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EX-31.2.1 - EX-31.2.1 - TESSCO TECHNOLOGIES INCexhibit312.htm
EX-32.1.1 - EX-32.1.1 - TESSCO TECHNOLOGIES INCexhibit321.htm
EX-31.1.1 - EX-31.1.1 - TESSCO TECHNOLOGIES INCexhibit311.htm
EX-32.2.1 - EX-32.2.1 - TESSCO TECHNOLOGIES INCexhibit322.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
For the quarterly period ended December 26, 2010
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from        to
 
Commission File Number: 0-24746
 
TESSCO Technologies Incorporated
(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 x           No o
 
   Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o    No o
 
   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 o
 
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company x

           
   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o           No x
 
   The number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of January 28, 2011, was 7,551,588.

 
 
 


TESSCO Technologies Incorporated
 
 
 


 
Item 1. Financial Statements.
 
TESSCO Technologies Incorporated
           
Consolidated Balance Sheets
           
             
   
December 26,
2010
   
March 28,
2010
 
   
(unaudited)
       
ASSETS
           
             
Current assets:
           
Cash and cash equivalents                                                                                                           
  $ 7,297,900     $ 7,658,700  
Trade accounts receivable, net                                                                                                           
    79,251,500       60,675,000  
Product inventory, net                                                                                                           
    49,848,500       44,991,500  
Deferred tax assets                                                                                                           
    4,615,000       4,615,000  
Prepaid expenses and other current assets                                                                                                           
    2,894,000       1,597,000  
Total current assets                                                                                                     
    143,906,900       119,537,200  
                 
Property and equipment, net                                                                                                                
    21,761,100       20,679,900  
Goodwill, net                                                                                                                
    11,684,700       9,017,700  
Other long-term assets                                                                                                                
    1,955,200       2,111,900  
Total assets                                                                                                     
  $ 179,307,900     $ 151,346,700  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Trade accounts payable                                                                                                           
  $ 82,132,200     $ 59,548,900  
Payroll, benefits and taxes                                                                                                           
    7,528,500       8,974,200  
Income and sales tax liabilities                                                                                                           
    2,960,100       2,528,000  
Accrued expenses and other current liabilities                                                                                                           
    1,501,000       1,312,900  
Current portion of long-term debt                                                                                                           
    3,214,500       380,000  
Total current liabilities                                                                                                     
    97,336,300       72,744,000  
                 
Deferred tax liabilities                                                                                                                
    3,650,800       3,650,800  
Long-term debt, net of current portion                                                                                                                
    200,200       3,328,000  
Other long-term liabilities                                                                                                                
    1,535,700       1,978,700  
Total liabilities                                                                                                     
    102,723,000       81,701,500  
                 
Commitments and Contingencies
               
                 
Shareholders’ equity:
               
Preferred stock                                                                                                           
    --       --  
Common stock
    83,500       81,500  
Additional paid-in capital                                                                                                           
    38,944,100       36,937,700  
Treasury stock
    (44,051,900 )     (42,819,400 )
Retained earnings                                                                                                           
    81,655,400       75,543,000  
Accumulated other comprehensive loss, net of tax                                                                                                           
    (46,200 )     (97,600 )
Total shareholders’ equity                                                                                                     
    76,584,900       69,645,200  
Total liabilities and shareholders’ equity                                                                                                     
  $ 179,307,900     $ 151,346,700  
 
See accompanying notes.


 
TESSCO Technologies Incorporated
       
Unaudited Consolidated Statements of Income
       
                 
 
   
Fiscal Quarters Ended
   
Nine Months Ended
 
   
December 26,
2010
   
December 27,
2009
   
December 26,
2010
   
December 27,
2009
 
   
 
   
 
             
                         
Revenues                                                    
  $ 167,940,000     $ 149,721,200     $ 474,919,000     $ 391,476,200  
Cost of goods sold                                                    
    134,137,000       116,932,800       371,996,200       298,058,700  
Gross profit                                               
    33,803,000       32,788,400       102,922,800       93,417,500  
Selling, general and administrative expenses
    29,465,800       27,939,700       89,581,100       81,023,400  
Income from operations                                               
    4,337,200       4,848,700       13,341,700       12,394,100  
Interest, net
    118,900       90,600       326,500       276,200  
Income before provision for income taxes
    4,218,300       4,758,100       13,015,200       12,117,900  
Provision for income taxes                                                    
    1,257,100       1,850,900       4,638,800       4,706,100  
Net income                                               
  $ 2,961,200     $ 2,907,200     $ 8,376,400     $ 7,411,800  
Basic earnings per share                                                    
  $ 0.39     $ 0.39     $ 1.11     $ 1.01  
Diluted earnings per share                                                    
  $ 0.38     $ 0.37     $ 1.07     $ 0.97  
                                 
Cash dividends declared per common share
  $ 0.10     $ 0.07     $ 0.30     $ 0.13  
 
 
See accompanying notes.


 
TESSCO Technologies Incorporated
           
Unaudited Consolidated Statements of Cash Flows
           
             
   
Nine Months Ended
 
   
December 26, 2010
   
December 27, 2009
 
             
Cash flows from operating activities:
           
Net income                                                                                   
  $ 8,376,400     $ 7,411,800  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization                                                                              
    3,240,400       3,086,000  
Non-cash stock compensation expense                                                                              
    954,900       1,750,600  
Deferred income taxes and other                                                                              
    (281,800 )     918,800  
Change in trade accounts receivable                                                                              
    (18,576,500 )     (10,510,800 )
Change in product inventory                                                                              
    (4,857,000 )     (22,291,800 )
Change in prepaid expenses and other current assets
    (1,297,000 )     646,400  
Change in trade accounts payable                                                                              
    22,768,300       26,556,600  
Change in payroll, benefits and taxes                                                                              
    (1,445,700 )     2,103,400  
Change in income and sales tax liabilities                                                                              
    432,100       1,649,200  
Change in accrued expenses and other current liabilities
    416,400       101,800  
Net cash provided by operating activities                                                                              
    9,730,500       11,422,000  
                 
Cash flows from investing activities:
               
Purchases of property and equipment                                                                                    
    (4,274,700 )     (2,318,400 )
Additional earn-out payments on acquired businesses
    (2,852,000 )     (2,382,000 )
Net cash used in investing activities                                                                               
    (7,126,700 )     (4,700,400 )
                 
Cash flows from financing activities:
               
Payments on long-term debt                                                                                    
    (293,300 )     (278,900 )
Proceeds from debt issuance                                                                                    
    --       250,000  
Proceeds from issuance of stock                                                                                    
    73,600       57,600  
Cash dividends paid                                                                                    
    (2,264,000 )     (985,300 )
Purchases of treasury stock and repurchases of stock from employees and directors for minimum tax withholdings
    (1,232,500 )     (484,900 )
Debt issue costs                                                                                    
    --       (175,000 )
Excess tax benefit (loss) from stock-based compensation
    751,600       (194,500 )
Net cash used in financing activities                                                                               
    (2,964,600 )     (1,811,000 )
                 
Net (decrease) increase in cash and cash equivalents
    (360,800 )     4,910,600  
                 
Cash and cash equivalents, beginning of period                                                                                         
    7,658,700       599,800  
                 
Cash and cash equivalents, end of period                                                                                         
  $ 7,297,900     $ 5,510,400  
 
See accompanying notes.
 
 


TESSCO Technologies Incorporated
Notes to Unaudited Consolidated Financial Statements
December 26, 2010
 
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, at lower costs, 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. Over 99% of the Company’s sales are made in United States Dollars.
 
In management’s opinion, the accompanying interim consolidated financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim consolidated financial statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2010.
 
Note 2. Recently Issued Accounting Pronouncements
 
In January 2010, the FASB issued updated accounting guidance related to fair value measurements and disclosures which requires a number of additional disclosures regarding fair value measurements, including the amount of transfers between Levels 1 and 2 of the fair value hierarchy, the reasons for transfers in or out of Level 3 of the fair value hierarchy and activity for recurring Level 3 measures. In addition, the amendment clarifies certain existing disclosure requirements related to the level at which fair value disclosures should be disaggregated and the requirement to provide disclosures about the valuation techniques and inputs used in determining the fair value of assets or liabilities classified as Levels 2 or 3. The standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010 with early adoption permitted. The adoption of the standard update did not have a material impact on the Company’s consolidated financial statements.
 
In December 2010, the FASB issued updated accounting guidance related to the goodwill impairment test which requires all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. This guidance modifies Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are adverse qualitative factors indicating that an impairment may exist.  The qualitative factors are consistent with existing guidance, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The standard is effective for interim and annual reporting periods beginning after December 15, 2010. The Company does not expect the adoption of the standard update to have a material impact on the Company’s consolidated financial statements.
 
Note 3. Stock Split Effected in the Form of a Dividend
 
On May 26, 2010, the Company issued a stock dividend in order to effect a three-for-two stock split of the Company’s common stock. All share and earnings per share numbers prior to the May 26, 2010 stock split (including without limitation all share and share-related numbers included in Notes 4, 7 and 11 below) have been retroactively restated to reflect the stock dividend for all periods presented. The number of authorized shares remains at 15,000,000.


 
Note 4. Stock Compensation
 
The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 26, 2010 includes ($408,200) and $954,900, respectively, of non-cash stock compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 27, 2009 includes $598,800 and $1,750,600, respectively, of non-cash stock compensation expense. Stock compensation expense is primarily related to our Performance Stock Unit (PSU) Program. In addition, the Company recorded an excess tax benefit (loss) directly to shareholders’ equity of $751,600 and ($194,500), primarily related to the PSUs which vested during the nine months ended December 26, 2010 and December 27, 2009, respectively.
 
Performance Stock Units: The following table summarizes the activity under the Company’s PSU program for the first nine months of fiscal year 2011:
 
   
Nine Months Ended December 26, 2010
   
Weighted Average Fair Value at Grant Date
 
Shares available for issue under outstanding PSUs, non-vested beginning of period
    679,627     $ 6.75  
Granted                                                                
    274,500       16.00  
Vested                                                                
    (238,163 )     7.24  
Forfeited/cancelled                                                                
    (12,375 )     6.47  
Shares available for issue under outstanding PSUs, non-vested end of period
    703,589     $ 10.19  
 
Of the 703,589 shares available for issuance under outstanding PSUs, but not yet vested as of December 26, 2010, 429,840 shares have been earned, and assuming the respective participants remain employed by or associated with the Company on these dates, these shares will vest and be issued ratably on or about May 1 of 2011, 2012 and 2013.
 
The PSUs cancelled during fiscal year 2011 primarily related to the fiscal year 2010 grant of PSUs, which had a 1-year measurement period (fiscal year 2010). Of the PSUs cancelled, PSUs covering 10,500 shares were cancelled because the applicable individual fiscal 2010 performance targets were not fully satisfied for certain non-director employee participants. In addition, 1,125 non-vested shares related to the fiscal year 2010 grant of PSUs were forfeited and 750 shares related to the fiscal year 2011 grant of PSUs were cancelled due to a participant no longer being employed by the Company. Per the provisions of the Second Amended and Restated 1994 Stock and Incentive Plan (the “1994 Plan”), the shares related to these PSUs were added back to the 1994 Plan and became available for future issuance.
 
During fiscal year 2011, the Compensation Committee of the Board of Directors, with the concurrence of the full Board of Directors, granted additional PSUs to select key individuals and directors, providing them with the opportunity to earn up to 274,500 additional shares of the Company’s common stock in the aggregate (of which 750 PSUs have since been cancelled due to a participant no longer being employed by the Company), depending upon whether certain threshold or goal earnings per share targets are met, subject to individual performance for employees (independent directors are not subject to individual performance factors). These PSUs have only one measurement year (fiscal year 2011), with any shares earned at the end of fiscal year 2011 to vest and be issued 25% on or about May 1 of each of 2011, 2012, 2013 and 2014, provided that the respective participants remain employed by or associated with the Company on each such date. As of the end of the third quarter of the current fiscal year, the Company has estimated that the threshold goal earnings per share targets for the minimum number of awards to be earned related to the fiscal 2011 awards will not be met. As a result, all previously recorded non-cash compensation expense related to the fiscal 2011 awards was reversed during the current quarter.
 
If the maximum target of PSUs granted in fiscal year 2011 is assumed to be earned, total unrecognized compensation costs, net of estimated forfeitures, on these and all other earned but unvested PSU’s would be approximately $4.4 million as of December 26, 2010 and would be expensed through fiscal year 2014. To the extent the forfeiture rate is different from what is anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.


 
Stock Options: In accordance with the FASB standard regarding stock compensation and share-based payments, the fair value of the Company’s stock options has been determined using the Black-Scholes-Merton option pricing model, based upon facts and assumptions existing at the date of grant. Outstanding stock options have exercise prices equal to the market price of the Company’s common stock on the grant date.
 
The fair value of each option at the date of grant is amortized as compensation expense over the option service or vesting period. This occurs without regard to subsequent changes in stock price, volatility or interest rates over time, provided that the option remains outstanding. As of December 26, 2010, all outstanding stock options are fully vested. The following table summarizes the pertinent option information for outstanding options for the nine months ended December 26, 2010:
 
   
Shares
   
Weighted Average Exercise Price
 
Outstanding, beginning of period
    180,000     $ 5.26  
Granted
    --       --  
Exercised
    --       --  
Cancelled
    --       --  
Outstanding and exercisable, end of period
    180,000       5.26  
 
Restricted Stock: In fiscal year 2007, the Company granted 225,000 shares of the Company’s common stock to its Chairman and Chief Executive Officer as a restricted stock award under the 1994 Plan. These shares vest ratably over ten fiscal years based on service, beginning on the last day of fiscal year 2007 and ending on the last day of fiscal year 2016, subject, however, to the terms applicable to the award, including terms providing for possible acceleration of vesting upon death, disability, change in control or certain other events. The weighted average fair value for these shares at the grant date was $10.56. As of December 26, 2010, 135,000 shares remain unvested and there was no activity related to these restricted shares during the first nine months of fiscal year 2011. As of December 26, 2010, there was approximately $1.2 million of total unrecognized compensation costs, net of forfeitures, related to this issuance of restricted stock. Unrecognized compensation costs are expected to be recognized ratably over a remaining period of approximately five years. Also in fiscal year 2011, restricted stock units covering 22,500 shares were issued to various non-executive employees. These shares vest on the last day of fiscal year 2014, provided the employees are still employed by the Company on that date. The weighted average fair value for these shares at the grant date was $16.13. As of December 26, 2010, there was approximately $0.1 million of total unrecognized compensation costs, net of forfeitures, related to this issuance of restricted stock. Unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years. To the extent the forfeiture rates are different from what is anticipated, stock-based compensation related to the restricted awards will be different from the Company’s expectations. No other shares of restricted stock are currently issued as awards under the 1994 Plan.
 
Note 5. Fair Value of Financial Instruments
 
The Company complies with the FASB standard regarding fair value measurement and disclosure requirements for assets and liabilities carried at fair value.  Accordingly, assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
 
·  
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
·  
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, and quoted prices for identical or similar assets or liabilities in markets that are not active.
·  
Level 3: Unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions about the inputs used in pricing the asset or liability.
 
The following table presents information about assets and liabilities recorded at fair value on the Company’s Consolidated Balance Sheet:
 
   
Balance at December 26, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
Liabilities:
                       
 Interest rate swap agreement, net of tax
  $ 46,200     $ --     $ 46,200     $ --  
 Total liabilities at fair value                                                                 
  $ 46,200     $ --     $ 46,200     $ --  

 
 
On October 1, 2005, the Company entered into a receive variable/pay fixed interest rate swap on a total notional amount of $4.2 million with Wachovia Bank, National Association to avoid the risks associated with fluctuating interest rates on the Company’s existing term loan, which bears interest at a floating rate of LIBOR plus 1.75%, and to eliminate the variability in the cash outflow for interest payments. The interest rate swap agreement locks the interest rate for the outstanding principal balance of the loan at 6.38% through June 30, 2011. The Company anticipates retaining at least some portion of the interest rate swap agreement whose notional amount outstanding amortizes down over the period of the interest rate swap at a rate which matches the Company’s debt principal payments throughout the period of the term loan. As such, no amount of the loss on the agreement, currently recorded in other comprehensive income (loss), has been, or is anticipated to be reclassified into earnings. There was no payment due or received at inception of the swap. No hedge ineffectiveness will be recognized as the interest rate swap’s provisions match the applicable provisions of the term bank loan. This cash flow hedge qualified for hedge accounting using the short-cut method since the swap terms match the critical terms of the hedged debt. The Company’s fair value of its interest rate swap is derived from valuation models commonly used for derivatives. Valuation models require a variety of inputs, including contractual terms, market fixed prices, inputs from forward price yield curves, notional quantities, measures of volatility and correlations of such inputs. The Company’s derivatives trade in liquid markets, and as such, model inputs can generally be verified and do not involve significant management judgment.
 
The carrying amounts of cash and cash equivalents, trade accounts receivable, product inventory, trade accounts payable, accrued expenses and other current liabilities approximate their fair values as of December 26, 2010 and March 28, 2010 due to their short term nature.
 
Fair value of long-term debt, calculated using current interest rates and future principal payments, as of December 26, 2010 and March 28, 2010 is estimated as follows:
 
   
December 26, 2010
   
March 28, 2010
 
   
Carrying Amount
   
Fair
Value
   
Carrying Amount
   
Fair
Value
 
Note payable to a Bank
  $ 3,056,300     $ 3,015,000     $ 3,225,000     $ 3,121,000  
Note payable to the Maryland Economic Development Corporation
  $ 146,700     $ 144,200     $ 253,900     $ 248,100  
Note payable to Baltimore County
  $ 211,700     $ 188,300     $ 229,100     $ 201,900  
 
Note 6. Income Taxes
 
During the fiscal quarter ended December 26, 2010, the Company experienced a favorable impact on its effective tax rate related to a reduction in unrecognized tax benefits due to the expiration of the statute of limitations as it related to one of the Company’s uncertain tax positions, as further discussed in Note 12 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2010. This item reduced the provision for income taxes by $410,400 for both the three and nine month periods ended December 26, 2010. As of December 26, 2010, the remaining gross amount of unrecognized tax benefits was $677,000 and if the Company were to prevail on all uncertain tax positions, the net effect would be a benefit to the Company’s effective tax rate of $471,200. The remaining $205,800 represents federal tax benefits that would be received in the event that the Company did not prevail on all uncertain state tax positions.
 
A reconciliation of the changes in the gross balance of unrecognized tax benefits amounts is as follows:
 
       
Beginning balance at March 28, 2010 of unrecognized tax benefit
  $ 1,001,600  
Increases related to prior period tax positions
    47,600  
Increases related to current period tax positions
    82,800  
Reductions as a result of a lapse in the applicable statute of limitations related to prior period tax positions
    (455,000 )
Ending balance at December 26, 2010 of unrecognized tax benefits
  $ 677,000  
 
 
Note 7. Earnings Per Share
 
The Company calculates earnings per share considering the FASB standard regarding the accounting for participating securities which requires the Company to use the two-class method to calculate earnings per share. Under the two-class method, earnings per common share are computed by dividing the sum of the distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.
 
The following table presents the calculation of basic and diluted earnings per common share:
 
Amounts in thousands, except per share amounts
 
Fiscal Quarter Ended
   
Nine Months Ended
 
   
December 26, 2010
   
December 27, 2009
   
December 26, 2010
   
December 27, 2009
 
Earnings per share – Basic:
                       
Net earnings
  $ 2,961     $ 2,907     $ 8,376     $ 7,412  
Less: Distributed and undistributed earnings allocated to nonvested stock
    (53 )     (62 )     (150 )     (159 )
Earnings available to common shareholders – Basic
  $ 2,908     $ 2,845     $ 8,226     $ 7,253  
                                 
Weighted average common shares outstanding – Basic
    7,410       7,218       7,385       7,198  
                                 
Earnings per common share – Basic
  $ 0.39     $ 0.39     $ 1.11     $ 1.01  
                                 
Earnings per share – Diluted:
                               
Net earnings
  $ 2,961     $ 2,907     $ 8,376     $ 7,412  
Less: Distributed and undistributed earnings allocated to nonvested stock
    (51 )     (59 )     (118 )     (154 )
Earnings available to common shareholders – Diluted
  $ 2,910     $ 2,848     $ 8,258     $ 7,258  
                                 
Weighted average common shares outstanding – Basic
    7,410       7,218       7,385       7,198  
Effect of dilutive options
    344       432       346       295  
Weighted average common shares outstanding – Diluted
    7,754       7,650       7,731       7,493  
                                 
Earnings per common share – Diluted
  $ 0.38     $ 0.37     $ 1.07     $ 0.97  
                                 
Anti-dilutive equity awards not included above
    --       --       --       --  
 
 
Note 8. Business Segments
 
The Company evaluates revenue, gross profit and inventory in three business segments: (1) Network infrastructure products are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Products include base station antennas, cable and transmission lines, fixed and mobile broadband equipment, wireless local area network (WLAN) products, wireless networking, filtering systems, small towers, lightning protection devices, connectors, security and surveillance products, power systems and miscellaneous hardware. Our network infrastructure service offering includes connector installation, custom jumper assembly, filter product tuning, site kitting, logistics integration and wireless network training. (2) Mobile devices and accessory 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 as well as two-way radios and related accessories. Retail merchandising displays, promotional programs, customized order fulfillment services and affinity-marketing programs, including providing outsourced call centers and private label Internet sites, complement our mobile devices and accessory product offering. (3) 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. Within the mobile devices and accessories line of business, the Company sells to both commercial and consumer markets. The network infrastructure and installation, test and maintenance lines of business sell primarily to commercial markets. The Company also regularly reviews its results of operations in three commercial customer categories and the consumer customer category, as described further below:
 
·  
Commercial Public Carriers and Network Operators. Public carriers and network operators include systems operators that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers.
 
·  
Commercial Resellers. Resellers include dealers and resellers that sell, install and/or service cellular telephone, wireless networking, broadband and two-way radio communications equipment primarily for the enterprise market, and to a lesser extent, the consumer market. These resellers include local and national value-added resellers and retailers, as well as sales and installation centers operated by cellular and paging carriers.
 
·  
Commercial Self-Maintained Users and Governments. Self-maintained user (SMU) and government customers include commercial entities such as major utilities and transportation companies, federal agencies and state and local governments.
 
·  
Consumers. Consumers include customers that buy through any of our affinity partner relationships or directly from our consumer website, YourWirelessSource.comTM.
 
The Company measures segment performance based on segment gross profit. The segment operations develop their product offering, pricing and strategies, which are collaborative with one another and the centralized sales and marketing function. Therefore, the Company does not segregate assets, other than inventory, for internal reporting, evaluating performance or allocating capital. In addition, the Company has allocated all goodwill and indefinite lived intangible assets to the applicable segments (and reporting units within segments, where applicable) for purposes of its annual impairment tests. The Company’s goodwill at December 26, 2010 relates to acquisitions within its network infrastructure line of business. Product delivery revenue and certain cost of sales expenses have been allocated to each segment based on a percentage of revenues and/or gross profit, as applicable.


Segment activity for the third quarter of fiscal years 2011 and 2010 is as follows:
 
(Amounts in thousands)
 
Network Infrastructure
   
Mobile Devices and Accessories
   
Installation, Test and Maintenance
   
Total
 
Fiscal Quarter ended December 26, 2010
                   
Commercial revenues:
                       
Public carriers and network operators
  $ 16,874     $ 647     $ 6,024     $ 23,545  
Resellers                                                           
    21,522       87,894       2,113       111,529  
SMUs and governments                                                           
    19,229       4,051       6,486       29,766  
Total commercial revenues                                                               
    57,625       92,592       14,623       164,840  
Consumer revenues                                                               
    --       3,100       --       3,100  
Total revenues                                                               
  $ 57,625     $ 95,692     $ 14,623     $ 167,940  
                                 
Commercial gross profit:
                               
Public carriers and network operators
  $ 4,250     $ 164     $ 1,043     $ 5,457  
Resellers                                                           
    6,282       13,023       549       19,854  
SMUs and governments                                                           
    5,115       1,030       1,255       7,400  
Total commercial gross profit                                                               
    15,647       14,217       2,847       32,711  
Consumer gross profit                                                               
    --       1,092       --       1,092  
Total gross profit                                                               
  $ 15,647     $ 15,309     $ 2,847     $ 33,803  
                                 
Selling, general and administrative expenses
                            29,466  
 Income from operations                                                               
                            4,337  
Interest, net                                                               
                            119  
 Income before provision for income taxes
                            4,218  
Provision for income taxes                                                               
                            1,257  
 Net income                                                               
                          $ 2,961  
                                 
Product inventory                                                               
  $ 22,890     $ 24,156     $ 2,803     $ 49,849  
                                 
Fiscal Quarter ended December 27, 2009
                         
Commercial revenues:
                               
Public carriers and network operators
  $ 13,710     $ 566     $ 2,884     $ 17,160  
Resellers                                                           
    18,297       78,294       1,694       98,285  
SMUs and governments                                                           
    17,073       3,624       10,001       30,698  
Total commercial revenues                                                               
    49,080       82,484       14,579       146,143  
Consumer revenues                                                               
    --       3,578       --       3,578  
Total revenues                                                               
  $ 49,080     $ 86,062     $ 14,579     $ 149,721  
                                 
Commercial gross profit:
                               
Public carriers and network operators
  $ 3,151     $ 142     $ 675     $ 3,968  
Resellers                                                           
    4,733       15,185       385       20,303  
SMUs and governments                                                           
    4,356       1,024       1,882       7,262  
Total commercial gross profit                                                               
    12,240       16,351       2,942       31,533  
Consumer gross profit                                                               
    --       1,255       --       1,255  
Total gross profit                                                               
  $ 12,240     $ 17,606     $ 2,942     $ 32,788  
                                 
Selling, general and administrative expenses
                            27,939  
 Income from operations                                                               
                            4,849  
Interest, net                                                               
                            91  
 Income before provision for income taxes
                            4,758  
Provision for income taxes                                                               
                            1,851  
 Net income                                                               
                          $ 2,907  
                                 
Product inventory                                                               
  $ 23,636     $ 30,693     $ 4,503     $ 58,832  

 
Segment activity for the first nine months of fiscal years 2011 and 2010 is as follows:
 
(Amounts in thousands)
 
Network Infrastructure
   
Mobile Devices and Accessories
   
Installation, Test and Maintenance
   
Total
 
Nine Months ended December 26, 2010
                   
Commercial revenues:
                       
Public carriers and network operators
  $ 53,531     $ 1,808     $ 13,835     $ 69,174  
Resellers                                                           
    66,878       240,039       5,758       312,675  
SMUs and governments                                                           
    53,874       12,260       16,276       82,410  
Total commercial revenues                                                               
    174,283       254,107       35,869       464,259  
Consumer revenues                                                               
    --       10,660       --       10,660  
Total revenues                                                               
  $ 174,283     $ 264,767     $ 35,869     $ 474,919  
                                 
Commercial gross profit:
                               
Public carriers and network operators
  $ 12,697     $ 460     $ 2,686     $ 15,843  
Resellers                                                           
    18,259       41,374       1,506       61,139  
SMUs and governments                                                           
    14,436       3,232       4,566       22,234  
Total commercial gross profit                                                               
    45,392       45,066       8,758       99,216  
Consumer gross profit                                                               
    --       3,707       --       3,707  
Total gross profit                                                               
  $ 45,392     $ 48,773     $ 8,758     $ 102,923  
                                 
Selling, general and administrative expenses
                            89,581  
 Income from operations                                                               
                            13,342  
Interest, net                                                               
                            327  
 Income before provision for income taxes
                            13,015  
Provision for income taxes                                                               
                            4,639  
 Net income                                                               
                          $ 8,376  
                                 
Product Inventory                                                               
  $ 22,890     $ 24,156     $ 2,803     $ 49,849  
                                 
Nine Months ended December 27, 2009
                         
Commercial revenues:
                               
Public carriers and network operators
  $ 38,261     $ 1,571     $ 7,902     $ 47,734  
Resellers                                                           
    54,684       188,625       5,520       248,829  
SMUs and governments                                                           
    42,984       10,347       30,820       84,151  
Total commercial revenues                                                               
    135,929       200,543       44,242       380,714  
Consumer revenues                                                               
    --       10,762       --       10,762  
Total revenues                                                               
  $ 135,929     $ 211,305     $ 44,242     $ 391,476  
                                 
Commercial gross profit:
                               
Public carriers and network operators
  $ 9,224     $ 406     $ 1,934     $ 11,564  
Resellers                                                           
    15,054       40,912       1,304       57,270  
SMUs and governments                                                           
    11,704       3,060       6,475       21,239  
Total commercial gross profit                                                               
    35,982       44,378       9,713       90,073  
Consumer gross profit                                                               
    --       3,344       --       3,344  
Total gross profit                                                               
  $ 35,982     $ 47,722     $ 9,713     $ 93,417  
                                 
Selling, general and administrative expenses
                            81,023  
 Income from operations                                                               
                            12,394  
Interest, net                                                               
                            276  
 Income before provision for income taxes
                            12,118  
Provision for income taxes                                                               
                            4,706  
 Net income                                                               
                          $ 7,412  
                                 
Product Inventory                                                               
  $ 23,636     $ 30,693     $ 4,503     $ 58,832  

 
Note 9. Comprehensive Income
 
The components of total comprehensive income were as follows:
 
   
Fiscal Quarter Ended
   
Nine Months Ended
 
   
December 26, 2010
   
December 27, 2009
   
December 26, 2010
   
December 27, 2009
 
                         
Net Income
  $ 2,961,200     $ 2,907,200     $ 8,376,400     $ 7,411,800  
Change in value of interest rate swap, net of tax
    21,600       12,200       51,400       33,000  
Total comprehensive income
  $ 2,982,800     $ 2,919,400     $ 8,427,800     $ 7,444,800  
 
Note 10. Borrowings Under Revolving Credit Facility
 
On April 28, 2010, the Company and its primary operating subsidiaries, as borrowers, executed and delivered a Fourth Modification Agreement (the “Fourth Amendment”), with SunTrust Bank and Wachovia Bank, National Association, amending the Credit Agreement for the Company’s existing unsecured revolving credit facility.  Pursuant to the Fourth Amendment, the amount of dividend payments allowed to be made by the Company under the Credit Facility was increased from $2.5 million to $5.0 million in any 12 month period, assuming continued compliance by the Company with the otherwise applicable terms of the Credit Agreement. Pursuant to the relevant documents, the financial covenants included in the Credit Agreement for the unsecured revolving credit facility are also applicable to the Company’s existing Term Loan with the same lenders. Accordingly, the Fourth Amendment also has the effect of amending the financial covenants applicable to the Term Loan.
 
Note 11. Stock Buyback
 
On April 28, 2003, the Company’s Board of Directors approved a stock buyback program. As of December 26, 2010, the Board of Directors had authorized the purchase of up to 3,593,350 shares of outstanding common stock under the stock buyback program. Shares may be purchased from time to time in the open market, by block purchase, or through negotiated transactions, or possibly other transactions managed by broker-dealers. No time limit has been set for completion or expiration of the program. As of December 26, 2010, the Company had purchased 3,505,187 shares under the stock buyback program for approximately $30.7 million, or an average of $8.76 per share. Of the total shares repurchased under the stock buyback program, 2,300 shares were repurchased in the first nine months of fiscal year 2011 for approximately $32,100. As of December 26, 2010, 88,163 shares remained available for repurchase under this program.
 
In addition to the shares repurchased in the stock buyback program discussed immediately above, the Company repurchased all 705,000 shares of its common stock then held by Brightpoint, Inc. in a privately negotiated transaction on July 1, 2008 for approximately $6.4 million, or $9.09 per share.
 
The Company also withholds shares 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 the nine months ended December 26, 2010 and December 27, 2009 the allocated value of the shares withheld totaled $1,200,400 and $101,800, respectively.
 
Note 12. Customer Concentration
 
The Company’s future results could be negatively impacted by the loss of certain customer and/or vendor relationships. For both the fiscal quarter and nine months ended December 26, 2010, sales of products to the Company’s top customer relationship, AT&T Mobility (“AT&T”), accounted for 28% of total revenues. For the fiscal quarter and nine months ended December 27, 2009, sales of products to the Company’s top customer relationship, AT&T, accounted for 34% and 29% of total revenues, respectively. For both the fiscal quarter and nine months ended December 26, 2010, no customer other than AT&T accounted for more than 4% of total consolidated revenues. See Note 13 for additional discussion regarding AT&T.

 
Note 13. Subsequent Events
 
During the third quarter the Company experienced lower purchasing volumes and significant pricing pressure from its large tier-one carrier, AT&T, and the Company expects this trend to continue. In addition, based on recent communications from AT&T, the Company also faces planned business model changes from them. As a result of the lower volumes and pricing pressure, gross margins declined in the third quarter, impacting the Company's net profits. These factors will continue to put pressure on the Company's net profits, and the planned business model changes put the Company's current and future business with this customer at risk. As previously stated, the nature of the Company's business is that its relationships with most customers and suppliers, including AT&T, typically contain no ongoing purchase or sale obligations and are terminable by either party upon relatively short notice.
 
On January 17, 2011, the Company declared a quarterly cash dividend of ten cents ($0.10) per share of common stock, par value $0.01 per share, of the Company, payable on March 2, 2011, to shareholders of record as of February 16, 2011. 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.
 
Following a review by the Board of its corporate governance process and arrangements to ensure that they continue to serve the interests of the Company's shareholders for developing long-term value, the Board of Directors, on January 19, 2011, approved an amendment and restatement of the Company's By-Laws to declassify the Board. As a result, beginning with the 2011 annual meeting of shareholders and at each annual meeting thereafter, successors to the class of directors whose term then expires shall be elected to hold office for a term expiring at the next annual meeting of stockholders, with the effect that at the 2013 annual meeting of shareholders the classification of the Board of Directors shall be eliminated and all directors thereafter will be elected annually. The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the full text of the Company's Fifth Amended and Restated By-Laws which are incorporated herein by reference as Exhibit 3.1 to this Quarterly Report on Form 10-Q.
 


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2010.
 
Business Overview and Environment
 
TESSCO Technologies Incorporated (TESSCO, we, or the Company) architects and delivers innovative product and value chain solutions, at lower costs, to wireless systems. Although we sell products to customers in many countries, approximately 98% of our sales are made to customers in the United States. We have operations and office facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio, Texas.
 
Our third quarter revenues increased by 12.2% compared to the third quarter of fiscal year 2010. This increase was driven by growth in all our commercial lines of business. In the third quarter of fiscal year 2011 AT&T Mobility (“AT&T”), our largest customer, accounted for 28% of total revenues as compared to 34% of total revenues during the third quarter of the prior fiscal year. No other customer accounted for more than 4% of total consolidated revenues. Our third quarter gross profits increased by 3.1% compared to the third quarter of the prior fiscal year, driven by growth in our network infrastructure commercial line of business, partially offset by a decline in our mobile devices and accessories and installation, test and maintenance commercial lines of business. Selling, general and administrative expenses increased by 5.5% over the prior year quarter, primarily related to corporate support expenses and freight costs related to increased order volume. Consequently, net income increased by 1.9% and diluted earnings per share grew by 2.7% over the prior-year quarter.
 
During the third quarter we experienced lower purchasing volumes and significant pricing pressure from our large tier-one carrier, AT&T, and we expect this trend to continue. In addition, based on recent communications from the customer, we also face planned business model changes from them. The lower volumes and pricing pressure will put pressure on our net profits, and the planned business model changes put our current and future business with this customer at risk.  As we have historically disclosed, the nature of our business is that our relationships with most customers and suppliers, including AT&T, typically contain no ongoing purchase or sale obligations and are terminable by either party upon relatively short notice.
 
Notwithstanding the increased potential for economic recovery, the global financial crisis – which has included, 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, rising unemployment and concerns that the worldwide economy may continue to experience significant challenges – may 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. Our strong third quarter revenue growth was driven by a 3% growth in the average number of monthly buying customers and a 10% increase in the average dollars purchased for each buying customer compared to the same period of fiscal year 2010. Accordingly, while we believe that the economy continues to show signs of improvement and we believe we are starting to win a larger percentage of our customers’ business, we also believe that our customers are continuing to experience difficulty in the current economic environment. In addition, our suppliers’ access to capital and liquidity may continue to 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 impact of the current economic environment on our liquidity is further discussed below under the heading “Liquidity and Capital Resources.”
 
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 accessories 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 vendors 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. The nature of our business is that, from time to time, we experience the loss and changes in the business habits of significant customer and vendor relationships and may continue to do so in the future. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, 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.


Results of Operations
 
The following table summarizes the unaudited results of our operations for the fiscal quarter and nine months ended December 26, 2010 and December 27, 2009:
 
   
Fiscal Quarters Ended
   
Nine Months Ended
 
(Amounts in thousands, except per share data)
 
December 26, 2010
   
December 27, 2009
   
$
Change
   
% Change
   
December 26, 2010
   
December 27, 2009
   
$
Change
   
% Change
 
Commercial Revenues
                                               
Network Infrastructure:
                                               
Public Carriers and Network Operators
  $ 16,874     $ 13,710     $ 3,164       23.1 %   $ 53,531     $ 38,261     $ 15,270       39.9 %
Resellers                                    
    21,522       18,297       3,225       17.6 %     66,878       54,684       12,194       22.3 %
SMUs and Governments
    19,229       17,073       2,156       12.6 %     53,874       42,984       10,890       25.3 %
Total Network Infrastructure
    57,625       49,080       8,545       17.4 %     174,283       135,929       38,354       28.2 %
Mobile Devices and Accessories:
                                                               
Public Carriers and Network Operators
    647       566       81       14.3 %     1,808       1,571       237       15.1 %
Resellers                                    
    87,894       78,294       9,600       12.3 %     240,039       188,625       51,414       27.3 %
SMUs and Governments
    4,051       3,624       427       11.8 %     12,260       10,347       1,913       18.5 %
Total Mobile Devices and Accessories
    92,592       82,484       10,108       12.3 %     254,107       200,543       53,564       26.7 %
Installation, Test and Maintenance:
                                                               
Public Carriers and Network Operators
    6,024       2,884       3,140       108.9 %     13,835       7,902       5,933       75.1 %
Resellers                                    
    2,113       1,694       419       24.7 %     5,758       5,520       238       4.3 %
SMUs and Governments
    6,486       10,001       (3,515 )     (35.1 %)     16,276       30,820       (14,544 )     (47.2 %)
   Total Installation, Test and Maintenance     14,623       14,579       44       0.3 %     35,869       44,242       (8,373 )     (18.9 %)
Total Commercial Revenues
    164,840       146,143       18,697       12.8 %     464,259       380,714       83,545       21.9 %
Consumer Revenues - Mobile Devices and Accessories
    3,100       3,578       (478 )     (13.4 %)     10,660       10,762       (102 )     (0.9 %)
Total Revenues                                         
  $ 167,940     $ 149,721     $ 18,219       12.2 %   $ 474,919     $ 391,476     $ 83,443       21.3 %
                                                                 
Commercial Gross Profit
                                                               
Network Infrastructure:
                                                               
Public Carriers and Network Operators
  $ 4,250     $ 3,151     $ 1,099       34.9 %   $ 12,697     $ 9,224     $ 3,473       37.7 %
Resellers                                    
    6,282       4,733       1,549       32.7 %     18,259       15,054       3,205       21.3 %
SMUs and Governments
    5,115       4,356       759       17.4 %     14,436       11,704       2,732       23.3 %
Total Network Infrastructure
    15,647       12,240       3,407       27.8 %     45,392       35,982       9,410       26.2 %
Mobile Devices and Accessories:
                                                               
Public Carriers and Network Operators
    164       142       22       15.5 %     460       406       54       13.3 %
Resellers                                    
    13,023       15,185       (2,162 )     (14.2 %)     41,374       40,912       462       1.1 %
SMUs and Governments
    1,030       1,024       6       0.6 %     3,232       3,060       172       5.6 %
Total Mobile Devices and Accessories
    14,217       16,351       (2,134 )     (13.1 %)     45,066       44,378       688       1.6 %
Installation, Test and Maintenance:
                                                               
Public Carriers and Network Operators
    1,043       675       368       54.5 %     2,686       1,934       752       38.9 %
Resellers                                    
    549       385       164       42.6 %     1,506       1,304       202       15.5 %
SMUs and Governments
    1,255       1,882       (627 )     (33.3 %)     4,566       6,475       (1,909 )     (29.5 %)
Total Installation, Test and Maintenance
    2,847       2,942       (95 )     (3.2 %)     8,758       9,713       (955 )     (9.8 %)
Total Commercial Gross Profit
    32,711       31,533       1,178       3.7 %     99,216       90,073       9,143       10.2 %
Consumer Gross Profit - Mobile Devices and Accessories
    1,092       1,255       (163 )     (13.0 %)     3,707       3,344       363       10.9 %
Total Gross Profit                                         
    33,803       32,788       1,015       3.1 %     102,923       93,417       9,506       10.2 %
Selling, general and administrative expenses
    29,466       27,939       1,527       5.5 %     89,581       81,023       8,558       10.6 %
Income from operations
    4,337       4,849       (512 )     (10.6 %)     13,342       12,394       948       7.6 %
Interest, net                                         
    119       91       28       30.8 %     327       276       51       18.5 %
Income before provision for income taxes
    4,218       4,758       (540 )     (11.3 %)     13,015       12,118       897       7.4 %
Provision for income taxes
    1,257       1,851       (594 )     (32.1 %)     4,639       4,706       (67 )     (1.4 %)