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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 March 31, 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   (IRS Employer ID No.)
of incorporation of organization)  

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 May 15, 2012

Common Stock, par value $0.01 per share

  4,308,947

 

 

 


Table of Contents

TUFCO TECHNOLOGIES, INC.

Index

 

         Page  
         Number  

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Condensed Consolidated Financial Statements   
  Condensed Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011      3   
  Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011      4   
  Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 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   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,     September 30,  
     2012     2011  

Assets

    

CURRENT ASSETS:

    

Cash

   $ 9,382      $ 8,300   

Accounts receivable-net

     12,084,922        15,362,710   

Inventories-net

     17,513,866        14,200,576   

Prepaid expenses and other current assets

     1,023,749        831,000   

Deferred income taxes

     503,683        503,683   
  

 

 

   

 

 

 

Total current assets

     31,135,602        30,906,269   

PROPERTY, PLANT AND EQUIPMENT-Net

     16,727,250        17,027,006   

GOODWILL

     7,211,575        7,211,575   

OTHER ASSETS-Net

     131,137        136,047   
  

 

 

   

 

 

 

TOTAL

   $ 55,205,564      $ 55,280,897   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

CURRENT LIABILITIES:

    

Revolving line of credit

   $ 7,032,812      $ 6,449,133   

Current portion of note payable

     266,553        259,017   

Accounts payable

     10,100,057        8,968,222   

Accrued payroll, vacation and payroll taxes

     680,636        571,319   

Other current liabilities

     428,858        452,186   

Income taxes payable

     17,858        17,858   
  

 

 

   

 

 

 

Total current liabilities

     18,526,774        16,717,735   

LONG-TERM PORTION OF NOTE PAYABLE

     632,762        767,950   

DEFERRED INCOME TAXES

     1,423,537        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

     25,567,605        25,549,239   

Retained earnings

     11,165,256        12,270,911   

Treasury stock—399,794 common shares at cost

     (2,157,457     (2,157,457
  

 

 

   

 

 

 

Total stockholders’ equity

     34,622,491        35,709,780   
  

 

 

   

 

 

 

TOTAL

   $ 55,205,564      $ 55,280,897   
  

 

 

   

 

 

 

 

 

3


Table of Contents

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED  
     March 31,     March 31,  
     2012     2011     2012     2011  

NET SALES

   $ 24,139,087      $ 28,611,305      $ 49,815,687      $ 52,772,415   

COST OF SALES

     23,416,364        26,885,917        48,658,621        49,944,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     722,723        1,725,388        1,157,066        2,828,265   

OPERATING EXPENSES:

        

Selling, general & administrative

     1,444,468        1,488,842        2,791,138        2,828,759   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (721,745     236,546        (1,634,072     (494

OTHER (EXPENSE) INCOME:

        

Interest expense

     (69,673     (67,900     (137,264     (132,265

Interest income and other income

     54        31,122        7,933        48,287   
  

 

 

   

 

 

   

 

 

   

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES

     (791,364     199,768        (1,763,403     (84,472

INCOME TAX (BENEFIT) EXPENSE

     (295,178     74,513        (657,748     (31,508
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME

   $ (496,186   $ 125,255      $ (1,105,655   $ (52,964
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC (LOSS) INCOME PER SHARE:

        

Net (Loss) Income

   $ (0.12   $ 0.03      $ (0.26   $ (0.01

DILUTED (LOSS) INCOME PER SHARE:

        

Net (Loss) Income

   $ (0.12   $ 0.03      $ (0.26   $ (0.01

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

        

Basic

     4,308,947        4,308,947        4,308,947        4,308,947   

Diluted

     4,308,947        4,309,609        4,308,947        4,308,947   

See notes to condensed consolidated financial statements.

 

4


Table of Contents

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    

SIX MONTHS ENDED

March 31,

 
OPERATING ACTIVITIES    2012     2011  

Net loss

   $ (1,105,655   $ (52,964

Noncash items in net loss:

    

Depreciation and amortization of property, plant and equipment

     1,473,053        1,438,822   

Deferred income taxes

     (661,895     (33,510

Stock-based compensation expense

     18,366        11,316   

Changes in operating working capital:

    

Accounts receivable

     3,277,788        1,639,355   

Inventories

     (3,313,290     (3,720,250

Prepaid expenses and other assets

     (187,839     (101,522

Accounts payable

     1,131,835        (204,506

Accrued and other current liabilities

     85,989        288,586   

Income taxes receivable

     —          87   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     718,352        (734,586

INVESTING ACTIVITIES

    

Additions to property, plant and equipment

     (1,173,297     (809,528
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,173,297     (809,528

FINANCING ACTIVITIES

    

Net borrowings of revolving debt

     583,679        1,664,296   

Principal payments of note payable

     (127,652     (120,534
  

 

 

   

 

 

 

Net cash provided by financing activities

     456,027        1,543,762   

NET INCREASE (DECREASE) IN CASH

     1,082        (352

CASH:

    

Beginning of period

     8,300        7,899   
  

 

 

   

 

 

 

End of period

   $ 9,382      $ 7,547   
  

 

 

   

 

 

 

NONCASH SUPPLEMENTAL INFORMATION:

    

Change in construction payable

   $ —        $ 62,015   

 

5


Table of Contents

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and six months ended March 31, 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 six month periods ended March 31, 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 March 31, 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. There was no effect for the three months ended March 31, 2012 and the effect was 662 shares for the three months ended March 31, 2011. During the three months ended March 31, 2012 and 2011, options to purchase 236,225 and 294,625 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, 2012 and 2011, options to purchase 236,225 and 296,650 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:

 

     March 31,
2012
     September 30,
2011
 

Raw materials

   $ 13,238,398       $ 10,908,178   

Finished goods

     4,275,468         3,292,398   
  

 

 

    

 

 

 

Total inventories

   $ 17,513,866       $ 14,200,576   
  

 

 

    

 

 

 

 

6


Table of Contents

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 Contract Manufacturing, reduced sales volume, shifts in product sales mix and operating inefficiencies resulted in reduced gross profit. The Business Imaging segment continues to experience increased paper costs, which have resulted in reduced gross profit. These factors at the reporting units have contributed to recurring losses for the Company as a whole. The impact of increased paper costs on gross profit has lasted longer than expected, although management still believes it to be temporary. However, a recently implemented price increase is expected to improve margins. The Company continues to focus on increasing sales volume, improving product sales mix, new product development and cost reduction activities. Some of these initiatives and activities have required start-up or one-time expenses. Business conditions have required that the Company review its estimates in the second quarter, including short-term forecasting, customer backlog, and profit initiatives.

Management noted no indicators of impairment existed during the three months and six months ended March 31, 2012, which 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. Although management’s plans and projections over the long-term have not changed, if the initiatives implemented in the second quarter do not improve operations as expected in the third quarter, it will have to reconsider whether impairment has occurred and accelerate testing during the next interim period.

 

6. Revolving Line of Credit

The Company amended its credit agreement effective September 30, 2011 to extend its termination date to January 31, 2013 and modified the required levels of after tax net income (or loss) under its financial covenants for periods commencing September 30, 2011 and thereafter. The amount available for borrowing under the revolving line of credit facility is $10.0 million. 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.

For the fiscal quarter ended March 31, 2012, the Company received a waiver from its lender of compliance with a covenant under its credit agreement requiring it to maintain a specified level of after tax net income. In consideration of the waiver, the Company has agreed to grant a security interest in substantially all of the assets of Tufco, L.P. to the lender in a form reasonably acceptable to the lender. The Company may require a modification or waiver of this financial covenant for future quarters. The inability to either obtain any such required modification or waiver or to refinance its credit facility, is likely to have a material adverse effect on the financial condition of the Company.

As of March 31, 2012, the Company had approximately $3.0 million available and $7.0 million outstanding under its revolving credit line pursuant to its credit agreement.

 

7


Table of Contents

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 three and six months ended March 31, 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 March 31, 2012 based on its evaluation of the available evidence, which includes consideration of reversal patterns for long-term deferred tax liabilities. 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 (benefit) expense 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.

 

8


Table of Contents

Notes to condensed consolidated financial statements—(continued)

 

Three Months Ended    Contract      Business     Corporate        
March 31, 2012    Manufacturing      Imaging     and Other     Consolidated  

Net sales

   $ 17,761,414       $ 6,377,673      $ —        $ 24,139,087   

Gross profit

     548,374         174,349        —          722,723   

Operating income (loss)

     199,280         (178,541     (742,484     (721,745

Depreciation and amortization expense

     701,792         36,615        122        738,529   

Capital expenditures

     582,655         4,708        —          587,363   
Three Months Ended    Contract      Business     Corporate        
March 31, 2011    Manufacturing      Imaging     and Other     Consolidated  

Net sales

   $ 22,351,204       $ 6,260,101      $ —        $ 28,611,305   

Gross profit

     1,379,321         346,067        —          1,725,388   

Operating income (loss)

     940,107         3,868        (707,429     236,546   

Depreciation and amortization expense

     693,329         29,495        123        722,947   

Capital expenditures

     438,167         103,686        —          541,853   
Six Months Ended    Contract      Business     Corporate        
March 31, 2012    Manufacturing      Imaging     And Other     Consolidated  

Net sales

   $ 35,886,023       $ 13,929,664      $ —        $ 49,815,687   

Gross profit

     717,893         439,173        —          1,157,066   

Operating income (loss)

     19,706         (234,119     (1,419,659     (1,634,072

Depreciation and amortization expense

     1,399,221         73,587        245        1,473,053   

Capital expenditures

     1,168,589         4,708        —          1,173,297   
Six Months Ended    Contract      Business     Corporate        
March 31, 2011    Manufacturing      Imaging     And Other     Consolidated  

Net sales

   $ 40,947,964       $ 11,824,451      $ —        $ 52,772,415   

Gross profit

     2,195,257         633,008        —          2,828,265   

Operating income (loss)

     1,357,200         (3,092     (1,354,602     (494

Depreciation and amortization expense

     1,379,065         59,435        322        1,438,822   

Capital expenditures

     580,667         228,861        —          809,528   

 

9


Table of Contents

Notes to condensed consolidated financial statements—(continued)

 

 

     Contract      Business      Corporate         
March 31, 2012    Manufacturing      Imaging      and Other      Consolidated  

Assets:

           

Inventories-net

   $ 13,433,035       $ 4,080,831       $ —         $ 17,513,866   

Property, plant and equipment-net

     14,747,262         1,977,937         2,051         16,727,250   

Accounts receivable and other (including goodwill)

     14,451,323         5,868,923         644,202         20,964,448   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 42,631,620       $ 11,927,691       $ 646,253       $ 55,205,564   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Contract      Business      Corporate         
September 30, 2011    Manufacturing      Imaging      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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents
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 recent 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 return to profitability and then continue to improve profitability, 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.

 

11


Table of Contents

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     Six Months Ended     Period-to-Period  
     March 31,     Change     March 31,     Change  
     2012     2011     $     %     2012     2011     $     %  

Net Sales

   $ 24,139      $ 28,611      $ (4,472     (16 %)    $ 49,816      $ 52,772      $ (2,956     (6 %) 

Gross Profit

     723        1,725        (1,002     (58 %)      1,157        2,828        (1,671     (59 %) 
     3.0     6.0         2.3     5.4    

Operating Expenses

     1,444        1,489        (45     (3 %)      2,791        2,829        (38     (1 %) 
     6.0     5.2         5.6     5.4    

Operating (Loss) Income

     (721     237        (958     NM        (1,634     (1     (1,633     NM   
     (3.0 %)      0.8         (3.3 %)      0.0    

Interest and Other-Net

     70        37        33        89     129        84        45        54
     0.3     0.1         0.3     0.2    

(Loss) Income Before Income Taxes

     (791     200        (991     NM        (1,763     (84     (1,679     NM   
     (3.3 %)      0.7         (3.5 %)      (0.2 %)     

Income Tax (Benefit) Expense

     (295     75        (370     NM        (658     (31     (627     NM   
     (1.2 %)      0.3         (1.3 %)      (0.1 %)     

Net (Loss) Income

   $ (496   $ 125        (621     NM      $ (1,105   $ (53     (1,052     NM   
     (2.1 %)      0.4         (2.2 %)      (0.1 %)     

Basic and Diluted (Loss)

                

Income Per Share

   $ (0.12   $ 0.03          $ (0.26   $ (0.01    

 

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              
     March 31,              
     2012     2011     Period-to-Period  
            % of            % of     Change  
     Amount      Total     Amount      Total     $     %  

Net Sales

              

Contract Manufacturing and printing

   $ 17,761         74   $ 22,351         78   $ (4,590     (21 %) 

Business Imaging paper products

     6,378         26        6,260         22        118        2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Net Sales

   $ 24,139         100   $ 28,611         100   $ (4,472     (16 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   
     2012     2011     Period-to-Period  
            Margin            Margin     Change  
     Amount      %     Amount      %     $     %  

Gross Profit

              

Contract Manufacturing and printing

   $ 549         3   $ 1,379         6   $ (830     (60 %) 

Business Imaging paper products

     174         3     346         6     (172     (50 %) 
  

 

 

      

 

 

      

 

 

   

Gross Profit

   $ 723         3   $ 1,725         6   $ (1,002     (58 %) 
  

 

 

      

 

 

      

 

 

   
     Six Months Ended              
     March 31,              
     2012     2011     Period-to-Period  
            % of            % of     Change  
     Amount      Total     Amount      Total     $     %  

Net Sales

              

Contract Manufacturing and printing

   $ 35,886         72   $ 40,948         78   $ (5,062     (12 %) 

Business Imaging paper products

     13,930         28        11,824         22        2,106        18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Net Sales

   $ 49,816         100   $ 52,772         100   $ (2,956     (6 %) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   
     2012     2011     Period-to-Period  
            Margin            Margin     Change  
     Amount      %     Amount      %     $     %  

Gross Profit

              

Contract Manufacturing and printing

   $ 718         2   $ 2,195         5   $ (1,477     (67 %) 

Business Imaging paper products

     439         3     633         5     (194     (31 %) 
  

 

 

      

 

 

      

 

 

   

Gross Profit

   $ 1,157         2   $ 2,828         5   $ (1,671     (59 %) 
  

 

 

      

 

 

      

 

 

   

 

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Table of Contents

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

 

Net Sales:

Consolidated net sales decreased $4.5 million (16%) to $24.1 million in the second quarter of fiscal 2012, when compared to the same period last year. This was due to a decrease of $4.6 million (21%) in the Contract Manufacturing segment and a slight increase of $0.1 million (2%) in the Business Imaging segment.

For the six months ended March 31, 2012, net sales decreased $2.9 million (6%) when compared to the first six months of fiscal 2011. This was due to a decrease of $5.0 million (12%) in the Contract Manufacturing segment and an increase of $2.1 million (18%) in the Business Imaging segment.

The Company depends on two Contract Manufacturing customers for a significant portion of its revenue. One customer accounted for 17% of the Company’s total net sales in the second quarter of fiscal 2012 compared to 19% for the same period in fiscal 2011. This same customer accounted for 18% of the Company’s total net sales in the first six months of fiscal 2012, compared to 20% for the same period last year. The other significant customer accounted for 27% of the Company’s total net sales in the second quarter of fiscal 2012 compared to 37% for the same period in fiscal 2011. This customer accounted for 26% of the Company’s total net sales in the first six months of fiscal 2012 compared to 37% for the same period last year.

In Contract Manufacturing, the decrease in sales was the result of reduced sales volume and shifts in the segment’s product sales mix. In Business Imaging, the increase in sales was the result of increased sales to several of the segments Hamco Distributors and direct customers.

Gross Profit:

Consolidated gross profit decreased $1.0 million (58%) for the second quarter of fiscal 2012 when compared to the second quarter of fiscal 2011. This was due to a decrease of $0.8 million (60%) in the Contract Manufacturing segment and a decrease of $0.2 million (50%) in the Business Imaging segment.

For the six months ended March 31, 2012, gross profit decreased $1.7 million (59%) when compared to the same period last year. This was due to a decrease of $1.5 million (67%) in the Contract Manufacturing segment and a decrease of $0.2 million (31%) in the Business Imaging segment.

At Contract Manufacturing, reduced sales volume, shifts in product sales mix and operating inefficiencies resulted in reduced gross profit. The Business Imaging segment continues to experience increased paper costs, which have resulted in reduced gross profit. However, a recently implemented price increase is expected to improve margins. The Company continues to focus on increasing sales volume, improving product sales mix, new product development and cost reduction activities. Some of these initiatives and activities have required start-up or one-time expenses.

Operating Expenses:

Selling, general and administrative expenses decreased $45,000 (3%) for the second quarter of fiscal 2012 when compared to the same period in fiscal 2011, and decreased $38,000 (1%) when compared to the first six months of fiscal 2011 as a result of the Company’s overall cost reduction activities.

Interest Expense and Other Income (Expense) net:

Interest expense and other income increased $33,000 to $70,000 for the second quarter of fiscal 2012 when compared to the same period in fiscal 2011 and increased $45,000 to $129,000 for the first six 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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Table of Contents

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

 

Income Tax (Benefit) Expense:

Income tax benefit for the second quarter of fiscal 2012 was $295,000, compared to an income tax expense of $75,000 for the same period of fiscal 2011. For the first six months of fiscal 2012, the Company had an income tax benefit of $658,000 compared to an income tax benefit of $31,000 for the same period of fiscal 2011. The income tax expense recognized in the second quarter of fiscal 2011 was the result of increased profits. 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 as the deferred tax liabilities reverse.

Net Income:

The Company reported a net loss of $496,000 [per share: $(0.12) basic and diluted] for the second quarter of fiscal 2012, versus net income of $125,000 [per share: $0.03 basic and diluted] for the same period in fiscal 2011. For the six months ended March 31, 2012, the net loss was $1,106,000 [per share: $(0.26) basic and diluted] compared to a net loss of $53,000 [per share: $(0.01) basic and diluted] for the first six months of fiscal 2011.

Liquidity and Capital Resources:

Cash flows provided by operations were $0.7 million through the first six months of fiscal 2012, compared to cash used in operations of $0.7 million for the same period last year. Accounts receivable decreased $3.3 million for the first six months of fiscal 2012 while accounts payable increased $1.1 million in the first six months of fiscal 2012 compared to the same period last year, largely due to an increase in the volume of raw materials purchased. Inventories increased $3.3 million, primarily related to a planned build-up in inventory to cover the change out period during the startup of a new component for the canister line in the second quarter and longer lead times in the supply change. Depreciation was $1.5 million for the first six months of fiscal 2012.

Net cash used in investing activities was $1.2 million for the first six months of fiscal 2012, primarily related to capital expenditures to support ongoing operational needs.

Net cash provided by financing activities was $456,000 for the first six months of fiscal 2012, consisting of $584,000 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 $128,000 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 March 31, 2012, cash recorded on the balance sheet was $9,382.

The Company amended its credit agreement effective September 30, 2011 to extend its termination date to January 31, 2013 and modified the required levels of after tax net income (or loss) under its financial covenants for periods commencing September 30, 2011 and thereafter. The amount available for borrowing under the revolving line of credit facility is $10.0 million. 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.

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.

For the fiscal quarter ended March 31, 2012, the Company received a waiver from its lender of compliance with a covenant under its credit agreement requiring it to maintain a specified level of after tax net income. In consideration of the waiver, the Company has agreed to grant a security interest in substantially all of the assets of Tufco, L.P. to the lender in a form reasonably acceptable to the lender. The Company may require a modification or waiver of this financial covenant for future quarters. The inability to either obtain any such required modification or waiver or to refinance its credit facility, is likely to have a material adverse effect on the financial condition of the Company.

 

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Table of Contents

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

 

As of May 14, 2012, the Company had approximately $2.2 million available and $7.8 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, 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 March 31, 2012.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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Table of Contents

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

 

  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.
  101.INS†    XBRL Report Instance Document
  101.SCH†    XBRL Taxonomy Extension Schema Document
  101.CAL†    XBRL Taxonomy Calculation Linkbase Document
  101.LAB†    XBRL Taxonomy Label Linkbase Document
  101.PRE†    XBRL Presentation Linkbase Document
  101.DEF†    XBRL Taxonomy Extension Definition Linkbase Document

 

† Indicates furnished herewith

 

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Table of Contents

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: May 15, 2012     /s/ James F. Robinson
    James F. Robinson
    President and Chief Executive Officer

Date: May 15, 2012

    /s/ Michael B. Wheeler
   

Michael B. Wheeler

Executive Vice President,

Chief Financial Officer and Chief Operating Officer

 

18