Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to        

Commission file number 0-21018

 

 

TUFCO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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) (Zip code)

(920) 336-0054

(Registrant’s telephone number, including area code)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller Reporting Company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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 August 14, 2012
Common Stock, par value $0.01 per share		4,308,947

 

 

 

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TUFCO TECHNOLOGIES, INC.

Index

 

				Page Number
PART I.		FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of June 30, 2012 and September 30, 2011			3
		Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011			4
		Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011			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			16
Item 4		Controls and Procedures			16
PART II:		OTHER INFORMATION
Item 1		Legal Proceedings			17
Item 1A.		Risk Factors			17
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3.		Defaults Upon Senior Securities			17
Item 4.		Mine Safety Disclosures			17
Item 5.		Other Information			17
Item 6.		Exhibits			17
SIGNATURES					18

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30, 2012				September 30, 2011
Assets
CURRENT ASSETS:
Cash		$	5,284			$	8,300
Accounts receivable-net			14,860,737				15,362,710
Inventories-net			16,803,856				14,200,576
Prepaid expenses and other current assets			209,063				831,000
Deferred income taxes			503,683				503,683
Total current assets			32,382,623				30,906,269
PROPERTY, PLANT AND EQUIPMENT–Net			16,376,808				17,027,006
GOODWILL			7,211,575				7,211,575
OTHER ASSETS–Net			128,683				136,047
TOTAL		$	56,099,689			$	55,280,897
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Revolving line of credit		$	7,086,200			$	6,449,133
Current portion of note payable			270,403				259,017
Accounts payable			9,953,504				8,968,222
Accrued payroll, vacation and payroll taxes			595,579				571,319
Other current liabilities			528,191				452,186
Income taxes payable			17,858				17,858
Total current liabilities			18,451,735				16,717,735
LONG-TERM PORTION OF NOTE PAYABLE			563,700				767,950
DEFERRED INCOME TAXES			1,799,742				2,085,432
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value – 9,000,000 shares authorized; 4,708,741 shares issued			47,087				47,087
Non-voting common stock, $.01 par value – 2,000,000 shares authorized and unissued			—				—
Preferred stock, $.01 par value – 1,000,000 shares authorized and unissued			—				—
Additional paid-in capital			25,582,262				25,549,239
Retained earnings			11,812,620				12,270,911
Treasury stock - 399,794 common shares at cost			(2,157,457	)			(2,157,457	)
Total stockholders’ equity			35,284,512				35,709,780
TOTAL		$	56,099,689			$	55,280,897

 

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		THREE MONTHS ENDED June  30,								NINE MONTHS ENDED June  30,
		2012				2011				2012				2011
NET SALES		$	28,528,365			$	27,985,952			$	78,344,052			$	80,758,367
COST OF SALES			25,954,772				26,591,816				74,613,393				76,535,966
GROSS PROFIT			2,573,593				1,394,136				3,730,659				4,222,401
OPERATING EXPENSES:
Selling, general & administrative			1,472,053				1,436,286				4,263,191				4,265,045
OPERATING INCOME (LOSS)			1,101,540				(42,150	)			(532,532	)			(42,644	)
OTHER (EXPENSE) INCOME:
Interest expense			(69,133	)			(65,883	)			(206,397	)			(198,148	)
Interest income and other income			71				943				8,004				49,230
INCOME (LOSS) BEFORE INCOME TAXES			1,032,478				(107,090	)			(730,925	)			(191,562	)
INCOME TAX EXPENSE (BENEFIT)			385,114				(39,945	)			(272,634	)			(71,453	)
NET INCOME (LOSS)		$	647,364			$	(67,145	)		$	(458,291	)		$	(120,109	)
BASIC INCOME (LOSS) PER SHARE:
Net Income (Loss)		$	0.15			$	(0.02	)		$	(0.11	)		$	(0.03	)
DILUTED INCOME (LOSS) PER SHARE:
Net Income (Loss)		$	0.15			$	(0.02	)		$	(0.11	)		$	(0.03	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			4,308,947				4,308,947				4,308,947				4,308,947
Diluted			4,309,721				4,308,947				4,308,947				4,308,947

See notes to condensed consolidated financial statements.

 

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		NINE MONTHS ENDED June 30,
		2012				2011
OPERATING ACTIVITIES
Net loss		$	(458,291	)		$	(120,109	)
Noncash items in net loss:
Depreciation and amortization of property, plant and equipment			2,214,658				2,175,716
Deferred income taxes			(285,690	)			(80,243	)
Stock-based compensation expense			33,023				28,772
Changes in operating working capital:
Accounts receivable			501,973				1,617,057
Inventories			(2,603,280	)			(2,848,192	)
Prepaid expenses and other assets			629,301				(386,745	)
Accounts payable			985,282				(2,077,736	)
Accrued and other current liabilities			100,265				116,028
Income taxes receivable			—				87
Net cash provided by (used in) operating activities			1,117,241				(1,575,365	)
INVESTING ACTIVITIES
Additions to property, plant and equipment			(1,564,460	)			(1,232,259	)
Net cash used in investing activities			(1,564,460	)			(1,232,259	)
FINANCING ACTIVITIES
Net borrowings of revolving debt			637,067				2,990,292
Principal payments of note payable			(192,864	)			(183,430	)
Net cash provided by financing activities			444,203				2,806,862
NET DECREASE IN CASH			(3,016	)			(762	)
CASH:
Beginning of period			8,300				7,899
End of period		$	5,284			$	7,137
NONCASH SUPPLEMENTAL INFORMATION:
Change in construction payable		$	—			$	7,873

 

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and nine months ended June 30, 2012 and 2011

(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 nine month periods ended June 30, 2012 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 2011 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 June 30, 2012 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, 2011.

 

2.

Financial Instruments

Financial instruments consist of cash, receivables, payables, debt, and letters of credit. Their carrying values are estimated to approximate their fair values unless otherwise indicated due to their short maturities, variable interest rates plus a margin applicable to the credit risk associated with the revolving line of credit and comparable borrowing costs for equipment loans.

 

3.

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 was 774 shares for the three months ended June 30, 2012 and there was no effect for the three months ended June 30, 2011. During the three months ended June 30, 2012 and 2011, options to purchase 242,725 and 275,000 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. During the nine months ended June 30, 2012 and 2011, options to purchase 238,725 and 293,000 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive.

 

4.

Inventories

Inventories consist of the following:

 

		June 30, 2012				September 30, 2011
Raw materials		$	11,056,492			$	10,908,178
Finished goods			5,747,364				3,292,398
Total inventories		$	16,803,856			$	14,200,576

 

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Notes to condensed consolidated financial statements— (continued)

 

5.

Goodwill

As previously disclosed, the Company tests goodwill annually at the reporting unit level for impairment as of July 1. The operating segments herein also represent the Company’s reporting units for goodwill purposes. The Company uses a discounted cash flow analysis to estimate reporting unit fair values and also considers multiples of relevant companies. In determining the fair values of the reporting units, the Company was required to make certain assumptions and cannot predict what future events may occur that could adversely affect the reported value of its goodwill.

At the Green Bay Contract Manufacturing segment, increased sales volume and operational cost reductions during the quarter contributed to improved operating profit. The Newton Business Imaging segment generated improved gross profit due to reduced manufacturing costs. The Company continues its commitment to growing sales volume, improving product sales mix and reducing operational costs.

Management determined that no indicators of impairment existed during the three months and nine months ended June 30, 2012 to indicate that the annual goodwill impairment test should be accelerated. However, there can be no assurance that valuation multiples will not decline, growth rates will not be lower than expected, discount rates will not increase, or the projected cash flows of the individual reporting units will not decline. At the time of filing, the Company is in the process of performing its annual goodwill impairment test.

 

6.

Revolving Line of Credit

The Company amended its credit agreement effective July 31, 2012 to extend its maturity date to June 30, 2013 and modified the required levels of after tax net income (or loss) under its financial covenants for fiscal years 2012 and 2013. However, there can be no assurances that the Company will be able to maintain such specified minimum levels of after tax net income in such years. The amount available for borrowing under the revolving line of credit facility was increased to $10.5 million subject to borrowing base limitations as defined in the agreement. The amendment also limits capital expenditures as defined in the agreement. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. Borrowings under the new credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.

On April 3, 2012, the Company entered into a Commercial Security Agreement in favor of the lender to secure obligations under the First Amended and Restated Credit Agreement. The Commercial Security Agreement grants to the lender a security interest in all of the accounts and inventory of Tufco, L.P., a subsidiary of the Company.

As of June 30, 2012, the Company had approximately $2.9 million available and $7.1 million outstanding under its revolving credit line pursuant to its credit agreement.

 

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Notes to condensed consolidated financial statements— (continued)

 

7.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due, plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets include recognition of operating losses that are available to offset future taxable income. Valuation allowances are recorded when, based on an evaluation of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realized.

As a result of the taxable loss generated for the nine months ended June 30, 2012, the Company has recorded a long-term deferred tax asset for net operating loss carryforwards. The Company has not recorded a valuation allowance against its deferred tax assets as of June 30, 2012 based on its evaluation of the available evidence, which includes consideration of reversal patterns for long-term deferred tax liabilities and the book income generated in the third quarter of fiscal 2012. The assessment of a valuation allowance is an estimate and changes in future taxable income or loss can result in change in the assessment of a valuation allowance. In addition, if net operating loss carryforwards will not reverse and be realized over the same long-term period as the difference for depreciation on property and equipment, a change in the assessment of a valuation allowance could occur. If the Company continues to experience operating losses, it is possible that it will be necessary to reconsider its expected reversal patterns and whether the offset of the net operating loss carryforward and the deferred tax liability is still appropriate.

 

8.

Segment Information

The Company manufactures and distributes custom paper-based and nonwoven products, and provides contract manufacturing, specialty printing and related services on these types of products. The Company separates its operations and prepares information for management use by the market segment aligned with the Company’s products and services. Corporate costs, such as interest income, interest expense and income tax expense (benefit) are recorded under the Corporate and Other segment. Such market segment information is summarized below. The Contract Manufacturing segment provides services to multinational consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.

Substantially all of the Company’s revenues are attributed to domestic external customers. There are no long-lived assets located outside of the United States.

 

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Notes to condensed consolidated financial statements— (continued)

 

Three Months Ended June 30, 2012		Contract Manufacturing				Business Imaging				Corporate and Other				Consolidated
Net sales		$	22,084,775			$	6,443,590			$	—			$	28,528,365
Gross profit			2,161,526				412,067				—				2,573,593
Operating income (loss)			1,825,022				71,748				(795,230	)			1,101,540
Depreciation and amortization expense			704,981				36,624				—				741,605
Capital expenditures			391,163				—				—				391,163
Three Months Ended June 30, 2011		Contract Manufacturing				Business Imaging				Corporate and Other				Consolidated
Net sales		$	21,566,135			$	6,419,817			$	—			$	27,985,952
Gross profit			1,070,618				323,518				—				1,394,136
Operating income (loss)			659,643				6,668				(708,461	)			(42,150	)
Depreciation and amortization expense			702,308				34,463				123				736,894
Capital expenditures			313,042				109,689				—				422,731
Nine Months Ended June 30, 2012		Contract Manufacturing				Business Imaging				Corporate And Other				Consolidated
Net sales		$	57,970,798			$	20,373,254			$	—			$	78,344,052
Gross profit			2,879,419				851,240				—				3,730,659
Operating income (loss)			1,844,729				(162,371	)			(2,214,890	)			(532,532	)
Depreciation and amortization expense			2,104,203				110,210				245				2,214,658
Capital expenditures			1,559,752				4,708				—				1,564,460
Nine Months Ended June 30, 2011		Contract Manufacturing				Business Imaging				Corporate And Other				Consolidated
Net sales		$	62,514,099			$	18,244,268			$	—			$	80,758,367
Gross profit			3,265,876				956,525				—				4,222,401
Operating income (loss)			2,016,844				3,576				(2,063,064	)			(42,644	)
Depreciation and amortization expense			2,081,374				93,897				445				2,175,716
Capital expenditures			893,709				338,550				—				1,232,259

 

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Notes to condensed consolidated financial statements— (continued)

 

June 30, 2012		Contract Manufacturing				Business Imaging				Corporate and Other				Consolidated
Assets:
Inventories-net		$	12,573,510			$	4,230,346			$	—			$	16,803,856
Property, plant and equipment-net			14,433,442				1,941,315				2,051				16,376,808
Accounts receivable and other (including goodwill)			16,538,636				5,742,739				637,650				22,919,025
Total assets		$	43,545,588			$	11,914,400			$	639,701			$	56,099,689
September 30, 2011		Contract Manufacturing				Business Imaging				Corporate and Other				Consolidated
Assets:
Inventories-net		$	11,010,125			$	3,190,451			$	—			$	14,200,576
Property, plant and equipment-net			14,977,893				2,046,816				2,297				17,027,006
Accounts receivable and other (including goodwill)			16,837,134				6,568,152				648,029				24,053,315
Total assets		$	42,825,152			$	11,805,419			$	650,326			$	55,280,897

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Management’s discussion of the Company’s fiscal 2012 results in comparison to fiscal 2011 contains forward-looking statements regarding current expectations, risks and uncertainties for future periods. The actual results could differ materially from those discussed herein due to a variety of factors such as the Company’s ability to increase sales, changes in customer demand for its products, cancellation of production agreements by significant customers including two Contract Manufacturing customers it depends upon for a significant portion of its business, its ability to meet competitors’ prices on products to be sold under these production agreements, the effects of the economy in general, including the slow economic recovery from the continued economic downturn, the Company’s inability to benefit from any general economic improvements, material increases in the cost of raw materials, competition in the Company’s product areas, the ability of management to successfully reduce operating expenses, the Company’s ability to increase sales and earnings as a result of new projects and services, the Company’s ability to successfully install new equipment on a timely basis and to improve productivity through equipment upgrades, the Company’s ability to continue to produce new products, the Company’s ability to comply with the financial covenants in its credit facility, the Company’s ability to extend or refinance its credit facility upon expiration, the Company’s ability to sustain profitable operations, the Company’s ability to successfully attract new customers through its sales initiatives and strengthening its new business development efforts, and the Company’s ability to improve the run rates for its products. Therefore, the financial data for the periods presented may not be indicative of the Company’s future financial condition or results of operations.

General Information:

Tufco is a leader in providing diversified contract wet and dry wipes converting, as well as specialty printing services and business imaging products. The Company works closely with its customers to develop products or perform services which meet or exceed the customers’ quality standards, and then uses the Company’s operating efficiencies and technical expertise to supplement or replace its customers’ own production and distribution functions.

The Company’s technical proficiencies include wide web flexographic printing, wet and dry wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging and quality and microbiological process management and the manufacture and distribution of business imaging paper products.

The Company has manufacturing operations in Green Bay, WI, which is ISO certified, and Newton, NC. The Company’s corporate headquarters, including corporate support services, are located in Green Bay, WI.

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations–Continued

 

Results of Operations:

Condensed operating data, percentages of net sales and period-to-period changes in these items are as follows (dollars in thousands):

 

		Three Months Ended								Period-to-Period								Nine Months Ended								Period-to-Period
		June 30,								Change								June 30,								Change
		2012				2011				$				%				2012				2011				$				%
Net Sales		$	28,528			$	27,986			$	542				2	%		$	78,344			$	80,758			$	(2,414	)			(3	%)
Gross Profit			2,573				1,394				1,179				85	%			3,731				4,222				(491	)			(12	%)
			9.0	%			5.0	%											4.8	%			5.2	%
Operating Expenses			1,472				1,436				36				3	%			4,263				4,265				(2	)			—
			5.2	%			5.1	%											5.4	%			5.3	%
Operating Income (Loss)			1,101				(42	)			1,143				NM				(533	)			(43	)			(490	)			NM
			3.9	%			(0.2	%)											(0.7	%)			(0.1	%)
Interest and Other-Net			69				65				4				6	%			198				149				49				33	%
			0.2	%			0.2	%											0.3	%			0.2	%
Income (Loss) Before Income Taxes			1,032				(107	)			1,139				NM				(731	)			(192	)			(539	)			NM
			3.6	%			(0.4	%)											(0.9	%)			(0.2	%)
Income Tax Expense (Benefit)			385				(40	)			425				NM				(273	)			(71	)			(202	)			NM
			1.3	%			(0.1	%)											(0.3	%)			(0.1	%)
Net Income (Loss)		$	647			$	(67	)			714				NM			$	(458	)		$	(120	)			(338	)			NM
			2.3	%			(0.2	%)											(0.6	%)			(0.1	%)
Basic and Diluted Income (Loss) Per Share		$	0.15			$	(0.02	)										$	(0.11	)		$	(0.03	)

 

NM = Not Meaningful

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations–Continued

 

		Three Months Ended
		June 30,
		2012								2011								Period-to-Period
						% of								% of				Change
		Amount				Total				Amount				Total				$				%
Net Sales
Contract Manufacturing and printing		$	22,085				77	%		$	21,566				77	%		$	519				2	%
Business Imaging paper products			6,443				23				6,420				23				23				0.4	%
Net Sales		$	28,528				100	%		$	27,986				100	%		$	542				2	%
		2012								2011								Period-to-Period
						Margin								Margin				Change
		Amount				%				Amount				%				$				%
Gross Profit
Contract Manufacturing and printing		$	2,161				10	%		$	1,071				5	%		$	1,090				102	%
Business Imaging paper products			412				6	%			323				5	%			89				28	%
Gross Profit		$	2,573				9	%		$	1,394				5	%		$	1,179				85	%
		Nine Months Ended
		June 30,
		2012								2011								Period-to-Period
						% of								% of				Change
		Amount				Total				Amount				Total				$				%
Net Sales
Contract Manufacturing and printing		$	57,971				74	%		$	62,514				77	%		$	(4,543	)			(7	%)
Business Imaging paper products			20,373				26				18,244				23				2,129				12	%
Net Sales		$	78,344				100	%		$	80,758				100	%		$	(2,414	)			(3	%)
		2012								2011								Period-to-Period
						Margin								Margin				Change
		Amount				%				Amount				%				$				%
Gross Profit
Contract Manufacturing and printing		$	2,880				5	%		$	3,266				5	%		$	(386	)			(12	%)
Business Imaging paper products			851				4	%			956				5	%			(105	)			(11	%)
Gross Profit		$	3,731				5	%		$	4,222				5	%		$	(491	)			(12	%)

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations–Continued

 

Net Sales:

Consolidated net sales increased $0.5 million (2%) to $28.5 million in the third quarter of fiscal 2012, when compared to the same period last year. This was primarily due to an increase of $0.5 million (2%) in the Contract Manufacturing segment and a slight increase of $23,000 (0.4%) in the Business Imaging segment.

For the nine months ended June 30, 2012, net sales decreased $2.4 million (3%) when compared to the first nine months of fiscal 2011. This was due to a decrease of $4.5 million (7%) in the Contract Manufacturing segment and an increase of $2.1 million (12%) in the Business Imaging segment.

The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 16% of the Company’s total net sales in the third quarter of fiscal 2012 compared to 18% for the same period in fiscal 2011. This same customer accounted for 17% of the Company’s total net sales in the first nine months of fiscal 2012, compared to 19% for the same period last year. The other significant customer accounted for 33% of the Company’s total net sales in the third quarter of fiscal 2012 compared to 28% for the same period in fiscal 2011. This customer accounted for 29% of the Company’s total net sales in the first nine months of fiscal 2012 compared to 34% for the same period last year.

Gross Profit:

Consolidated gross profit increased $1.2 million (85%) for the third quarter of fiscal 2012 when compared to the third quarter of fiscal 2011. This was due to an increase of $1.1 million (102%) in the Contract Manufacturing segment and an increase of $0.1 million (28%) in the Business Imaging segment.

For the nine months ended June 30, 2012, gross profit decreased $0.5 million (12%) when compared to the same period last year. This was due to a decrease of $0.4 million (12%) in the Contract Manufacturing segment and a decrease of $0.1 million (11%) in the Business Imaging segment.

At the Green Bay Contract Manufacturing segment, increased sales volume and operational cost reductions during the quarter contributed to improved operating profit. The Newton Business Imaging segment generated improved gross profit due to reduced manufacturing costs. The Company continues its commitment to growing sales volume, improving product sales mix and reducing operational costs.

Operating Expenses:

Selling, general and administrative expenses increased $36,000 (3%) for the third quarter of fiscal 2012 when compared to the same period in fiscal 2011, and decreased $2,000 (0.05%) when compared to the first nine months of fiscal 2011 primarily due to an increase in reserves for bad debt.

Interest Expense and Other Income (Expense) net:

Interest expense and other income increased $4,000 to $69,000 for the third quarter of fiscal 2012 when compared to the same period in fiscal 2011 and increased $49,000 to $198,000 for the first nine months of fiscal 2012 when compared to the same period in fiscal 2011 due to higher average debt outstanding as a result of the Company borrowing from its revolving credit line.

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations–Continued

 

Income Tax (Benefit) Expense:

Income tax expense for the third quarter of fiscal 2012 was $385,000, compared to an income tax benefit of $40,000 for the same period of fiscal 2011. For the first nine months of fiscal 2012, the Company had an income tax benefit of $273,000 compared to an income tax benefit of $71,000 for the same period of fiscal 2011. The income tax expense recognized in the third quarter of fiscal 2012 was the result of increased profits. The income tax benefit for the first nine months of 2012 represents a net operating loss carryforward that the Company expects to realize in the future as the deferred tax liabilities reverse.

Net Income:

The Company reported net income of $647,000 [per share: $0.15 basic and diluted] for the third quarter of fiscal 2012, versus a net loss of $67,000 [per share: $(0.02) basic and diluted] for the same period in fiscal 2011. For the nine months ended June 30, 2012, the net loss was $458,000 [per share: $(0.11) basic and diluted] compared to a net loss of $120,000 [per share: $(0.03) basic and diluted] for the first nine months of fiscal 2011.

Liquidity and Capital Resources:

Cash flows provided by operations were $1.1 million through the first nine months of fiscal 2012, compared to cash used in operations of $1.6 million for the same period last year. Accounts receivable decreased $502,000 for the first nine months of fiscal 2012 while accounts payable increased $985,000 in the first nine months of fiscal 2012 compared to the same period last year, largely due to an increase in the volume of raw material purchased. Inventories increased $2.6 million, primarily related to a planned build-up in inventory to cover the change out period during the startup of a new component for a production line in the second quarter and longer lead times in the supply chain. Depreciation was $2.2 million for the first nine months of fiscal 2012.

Net cash used in investing activities was $1.6 million for the first nine months of fiscal 2012, primarily related to capital expenditures to support ongoing operational needs.

Net cash provided by financing activities was $444,000 for the first nine months of fiscal 2012, consisting of $637,000 of cash provided to the Company from borrowing under its revolving credit line to fund a portion of its increased working capital and equipment needs and $193,000 of cash used to make principal payments on a note payable related to a purchase of equipment made in June, 2010.

The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of June 30, 2012, cash recorded on the balance sheet was $5,284.

The Company amended its credit agreement effective July 31, 2012 to extend its maturity date to June 30, 2013 and modified the required levels of after tax net income (or loss) under its financial covenants for fiscal years 2012 and 2013. However, there can be no assurances that the Company will be able to maintain such specified minimum levels of after tax net income in such years. The amount available for borrowing under the revolving line of credit facility was increased to $10.5 million subject to borrowing base limitations as defined in the agreement. The amendment also limits capital expenditures as defined in the agreement. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. It is also the Company’s policy to classify borrowings under the revolving line of credit as current based on how it manages working capital. Borrowings under the new credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations–Continued

 

On April 3, 2012, the Company entered into a Commercial Security Agreement in favor of the lender to secure obligations under the First Amended and Restated Credit Agreement. The Commercial Security Agreement grants to the lender a security interest in all of the accounts and inventory of Tufco, L.P., a subsidiary of the Company.

As of August 13, 2012, the Company had approximately $3.6 million available and $6.9 million outstanding under its revolving credit line pursuant to its credit agreement.

Management believes that the Company’s operating cash flow, together with amounts available under its credit agreement, are adequate to service the Company’s current obligations as of June 30, 2012, assuming the Company is able to extend or refinance its credit agreement upon expiration.

The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future.

Off Balance Sheet Arrangements:

The Company has no Off Balance Sheet Arrangements (as defined in Item 303(a)(4) of Regulation S-K).

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

 

ITEM 4.

Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) were effective as of the end of the Company’s fiscal quarter ended June 30, 2012.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

The Company is subject to lawsuits, investigations, and potential claims arising out of the ordinary conduct of its business. The Company is not currently involved in any material litigation.

 

ITEM 1A.

Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

 

ITEM 3.

Defaults Upon Senior Securities

None

 

ITEM 4.

Mine Safety Disclosures

Not applicable

 

ITEM 5.

Other Information

None

 

ITEM 6.

Exhibits

 

10.1		Commercial Security Agreement by Tufco, L.P., in favor of JPMorgan Chase Bank N.A., dated April 3, 2012.*
31.1		Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification furnished Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Tufco Technologies, Inc. on April 6, 2012.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

						TUFCO TECHNOLOGIES, INC.
Date: August 14, 2012						/s/ James F. Robinson
						James F. Robinson
						President and Chief Executive Officer
Date: August 14, 2012						/s/ Michael B. Wheeler
						Michael B. Wheeler
						Executive Vice President, Chief Financial Officer and
						Chief Operating Officer

 

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