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Tessco Reports Third-Quarter 2019 Financial Results
[January 24, 2019]

Tessco Reports Third-Quarter 2019 Financial Results


TESSCO TECHNOLOGIES INCORPORATED (NASDAQ: TESS) today reported financial results for its third quarter of fiscal 2019, ended December 30, 2018.

Third-Quarter Highlights:

  • Diluted earnings per share up 68% year over year to $0.32, the highest quarterly EPS in three years
  • Revenue of $152.3 million, up 4% year over year
  • Year over year revenue growth achieved for eighth time in past nine quarters
  • Revenue up 7% for the first nine months of fiscal 2019 compared to the same period of fiscal 2018
  • Revenue growth of 48% in the public carrier market compared with prior-year third quarter
  • Overall expense management contributed to operating margin of 2.3%, compared with 1.5% in the third quarter of fiscal 2018
  • Declared quarterly dividend of $0.20 per share




             
   

Third Quarter
FY 2019

 

Third Quarter
FY 2018

 

Second Quarter
FY 2019

Revenue   $152.3M   $146.3M   $158.6M
Earnings per diluted share   $0.32   $0.19   $0.14
EBITDA per diluted share*   $0.52   $0.38   $0.33
Operating margin   2.3%   1.5%   1.2%
Line of credit balance outstanding   $16.9M   $5.9M   $19.7M
     

* EBITDA per diluted share and EBITDA (on which EBITDA per diluted share is based) are Non-GAAP financial measures. Non-GAAP financial measures indicated by an asterisk (*) in the above chart of this press release are so indicated as a means to direct the reader to the discussion of Non-GAAP Information below and the reconciliation of Non-GAAP to GAAP results included as an exhibit to this press release.

Third-Quarter Revenue by Market:

         
   

Year over Year
Q3 FY 2019 vs.
Q3 FY 2018

 

Sequential
Q3 FY 2019 vs.
Q2 FY 2019

Commercial:        
Public Carrier   47.9%   (15.4)%

VAR and Integrator

  (5.4)%   (4.8)%
Total Commercial   7.8%   (8.7)%
Retail   (2.1)%   6.0%
Total   4.1%   (4.0)%
   

"We achieved $0.32 of earnings per share in the third quarter, a 68% increase year over year, which represents the highest quarterly EPS in three years," said Murray Wright, President and Chief Executive Officer. "Overall revenue growth was 4% in the third quarter, representing the eighth quarterly year over year sales increase in the past nine quarters. This revenue growth was driven by a 48% increase in sales to the Public Carrier ecosystem as we continue to capitalize on opportunities in that market related to FirstNet and other carrier projects. We are seeing strong results from our larger customers, winning new project-driven business with major contractors, and increasing market share with existing customers. We are also well positioned to be a leader in providing products and solutions for the 5G build out over the next several years.

"The strength in Public Carrier sales was partially offset by lower year over year sales to our VAR and Integrator as well as Retail markets. We completed the restructure of our VAR and Integrator sales organization in the second quarter to a regional model, and it took longer than expected to work through those changes. We are confident that we will gain traction in this market in the coming quarters and that this new model positions us well to capitalize on exciting growth opportunities. Retail market sales were affected, in part, by a softer-than-expected major phone release.

"Expense management initiatives and a lower effective tax rate also contributed to the year over year increase in earnings per share to $0.32. We will continue our focus on rigorous operational execution as we manage the near-term challenges inherent with the strong growth we are experiencing from project-based and larger retail customers.

"As we enter the final quarter of fiscal 2019, our team is executing well on both sales and profitability initiatives. We expect to be profitable in the fourth quarter and to achieve annual increases on both the top and bottom lines year over year. While we still have work to do as we prepare to capitalize on the growth in our marketplace, we are confident in our future and excited about the prospects ahead," concluded Wright.

Third-Quarter 2019 Financial Results

For the fiscal 2019 third quarter, revenues totaled $152.3 million, compared with $146.3 million for the third quarter of fiscal 2018. The increase in revenue was driven by the Company's Public Carrier market, which was partially offset by year over year declines in its VAR and Integrator, and Retail markets.

Gross profit was $31.0 million for the third quarter of fiscal 2019, compared with $29.6 million for the same quarter of fiscal 2018. The 5% increase in third-quarter gross profit year over year was primarily the result of higher total sales and improved margins in the non-Carrier markets. Gross margin was 20.4% of revenue for the third quarter of fiscal 2019, compared with 20.2% in the third-quarter of last year.

As a result of the Company's ongoing expense control initiatives and productivity enhancements, third quarter selling, general and administrative (SG&A) expenses of $27.5 million were essentially flat year over year. As a percentage of revenue, SG&A was 18.1%, compared with 18.7% of revenue last year.

The Company's effective tax rate declined to 16.9% in the third quarter, compared with 24.2% in the same quarter of 2018. The reduction is due in part to the new U.S. tax laws and other tax adjustments.

Net income and diluted earnings per share (EPS) were $2.7 million and $0.32, respectively, for the third quarter of fiscal 2019, compared with $1.6 million, and $0.19 per share, for the prior-year third quarter.

For the first nine months of fiscal 2019, net income and diluted earnings per share were $5.1 million and $0.59, respectively, compared with $4.0 million and $0.48 in the same period of fiscal 2018. Revenue and gross profit increased 7% and 5% respectively, over the same period.

Cash Dividend

The Company's Board of Directors has declared a quarterly cash dividend of $0.20 per common share payable on February 27, 2019 to common shareholders of record on February 13, 2019. Any future declaration of dividends, and the establishment of record and payment dates, is subject to future determinations of the Board of Directors.

Business Outlook

Tessco currently anticipates positive earnings in the fourth quarter, its historically least profitable quarter. The Company also anticipates fiscal year revenue and earnings growth.

Forecasting future results or trends is inherently difficult for any business, and actual results or trends may differ materially from those forecasted. The nature of the business is that Tessco typically ships products within several days after booking orders, which makes it more difficult to forecast future results. The Business Outlook published in this press release reflects only the Company's current best estimate and the Company assumes no obligation to update the information contained in this press release, including the Business Outlook, at any time.

Third-Quarter Fiscal 2019 Conference Call

Management will host a conference call to discuss third-quarter fiscal year 2019 results tomorrow, Friday, January 25, 2019 at 8:30 a.m. ET. To participate in the conference call, please call 855-319-5921 (domestic call-in) or 503-343-6034 (international call-in) and reference code #7019079.

A live webcast of the conference call will be available on the Events page of the Company's website. All participants should call or access the website approximately 10 minutes before the conference begins. An archived version of the webcast will be available on the Company's website for one year.

Non-GAAP Information

EBITDA and EBITDA per diluted share are measures used by management to evaluate the Company's ongoing operations, and to provide a general indicator of the Company's operating cash flow (in conjunction with a cash flow statement which also includes among other items, changes in working capital and the effect of non-cash charges). EBITDA is defined as income from operations, plus interest expense, net of interest income, provision for income taxes, and depreciation and amortization. EBITDA per diluted share is defined as EBITDA divided by Tessco's diluted weighted average shares outstanding.

Management believes EBITDA and EBITDA per share are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies. Because not all companies use identical calculations, the Company's presentation of these Non-GAAP measures may not be comparable to other similarly titled measures of other companies. Neither EBITDA nor EBITDA per diluted share is a recognized term under GAAP, and EBITDA does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, neither EBITDA nor EBITDA per diluted share is intended to be a measure of free cash flow for management's discretionary use, as certain cash requirements, such as interest payments, tax payments and debt service requirements, are not reflected.

A reconciliation of Non-GAAP to GAAP results is included as an exhibit to this release.

About TESSCO Technologies Incorporated (NASDAQ: TESS)

TESSCO Technologies, Incorporated (NASDAQ: TESS) is a value-added technology distributor, manufacturer, and solutions provider serving commercial and retail customers in the wireless infrastructure and mobile device accessories markets. The company was founded more than 30 years ago with a commitment to deliver industry-leading products, knowledge, solutions, and customer service. Tessco supplies more than 50,000 products from 400 of the industry's top manufacturers in mobile communications, Wi-Fi, Internet of Things ("IoT"), wireless backhaul, and more. Tessco is a single source for outstanding customer experience, expert knowledge, and complete end-to-end solutions for the wireless industry. For more information, visit www.tessco.com.

Forward-Looking Statements

This press release contains certain forward-looking statements as to anticipated results and future prospects. These forward-looking statements are based on current expectations and analysis, and actual results may differ materially from those projected. These forward-looking statements may generally be identified by the use of the words "may," "will," "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "seeks," "believes," "estimates," and similar expressions, but the absence of these words or phrases does not necessarily mean that a statement is not forward-looking. These forward-looking statements are only predictions and involve a number of risks, uncertainties and assumptions, many of which are outside of our control. Our actual results may differ materially and adversely from those described in or contemplated by any such forward-looking statement for a variety of reasons, including those risks identified in our most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission (the "SEC"), under the heading "Risk Factors" and otherwise. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject. For additional information with respect to risks and other factors which could occur, see Tessco's Annual Report on Form 10-K for the year ended April 1, 2018, including Part I, Item 1A, "Risk Factors" therein, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other securities filings with the SEC that are available at the SEC's website at www.sec.gov and other securities regulators.

We are not able to identify or control all circumstances that could occur in the future that may materially and adversely affect our business and operating results. Without limiting the risks that we describe in our periodic reports and elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners that are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers or relationships, including affinity relationships; loss of customers either directly or indirectly as a result of consolidation among large wireless services carriers and others within the wireless communications industry; the strength of our customers', vendors' and affinity partners' business; negative or adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending or otherwise adversely impacting our vendors or customers, including their access to capital or liquidity, or our customers' demand for, or ability to fund or pay for, the purchase of our products and services; our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; changes in customer and product mix that affect gross margin; effect of "conflict minerals" regulations on the supply and cost of certain of our products; failure of our information technology system or distribution system; system security or data protection breaches; technology changes in the wireless communications industry or technological failures, which could lead to significant inventory obsolescence and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition from competitors, including manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; our relative bargaining power and inability to negotiate favorable terms with our vendors and customers; our inability to access capital and obtain financing as and when needed; transitional and other risks associated with acquisitions of companies that we may undertake in an effort to expand our business; claims against us for breach of the intellectual property rights of third parties; product liability claims; our inability to protect certain intellectual property, including systems and technologies on which we rely; our inability to hire or retain for any reason our key professionals, management and staff; and the possibility that, for unforeseen or other reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings.

 

TESSCO Technologies Incorporated

Consolidated Statements of Income (Unaudited)

 
  Fiscal Quarters Ended   Nine Months Ended

December 30,
2018

 

December 24,
2017

 

September 30,
2018

December 30,
2018

 

December 24,
2017

 
Revenues $ 152,294,500 $ 146,260,300 $ 158,636,100 $ 461,850,000 $ 431,354,600
Cost of goods sold   121,295,800   116,660,500   127,241,400   368,758,500   342,664,900
Gross profit 30,998,700 29,599,800 31,394,700 93,091,500 88,689,700
Selling, general and administrative expenses   27,494,800   27,413,200   29,477,300   85,933,400   81,969,100
Income from operations 3,503,900 2,186,600 1,917,400 7,158,100 6,720,600
Interest, net   247,900   114,500   244,800   667,100   339,600
Income before provision for income taxes 3,256,000 2,072,100 1,672,600 6,491,000 6,381,000
Provision for income taxes   551,400   501,900   481,800   1,437,200   2,354,000
Net income $ 2,704,600 $ 1,570,200 $ 1,190,800 $ 5,053,800 $ 4,027,000
 
Basic earnings per share $ 0.32 $ 0.19 $ 0.14 $ 0.60 $ 0.48
Diluted earnings per share $ 0.32 $ 0.19 $ 0.14 $ 0.59 $ 0.48
 
 

TESSCO Technologies Incorporated

Consolidated Balance Sheets

 
 

December 30,
2018

 

April 1,
2018

(unaudited) (audited)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 1,600 $ 19,400
Trade accounts receivable, net 90,374,600 87,862,300
Product inventory 74,644,800 72,323,000
Prepaid expenses and other current assets   5,965,800   4,489,100
Total current assets 170,986,800 164,693,800
 
Property and equipment, net 15,176,300 13,662,800
Goodwill, net 11,677,700 11,677,700
Deferred tax assets 627,000 710,500
Other long-term assets   7,725,400   8,678,900
Total assets $ 206,193,200 $ 199,423,700
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 67,565,700 $ 67,041,100
Payroll, benefits and taxes 6,994,700 8,291,100
Income and sales tax liabilities 1,301,100 2,339,200
Accrued expenses and other current liabilities 2,949,200 1,370,300
Revolving line of credit 16,905,500 10,835,400
Current portion of long-term debt   9,200   27,300
Total current liabilities 95,725,400 89,904,400
 
Long-term debt, net of current portion - 2,300
Other long-term liabilities   1,005,900   1,465,400
Total liabilities   96,731,300   91,372,100
 
Shareholders' Equity:
Preferred stock -- --
Common stock 99,600 99,000
Additional paid-in capital 62,140,700 60,611,900
Treasury stock, at cost (57,614,100) (57,503,000)
Retained earnings   104,835,700   104,843,700
Total shareholders' equity   109,461,900   108,051,600
 

Total liabilities and shareholders' equity

$ 206,193,200 $ 199,423,700
 
 

TESSCO Technologies Incorporated

Reconciliation of Net Income to Earnings Before Interest, Taxes and Depreciation and Amortization (EBITDA) (Unaudited)

 
  Fiscal Quarters Ended   Nine Months Ended

December 30,
2018

 

December 24,
2017

 

September 30,
2018

December 30,
2018

 

December 24,
2017

 
Net Income as reported $ 2,704,600 $ 1,570,200 $ 1,190,800 $ 5,053,800 $ 4,027,000
Add:
Provision for income taxes 551,400 501,900 481,800 1,437,200 2,354,000
Interest, net 247,900 114,500 244,800 667,100 339,600
Depreciation and amortization   868,800   999,700   900,900   2,706,800   3,030,700
EBITDA $ 4,372,700 $ 3,186,300 $ 2,818,300 $ 9,864,900 $ 9,751,300
Add:
Stock based compensation   274,100   243,500   384,800   979,400   745,400
EBITDA, adjusted $ 4,646,800 $ 3,429,800 $ 3,203,100 $ 10,844,300 $ 10,496,700
 
EBITDA per diluted share $ 0.52 $ 0.38 $ 0.33 $ 1.15 $ 1.16
Adjusted EBITDA per diluted share $ 0.55 $ 0.41 $ 0.37 $ 1.27 $ 1.25
 
 
TESSCO Technologies Incorporated
Supplemental Results Summary (in thousands) (Unaudited)
 
 

Three Months Ended
December 30, 2018

 

Three Months Ended
December 24, 2017

 

Growth Rates Compared to
Prior Year Period

           
Market Revenues Commercial Retail Total Commercial Retail Total Commercial Retail Total
Public Carrier $ 33,593 $ - $ 33,593 $ 22,721 $ - $ 22,721 47.9% - 47.9%
VAR and Integrator 65,373 - 65,373 69,081 - 69,081 (5.4%) - (5.4%)
Retail   -   53,329   53,329   -   54,458   54,458 - (2.1%) (2.1%)
Total revenues $ 98,966 $ 53,329 $ 152,295 $ 91,802 $ 54,458 $ 146,260 7.8% (2.1%) 4.1%
 
Market Gross Profit Commercial Retail Total Commercial Retail Total Commercial Retail Total
Public Carrier $ 4,583 $ - $ 4,583 $ 3,178 $ - $ 3,178 44.2% - 44.2%
VAR and Integrator 16,013 - 16,013 16,073 - 16,073 (0.4%) - (0.4%)
Retail   -   10,403   10,403   -   10,349   10,349 - 0.5% 0.5%
Total gross profit $ 20,596 $ 10,403 $ 30,999 $ 19,251 $ 10,349 $ 29,600 7.0% 0.5% 4.7%
% of revenues 20.8% 19.5% 20.4% 21.0% 19.0% 20.2%
 
 
TESSCO Technologies Incorporated
Supplemental Results Summary (in thousands) (Unaudited)
 
 

Three Months Ended
December 30, 2018

 

Three Months Ended
December 24, 2017

 

Growth Rates Compared to
Prior Year Period

 

Product Revenues

Base Station Infrastructure $ 67,988 $ 57,282 18.7%
Network Systems 21,477 24,024 (10.6%)
Installation, Test and Maintenance 8,306 9,255 (10.3%)
Mobile Device Accessories   54,524   55,699 (2.1%)
Total revenues $ 152,295 $ 146,260 4.1%
 

Product Gross Profit

Base Station Infrastructure $ 14,822 $ 13,280 11.6%
Network Systems 3,453 3,420 1.0%
Installation, Test and Maintenance 1,623 1,759 (7.7%)
Mobile Device Accessories   11,101   11,141 (0.4%)
Total gross profit $ 30,999 $ 29,600 4.7%
% of revenues 20.4% 20.2%
 
 
TESSCO Technologies Incorporated
Supplemental Results Summary (in thousands) (Unaudited)
 
 

Three Months Ended
December 30, 2018

 

Three Months Ended
September 30, 2018

 

Growth Rates Compared to
Prior Year Period

           
Market Revenues Commercial Retail Total Commercial Retail Total Commercial Retail Total
Public Carrier $ 33,593 $ - $ 33,593 $ 39,694 $ - $ 39,694 (15.4%) - (15.4%)
VAR and Integrator

 

65,373 - 65,373 68,650 - 68,650 (4.8%) - (4.8%)
Retail   -   53,329   53,329   -   50,292   50,292 - 6.0% 6.0%
Total revenues $ 98,966 $ 53,329 $ 152,295 $ 108,344 $ 50,292 $ 158,636 (8.7%) 6.0% (4.0%)
 
Market Gross Profit Commercial Retail Total Commercial Retail Total Commercial Retail Total
Public Carrier $ 4,583 $ - $ 4,583 $ 4,780 $ - $ 4,780 (4.1%) - (4.1%)
VAR and Integrator 16,013 - 16,013 16,912 - 16,912 (5.3%) - (5.3%)
Retail   -   10,403   10,403   -   9,703   9,703 - 7.2% 7.2%
Total gross profit $ 20,596 $ 10,403 $ 30,999 $ 21,692 $ 9,703 $ 31,395 (5.1%) 7.2% (1.3%)
% of revenues 20.8% 19.5% 20.4% 20.0% 19.3% 19.8%
 
 

TESSCO Technologies Incorporated

Supplemental Results Summary (in thousands) (Unaudited)
 
 

Three Months Ended
December 30, 2018

 

Three Months Ended
September 30, 2018

 

Growth Rates Compared to
Prior Year Period

 

Product Revenues

Base Station Infrastructure $ 67,988 $ 75,515 (10.0%)
Network Systems 21,477 22,564 (4.8%)
Installation, Test and Maintenance 8,306 8,891 (6.6%)
Mobile Device Accessories   54,524   51,666 5.5%
Total revenues $ 152,295 $ 158,636 (4.0%)

 

Product Gross Profit

Base Station Infrastructure $ 14,822 $ 15,534 (4.6%)
Network Systems 3,453 3,561 (3.0%)
Installation, Test and Maintenance 1,623 1,803 (10.0%)
Mobile Device Accessories   11,101   10,497 5.8%
Total gross profit $ 30,999 $ 31,395 (1.3%)
% of revenues 20.4% 19.8%
 
 
TESSCO Technologies Incorporated
Supplemental Results Summary (in thousands) (Unaudited)
 
 

Nine Months Ended
December 30, 2018

 

Nine Months Ended
December 24, 2017

 

Growth Rates Compared to
Prior Year Period

           
Market Revenues Commercial Retail Total Commercial Retail Total Commercial Retail Total
Public Carrier $ 113,647 $ - $ 113,647 $ 76,742 $ - $ 76,742 48.1% - 48.1%
VAR and Integrator 199,570 - 199,570 203,791 - 203,791 (2.1%) - (2.1%)
Retail   -   148,633   148,633   -   150,822   150,822 - (1.5%) (1.5%)
Total revenues $ 313,217 $ 148,633 $ 461,850 $ 280,533 $ 150,822 $ 431,355 11.7% (1.5%) 7.1%
 
Market Gross Profit Commercial Retail Total Commercial Retail Total Commercial Retail Total
Public Carrier $ 14,989 $ - $ 14,989 $ 11,083 $ - $ 11,083 35.2% - 35.2%
VAR and Integrator 48,842 - 48,842 48,053 - 48,053 1.6% - 1.6%
Retail   -   29,261   29,261   -   29,554   29,554 - (1.0%) (1.0%)
Total gross profit $ 63,831 $ 29,261 $ 93,092 $ 59,136 $ 29,554 $ 88,690 7.9% (1.0%) 5.0%
% of revenues 20.4% 19.7% 20.2% 21.1% 19.6% 20.6%
 
 
TESSCO Technologies Incorporated
Supplemental Results Summary (in thousands) (Unaudited)
 
   

Nine Months Ended
December 30, 2018

   

Nine Months Ended
December 24, 2017

 

Growth Rates Compared to
Prior Year Period

 

Product Revenues

Base Station Infrastructure $ 217,817 $ 175,800 23.9%
Network Systems 66,818 77,041 (13.3%)
Installation, Test and Maintenance 24,628 23,927 2.9%
Mobile Device Accessories   152,587   154,587 (1.3%)
Total revenues $ 461,850 $ 431,355 7.1%
 

Product Gross Profit

Base Station Infrastructure $ 46,072 $ 41,423 11.2%
Network Systems 10,677 11,170 (4.4%)
Installation, Test and Maintenance 4,899 4,611 6.2%
Mobile Device Accessories   31,444   31,486 (0.1%)
Total gross profit $ 93,092 $ 88,690 5.0%
% of revenues 20.2% 20.6%


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