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 September 30, 2007
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 charter)

 

 

Registrant’s telephone number, including area code:  (410) 229-1000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.Yes  x          No  o

 

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer o  Accelerated filer o   Non-Accelerated Filer x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  o           No  x

 

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of November 1, 2007, was 5,152,159.

 

 

TESSCO TECHNOLOGIES INCORPORATED

Index to Form 10-Q

 

Part I	Financial Information
	Item 1.	Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II	Other Information
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
	Signature

 

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Part I. Financial Information

 

Item 1. Financial Statements.

 

TESSCO TECHNOLOGIES INCORPORATED

Consolidated Balance Sheets

 

		September 30, 2007			April 1, 2007
		(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,390,800		$	4,176,300
Trade accounts receivable, net		54,899,300			44,859,600
Product inventory, net		50,360,400			37,448,800
Deferred tax asset		3,460,100			3,460,100
Prepaid expenses and other current assets		3,693,100			1,959,500
Total current assets		114,803,700			91,904,300
Property and equipment, net		24,003,000			24,256,300
Goodwill, net		5,056,400			5,008,300
Other long-term assets		2,788,900			2,513,800
Total assets		$	146,652,000		$	123,682,700
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	71,453,400		$	47,257,700
Payroll, benefits and taxes		3,026,800			6,658,500
Income and sales taxes		2,909,500			2,960,800
Accrued expenses and other current liabilities		1,165,800			1,143,800
Revolving line of credit		4,384,400			—
Current portion of long-term debt		358,300			356,200
Total current liabilities		83,298,200			58,377,000
Deferred tax liability		2,700,400			2,700,400
Long-term debt, net of current portion		4,023,500			4,203,200
Other long-term liabilities		1,505,400			1,250,800
Total liabilities		91,527,500			66,531,400
Commitments and contingencies
Shareholders’ equity:
Preferred stock		—			—
Common stock		78,000			75,800
Additional paid-in capital		30,182,200			27,463,700
Treasury stock		(33,454,300		)	(27,216,200		)
Retained earnings		58,316,600			56,806,300
Accumulated other comprehensive income, net of tax		2,000			21,700
Total shareholders’ equity		55,124,500			57,151,300
Total liabilities and shareholders’ equity		$	146,652,000		$	123,682,700

 

See accompanying notes.

 

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TESSCO TECHNOLOGIES INCORPORATED

Consolidated Statements of Income

 

		Fiscal Quarters Ended						Six Months Ended
		September 30, 2007			September 24, 2006			September 30, 2007			September 24, 2006
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues		$	132,518,300		$	118,655,700		$	256,948,400		$	230,596,000
Cost of goods sold		103,837,700			88,625,800			200,106,800			172,481,000
Gross profit		28,680,600			30,029,900			56,841,600			58,115,000
Selling, general and administrative expenses		27,340,000			26,855,800			54,008,800			51,823,900
Income from operations		1,340,600			3,174,100			2,832,800			6,291,100
Interest, net		115,900			180,500			176,800			335,800
Income before provision for income taxes		1,224,700			2,993,600			2,656,000			5,955,300
Provision for income taxes		508,300			1,137,600			1,073,600			2,245,900
Net income		$	716,400		$	1,856,000		$	1,582,400		$	3,709,400
Basic earnings per share		$	0.13		$	0.30		$	0.29		$	0.60
Diluted earnings per share		$	0.13		$	0.29		$	0.28		$	0.58
Basic weighted average shares outstanding		5,328,100			6,155,300			5,374,400			6,213,000
Diluted weighted average shares outstanding		5,538,600			6,338,000			5,616,500			6,375,800

 

See accompanying notes.

 

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TESSCO TECHNOLOGIES INCORPORATED

Consolidated Statements of Cash Flows

 

		Six Months Ended
		September 30, 2007			September 24, 2006
		(unaudited)			(unaudited)
Cash flows from operating activities:
Net income		$	1,582,400		$	3,709,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,433,300			2,320,300
Non-cash stock compensation expense		1,079,700			991,900
Deferred taxes and other non-cash items		37,200			60,500
Change in trade accounts receivable		(9,741,700		)	846,700
Change in product inventory		(12,911,600		)	(10,832,500		)
Change in prepaid expenses and other current assets		(257,000		)	(614,400		)
Change in trade accounts payable		25,723,800			11,342,100
Change in payroll, benefits and taxes		(3,643,900		)	1,372,600
Change in income and sales tax		(1,414,800		)	222,400
Change in accrued expenses and other current liabilities		22,000			(41,500		)
Net cash provided by operating activities		2,909,400			9,377,500
Cash flows from investing activities:
Purchases of property and equipment		(1,974,600		)	(2,054,600		)
Acquisition of business in purchase transaction and additional earn-out payments on acquired businesses		(2,330,000		)	(3,933,300		)
Net cash used in investing activities		(4,304,600		)	(5,987,900		)
Cash flows from financing activities:
Net borrowings from revolving line of credit		4,384,400			7,935,400
Payments on long-term debt		(177,600		)	(264,700		)
Proceeds from issuance of stock		507,000			95,400
Purchase of treasury stock		(6,238,100		)	(16,000,600		)
Excess tax benefit from stock-based compensation		1,134,000			101,500
Bank overdraft		—			2,456,500
Net cash used in financing activities		(390,300		)	(5,676,500		)
Net decrease in cash and cash equivalents		(1,785,500		)	(2,286,900		)
Cash and cash equivalents, beginning of period		4,176,300			2,286,900
Cash and cash equivalents, end of period		$	2,390,800		$	—

 

See accompanying notes.

 

5

 

TESSCO Technologies Incorporated

Notes to Consolidated Financial Statements

September 30, 2007

(Unaudited)

 

Note 1. Description of Business and Basis of Presentation

 

TESSCO Technologies Incorporated, a Delaware corporation (TESSCO or the Company), is a leading provider of integrated product and supply chain solutions to the professionals that design, build, run, maintain and use wireless, mobile, fixed and in-building systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive Internet and information technology. Approximately 97% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange.

 

In management’s opinion, the accompanying interim financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (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 financial statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended April 1, 2007.

 

Note 2. Recently Issued Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements,” which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is reviewing SFAS No. 157 to determine the impact of adoption on its financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”  SFAS No. 159 permits an entity to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is reviewing SFAS No. 159 to determine the impact of adoption on its financial statements.

 

Note 3. Borrowings Under Revolving Credit Facility and Long-Term Debt

 

On May 31, 2007, the Company replaced its previously existing $30 million revolving line of credit facility with a new $50 million revolving line of credit facility with SunTrust Bank and Wachovia Bank, N.A. The previous facility was established in September 2003 and had a term expiring in September 2007, was unsecured and had provided for monthly payments of interest accruing at a LIBOR rate plus an applicable margin ranging from 1.5% to 2.0%. The new facility has a term expiring in May 2010, with interest also payable monthly at a LIBOR rate plus an applicable margin, which ranges from 1.25% to 2.75%. Like the replaced facility, borrowing availability under this new facility is determined in accordance with a borrowing base. This new facility includes financial covenants, including a minimum tangible net worth, minimum cash flow coverage of debt service, and a maximum funded debt to EBITDA ratio. These financial covenants also apply to the existing term loan secured by the Company’s Hunt Valley, Maryland facility. The new facility also limits the Company’s ability to engage in certain transactions or activities, including (but not limited to) investments and acquisitions, sales of assets, payment of dividends, issuance of additional debt and other matters. At

 

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September 30, 2007, the Company had a balance of $4.4 million outstanding on its current revolving line of credit facility. At April 1, 2007, the Company had no outstanding balance on its revolving line of credit facility.

 

Note 4. Stock Compensation

 

The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 30, 2007 includes $502,900 and $1,079,700, respectively, of stock compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 24, 2006 includes $462,400 and $991,900, respectively, of 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 directly to shareholders’ equity of $1,134,000, primarily related to the 164,831 PSUs which vested during the six months ended September 30, 2007.

 

Performance Stock Units:  The following table summarizes the activity under the Company’s PSU program:

 

		2007		Weighted Average Fair Value at Grant
Shares available for issue under outstanding PSUs, non-vested beginning of period		870,172		$	10.15
Granted		183,000		24.11
Vested		(164,831	)	10.67
Forfeited/cancelled		(454,310	)	9.25
Shares available for issue under outstanding PSUs, non-vested end of period		434,031		16.78

 

Of the 434,031 shares available for issuance under outstanding PSUs but not yet vested as of September 30, 2007, 251,031 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 on or about May 1 of 2008, 2009 and 2010.

 

The vast majority of the PSUs cancelled during fiscal year 2008, 449,701 shares, related to the 2005 grant of PSUs which had a 3-year measurement period.  During that period, actual earnings per share on a cumulative basis exceeded the threshold level, but did not reach the goal level, and thus, the underlying shares not earned from those PSUs were cancelled.  Per the provisions of the 1994 Stock and Incentive Plan, the shares related to these PSUs were added back to the Plan and became available for future issuance.

 

During fiscal year 2008, the Compensation Committee of the Board of Directors, with the concurrence of the full Board of Directors, granted additional PSUs to selected key individuals and Directors, providing them with the opportunity to earn up to 183,000 additional shares of the Company’s common stock in the aggregate, depending upon whether certain threshold or goal earnings per share targets are met, subject to individual performance for non-Director employees. These PSUs have only one measurement year (fiscal year 2008), with any shares earned at the end of fiscal year 2008 to vest 25% on or about May 1 of 2008, 2009, 2010 and 2011, provided that the participant remains employed by or associated with the Company on each such date.

 

As of September 30, 2007, there was approximately $2.0 million of total unrecognized compensation costs related to PSUs. If the maximum target of PSUs outstanding were assumed to be earned, total unrecognized compensation costs would be approximately $6.4 million.

 

Stock Options:  In accordance with SFAS No. 123R, the fair value of the Company’s stock options have been determined using the Black-Scholes-Merton option pricing model, based upon facts and assumptions existing at the date of grant. Stock options granted have exercise prices equal to the market price of the Company’s common stock on the grant date.

 

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The value of each option at the date of grant is amortized as compensation expense over the option service 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 September 30, 2007, all outstanding stock options are fully vested. The following table summarizes the pertinent option information for outstanding options for the six months ended September 30, 2007:

 

		Shares		Weighted Average Exercise Price
Outstanding, beginning of period		185,000		$	8.07
Granted		—		—
Exercised		(50,000	)	7.33
Cancelled		—		—
Outstanding and exercisable, end of period		135,000		8.34

 

Note 5. Acquisition

 

On July 2, 2007, the Company acquired the net assets and business of NetForce Solutions, Inc. (NetForce), a provider of technical and sales training solutions to wireless, telecommunications, and networking industries. The purchase included substantially all the non-cash business assets for an initial cash payment of approximately $650,000 and additional cash earn-out payments of up to approximately $2.8 million over a four-year period, contingent on the achievement of certain earnings thresholds. The unaudited revenues earned by NetForce for calendar year 2006, prior to the acquisition, amounted to less than 1 percent of the amount of the Company’s total revenue for fiscal year 2007.

 

The Company has included the financial results of NetForce in its consolidated financial statements beginning July 2, 2007 (Acquisition Date). Pro forma results have not been presented as the impact of the acquisition is not material and did not involve a significant amount of assets. This business is included in the installation, test and maintenance segment.

 

For the period of July 2, 2007 through September 30, 2007, no additional earn-out has been accrued, because applicable annual fiscal year 2008 targets have not been met as of September 30, 2007.

 

Note 6. Income Taxes

 

Effective April 2, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”  As a result of the adoption of FIN 48, the Company recognized a $72,100 decrease in beginning retained earnings as of April 2, 2007. As of April 2, 2007, the Company had total gross unrecognized tax benefits of approximately $319,000, all of which, if recognized, would favorably affect the effective income tax rate in future periods. It is reasonably possible that within the next twelve months the Company’s unrecognized tax benefits related to certain state tax issues and the timing of certain deductions may decrease by approximately $200,000, as a result of the expiration of statutes of limitations. During the fiscal quarter ended September 30, 2007, there were no material increases or decreases in unrecognized tax benefits.

 

The Company’s historical accounting policy with respect to interest and penalties related to tax uncertainties has been to classify these amounts as income taxes, and the Company continued this classification upon the adoption of FIN 48.  As of April 2, 2007, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $26,200. The total amount of interest and penalties related to tax uncertainties recognized in the statement of income for the fiscal quarter and six months ended September 30, 2007 was $25,800 and $36,100, respectively.

 

The Company files income tax returns in the U.S. federal, state and local jurisdictions. Income tax returns filed for fiscal years 2003 and earlier are no longer subject to examination by U.S. federal, state and local tax authorities. No federal, state and local income tax returns are currently under examination. Certain income tax returns for fiscal years 2004 through 2006 remain open to examination by U.S. federal, state and local tax authorities.

 

8

 

Note 7. Earnings Per Share

 

The dilutive effect of all options and PSUs outstanding has been determined by using the treasury stock method. The weighted average shares outstanding is calculated as follows:

 

		Fiscal Quarters Ended				Six Months Ended
		September 30, 2007		September 24, 2006		September 30, 2007		September 24, 2006
Basic weighted average common shares outstanding		5,328,100		6,155,300		5,374,400		6,213,000
Effect of dilutive common stock equivalents outstanding		210,500		182,700		242,100		162,800
Diluted weighted average common shares outstanding		5,538,600		6,338,000		5,616,500		6,375,800

 

As of September 30, 2007, stock options with respect to 135,000 shares of common stock were outstanding. All outstanding options and earned but unvested PSUs were included in the computation of diluted earnings per share because all such instruments were dilutive.

 

Note 8. Business Segments

 

The Company evaluates revenue, gross profit and inventory in three business segments:  (1) Network infrastructure products, which are used to build, repair and upgrade wireless telecommunications, computing and Internet networks, and generally complement radio frequency transmitting and switching equipment provided directly by original equipment manufacturers (OEMs); (2) Mobile devices and accessory products, which include data devices, pagers and two-way radios and related accessories such as replacement batteries, cases, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas and various wireless data devices; and (3) Installation, test and maintenance products, which are used to install, tune, maintain and repair wireless communications equipment. Within the mobile devices and accessory products 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. Beginning in fiscal year 2008, the Company expanded its regular review within each segment from three to four customer categories. These categories are:  (1) commercial public carriers and network operators; (2) commercial resellers; (3) commercial self-maintained users and governments; and (4) consumers. These categories are 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 service cellular telephone, paging and two-way radio communications equipment primarily for the consumer and small business markets. These resellers include local and national proprietorships and retailers, as well as sales and installation centers operated by cellular and paging carriers.

•                  Commercial Self-Maintained Users and Governments. Self-maintained users (SMUs) and government customers include commercial entities such as major utilities and transportation companies, repair centers, and federal agencies and state and local governments, including public safety organizations.

•                  Consumers. Consumers include customers that buy through any 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. 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. The Company’s goodwill at September 30, 2007 relates to acquisitions within its network infrastructure line of business.

 

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(Amounts in thousands)		Network Infrastructure			Mobile Devices and Accessories			Installation, Test and Maintenance			Total
Fiscal Quarter ended September 30, 2007
Commercial Revenues:
Public Carriers and Network Operators		$	11,471		$	568		$	3,420		$	15,459
Resellers		18,289			60,878			2,281			81,448
SMUs and Governments		12,494			3,520			16,626			32,640
Total Commercial Revenues		42,254			64,966			22,327			129,547
Consumer Revenues		—			2,971			—			2,971
Total Revenues		$	42,254		$	67,937		$	22,327		$	132,518
Commercial Gross Profit:
Public Carriers and Network Operators		$	2,801		$	160		$	834		$	3,795
Resellers		4,513			11,040			663			16,216
SMUs and Governments		3,214			1,103			3,313			7,630
Total Commercial Gross Profit		10,528			12,303			4,810			27,641
Consumer Gross Profit		—			1,040			—			1,040
Total Gross Profit		$	10,528		$	13,343		$	4,810		$	28,681
Product Inventory		$	19,326		$	27,236		$	3,798		$	50,360
Fiscal Quarter ended September 24, 2006
Commercial Revenues:
Public Carriers and Network Operators		$	11,868		$	603		$	3,016		$	15,487
Resellers		17,286			47,469			2,631			67,386
SMUs and Governments		14,129			3,536			16,342			34,007
Total Commercial Revenues		43,283			51,608			21,989			116,880
Consumer Revenues		—			1,776			—			1,776
Total Revenues		$	43,283		$	53,384		$	21,989		$	118,656
Commercial Gross Profit:
Public Carriers and Network Operators		$	2,943		$	192		$	807		$	3,942
Resellers		4,578			9,403			610			14,591
SMUs and Governments		3,355			1,063			6,236			10,654
Total Commercial Gross Profit		10,876			10,658			7,653			29,187
Consumer Gross Profit		—			843			—			843
Total Gross Profit		$	10,876		$	11,501		$	7,653		$	30,030
Product Inventory		$	16,902		$	22,545		$	19,898		$	59,345

 

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(Amounts in thousands)		Network Infrastructure			Mobile Devices and Accessories			Installation, Test  and Maintenance			Total
Six Months ended September 30, 2007
Commercial Revenues:
Public Carriers and Network Operators		$	22,896		$	1,149		$	6,026		$	30,071
Resellers		35,856			117,926			4,664			158,446
SMUs and Governments		23,437			6,763			33,065			63,265
Total Commercial Revenues		82,189			125,838			43,755			251,782
Consumer Revenues		—			5,166			—			5,166
Total Revenues		$	82,189		$	131,004		$	43,755		$	256,948
Commercial Gross Profit:
Public Carriers and Network Operators		$	5,478		$	324		$	1,511		$	7,313
Resellers		8,718			22,449			1,463			32,630
SMUs and Governments		6,034			2,164			6,788			14,986
Total Commercial Gross Profit		20,230			24,937			9,762			54,929
Consumer Gross Profit		—			1,913			—			1,913
Total Gross Profit		$	20,230		$	26,850		$	9,762		$	56,842
Product Inventory		$	19,326		$	27,236		$	3,798		$	50,360
Six Months ended September 24, 2006
Commercial Revenues:
Public Carriers and Network Operators		$	24,095		$	1,258		$	7,266		$	32,619
Resellers		32,673			85,490			5,302			123,465
SMUs and Governments		24,167			6,763			40,288			71,218
Total Commercial Revenues		80,935			93,511			52,856			227,302
Consumer Revenues		—			3,294			—			3,294
Total Revenues		$	80,935		$	96,805		$	52,856		$	230,596
Commercial Gross Profit:
Public Carriers and Network Operators		$	5,745		$	377		$	1,757		$	7,879
Resellers		8,265			17,023			1,215			26,503
SMUs and Governments		5,899			1,996			14,239			22,134
Total Commercial Gross Profit		19,909			19,396			17,211			56,516
Consumer Gross Profit		—			1,599			—			1,599
Total Gross Profit		$	19,909		$	20,995		$	17,211		$	58,115
Product Inventory		$	16,902		$	22,545		$	19,898		$	59,345

 

Note 9. Stock Buyback

 

On April 28, 2003, the Company’s Board of Directors approved a stock buyback program, authorizing the purchase of up to 675,000 shares of its outstanding common stock. On October 20, 2005 and July 17, 2006, the Board of Directors amended the program, authorizing the purchase of an additional 675,000 and 600,000 shares, respectively, of outstanding common stock. On July 26, 2007 and August 14, 2007, the Board of Directors authorized the purchase of an additional 144,867 and 300,700 shares, respectively, of outstanding common stock under the stock buyback program. After accounting for the actions of the Board of Directors in authorizing the purchase of the additional shares, a total of 2,395,567 shares have been authorized for repurchase. 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 of the program. As of September 30, 2007, the Company had purchased 2,140,974

 

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shares for approximately $28.3 million, or an average of $13.20 per share. Of the total shares repurchased, 346,107 shares had been repurchased in the first six months of fiscal year 2008 at an average price of $13.96 per share.

 

Note 10. Customer Concentration

 

The Company’s future results could be negatively impacted by the loss of certain customer and/or vendor relationships. For the fiscal quarter and six months ended September 30, 2007, sales of products to the Company’s top customer relationship, AT&T Mobility (formerly Cingular Wireless LLC), accounted for 25% of total revenues and 21% and 22% of total gross profits, respectively. For the fiscal quarter and six months ended September 30, 2007, sales of products related to the Company’s top vendor relationship, the Nokia Inc. (Nokia) repair and replacement component relationship, accounted for 9% of total revenues and 7% and 8% of total gross profits, respectively. The Nokia relationship is a complete supply chain relationship and, therefore, the Company has no alternative sources of supply, and the Company's purchases, and ultimately its resale of these products, is dependent upon the continuation of the Nokia relationship. The Company also sells products other than Nokia repair and replacement materials to many of these customers. Absent this arrangement with Nokia, the Company would maintain the ability to sell these other products to these customers.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Form 10-K for the fiscal year ended April 1, 2007.

 

Business Overview and Environment

 

TESSCO Technologies Incorporated (TESSCO or the Company) is a leading provider of integrated product and supply chain solutions to the professionals that design, build, run, maintain and use wireless mobile, fixed and in-building systems. Although we sell products to customers in over 100 countries, approximately 97% 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. Due to the diversity of our business, we are not significantly affected by seasonality. However, sales to our retailers generally peak in our second and third quarters in preparation for the winter holiday season. Also, our network infrastructure sales are typically affected by weather conditions in the United States, especially in our first quarter.

 

We offer a wide range of products that are classified into three business segments: network infrastructure; mobile devices and accessories; and installation, test and maintenance. Network infrastructure products, which are sold to our commercial customers, are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Sales of traditional network infrastructure products, such as cable, transmission lines and antennas are in part dependent on capital spending in the wireless communications industry. However, we have also been growing our offering of wireless broadband and network equipment products, which are not as dependent on the overall capital spending of the industry. Mobile devices and accessory products include data devices, pagers and two-way radios and related accessories. Mobile devices and accessory products are widely sold to commercial customers and consumers. Commercial customers include retail stores, value-added resellers and dealers. Consumers are primarily reached through our affinity partnerships, where we offer services including customized order fulfillment, outsourced call centers, and building and maintaining private label Internet sites. Approximately 50% of all of our mobile devices and accessory product sales for the fiscal quarter and six months ended September 30, 2007 were generated from sales to AT&T Mobility (AT&T) (formerly Cingular Wireless LLC). Installation, test and maintenance products, which are sold to our commercial customers, are used to install, tune, maintain and repair wireless communications equipment. Approximately 50% of all of our installation, test and maintenance sales for the fiscal quarter and six months ended September 30, 2007 were generated from the sales of replacement parts and materials for original equipment manufacturers, primarily Nokia, Inc. (Nokia). The remainder of this segment is made up of sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware and supplies required by service technicians. Both our repair and replacement parts sales and consumer sales through our affinity partnerships are reliant on relationships with a small number of vendors. Beginning in fiscal year 2008, we expanded our regular review within each segment from three to four categories. These categories are:  (1) commercial public carriers and network operators; (2) commercial resellers; (3) commercial self-maintained users and governments; and (4) consumers. These categories are 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 service cellular telephone, paging and two-way radio communications equipment primarily for the consumer and small business markets. These resellers include local and national proprietorships and retailers, as well as sales and installation centers operated by cellular and paging carriers.

•                                          Commercial Self-Maintained Users (SMUs) and Governments. SMUs and government customers include commercial entities such as major utilities and transportation companies, federal agencies and state and local governments, including public safety organizations.

•                                          Consumers. Consumers are customers buying through any of our affinity-partner relationships or directly from our consumer website, YourWirelessSource.comTM.

 

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

 

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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 relatively short notice. Our ability to maintain these relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and purchasing relationships with approximately 350 manufacturers provide us with a significant competitive advantage over new entrants to the market.

 

Our second quarter revenues increased by 11.7% compared to the second quarter of last year. This growth was driven by our mobile devices and accessories commercial line of business. Gross profits also increased in our mobile devices and accessories commercial line of business as compared with the second quarter of last year. However, the increase in gross profit from our mobile devices and accessories line of business was more than offset by a decline in our installation, test and maintenance line of business due to gross profits from our Nokia relationship returning to historical levels as we had discussed in previous quarters. This overall decrease in gross profit, combined with an increase in operating expenses to support our growth initiatives and increased order volumes, resulted in a 61.4% decline in net income over the prior-year quarter.

 

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Results of Operations

 

The following table summarizes the unaudited results of our operations for the fiscal quarter and six months ended September 30, 2007 and September 24, 2006:

 

		Fiscal Quarters Ended											Six Months Ended
(Amounts in thousands, except per share data)		September 30, 2007			September 24, 2006			$  Change			% Change		September 30, 2007			September 24, 2006			$  Change			% Change
Commercial Revenues
Network Infrastructure:
Public Carriers and Network Operators		$	11,471		$	11,868		$	(397	)	(3.3	)%	$	22,896		$	24,095		$	(1,199	)	(5.0	)%
Resellers		18,289			17,286			1,003			5.8	%	35,856			32,673			3,183			9.7	%
SMUs and Governments		12,494			14,129			(1,635		)	(11.6	)%	23,437			24,167			(730		)	(3.0	)%
Total Network Infrastructure		42,254			43,283			(1,029		)	(2.4	)%	82,189			80,935			1,254			1.5	%
Mobile Devices and Accessories:
Public Carriers and Network Operators		568			603			(35		)	(5.8	)%	1,149			1,258			(109		)	(8.7	)%
Resellers		60,878			47,469			13,409			28.2	%	117,926			85,490			32,436			37.9	%
SMUs and Governments		3,520			3,536			(16		)	(0.5	)%	6,763			6,763			—-			0.0	%
Total Mobile Devices and Accessories		64,966			51,608			13,358			25.9	%	125,838			93,511			32,327			34.6	%
Installation, Test and Maintenance:
Public Carriers and Network Operators		3,420			3,016			404			13.4	%	6,026			7,266			(1,240		)	(17.1	)%
Resellers		2,281			2,631			(350		)	(13.3	)%	4,664			5,302			(638		)	(12.0	)%
SMUs and Governments		16,626			16,342			284			1.7	%	33,065			40,288			(7,223		)	(17.9	)%
Total Installation, Test and Maintenance		22,327			21,989			338			1.5	%	43,755			52,856			(9,101		)	(17.2	)%
Total Commercial Revenues		129,547			116,880			12,667			10.8	%	251,782			227,302			24,480			10.8	%
Consumer Revenues - Mobile Devices and Accessories		2,971			1,776			1,195			67.3	%	5,166			3,294			1,872			56.8	%
Total Revenues		$	132,518		$	118,656		$	13,862		11.7	%	$	256,948		$	230,596		$	26,352		11.4	%
Commercial Gross Profit
Network Infrastructure:
Public Carriers and Network Operators		$	2,801		$	2,943		$	(142	)	(4.8	)%	$	5,478		$	5,745		$	(267	)	(4.6	)%
Resellers		4,513			4,578			(65		)	(1.4	)%	8,718			8,265			453			5.5	%
SMUs and Governments		3,214			3,355			(141		)	(4.2	)%	6,034			5,899			135			2.3	%
Total Network Infrastructure		10,528			10,876			(348		)	(3.2	)%	20,230			19,909			321			1.6	%
Mobile Devices and Accessories:
Public Carriers and Network Operators		160			192			(32		)	(16.7	)%	324			377			(53		)	(14.1	)%
Resellers		11,040			9,403			1,637			17.4	%	22,449			17,023			5,426			31.9	%
SMUs and Governments		1,103			1,063			40			3.8	%	2,164			1,996			168			8.4	%
Total Mobile Devices and Accessories		12,303			10,658			1,645			15.4	%	24,937			19,396			5,541			28.6	%
Installation, Test and Maintenance:
Public Carriers and Network Operators		834			807			27			(3.3	)%	1,511			1,757			(246		)	(14.0	)%
Resellers		663			610			53			8.7	%	1,463			1,215			248			20.4	%
SMUs and Governments		3,313			6,236			(2,923		)	(46.9	)%	6,788			14,239			(7,451		)	(52.3	)%
Total Installation, Test and Maintenance		4,810			7,653			(2,843		)	(37.1	)%	9,762			17,211			(7,449		)	(43.3	)%
Total Commercial Gross Profit		27,641			29,187			(1,546		)	(5.3	)%	54,929			56,516			(1,587		)	(2.8	)%
Consumer Gross Profit - Mobile Devices and Accessories		1,040			843			197			23.4	%	1,913			1,599			314			19.6	%
Total Gross Profit		28,681			30,030			(1,349		)	(4.5	)%	56,842			58,115			(1,273		)	(2.2	)%
Selling, general and administrative expenses		27,340			26,856			484			1.8	%	54,009			51,824			2,185			4.2	%
Income from operations		1,341			3,174			(1,833		)	(57.8	)%	2,833			6,291			(3,458		)	(55.0	)%
Interest, net		116			180			(64		)	(35.6	)%	177			336			(159		)	(47.3	)%
Income before provision for income taxes		1,225			2,994			(1,769		)	(59.1	)%	2,656			5,955			(3,299		)	(55.4	)%
Provision for income taxes		509			1,138			(629		)	(55.3	)%	1,074			2,246			(1,172		)	(52.2	)%
Net income		$	716		$	1,856		$	(1,140	)	(61.4	)%	$	1,582		$	3,709		$	(2,127	)	(57.3	)%
Diluted earnings per share		$	0.13		$	0.29		$	(0.16	)	(55.2	)%	$	0.28		$	0.58		$	(0.30	)	(51.7	)%

 

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