TUFCO TECHNOLOGIES INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005

Commission file number 0-21018

TUFCO TECHNOLOGIES, INC.


Delaware		39-1723477

(State of other jurisdiction of incorporation of organization)		(IRS Employer ID No.)

PO BOX 23500 Green Bay, WI 54305

(Address of principal executive offices)

(920) 336-0054

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 such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each or the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of May 13, 2005

Common Stock, par value $0.01 per share		4,555,144

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,
	2005			September 30,
	(Unaudited)			2004*
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	5,897		$	7,692
Accounts receivable - net		9,728,768			12,639,389
Inventories		10,970,087			9,624,963
Prepaid expenses and other current assets		281,364			158,856
Deferred income taxes		618,588			618,588


Total current assets		21,604,704			23,049,488

PROPERTY, PLANT AND EQUIPMENT-Net		15,649,402			16,329,335
GOODWILL		7,211,575			7,211,575
OTHER ASSETS-Net		331,345			392,154


TOTAL	$	44,797,026		$	46,982,552


Liabilities and Stockholders’ Equity

CURRENT LIABILITIES:
Accounts payable	$	5,875,739		$	5,917,351
Accrued payroll, vacation and payroll taxes		584,250			863,368
Other current liabilities		519,825			865,923
Income taxes payable		1,014,606			981,077


Total current liabilities		7,994,420			8,627,719

LONG-TERM DEBT-Less current portion		500,000			2,500,000
DEFERRED INCOME TAXES		487,466			405,640

STOCKHOLDERS’ EQUITY:
Common Stock: $.01 par value: 9,000,000 shares authorized; 4,706,341 shares issued		47,063			47,063
Additional paid-in capital		25,088,631			25,088,631
Retained earnings		11,692,383			11,144,884
Treasury stock, 151,197 and 123,997 common shares at cost, respectively		(1,012,937	)		(831,385	)


Total stockholders’ equity		35,815,140			35,449,193


TOTAL	$	44,797,026		$	46,982,552

See notes to condensed consolidated financial statements.
* Condensed from audited financial statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	THREE MONTHS ENDED						SIX MONTHS ENDED
	March 31,						March 31,
	2005			2004			2005			2004
NET SALES	$	21,215,449		$	20,198,871		$	41,219,438		$	33,244,481
COST OF SALES		19,823,989			18,333,277			38,376,874			29,804,948


GROSS PROFIT		1,391,460			1,865,594			2,842,564			3,439,533

OPERATING EXPENSES:
Selling, general & administrative		1,157,932			1,298,241			2,335,916			2,417,250
(Gain) loss on sale of property, plant and equipment		—			(1,681	)		(415,781	)		1,348


OPERATING INCOME		233,528			569,034			922,429			1,020,935
OTHER INCOME (EXPENSE):
Interest expense		(8,058	)		(14,022	)		(21,578	)		(28,907	)
Interest income and other income		5,324			7,871			19,508			7,494


INCOME BEFORE INCOME TAXES		230,794			562,883			920,359			999,522
INCOME TAX EXPENSE		91,293			241,086			372,860			425,335

NET INCOME	$	139,501		$	321,797		$	547,499		$	574,187


BASIC EARNINGS PER SHARE:
Net Income	$	0.03		$	0.07		$	0.12		$	0.13

DILUTED EARNINGS PER SHARE:
Net Income	$	0.03		$	0.07		$	0.12		$	0.12

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

Basic		4,573,277			4,582,344			4,577,811			4,582,344
Diluted		4,598,096			4,604,783			4,606,707			4,597,317

See notes to condensed consolidated financial statements.

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	SIX MONTHS ENDED
	March 31,
	2005			2004

OPERATING ACTIVITIES
Net income	$	547,499		$	574,187
Noncash items in net income

Depreciation and amortization of property, plant and equipment		1,018,122			1,122,273
Amortization		10,572			46,738
Deferred income taxes		81,826			—
(Gain) loss on sale of property, plant and equipment		(415,781	)		1,348
Changes in operating working capital:
Accounts receivable		2,910,621			(3,718,122	)
Inventories		(1,345,124	)		(3,123,619	)
Prepaid expenses and other assets		(72,271	)		(119,983	)
Accounts payable		(41,612	)		3,919,168
Accrued and other current liabilities		(530,216	)		16,170
Income taxes payable		33,529			223,022


Net cash provided (used) by operating activities		2,197,165			(1,058,818	)

INVESTING ACTIVITIES
Additions to property, plant and equipment		(479,450	)		(2,314,097	)
Proceeds from disposals of property, plant and equipment		462,042			19,701


Net cash used by investing activities		(17,408	)		(2,294,396	)

FINANCING ACTIVITIES
Borrowings of short-term debt		—			1,421,554
Increase in restricted cash		—			(750,096	)
Repayment of long-term debt		(2,500,000	)		—
Borrowings of long-term debt		500,000			—
Purchase of common stock		(181,552	)		—


Net cash (used) provided by financing activities		(2,181,552	)		671,458

NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,795	)		(2,681,756	)
CASH AND CASH EQUIVALENTS:
Beginning of period		7,692			2,930,416


End of period	$	5,897		$	248,660


NONCASH SUPPLEMENTAL INFORMATION:
Deferred gain on sale of equipment	$	95,000			—

See notes to condensed consolidated financial statements.

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and six months ended March 31, 2005 and 2004

(Unaudited)

1.   Basis of Presentation

    The accompanying condensed consolidated financial statements have been prepared by Tufco Technologies, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments necessary for a fair statement of results for each period shown (unless otherwise noted herein, all adjustments are of a normal recurring nature). Operating results for the three-month and six-month period ended March 31, 2005 are not necessarily indicative of results expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to prevent the financial information given from being misleading. The Company’s fiscal 2004 Annual Report on Form 10-K contains a summary of significant accounting policies and includes the consolidated financial statements and the notes to the consolidated financial statements. The same accounting policies are followed in the preparation of interim reports. The Company’s condensed consolidated balance sheet at September 30, 2004 was derived from the audited consolidated balance sheet. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2004.

    Earnings Per Share

    Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share includes common stock equivalents from dilutive stock options outstanding during the year, the effect of which was 24,819 and 22,439 shares for the three months ended March 31, 2005 and 2004, respectively. For the six months ended March 31, 2005 and 2004, the common stock equivalents from dilutive stock options outstanding were 28,896 and 14,973, respectively. During the three months ended March 31, 2005 and 2004, options to purchase 257,200 and 223,700 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. For the six months ended March 31, 2005 and 2004, options to purchase 206,975 and 294,333 shares, respectively, were excluded from the diluted earnings per share computation.

    Stock Based Compensation

    Stock option grants to employees are accounted for by the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages (but does not require) the cost of stock options and other stock-based compensation arrangements with employees to be measured based on the fair value of the equity instrument awarded. The following table illustrates the effect on net income and related earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation, for the three months and six months ended March 31, 2005 and 2004.

Notes to condensed consolidated financial statements—(continued)


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2005			2004			2005			2004
Net income as reported	$	139,501		$	321,797		$	547,499		$	574,187

Less total stock-based employee compensation expense determined under fair value based method of all awards, net of related tax effects		(77,268	)		(68,628	)		(96,354	)		(88,650	)


Pro forma net income	$	62,233		$	253,169		$	451,145		$	485,537


Earnings per share:
Basic - as reported	$	0.03		$	0.07		$	0.12		$	0.13
Basic - pro forma	$	0.01		$	0.06		$	0.10		$	0.11

Diluted - as reported	$	0.03		$	0.07		$	0.12		$	0.12
Diluted - pro forma	$	0.01		$	0.05		$	0.10		$	0.11

Pro forma net income for the three and six months ended March 31, 2005 includes $58,182 after tax of compensation expense for retirement eligible stock option participants. Stock compensation expense for retirement eligible participants is reported in pro forma net income when the options are granted in accordance with the provisions of the Plan. Previously, we reported compensation expense for these participants over the vesting period.

2. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued the revised SFAS No. 123, Share-Based Payment (SFAS 123(R)). SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the requisite service period, generally as the award vests. The Company is required to adopt SFAS 123(R) in the first quarter of 2006. SFAS 123(R) applies to all awards granted after October 1, 2005 and to previously-granted awards unvested as of the adoption date. The Company is currently evaluating the effect of SFAS 123(R) on its financial statements and related disclosures.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current-period charges. Further, SFAS 151 requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. SFAS 151 is effective for inventory costs incurred beginning in the first quarter of 2006. The Company is currently evaluating the effect of SFAS 151 on its financial statements and related disclosures.

Notes to condensed consolidated financial statements—(continued)

3. Inventories

Inventories consist of the following:


	March 31,		September 30,
	2005		2004
Raw materials	$	9,207,851	$	7,941,894
Finished goods		1,762,236		1,683,069


Total inventories	$	10,970,087	$	9,624,963

4.   Stock Repurchase Plan

    In March 2005, the Company’s Board of Directors approved the purchase by the Company of up to 300,000 of its shares of common stock given that the cash and debt position would enable these purchases without impairment to the Company’s capital. The purchase plan will terminate in December, 2005. A total of 27,200 shares were purchased under the plan as of March 31, 2005.

5.   Segment Information

    The Company manufactures and distributes business forms, custom paper-based non-woven products, and provides contract manufacturing, specialty printing and related services on these types of products. The Company does, however, separate its operations and prepares information for management use by the market segments aligned with the Company’s products and services. Such market information is summarized below. The Contract Manufacturing segment provides services to large national consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.

Notes to condensed consolidated financial statements—(continued)


Three Months Ended	Contract		Business		Corporate
March 31, 2005	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	15,328,405	$	5,887,044	$	—		$	21,215,449

Gross profit		890,690		500,770		—			1,391,460

Operating income (loss)		723,168		421,890		(911,530	)		233,528

Depreciation and amortization expense		358,035		81,816		73,425			513,276

Capital expenditures		317,610		76,027		—			393,637

Assets:
Inventories		8,922,483		2,047,604		—			10,970,087
Property, plant and equipment-net		12,503,477		2,820,528		325,397			15,649,402
Accounts receivable and other (including goodwill)		11,183,038		5,734,047		1,260,452			18,177,537


Total assets	$	32,608,998	$	10,602,179	$	1,585,849		$	44,797,026


Three Months Ended	Contract		Business		Corporate
March 31, 2004	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	14,151,617	$	6,047,254	$	—		$	20,198,871

Gross profit		1,180,098		685,496		—			1,865,594

Operating income (loss)		552,293		303,334		(286,593	)		569,034

Depreciation and amortization expense		277,989		129,029		181,838			588,856

Capital expenditures		1,489,726		14,355		—			1,504,081

Assets:
Inventories		4,787,451		2,227,251		—			7,014,702
Property, plant and equipment-net		11,703,318		2,959,153		827,211			15,489,682
Accounts receivable and other (including goodwill)		13,211,453		6,070,322		2,393,701			21,675,476


Total assets	$	29,702,222	$	11,256,726	$	3,220,912		$	44,179,860


		Page
		Number
PART I:	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2005 and September 30, 2004		3
	Condensed Consolidated Statements of Income for the three months and six months ended March 31, 2005 and 2004		4
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2005 and 2004		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4.	Controls and Procedures		15
PART II:	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 6.	Exhibits		16
SIGNATURES			17
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification Pursuant to Section 906
Certification Pursuant to Section 906

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

1.	Basis of Presentation

	The accompanying condensed consolidated financial statements have been prepared by Tufco Technologies, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments necessary for a fair statement of results for each period shown (unless otherwise noted herein, all adjustments are of a normal recurring nature). Operating results for the three-month and six-month period ended March 31, 2005 are not necessarily indicative of results expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to prevent the financial information given from being misleading. The Company’s fiscal 2004 Annual Report on Form 10-K contains a summary of significant accounting policies and includes the consolidated financial statements and the notes to the consolidated financial statements. The same accounting policies are followed in the preparation of interim reports. The Company’s condensed consolidated balance sheet at September 30, 2004 was derived from the audited consolidated balance sheet. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2004.

	Earnings Per Share

	Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share includes common stock equivalents from dilutive stock options outstanding during the year, the effect of which was 24,819 and 22,439 shares for the three months ended March 31, 2005 and 2004, respectively. For the six months ended March 31, 2005 and 2004, the common stock equivalents from dilutive stock options outstanding were 28,896 and 14,973, respectively. During the three months ended March 31, 2005 and 2004, options to purchase 257,200 and 223,700 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. For the six months ended March 31, 2005 and 2004, options to purchase 206,975 and 294,333 shares, respectively, were excluded from the diluted earnings per share computation.

	Stock Based Compensation

	Stock option grants to employees are accounted for by the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages (but does not require) the cost of stock options and other stock-based compensation arrangements with employees to be measured based on the fair value of the equity instrument awarded. The following table illustrates the effect on net income and related earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation, for the three months and six months ended March 31, 2005 and 2004.

4.	Stock Repurchase Plan

	In March 2005, the Company’s Board of Directors approved the purchase by the Company of up to 300,000 of its shares of common stock given that the cash and debt position would enable these purchases without impairment to the Company’s capital. The purchase plan will terminate in December, 2005. A total of 27,200 shares were purchased under the plan as of March 31, 2005.

5.	Segment Information

	The Company manufactures and distributes business forms, custom paper-based non-woven products, and provides contract manufacturing, specialty printing and related services on these types of products. The Company does, however, separate its operations and prepares information for management use by the market segments aligned with the Company’s products and services. Such market information is summarized below. The Contract Manufacturing segment provides services to large national consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.