

 

 

(37,800)

 

Net cash used in operating activities

 

 

(3,250,900)

 

 

(16,799,900)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(887,300)

 

 

(284,100)

 

Purchases of internal use software licenses

 

 

(1,428,500)

 

 

(1,179,000)

 

Net cash used in investing activities

 

 

(2,315,800)

 

 

(1,463,100)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net borrowings from revolving line of credit

 

 

8,906,000

 

 

13,278,600

 

Proceeds from note receivable

 

 

 —

 

 

38,300

 

Payments on long-term debt

 

 

(13,600)

 

 

(13,300)

 

Proceeds from issuance of common stock

 

 

137,200

 

 

76,400

 

Cash dividends paid

 

 

(3,371,200)

 

 

(3,346,600)

 

Purchases of treasury stock and repurchases of stock from employees

 

 

(111,100)

 

 

(64,800)

 

Net cash provided by financing activities

 

 

5,547,300

 

 

9,968,600

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(19,400)

 

 

(8,294,400)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

19,400

 

 

8,540,100

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$

 —

 

$

245,700

 

 

See accompanying notes.

5


 

TESSCO Technologies Incorporated 

Notes to Unaudited Consolidated Financial Statements

 

Note 1. Description of Business and Basis of Presentation

 

TESSCO Technologies Incorporated, a Delaware corporation (TESSCO, we, or the Company), architects and delivers innovative product and value chain solutions to support wireless systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive internet and information technology. Approximately 98% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange. Almost all of the Company’s sales are made in United States Dollars.

 

In management’s opinion, the accompanying interim Consolidated Financial Statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim Consolidated Financial Statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2018.

 

 

Note 2. Recently Issued Accounting Pronouncements

 

Recently issued accounting pronouncements not yet adopted:

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has identified the full population of leases and does not expect the adoption of the standard to have a material impact on the Consolidated Financial Statements. The standard will be adopted on the first day of the Company’s 2020 fiscal year.

 

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.

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard will change the classification of certain cash payments and receipts within the

6


 

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.

 

Recently issued accounting pronouncements adopted:

 

Effective April 2, 2018, the Company adopted the FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2015-14, Revenue from Contracts with Customers (Topic 606):  Deferral of Effective Date, which deferred the effective date of ASU 2014-09 by one year. 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, had no 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 a return asset within the inventory 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 September 30, 2018, the return asset and refund liability amounts were $1.6 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 Securities Exchange Commission (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. In its financial statements for the year ended April 1 2018, the Company included a provisional tax benefit estimate of approximately $0.2 million for the re-measurement of its U.S. deferred tax assets and liabilities to a 21% effective tax rate. We continue to evaluate the implications of the Tax Act and have not made any adjustments to the provisional amounts recorded in the prior year. Additional tax impacts from the Tax Act will be recorded as they are identified in the measurement period which will not extend past December 22, 2018. The final impact of the Tax Act may differ from the provisional amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, legislative or administrative actions to clarify the intent of the statutory language provided that differ from the Company’s current interpretation, or any updates or changes to estimates utilized

7


 

to calculate the tax impacts, including changes to estimates for permanently disallowed expenses, of the Tax Act. Additionally, the Company intends to file its 2017 U.S. income tax return in the second half of 2018, which may change our tax basis in temporary differences, and other elements of the income tax effects of the Tax Act estimated as of April 1, 2018. This may result in an adjustment to the tax provision and be reflected as a re-measurement amount recorded in the financial statements during the quarter in which the U.S. tax return is filed.

 

 

Note 3. Stock-Based Compensation

 

The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 30, 2018 includes $384,800 and $705,300, respectively, of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 24, 2017 included $254,300 and $501,900, respectively, of non-cash stock-based compensation expense. Stock-based compensation expense is primarily related to our Performance Stock Units (PSUs), Restricted Stock Units (RSUs) and Stock Options, granted or outstanding under the Company’s Third Amended and Restated Stock and Incentive Plan (the “1994 Plan”).

 

Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the 1994 Plan, for the first six months of fiscal 2019:

 

 

 

 

 

 

 

 

 

 

    

Six Months

    

Weighted

 

 

 

 

Ended 

 

Average Fair

 

 

 

 

September 30,

 

Value at Grant

 

 

 

 

2018

 

Date (per unit)

 

 

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

 

67,000

 

$

12.65

 

 

PSU’s Granted

 

71,000

 

 

15.58

 

 

PSU’s Vested

 

(14,257)

 

 

12.66

 

 

PSU’s Forfeited/Cancelled

 

(25,437)

 

 

13.46

 

 

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

 

98,306

 

$

14.55

 

 

 

During the first quarter of fiscal 2019, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved the grant of PSUs to select key employees, providing them with the opportunity to earn up to 71,000 shares of the Company’s common stock in the aggregate, depending upon whether and to the extent which certain earnings per share targets and other Company and individual performance metrics are met. These not-yet-earned PSUs have a one-year measurement period (fiscal 2019), and assuming the performance metrics are met to a sufficient extent, any shares earned at the end of fiscal 2019 will vest 25% and be issued ratably on or about each of May 1 of 2019, 2020, 2021 and 2022, provided that the respective employees remain employed by the Company on each such date.

 

The PSUs cancelled during fiscal 2019 primarily related to the fiscal 2018 grant of PSUs, which had a one-year measurement period (fiscal 2018). These PSUs were cancelled because the applicable fiscal 2018 performance targets were not fully satisfied. Per the provisions of the 1994 Plan, the shares related to these forfeited and cancelled PSUs were added back to the 1994 Plan and became available for future issuance under the 1994 Plan.

 

If all PSUs granted thus far in fiscal 2019 are assumed to be earned on account of the applicable performance metrics being fully met, total unrecognized compensation costs on these PSUs plus all earned but unvested PSU’s would be approximately $1.0 million, as of September 30, 2018, and would be expensed through fiscal 2022. To the extent the maximum number of PSUs granted in fiscal 2019 are not earned, stock-based compensation related to these awards will differ from this amount.

8


 

 

Restricted Stock Units: The Company has made annual RSU awards under the 1994 Plan to its non-employee directors over recent years. On May 10, 2018, the Compensation Committee approved the grant of an aggregate of 18,000 RSUs, ratably to the then five non-employee directors of the Company, and to Robert B. Barnhill, Jr. In addition to this, effective June 6, 2018, Paul J. Gaffney was appointed to the Board of Directors and was granted 3,000 RSUs. These RSU awards to non-employee directors and to Mr. Barnhill provide for the issuance of shares of the Company’s common stock in four equal installments, beginning on May 1 of the year following the award and continuing on May first of each of the following three years, provided that the director remains associated with the Company (or meets other criteria as prescribed in the applicable award agreement) on each date.

 

On August 8, 2017, the Compensation Committee approved the grant of 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 to the recipient upon the fourth anniversary of the award date. As of September 30, 2018, 8,000 of these 56,000 RSUs have been canceled due to employee departures, leaving 48,000 of these RSUs outstanding.

 

As of September 30, 2018, there was approximately $0.9 million of total unrecognized compensation cost related to all outstanding RSUs, assuming all shares are earned. Unrecognized compensation costs are expected to be recognized ratably over a weighted average period of approximately three years.

 

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

 

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: As summarized below, in the first six months of fiscal 2019, stock options for an aggregate of 49,000 shares of common stock were granted, all under the 1994 Plan. These stock options have exercise prices equal to the market price of the Company’s stock on the grant date, and the terms thereof provide for 25% vesting after one year and then 1/36 per month over the following three years. The grant date value of the Company’s stock options is determined using the Black-Scholes-Merton pricing model, based upon facts and assumptions existing at the date of grant.

 

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

 

9


 

The following tables summarize the pertinent information for outstanding options.

 

 

 

 

 

 

 

 

    

Six Months

    

Weighted

 

 

 

Ended 

 

Average Fair

 

 

 

September 30,

 

Value at Grant

 

 

 

2018

 

Date (per unit)

 

Unvested options, beginning of period

 

392,500

 

$

2.21

 

Options Granted

 

49,000

 

 

4.70

 

Options Vested

 

(96,042)

 

 

2.20

 

Options Forfeited/Cancelled

 

(15,000)

 

 

4.57

 

Unvested options, end of period

 

330,458

 

$

2.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

Grant Fiscal Year

 

Options Granted

 

 

Option Exercise Price

 

Options Outstanding

 

Options Exercisable

2019

 

49,000

 

$

17.55

 

44,000

 

 -

2018

 

230,000

 

$

15.12

 

160,000

 

49,792

2017

 

410,000

 

$

12.57

 

330,000

 

160,833

2016

 

100,000

 

$

22.64

 

40,000

 

31,667

Total

 

 

 

 

 

 

574,000

 

242,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant Fiscal Year

 

Expected Stock Price Volatility

 

Risk-Free Interest rate

 

Expected Dividend Yield

 

Average Expected Term

 

Resulting Black Scholes Value

2019

 

35.80

%

 

3.04

%

 

4.56

%

 

4.0

 

$

4.70

2018

 

32.63

%

 

1.96

%

 

5.34

%

 

4.0

 

$

2.57

2017

 

32.85

%

 

1.32

%

 

6.30

%

 

4.0

 

$

1.85

2016

 

26.40

%

 

1.67

%

 

3.50

%

 

4.0

 

$

3.43

 

As of September 30, 2018, there was approximately $0.8 million of total unrecognized compensation costs, related to these awards. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years. 

 

 

Note 4. Borrowings Under Revolving Credit Facility

 

On June 24, 2016, the Company and its primary operating subsidiaries entered into a Credit Agreement (the “Credit Agreement”) with SunTrust Bank, as Administrative Agent and Lender, and Wells Fargo Bank, National Association, as a Lender, for a senior asset based secured revolving credit facility of up to $35 million (the “Revolving Credit Facility”). This replaced our then 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 secured Revolving Credit Facility, as it was initially established, 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 secured Revolving Credit Facility as it was initially established was determined in part in accordance with a Borrowing Base, defined in the Credit Agreement, generally, as 85% of Eligible Receivables minus Reserves, as those terms were defined in the Credit Agreement.  The Credit Agreement included financial and other covenants, and 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

10


 

Loan Parties’ obligations, which included 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.

 

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 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 secured Revolving Credit Facility maturity date was extended to October 19, 2021. The Amended and Restated Credit Agreement otherwise includes representations, warranties, affirmative and negative covenants (including restrictions) and other terms 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.

Borrowings under the Amended and Restated Credit Agreement initially accrue interest from the applicable borrowing date at an Applicable Rate equal to the Eurodollar Rate plus the Applicable Margin. The Eurodollar Rate is the rate per annum obtained by dividing (i) LIBOR by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage. When the Applicable Rate is the Eurodollar Rate plus the Applicable Margin, the Applicable Margin is 1.50% if Average Availability is greater than or equal to $15 million, and 1.75% otherwise.  On September 30, 2018, the interest rate applicable to borrowings under the secured Revolving Credit Facility was 3.61%. Under certain circumstances, the Applicable Rate is subject to change at the Lenders’ option from the Eurodollar Rate plus the Applicable Margin to the Base Rate plus the Applicable Margin.  Following an Event of Default, in addition to changing the Applicable Rate to the Base Rate plus the Applicable Margin, the Lenders’ may at their option set the Applicable Margin at 0.50% if the Base Rate applies or 1.75% if the Eurodollar Rate applies, and increase the Applicable Rate by an additional 200 basis points. The Applicable Rate adjusts on the first Business Day of each calendar month.  The Company is required to pay a monthly Commitment Fee on the average daily unused portion of the Revolving Credit Facility provided for pursuant to the Amended and Restated Credit Agreement, at a per annum rate equal to 0.25%.

In connection with the entering into of the Amended and Restated Credit Agreement, the Company and other Loan Parties, executed and delivered to SunTrust Bank, as Administrative Agent, a Reaffirmation Agreement, pursuant to which the obligations of the Loan Parties under the Guaranty and Security Agreement delivered by them in connection with the secured Revolving 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. 

11


 

Borrowings may be used for working capital and other general corporate purposes, and as further provided in, and subject to the applicable terms of, the Amended and Restated Credit Agreement. As of September 30, 2018, borrowings under this Revolving Credit Facility totaled $19.7 million and, therefore, the Company had $55.3 million available for borrowing as of September 30, 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.  As of April 1, 2018, borrowings under this Revolving Credit Facility totaled $10.8 million and, therefore, the Company had $64.2 million available on its revolving line of credit facility as of April 1, 2018.

 

 

Note 5. Income Taxes

 

As of September 30, 2018, the Company had a gross amount of unrecognized tax benefits of $116,200 ($91,800 net of federal benefit).  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 the first six months of fiscal 2019 was an expense of $19,800 (net of federal benefit). The cumulative amount included in the consolidated balance sheet as of September 30, 2018 was $265,600 (net of federal benefit). The total amount of interest and penalties related to tax uncertainties recognized in the consolidated statement of income for the first six months of fiscal 2018 was an expense of $24,200 (net of federal benefit). The cumulative amount of interest and penalties included as a liability in the consolidated balance sheet as of April 1, 2018 was $250,500 (net of federal benefit).

 

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

 

 

 

 

 

 

 

    

 

    

 

Beginning balance at April 1, 2018 of unrecognized tax benefit

 

$

112,700

 

Increases related to current period tax positions

 

 

3,500

 

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

 

 

 —

 

Ending balance at September 30, 2018 of unrecognized tax benefits

 

$

116,200

 

 

 

 

Note 6. Earnings Per Share

 

The Company presents the computation of earnings per share (“EPS”) on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted earnings per share are computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common shares are excluded from the calculation if they are determined to be anti-dilutive. At September 30, 2018, stock options with respect to 574,000 shares of common stock were outstanding, of which 50,000 were anti-dilutive. At September 24, 2017, stock options with respect to 630,000 shares of common stock were outstanding, of which 290,000 were anti-dilutive. There were no anti-dilutive PSUs or RSUs outstanding as of September 30, 2018 or September 24, 2017, respectively.

 

12


 

 

Note 7. Business Segments

 

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; and (2) integrators and value-added resellers, 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 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 integrators and value-added resellers as a newly identified market, as described above, market revenue and gross profit as reported for the prior periods reflected in this Quarterly Report on Form 10 Q have been reclassified accordingly.

 

The retail segment consists of the retail market which includes retailers, independent dealer agents and carriers.

 

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

 

·

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

 

·

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

 

·

Installation, test and maintenance products are used to install, tune, maintain and repair wireless communications equipment. Products include sophisticated analysis equipment and various frequency, voltage- and power-measuring devices, as well as an assortment of tools, hardware, GPS, safety and replacement and component parts and supplies required by service technicians.  

 

·

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

 

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

13


 

Segment activity for the second quarter and first six months of fiscal years 2019 and 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 2018

 

September 24, 2017

 

 

 

Commercial

 

Retail

 

 

 

 

Commercial

 

Retail

 

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

Revenues

    

 

    

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

Public Carrier

 

$

39,694

 

$

 —

 

$

39,694

 

$

27,423

 

$

 —

 

$

27,423

 

Integrators and value-added resellers

 

 

68,650

 

 

 —

 

 

68,650

 

 

70,183

 

 

 —

 

 

70,183

 

Retail

 

 

 —

 

 

50,292

 

 

50,292

 

 

 —

 

 

47,478

 

 

47,478

 

Total revenues

 

$

108,344

 

$

50,292

 

$

158,636

 

$

97,606

 

$

47,478

 

$

145,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public Carrier

 

$

4,780

 

$

 —

 

$

4,780

 

$

3,777

 

$

 —

 

$

3,777

 

Integrators and value-added resellers

 

 

16,912

 

 

 —

 

 

16,912

 

 

16,408

 

 

 —

 

 

16,408

 

Retail

 

 

 —

 

 

9,703

 

 

9,703

 

 

 —

 

 

9,738

 

 

9,738

 

Total gross profit

 

$

21,692

 

$

9,703

 

$

31,395

 

$

20,185

 

$

9,738

 

$

29,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directly allocable expenses

 

 

8,562

 

 

4,544

 

 

13,106

 

 

7,796

 

 

3,716

 

 

11,512

 

Segment net profit contribution

 

$

13,130

 

$

5,159

 

 

18,289

 

$

12,389

 

$

6,022

 

 

18,411

 

Corporate support expenses

 

 

 

 

 

 

 

 

16,616

 

 

 

 

 

 

 

 

15,319

 

Income before provision for income taxes

 

 

 

 

 

 

 

$

1,673

 

 

 

 

 

 

 

$

3,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

September 30, 2018

 

September 24, 2017

 

 

 

Commercial

 

Retail

 

 

 

 

Commercial

 

Retail

 

 

 

 

 

 

Segment

 

Segment

 

Total

 

Segment

 

Segment

 

Total

 

Revenues

    

 

    

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

Public Carrier

 

$

80,054

 

$

 —

 

$

80,054

 

$

54,021

 

$

 —

 

$

54,021

 

Integrators and value-added resellers

 

 

134,197

 

 

 —

 

 

134,197

 

 

134,709

 

 

 —

 

 

134,709

 

Retail

 

 

 —

 

 

95,304

 

 

95,304

 

 

 —

 

 

96,364

 

 

96,364

 

Total revenues

 

$

214,251

 

$

95,304

 

$

309,555

 

$

188,730

 

$

96,364

 

$

285,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public Carrier

 

$

10,406

 

$

 —

 

$

10,406

 

$

7,905

 

$

 —

 

$

7,905

 

Integrators and value-added resellers

 

 

32,829

 

 

 —

 

 

32,829

 

 

31,980

 

 

 —

 

 

31,980

 

Retail

 

 

 —

 

 

18,858

 

 

18,858

 

 

 —

 

 

19,205

 

 

19,205

 

Total gross profit

 

$

43,235

 

$

18,858

 

$

62,093

 

$

39,885

 

$

19,205

 

$

59,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directly allocable expenses

 

 

16,643

 

 

8,353

 

 

24,996

 

 

16,318

 

 

7,466

 

 

23,784

 

Segment net profit contribution

 

$

26,592

 

$

10,505

 

 

37,097

 

$

23,567

 

$

11,739

 

 

35,306

 

Corporate support expenses

 

 

 

 

 

 

 

 

33,862

 

 

 

 

 

 

 

 

30,997

 

Income before provision for income taxes

 

 

 

 

 

 

 

$

3,235

 

 

 

 

 

 

 

$

4,309

 

 

14


 

 

Supplemental revenue and gross profit information by product category for the second quarter and first six months of fiscal years 2019 and 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

September 30, 2018

 

September 24, 2017

 

Revenues

 

 

 

 

 

 

 

Base station infrastructure

 

$

75,515

 

$

59,448

 

Network systems

 

 

22,564

 

 

29,180

 

Installation, test and maintenance

 

 

8,891

 

 

7,679

 

Mobile device accessories

 

 

51,666

 

 

48,777

 

Total revenues

 

$

158,636

 

$

145,084

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

Base station infrastructure

 

$

15,534

 

$

14,086

 

Network systems

 

 

3,561

 

 

3,921

 

Installation, test and maintenance

 

 

1,803

 

 

1,433

 

Mobile device accessories

 

 

10,497

 

 

10,483

 

Total gross profit

 

$

31,395

 

$

29,923

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

September 30, 2018

 

September 24, 2017

 

Revenues

 

 

 

 

 

 

 

Base station infrastructure

 

$

149,829

 

$

118,518

 

Network systems

 

 

45,341

 

 

53,017

 

Installation, test and maintenance

 

 

16,322

 

 

14,671

 

Mobile device accessories

 

 

98,063

 

 

98,888

 

Total revenues

 

$

309,555

 

$

285,094

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

Base station infrastructure

 

$

31,250

 

$

28,143

 

Network systems

 

 

7,224

 

 

7,750

 

Installation, test and maintenance

 

 

3,276

 

 

2,852

 

Mobile device accessories

 

 

20,343

 

 

20,345

 

Total gross profit

 

$

62,093