TESSCO : Reports Fiscal Year and Fourth-Quarter 2016 Financial Results

TESSCO Technologies Incorporated (NASDAQ: TESS), a leading supplier for the product and value chain solutions that enable organizations to build, use, maintain and resell wireless voice, data, video, connectivity and control systems, today reported financial results for its fiscal 2016 and fourth quarter of fiscal 2016, ended March 27, 2016.

Fiscal Year Highlights:

• TESSCO’s ongoing strategic transformation is progressing and will accelerate in the new year to drive the company’s evolution from a wireless carrier transaction-centric supplier, to a consultative, end-to-end solutions provider that enables the deployment of wireless connectivity systems for private, as well as public, network operators
• Net income of $5.3 million, or diluted earnings per share (EPS) of $0.65
• Adjusted diluted earnings per share, excluding a charge related to non-recurring software licensing fees¹, was $0.76*
• Retail market revenues grew by 14%
• Public carrier market revenue declined 30% as carrier hesitancy continued
• Strong year-end balance sheet

Fourth-Quarter Highlights:

• Net loss of $2.0 million, or (loss) per share of $(0.24)
• Adjusted net loss of $1.1 million* or (loss) per share of $(0.13)*, excluding charge related to non-recurring software licensing fees¹; meets low end of guidance range
• Quarterly dividend of $0.20 per share declared

*EBITDA, EBITDA per share, adjusted net income excluding charge related to non-recurring software licensing fees, and adjusted EPS excluding charge related to non-recurring software licensing fees (also referred to in the chart above as “Adjusted EPS” as applicable to the 2016 fiscal year and fourth quarter) are each Non-GAAP financial measures. In addition, references to 2015 fiscal year and fourth quarter EPS excluding a restructuring charge relating to severance costs, (also referred to in the chart above as “Adjusted EPS” for those periods), is also a Non-GAAP measure. These Non-GAAP measures are indicated by an asterisk (*) in this press release, 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.

Fiscal Year 2016 and Fourth-Quarter Revenue Results:

“Fiscal year 2016 presented TESSCO with significant revenue challenges due to the continued decline in cellular carrier purchases, which were down 30% year over year,” said Robert Barnhill, Founder, Chairman, President and Chief Executive Officer. “With the exception of strong results in our retail market, we did not achieve the revenue growth we had anticipated from the rest of the business. At the same time, we have been making progress throughout the year on many of our strategic transformations required to respond to the new realities in wireless, and to respond to changes in customer behavior and expectations. We ended the year with a strong balance sheet, continued the $0.20 per share quarterly dividend payments and maintained a deep commitment to regain profitable growth.

“Our fourth-quarter performance was disappointing. While the fourth quarter is seasonally our weakest, we were impacted by customer uncertainty in a difficult macroeconomic environment. We experienced a 29% year-over-year decline in the carrier market and small declines in some of our other markets. Our earnings were also impacted by an unanticipated, non-recurring charge resulting from a multi-year license usage compliance audit by one of our major software providers. After negotiation, we were successful in reaching an agreement to resolve the matter.

“As we enter fiscal 2017, we are beginning to see new opportunities and sales in all of our markets. We are focusing on market share growth, expansion in the non-carrier markets, new customer development, offer expansion, margin improvement and expense management. In addition, we launched a CEO succession plan. We are now engaged in a search for a new CEO with experience in achieving superior, profitable growth through innovative marketing and sales and productive operations. We expect a new CEO to be hired sometime during fiscal 2017. In the meantime, I remain the CEO, firmly dedicated to driving performance. Once the new CEO is retained, I will become the Executive Chairman, committed to working with the new CEO to take TESSCO to a new level of success in the exploding world of wireless connectivity.

“While short-term results have not met our expectations, TESSCO’s ongoing strategic transformation is progressing. In the New Year, we are accelerating our transformation to drive our evolution from a wireless carrier transaction-centric supplier, to a consultative, end-to-end solutions provider that enables the deployment of wireless voice, data, video, connectivity and control systems for private, as well as public, network operators. All of us at TESSCO are energized and accountable to make the right things happen to achieve the level of success and growth of shareowner value we all expect,” Barnhill concluded.

Fiscal Year 2016 Financial Results

For the 2016 fiscal year, revenues totaled $530.7 million, compared with $549.6 million in fiscal 2015.

Gross profit was $112.0 million in fiscal 2016, compared with $117.6 million in fiscal 2015.

Selling, general and administrative (SG&A) expenses were $102.9 million in fiscal 2016, including the $1.5 million charge related to non-recurring software licensing fees¹. This compares with $103.3 million in fiscal 2015, which included a $0.6 million fourth quarter restructuring charge related to severance costs.

Net income and earnings per share were $5.3 million and $0.65, respectively, for fiscal 2016. Excluding the impact of the $1.5 million software licensing charge¹, adjusted net loss and adjusted earnings per share totaled $6.3 million* and $0.76*, respectively, for fiscal 2016, compared with actual net loss and earnings per share of $8.6 million and $1.04, respectively for fiscal year 2015, or $9.0 million* and $1.08* excluding the $0.6 million fourth quarter restructuring charge.

Fourth-Quarter Fiscal 2016 Financial Results

For the fiscal 2016 fourth quarter, revenues totaled $114.2 million, compared with $113.0 million in the fourth quarter of fiscal 2015 and $139.5 million in the third quarter of fiscal 2015.

Gross profit was $23.0 million for the fourth quarter of fiscal 2016, compared with $24.3 million for the same quarter of fiscal 2015 and $29.5 million for the third quarter of fiscal 2016. The year-over-year decline in gross profit was primarily the result of changes in product and customer mix. Gross margin was 20.2% of revenue, compared with 21.5% for last year’s fourth quarter and 21.1% for the third quarter of fiscal 2016.

Selling, general and administrative (SG&A) expenses were $26.2 million in the fourth quarter of fiscal 2016, including the $1.5 million charge related to the non-recurring software licensing fees¹. This compares with $24.6 million in the same quarter of the prior year, including a $0.6 million restructuring charge related to severance costs, and compares to $24.7 million in the third quarter of fiscal 2016.

Net loss and loss per share were $(2.0 million) and $(0.24) for the fourth quarter of fiscal 2016. Excluding the impact of the $1.5 million software licensing charge¹, adjusted net loss and adjusted loss per share totaled $(1.1 million)* and $(0.13)*, respectively, for the fourth quarter of fiscal 2016, compared with net loss and earnings (loss) per share of $(0.2 million) and $(0.03), or $0.1 million* and $0.01*, respectively, excluding the $0.6 million restructuring charge, for the prior-year quarter, and compared with net income and earnings per share of $2.9 million and $0.35, respectively, for the third quarter of fiscal 2016.

Cash Dividend

TESSCO’s Board of Directors declared a quarterly cash dividend of $0.20 per common share payable on June 8, 2016 to holders of record on May 25, 2016. Any future declaration of dividends, and the establishment of record and payment dates, is subject to future determinations of the Board of Directors.

¹Non-Recurring Software License Charge

During the fourth quarter of fiscal 2016, TESSCO received the results of a software license audit conducted by a major software provider. After significant negotiations, the Company settled the audit for $1.5 million, which was accrued in the fourth quarter and will be paid in the first quarter of fiscal 2017. The ongoing annual cost from the results of this audit is minimal.

The adjusted net income and adjusted earnings (loss) per share amounts included in this release, when excluding (for fiscal year and fourth quarter 2016 amounts) the $1.5 million charge related to the non-recurring software licensing fees, or when excluding (for fiscal year and fourth quarter 2015 amounts) the $0.6 million restructuring charge related to severance costs, are each non-GAAP numbers and are presented here because we believe these charges to be infrequent and, therefore, not indicative of our operating performance.

Business Outlook

The Company is not providing earnings guidance at this time for fiscal 2017 due to the uncertainty that persists primarily in the carrier market. While the Company expects both revenue and earnings to increase sequentially for the first quarter of fiscal 2017 as compared to the fourth quarter of fiscal 2016, those results are expected to be lower than in the first quarter of fiscal 2016, primarily because of continued carrier market pressure, pricing pressure in the retail market and the impact of recent talent investments. TESSCO may provide financial guidance later in the fiscal year as visibility improves.

Forecasting future results 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. The lack of an order backlog makes it even more difficult to forecast future results. The Business Outlook published in this press release reflects only the Company’s current best estimate and it assumes no obligation to update the information contained in this press release, including the Business Outlook, at any time.

Fourth-Quarter Fiscal 2016 Conference Call

Management will host a conference call to discuss fourth-quarter 2016 results tomorrow, May 10, 2016 at 8:30 a.m. ET. To participate in the conference call, please call: 877-311-4347 (domestic call-in) or 484-653-6779 (international call-in) and reference code #89690838.

A live webcast of the conference call will be available at www.tessco.com/go/corporatepresentations. All participants should call or access the website approximately 10 minutes before the conference begins.

A telephone replay of the conference call will be available from 11:30 a.m. ET on May 10, 2016 until 11:59 p.m. ET on May 17, 2016 by calling 855-859-2056 (domestic) or 404-537-3406 (international) and entering confirmation #89690838. An archived replay of the conference call will also be available on the Company's website at www.tessco.com/go/corporatepresentations.

Non-GAAP Information

EBITDA is used by management to evaluate the Company’s ongoing operations and as a general indicator of its 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.

Adjusted net income and adjusted EPS, excluding the charge related to the non-recurring software licensing fees (for 2016 fiscal year and fourth quarter amounts), are presented because we believe the non-recurring software licensing fees to be infrequent and not indicative of our operating performance.

Net income (loss) and EPS, net of restructuring charges (for 2015 fiscal year and fourth quarter amounts) are presented because we believe the severance costs to be infrequent and not indicative of our operating performance.

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 each of these Non-GAAP measures may not be comparable to other similarly titled measures of other companies. Management also believes the adjusted (Non-GAAP) calculations of net income and earnings per share are useful to investors as they remove the impact of infrequent and unusual charges for non-recurring software licensing fees and non-recurring charges related to severance costs. EBITDA is not a recognized term under GAAP and 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. EBITDA per diluted share is also a non-GAAP calculation defined as EBITDA divided by TESSCO’s diluted weighted average shares outstanding. Additionally, EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not reflect certain cash requirements such as interest payments, tax payments and debt service requirements. The amounts shown for EBITDA as presented herein differ from the amounts calculated under the definition of EBITDA used in our loan agreements. The definition of EBITDA as used in our loan agreements is further adjusted for certain cash and non-cash charges/credits, including stock compensation expense, and is used to determine compliance with financial covenants and the ability to engage in certain activities such as incurring additional debt.

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

Reclassification of Items in Statement of Income and Supplemental Results Summary

Prior to the third quarter of fiscal 2016, the Company classified indirect costs relieved from inventory upon a sale as selling, general and administrative expenses, as opposed to cost of goods sold. The financial results presented in this release correctly reflect indirect costs relieved from inventory as cost of goods sold for all periods. The accompanying Consolidated Statements of Income and Supplemental Results Summary have been adjusted to correct this immaterial error in the classification of indirect inventory costs in the income statement. This resulted in an increase in cost of goods sold, and a corresponding decrease in selling, general and administrative expenses, of $3.4 million and $13.3 million for the three- and twelve-month periods ended March 29, 2015, respectively. These corrections have no impact on previously reported revenues, operating margin, EBITDA, net income, earnings per share or on previously reported Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

About TESSCO Technologies Incorporated (NASDAQ: TESS)

The convergence of wireless and the Internet is revolutionizing the way we live, work and play. New systems and applications are creating challenges and opportunities at an unprecedented rate.

TESSCO is there ‒ enabling organizations to capitalize on the opportunities in wireless by providing Your Total Source® of end-to-end solutions. TESSCO delivers the knowledge, and product and supply chain solutions required to build, use and maintain, wireless voice, data, video, connectivity and control systems.

Forward-Looking Statements

This press release contains 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. These forward-looking statements may generally be identified by the use of the words "may," "will," "expects," "anticipates," "believes," "estimates," 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 risks and uncertainties. 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 and other periodic reports filed with the Securities and Exchange Commission, 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: 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 as a result of consolidation among the wireless communications industry; the strength of our customers', vendors' and affinity partners' business; economic conditions that may impact customers' ability to fund or pay for our products and services; 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; fourth-party freight carrier interruption; increased competition; 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; claims against us for breach of the intellectual property rights of fourth parties; product liability claims; 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.

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