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TESSCO is strategically, financially and operationally strong. But what a year! Despite the very
difficult environment of the wireless telecom market, the first six months of TESSCO's fiscal year showed good progress,
with revenues growing 14% and earnings increasing 96% over the prior year's first six months. Then, on October 12, our
central sales, support, data and phone center was destroyed, requiring a shift in focus from growth to survival and rebuilding!
While the recovery distractions have been immense, we have continued to leverage our value proposition,
"Delivering what you need, when and where you need it."® We completed our fourth quarter with a 12% revenue growth versus
last year's fourth quarter, and ended the year with revenues growing 10% to a record $273.9 million. We achieved record
product deliveries and revenues while we maintained profitability and a very strong balance sheet. During the same period,
many of our competitors saw a decline in shipments, revenue, and earnings.
Our business model is solidly intact and we are passionately focused on executing strategic initiatives to
grow customers and offerings and achieve superior operating results in the long term.
What happened on October 12?
Despite the challenges of the marketplace, the single most influential event for TESSCO this past year was
the disaster that occurred on October 12. During the late evening hours of Saturday, October 12, 2002, a publicly maintained
water system located 60 feet from the side of our corporate headquarters malfunctioned, causing a torrent of water to break
through the brick and cinderblock wall of the building. The tremendous force of the water severely damaged the central
network-operating center and the entire 180,000 square-foot facility flooded with 10 to 24 inches of water. All 50,000
square feet of office space was destroyed and is in the process of being rebuilt. The central voice, data and Internet
system has been temporarily rebuilt in other facilities and still requires total replacement. Inventory was essentially
unharmed, and the distribution center in that facility was operable within a short period of time after the flooding.
Despite the damage and disruption, order deliveries resumed Monday, October 14, less than 32 hours after
the disaster. Sales and administrative functions and voice and data operations were immediately diverted to our other Maryland
and Nevada facilities. Today all displaced office team members have been relocated into temporary leased space.
TESSCO's response and recovery were incredible. Extraordinary contribution and teamwork by TESSCO team
members allowed our disaster plan to be implemented and service to our customers protected.
While we were able to deliver and react to customers' requirements, our proactive business generation
programs were seriously disrupted by the demands of working on the recovery.
Various insurance claims have been filed with the Company's insurance carrier. While the final resolution
of the insurance claims is not yet known, the Company continues to believe that the total insurance proceeds should be
adequate to cover short-term recovery costs, the cost of rebuilding and even some of the lost profits.
Below I have tried to answer many of the questions we are asking.
What is TESSCO's strategy?
Our vision is to continue to be the virtual superstore, "Your Total Source"® for everything needed to design,
build, run, maintain or use wireless, for a vast number of customers. Customers, when doing business with TESSCO, can have what
they need, when and where they need it, without the necessity of maintaining large and costly inventories.
Our revenue growth last year resulted from our strategy of diversification and transition. Diversification
in new products, solutions, customers and markets, and continued transition from a sales-centric, service-at-any-cost company
to a highly productive artful-scientific databased marketing organization was and will remain a key strategy.
While growing revenues through marketing innovation, we strive to build productivity from operating excellence.
TESSCO's integrated operating capability continues to be refined to respond to the changing nature of our product offering,
customer base, and order profile. We strive to achieve global productive throughput through methodical and systemic process
improvements that continue to assure flexible capacity.
How will TESSCO grow revenues?
Growing revenues will result from enhancing our value to customers, increasing market share, moving into new
markets and developing new product offerings. We will continue to grow our market share by achieving a higher share of current
product categories purchased, expanding the product categories purchased by our customers, and selling more customers on a
monthly basis.
A major component of our growth in market share should result from geographic expansion in the western United
States. Our new expanded logistics center in Reno, Nevada, came online June 2, 2003. The facility will also provide a platform
for the growth of our market development and sales teams, helping to acquire and serve new customers, extend our total logistics
capacity, and provide a fully redundant disaster recovery site.
We recognize that the major cellular/PCS carrier network infrastructure site buildout will not return as we
once knew it. Customers have consolidated and total capital expenditures have declined; this, combined with overcapacity, has
led to hypercompetition, resulting in intense pricing pressures. We have and will continue to compete on value delivery rather
than price.
More importantly, we are aggressively pursuing the diverse enterprise, education, healthcare, security, public
safety, government, military, transportation and utility markets. Customers within these markets are building and running
decentralized communication, network, data and security systems, and require and value the TESSCO value proposition. We are
reaching these markets directly if the customer is a "self-maintained" user, and through an expanding network of dealers and
value-added resellers. Selling to the government markets will be aided upon the expected award of two GSA contracts by this
fall.
To capture a bigger portion of the large and growing subscriber market, we have continued to build retailer
and dealer programs with solutions offering expansion and industry-leading innovations in retail packaging and in-store
merchandising. We also reach the subscriber market through consumer-direct affinity programs. TESSCO's newest cobranded Web
solution offers carriers and dealers the ability to generate cost effective incremental sales and integrate the customer experience.
New product expansion is robust. This year we expect our initiatives in wireless broadband (the FCC license-free
2.4 GHz and 5.8 GHz frequency bands) to produce more meaningful results. Broadband adoption has been gaining significant market
momentum, driven by more cost-effective products and an increasing awareness of the value of wireless as a mainstream technology
for fixed and in-building voice and data applications.
Additional new product category introductions this year will include mobile wireless data, voice over IP, wireless
security, video conferencing and an expanded range of installation, test and maintenance equipment. We are also expanding our service
offerings, including leasing and training.
While we focus on organic growth, we will continue to search for acquisitions that integrate with our core strategy,
expand our customer and/or product base and leverage our operating platform.
How will TESSCO grow productivity and profitability?
Today customers demand more services and command lower prices, creating intense pressure on gross profit and operating margins.
TESSCO's strategy to improve productivity and profitability can be summarized as follows:
- Assuring that we deliver the value customers recognize, need and are willing to pay for, and maintaining the courage to sell this value or retreat from a nonprofitable market or customer.
- Lowering the cost of sales by accelerating our cost-effective artful-scientific databased and e-commerce marketing and sales strategies.
- Improving operating margins by leveraging our fixed investments in talent, e-commerce, technology and fulfillment facilities.
- Eliminating all unnecessary or nonproductive processes, policies and/or resources.
- Improving holistic productivity by continuing our disciplined methodology, collaboration and rigorous project management.
- Improving the return on assets by continuing our focus on inventory, receivables and cash-flow management.
Why is TESSCO repurchasing shares and options?
Our current per share stock price represents about 60% of our book value per share. We believe this share price does not accurately reflect TESSCO's current value and certainly gives us no credit at all for our future prospects. The Board of Directors, after thoughtful and considered analysis, developed a two-fold strategy in the best interest of all shareowners.
The Board approved a stock buyback program with the objective of increasing long-term value for our shareowners and enhancing the value of our shares in the near term. At current prices, we believe the purchase of our shares is accretive and an excellent use of funds.
Many of the outstanding options issued to team members have exercise prices that are significantly higher than the current market price of our common stock. We issued these options to attract talent and to motivate this talent to drive performance and continue to make TESSCO their career. Today, because of the significant decline in equity values across the market and in particular for the wireless industry and TESSCO, most of our outstanding options no longer achieve our intended objectives. The Board-initiated stock option repurchase program allows TESSCO to compensate team members holding eligible options. In addition, it provides our plan with available options for future grants, so that we might better attract, retain and motivate quality team members responsible for building shareowner value.
What is TESSCO's governance policy?
In light of the elevated concern with corporate governance, it is appropriate to remind TESSCO shareowners of TESSCO's ongoing diligence in this arena. Ethical behavior, good corporate governance and impeccable business standards have always been a part of the TESSCO Way, the principles that guide our actions and the foundation of our corporate culture. Every day, team members demonstrate our Win-Win business value, described as "Nurturing respectful, honest, caring and rewarding long-term business relationships with our customers, vendors, associates and each other." Daily, we operate to deliver our promise to shareowners, "Demanding behaviors which allow ‘glass house' ethical and legal inspection."
All compensation programs are performance-based to align reward to the interests of all shareowners. Stock options have always been granted at fair market value, and our stock option plans and amendments have consistently been approved by Company shareowners.
Other than me, TESSCO's Board members are independent. The Board of Directors and the independent Compensation and Audit Committees of the Board meet at least four times each year and, during each Board meeting, the independent members of the Board meet privately in executive session without Company management. During fiscal 2003, the charters of the Compensation and Audit Committees were updated and enhanced. In addition, the Board created an independent Nominating Committee to assure that the Board of Directors will be appropriately constituted and organized to meet its fiduciary obligations to the Company and the shareowners on an ongoing basis.
Our independent directors are experienced, qualified and talented, forming a diverse team that brings a wealth of experience and expertise to TESSCO. The Board continues to ask tough questions and put intense demands on management. I am proud of our independent directors' focus and commitment to shareowner value. All of us on the Board want to hear your concerns and suggestions.
In summary . . .
We have the strategic, financial, operational and leadership strengths, and team culture in place; now we must execute.
We continue to focus on the wireless industry, an industry with outstanding long-term growth characteristics. We want to be The Vital Link®, the primary supply partner to the companies and individuals that are designing, building, running, maintaining and using wireless communications and data systems and the primary distribution partner to world-class manufacturers.
Our passion and our goal is to continue to build an enduring corporation, an institution, with a culture and commitment to serve customers, manufacturers, and shareowners, and provide meaningful careers to talented people. We will continue to focus on the combination and match of driving marketing innovation and operational excellence, and continue our journey of building on our successes, brick by brick, to grow revenues, profits and shareowner value.
In closing, I want to take this opportunity to again recognize and congratulate the TESSCO team for their continued focus and performance during some difficult and stressful times, and thank you . . . our shareowners . . . our customers and manufacturers . . . our Board of Directors . . . for your support and commitment to our vision.
Sincerely,
Robert B. Barnhill, Jr.
Chairman, President and Chief Executive Officer
Chairman@TESSCO.com
P.S. When you need a cellular/PCS phone or accessory, experience a few of TESSCO's consumer-direct "affinity" e-commerce sites:
http://www.buywirelessnow.com/cellularone
http://shopwireless.sonyericsson.com/
http://www.yourwirelesssource.com/
http://www.buywirelessnow.com/attwireless/
http://shop.t-mobile.com
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