UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

      

Form 10-Q

      

(Mark One)

 

For the quarterly period ended March 31, 2013

 

For the transition period from to

Commission file number 0-21018

      

TUFCO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

      

   

 

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):

   

 

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.

   

 

   

      

      

   

   

   

 

 

---

TUFCO TECHNOLOGIES, INC.

Index

   

 

   

 

 2 

---

PART I.  FINANCIAL INFORMATION

 

   

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

   

 

   

 

 3 

---

   

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

   

 

See notes to condensed consolidated financial statements.

   

 

 4 

---

   

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

   

 

   

   

 

 5 

---

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and six months ended March 31, 2013 and 2012

(Unaudited)

   

   

 

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 and six month periods ended March 31, 2013 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 2012 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 March 31, 2013 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, 2012.

 

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.

 

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 10,986 shares for the three months ended March 31, 2013. There was no effect for the three months ended March 31, 2012. For the six months ended March 31, 2013, the common stock equivalents from dilutive stock options outstanding were 8,956 shares. There was no effect for the six months ended March 31, 2012. During the three months ended March 31, 2013 and 2012, options to purchase 117,650 and 236,225 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 six months ended March 31, 2013 and 2012, options to purchase 165,650 and 236,225 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive.

 

Inventories consist of the following:

   

 

   

   

   

   

 

 6 

---

Notes to condensed consolidated financial statements—(continued)

   

   

 

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.

The Company saw increased sales volumes at the Green Bay Contract Manufacturing segment in the second quarter and first six months of fiscal 2013 compared to the same periods of fiscal 2012 which, in combination with the Company’s focus on reducing operating costs, contributed to increased earnings. The Company’s Newton Business Imaging segment operation has shown consistent improved gross profit. Additionally, during the second fiscal quarter of 2013, the Company reduced borrowings under its credit facility by almost $0.6 million to $4.1 million due to improved operating cash inflows.

Management determined that no indicators of impairment existed during the three and six months ended March 31, 2013 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.

   

 

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 extend or refinance its credit facility upon expiration or 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.

As of March 31, 2013, the Company had approximately $6.4 million available and $4.1 million outstanding under its revolving credit line pursuant to its credit agreement.

   

 

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.

The Company has not recorded a valuation allowance against its deferred tax assets as of March 31, 2013 based on its evaluation of the available evidence, which includes consideration of reversal patterns for long-term deferred tax liabilities and the profit generated in the first six months of fiscal 2013 as well as the third and fourth quarters of fiscal 2012. During the first six months of fiscal 2013, the Company generated taxable income which utilized net operating loss carryforwards for the period. The assessment of a valuation allowance is an estimate. Changes in future taxable income or loss can result in change to 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. The Company’s effective tax rate approximates the statutory tax rates in the jurisdictions in which it files.

 

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 a variety of products and services to multinational consumer products companies. The Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.

 

 7 

---

Notes to condensed consolidated financial statements—(continued)

   

External customer revenues attributed to foreign countries were approximately 3% of total sales for the three and six months ended March 31, 2013 and 2012. The revenues are attributed to countries in Europe and to Japan. There are no long-lived assets located outside of the United States at March 31, 2013 and 2012.

   

 

 8 

---

Notes to condensed consolidated financial statements—(continued)

   

   

 

   

 

   

 

   

 

      

 

   

 

   

   

   

   

 

 9 

---

   

   

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 2013 results in comparison to fiscal 2012 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 or non renewal 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, the Company’s inability to benefit from any general economic improvements, react to material increases in the cost of raw materials or 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, the Company’s ability to improve the run rates for its products, and changes to regulations governing its operations or other factors beyond the Company’s control. 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 wipe converting and printing, as well as specialty printing and finishing 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 wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging, 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.

   

   

   

 

 10 

---

   

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):

   

 

_________________

NM = Not Meaningful

   

 

 11 

---

   

ITEM 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations-Continued

   

 

   

   

   

 

   

   

   

 

   

   

   

 

   

   

   

   

 

 12 

---

   

ITEM 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations-Continued

Net Sales:

Consolidated net sales in the second quarter of fiscal 2013 were $24,167,000, compared to $24,139,000 for the same period last year. This was due to an increase of $0.5 million (3%) in the Contract Manufacturing segment offset by a decrease of $0.5 million (8%) in the Business Imaging segment.

For the six months ended March 31, 2013, net sales increased $2.7 million (5%) when compared to the first six months of fiscal 2012. This was due to an increase of $4.7 million (13%) in the Contract Manufacturing segment which was partially offset by a decrease of $2.0 million (14%) in the Business Imaging segment.

The Company depends on two Contract Manufacturing customers for a significant portion of its revenue.  One customer accounted for 10% of the Company’s total net sales in the second quarter of fiscal 2013 compared to 17% for the same period in fiscal 2012.  This same customer accounted for 9% of the Company’s total net sales in the first six months of fiscal 2013, compared to 18% for the same period last year.  The current manufacturing contract with this customer expires June 2013.  The Company is currently negotiating renewal terms with this customer. The other significant customer accounted for 38% of the Company’s total net sales in the second quarter of fiscal 2013 compared to 27% for the same period in fiscal 2012.  This customer accounted for 42% of the Company’s total net sales in the first six months of fiscal 2013 compared to 26% for the same period last year. An extension to the manufacturing contract with this customer expires June 30, 2013.  The Company is currently negotiating renewal terms with this customer.

Gross Profit:

Consolidated gross profit increased $1.1 million for the second quarter of fiscal 2013 when compared to the second quarter of fiscal 2012, consisting of an increase of $0.8 million in the Contract Manufacturing segment and an increase of $0.3 million in the Business Imaging segment.

For the six months ended March 31, 2013, gross profit increased $3.2 million when compared to the same period last year.  This was due to an increase of $2.7 million in the Contract Manufacturing segment and an increase of $0.5 million in the Business Imaging segment.

The Company saw increased sales volumes at the Green Bay Contract Manufacturing segment in the second quarter and first six months of fiscal 2013 compared to the same periods of fiscal 2012 which, in combination with the Company’s focus on reducing operating costs, contributed to increased earnings.  The Company’s Newton Business Imaging segment operation has shown consistent improved gross profit. Additionally, during the second fiscal quarter of 2013, the Company reduced borrowings under its credit facility by almost $0.6 million to $4.1 million due to improved operating cash inflows.

Operating Expenses:

Selling, general and administrative expenses increased $126,000 (9%) for the second quarter of fiscal 2013 when compared to the same period in fiscal 2012, and increased $41,000 (1%) when compared to the first six months of fiscal 2012.  

Interest Expense and Other Income (Expense) net:

Interest expense and other income (expense) decreased $22,000 to $48,000 (31%) for the second quarter of fiscal 2013 when compared to the same period in fiscal 2012 and decreased $30,000 to $99,000 (23%) for the first six months of fiscal 2013 when compared to the same period in fiscal 2012 due to lower average debt outstanding and lower interest rates on borrowings.

Income Tax (Benefit) Expense:

Income tax expense for the second quarter of fiscal 2013 was $90,000, compared to an income tax benefit of $295,000 for the same period of fiscal 2012.  For the first six months of fiscal 2013, the Company had income tax expense of $530,000 compared to an income tax benefit of $658,000 for the same period of fiscal 2012.  The income tax expense for the first six months of fiscal 2013 was the result of increased profits which utilized net operating loss carryforwards for the period.  The income tax benefit for the first six months of 2012 represents a net operating loss carryforward that the Company expects to realize in the future.

Net Income:

The Company reported net income of $151,000 [per share: $0.04 basic and diluted] for the second quarter of fiscal 2013, versus a net loss of $496,000 [per share: $(0.12) basic and diluted] for the same period in fiscal 2012.  For the six months ended March 31, 2013, net income was $891,000 [per share: $0.21 basic and diluted] compared to a net loss of $1,106,000 [per share: $(0.26) basic and diluted] for the first six months of fiscal 2012.

 

 13 

---

   

ITEM 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations-Continued

Liquidity and Capital Resources:

Cash flows provided by operations were $4.5 million through the first six months of fiscal 2013, compared to $0.7 million for the same period last year.  Accounts receivable decreased $3.2 million and inventories decreased $2.6 million offset by a decrease in accounts payable of $3.6 million for the first six months of fiscal 2013.  Depreciation was $1.4 million and $1.5 million for the first six months of fiscal 2013 and 2012, respectively.

Net cash used in investing activities was $1.3 million for the first six months of fiscal 2013, primarily related to capital expenditures to support ongoing operational needs.

Net cash used in financing activities was $3.3 million for the first six months of fiscal 2013. This consisted of $3.2 million paid on the Company’s revolving credit line and $0.1 million used for principal payments on a note related to the 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 March 31, 2013, cash recorded on the balance sheet was $8,077.

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 extend or refinance its credit facility upon expiration or 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.  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 May 14, 2013, the Company had approximately $8.5 million available and $2.0 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 March 31, 2013, 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).

 

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

 

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 March 31, 2013.

 

 14 

---

   

During the fiscal quarter ended March 31, 2013, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

   

   

   

 

 15 

---

   

 

 

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.

 

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

 

None  

 

None

 

Not applicable

 

None

 

   

 

   

   

   

 

 16 

---

   

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.

 

   

 

 17 

---