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Aug. 5, 2021, 5:31 p.m. EDT

10-Q: TESSCO TECHNOLOGIES INC

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(EDGAR Online via COMTEX) -- 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, 2021, filed with the SEC on June 11, 2021.

Business Overview and Environment

Tessco architects and delivers innovative product and value chain solutions to support wireless systems. Although we sell products to customers in many 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.

On December 2, 2020, we sold most of our Retail inventory and certain other retail-related assets to Voice Comm. In connection with this sale, we assigned or licensed certain Ventev(R)- related intellectual property to Voice Comm, including our Ventev(R) trademark for their use in connection with the sale of mobile device and accessory products. Together, this resulted in our exit from our Retail business. Cash proceeds of $9.5 million were received at the time of sale. As part of the sale agreement, we are entitled to royalty payments, up to $3.0 million in the aggregate, on the sale of Ventev(R) branded products by Voice Comm over a four-year period after closing. Additionally, some customer returns we receive may be resold to Voice Comm over a two-year period after closing. As a result of the disposal, the operating results of our former Retail segment have been included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of (Loss) Income for all periods presented. We retain the Ventev(R) tradename for non-mobile device accessory products.

As a result of this sale and our exit from the Retail business during the third quarter of fiscal 2021, we now operate as one business segment.

We provide certain information within two key markets: (1) public carriers, which are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and (2) commercial, which includes value-added resellers, the government channel and private system operator markets.

We offer a wide range of products that are classified into three categories:

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, and the risk of new competitors entering the market is high. Consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base. In addition, the agreements or arrangements with our customers or suppliers looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months or otherwise short notice. Our ability

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to maintain these relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and our purchasing relationships with approximately 300 manufacturers provide us with a significant competitive advantage over new entrants to the market.

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Results of Continuing Operations

First quarter of Fiscal Year 2022 Compared with First quarter of Fiscal Year 2021

Total Revenues. Revenues for the first quarter of fiscal 2022 increased 8.8% compared with the first quarter of fiscal 2021. Revenues in our commercial market (formerly referred to as VAR and Integrator) increased 3.0%, and revenue in our public carrier market increased 17.2%. This increase in the public carrier market was due to gaining additional market share and improving macro-economic trends as the impact of the COVID-19 pandemic lessens. The increase in commercial market revenues was also largely driven by the lower impact of COVID-19.

Cost of Goods Sold. Cost of goods sold for the first quarter of fiscal 2022 increased 6.6% compared with the first quarter of fiscal 2021. Cost of goods sold in our public carrier market increased by 14.6%, and cost of goods sold in our commercial market increased by 0.2%, in each case for the first quarter year-over-year. These changes in cost of goods sold in both markets were largely driven by changes in revenue and customer mix, as discussed above.

As discussed above under the heading "Business Overview and Environment," our ongoing ability to earn revenues and gross profits from customers and suppliers depends upon a number of factors that often differ for each relationship. Agreements or arrangements on which these relationships are based typically do not include any obligation in respect of any specific product purchase or sale, are of limited duration, and are terminable by either party upon relatively short notice. We have been affected from time to time in the past by the loss and changes in the business habits of significant customers and suppliers, and expect that we will again be so affected from time to time in the future. Our customer and supplier relationships could also be affected by wireless carrier consolidation or the overall global economic environment, or other events beyond our control, including the COVID-19 pandemic.

Total Gross Profit. Gross profit for the first quarter of fiscal 2022 increased by 19.7% compared to the first quarter of fiscal 2021. This increase was primarily due to increased revenues. Overall gross profit margin increased from 17.1% in last year's first quarter to 18.8% for the first quarter of fiscal 2022. Gross profit margin in our public carrier market increased to 11.6% from 9.5% in the same quarter last year. Gross profit margin in our commercial market increased to 24.4% in the first quarter of fiscal 2022 from 22.2% in the same quarter last year. These gross margin improvements are primarily related to changes in customer and product mix, as well as higher freight charged to customers to offset increased freight costs included in selling, general, and administrative expenses.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by $0.1 million for the first quarter of fiscal 2022, compared to the first quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of revenues decreased from 22.3% for the first quarter of fiscal 2021, to 20.6% for the first quarter of fiscal 2022.

The increase in our selling, general and administrative expenses was primarily due to an increase of $1.2 million in freight expense, resulting from higher sales and higher rates due to national supply chain constraints and higher compensation and benefits cost of $0.7 million, primarily related to higher sales commissions and increased health insurance costs. These increases were partially offset by a $1.4 million decrease in information technology expenses during the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021.

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We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation. We had bad debt expense of $187,800 and $30,400, for the three months ended June 27, 2021 and June 28, 2020, respectively.

Interest, Net. Net interest expense increased from $110,700 for the first quarter of fiscal 2021 to $213,700 for the first quarter of fiscal 2022. An increase in the average amount outstanding and higher interest rates under our 2020 Revolving Credit Facility resulted in increased interest expense in the first fiscal quarter of 2022. In addition, capitalized interest increased from $48,800 from the first quarter of fiscal 2021 to $210,500 for the first quarter of fiscal 2022.

Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate decreased from 6.2% for the first quarter of fiscal 2021 to 1.8% for the first quarter of fiscal 2022. Net loss decreased 54.6% and diluted loss per share decreased from $(0.56) to ($0.25) for the first quarter of fiscal 2022, compared to the corresponding prior-year quarter.

Discontinued Operations. Net income from discontinued operations was $0.5 million for the first quarter of fiscal year 2022 compared to $0.2 million for the first quarter of fiscal year 2021. See footnote 11, "Discontinued Operations", for further discussion.

Liquidity and Capital Resources

The following table summarizes our cash flows provided by or used in operating, investing and financing activities for the three months ended June 27, 2021 and June 28, 2020.







                                                                 Three Months Ended
                                                           June 27, 2021     June 28, 2020
        Cash flow (used in) provided by operating
        activities                                        $   (5,832,300)    $    3,439,100
        Cash flow used in investing activities                (2,173,900)       (3,212,600)
        Cash flow provided by (used in) financing
        activities                                              9,103,700         (275,600)
        Net increase (decrease) in cash and cash
        equivalents                                       $     1,097,500    $     (49,100)
        


Net cash used in operating activities was $5.8 million for the first three months of fiscal 2022, compared with net cash provided by operating activities of $3.4 million for the first three months of fiscal 2021. The fiscal 2022 outflow was due to the net loss, and the increase in inventory, accounts receivable and prepaid expenses, partially offset by an increase in accounts payable.

Net cash used in investing activities was $2.2 million for the first three months of fiscal 2022, compared to $3.2 million used in the first three months of fiscal 2021. Both years are related to capital expenditures, largely comprised of investments in information technology.

Net cash provided by financing activities was $9.1 million for the first three months of fiscal 2022, compared to net cash used in financing activities of $0.3 million for the first three months of fiscal 2021. We utilized our asset based secured Revolving Credit Facility during the first three months of fiscal 2022, leading to a cash inflow of $9.1 million during this period. During the first three months of fiscal 2021, we utilized our asset based secured Revolving Credit Facility, leading to a cash outflow of $0.2 million during this period.

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On October 29, 2020, we entered into a Credit Agreement (the "Credit Agreement") among the Company, the Company's primary operating subsidiaries as co-borrowers, the Lenders party thereto, and Wells Fargo Bank, National Association ("Wells"), as Administrative Agent, swingline lender and an issuing bank, and terminated our previous secured Revolving Credit Facility. The Credit Agreement provides for a senior secured asset based revolving credit facility of up to $75 million (the "2020 Revolving Credit Facility"), which matures in forty-two months, on April 29, 2024. This new facility replaced a previously existing facility. As of June 27, 2021, borrowings under the secured 2020 Revolving Credit Facility totaled $39.7 million; therefore, we then had $35.3 million available, subject to the Borrowing Base limitations and compliance with the other applicable terms of the Credit Agreement, including the financial and other covenants discussed in Note 5 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Borrowings under the Credit Agreement accrue interest at the rates, and the Company is required to pay a monthly commitment fee, as also discussed in Note 5 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

We believe that our existing cash, payments from customers and availability under the secured 2020 Revolving Credit Facility will be sufficient to support our operations for at least the next twelve months. To minimize interest expense, our policy is to apply excess available cash to reduce the balance outstanding from time to time on our secured Revolving Credit Facility. Our increased focus over the past several years on business opportunities for sales to our public carrier customers led to the recent expansion of our borrowing limits, as now reflected in the 2020 secured Revolving Credit Facility, and has at times resulted in increased borrowings and dependence on that facility. We expect this trend to continue, although at present we have no plans for any further expansion of the current facility. If we were to undertake an acquisition or other major capital purchases that require funds in excess of existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances. As of June 27, 2021, we do not have any material capital expenditure commitments.

In addition, our liquidity could be negatively impacted by decreasing revenues and profits resulting from a decrease in demand for our products or a reduction in capital expenditures by our customers, or by the weakened financial conditions of our customers or suppliers, in each case as a result of a downturn in the global economy, among other factors.

Recent Accounting Pronouncements

A description of recently issued and adopted accounting pronouncements is contained in Note 2 to our Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

For a detailed discussion on our critical accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended March 28, 2021, filed with the SEC on June 11, 2021.

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Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain forward-looking statements. These forward-looking statements may generally be identified by the use of the words "may," "will," "expects," "anticipates," "believes," "estimates," "intends," "projects," "plans," "should," "would," "could," and similar expressions, but the absence of these words or phrases does not necessarily mean that a statement is not forward looking. Forward looking statements involve a number of known and unknown risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Our actual results may differ materially from those described in or contemplated by any such forward-looking statement for a variety of reasons, including those risks identified in our most recent Annual Report on Form 10-K, this Quarterly Report on Form 10-Q, and other periodic reports filed with the SEC, under the heading "Risk Factors" and otherwise. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.

We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. Without limiting the risks that we describe in our periodic reports and elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: the impact and results of any new or continued activism activities by Robert B. Barnhill, Jr. and/or other activist investors; termination or non-renewal of limited duration agreements or arrangements with our suppliers and affinity partners which are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers, suppliers or relationships, including affinity relationships; loss of customers or reduction in customers' business either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; any deterioration in the strength of our customers', suppliers and affinity partners' businesses; increasingly negative or adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending, or otherwise adversely affecting our suppliers or customers, including their access to capital or liquidity or our customers' demand for, or ability to fund or pay for the purchase, our products and services; our dependence on a relatively small number of suppliers, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; changes in customer and product mix that affect gross margin; effect of "conflict minerals" regulations on the supply and cost of certain of our products; failure of our information technology system or distribution system or our inability to maintain or upgrade our technology or telecommunications systems without undue cost, incident or delay; system security and data protection breaches and exposure to cyber-attacks, and the cost associated with ongoing efforts to maintain cyber-security measures and to meet applicable compliance standards; damage or destruction to our distribution or other facilities; prolonged or otherwise unusual quality or performance control problems; technology changes in the wireless communications industry, or technological failures, which could lead to significant inventory obsolescence or devaluation and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition from competitors, including manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; our relative bargaining power and inability to negotiate favorable terms with our suppliers and customers; our inability to access capital and obtain 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 or with dispositions of lines of business; claims against us for breach of the intellectual property rights of third parties; product liability claims; our inability to protect certain

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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; health epidemics or pandemics or other outbreaks or events, or national or world events or disasters beyond our control, changes in political and regulatory conditions, including tax and trade; and the possibility that, for unforeseen 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.

Available Information

Our internet website address is: www.tessco.com . We make available free of charge through our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission. Also available on our Website is our Code of Business Conduct and Ethics.

Aug 05, 2021

COMTEX_391038251/2041/2021-08-05T17:31:16

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