UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2010
Commission file number 0-21018
TUFCO TECHNOLOGIES, INC.
| | | |
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| 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.
Yesþ Noo
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).
Yeso Noo
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 filero | | Accelerated filero | | Non-accelerated filero(Do not check if a smaller reporting company) | | Smaller Reporting Companyþ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
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 14, 2010 |
| | | |
| Common Stock, par value $0.01 per share | | 4,308,947 |
TUFCO TECHNOLOGIES, INC.
Index
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | |
| | | March 31, | | | September 30, | |
| | | 2010 | | | 2009 | |
| Assets | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | |
| Cash | | $ | 5,031 | | | $ | 4,092 | |
| Accounts receivable-net | | | 12,673,534 | | | | 11,077,258 | |
| Inventories-net | | | 12,626,780 | | | | 10,645,168 | |
| Prepaid expenses and other current assets | | | 380,878 | | | | 245,534 | |
| Income taxes receivable | | | 604,144 | | | | 604,144 | |
| Deferred income taxes | | | 381,661 | | | | 381,661 | |
| | | | | | | |
| | | | | | | | | |
| Total current assets | | | 26,672,028 | | | | 22,957,857 | |
| | | | | | | | | |
| PROPERTY, PLANT AND EQUIPMENT-Net | | | 18,038,735 | | | | 17,892,453 | |
| GOODWILL | | | 7,211,575 | | | | 7,211,575 | |
| OTHER ASSETS-Net | | | 132,775 | | | | 128,684 | |
| | | | | | | |
| | | | | | | | | |
| TOTAL | | $ | 52,055,113 | | | $ | 48,190,569 | |
| | | | | | | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Current portion of long-term debt | | $ | 3,527,991 | | | $ | 1,270,099 | |
| Accounts payable | | | 8,906,298 | | | | 6,861,167 | |
| Accrued payroll, vacation and payroll taxes | | | 667,769 | | | | 542,534 | |
| Other current liabilities | | | 540,504 | | | | 463,736 | |
| | | | | | | |
| | | | | | | | | |
| Total current liabilities | | | 13,642,562 | | | | 9,137,536 | |
| | | | | | | | | |
| DEFERRED INCOME TAXES | | | 2,340,046 | | | | 2,611,572 | |
| | | | | | | | | |
| 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 | | | 25,434,750 | | | | 25,421,007 | |
| Retained earnings | | | 12,748,125 | | | | 13,130,824 | |
| Treasury stock, 399,794 common shares at cost | | | (2,157,457 | ) | | | (2,157,457 | ) |
| | | | | | | |
| | | | | | | | | |
| Total stockholders’ equity | | | 36,072,505 | | | | 36,441,461 | |
| | | | | | | |
| | | | | | | | | |
| TOTAL | | $ | 52,055,113 | | | $ | 48,190,569 | |
| | | | | | | |
3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | | March 31, | | | March 31, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| NET SALES | | $ | 20,874,663 | | | $ | 19,454,822 | | | $ | 40,916,719 | | | $ | 42,640,609 | |
| COST OF SALES | | | 19,854,574 | | | | 19,183,895 | | | | 38,852,403 | | | | 41,088,075 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| GROSS PROFIT | | | 1,020,089 | | | | 270,927 | | | | 2,064,316 | | | | 1,552,534 | |
| | | | | | | | | | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | | | | | | | | | |
| Selling, general & administrative | | | 1,356,737 | | | | 1,325,425 | | | | 2,633,535 | | | | 2,596,314 | |
| Gain on asset sales | | | — | | | | — | | | | — | | | | (37,500 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| OPERATING LOSS | | | (336,648 | ) | | | (1,054,498 | ) | | | (569,219 | ) | | | (1,006,280 | ) |
| OTHER (EXPENSE) INCOME: | | | | | | | | | | | | | | | | |
| Interest expense | | | (34,085 | ) | | | (25,913 | ) | | | (56,616 | ) | | | (68,519 | ) |
| Interest income and other income | | | 84 | | | | 164 | | | | 15,471 | | | | 13,603 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (370,649 | ) | | | (1,080,247 | ) | | | (610,364 | ) | | | (1,061,196 | ) |
| INCOME TAX BENEFIT | | | (138,252 | ) | | | (423,457 | ) | | | (227,665 | ) | | | (415,990 | ) |
| | | | | | | | | | | | | |
| NET LOSS | | $ | (232,397 | ) | | $ | (656,790 | ) | | $ | (382,699 | ) | | $ | (645,206 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| BASIC LOSS PER SHARE: | | | | | | | | | | | | | | | | |
| Net Loss | | $ | (0.05 | ) | | $ | (0.15 | ) | | $ | (0.09 | ) | | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | | |
| DILUTED LOSS PER SHARE: | | | | | | | | | | | | | | | | |
| Net Loss | | $ | (0.05 | ) | | $ | (0.15 | ) | | $ | (0.09 | ) | | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Basic | | | 4,308,947 | | | | 4,342,813 | | | | 4,308,947 | | | | 4,377,528 | |
| Diluted | | | 4,308,947 | | | | 4,342,813 | | | | 4,308,947 | | | | 4,377,528 | |
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | |
| | | SIX MONTHS ENDED | |
| | | March 31, | |
| | | 2010 | | | 2009 | |
| OPERATING ACTIVITIES | | | | | | | | |
| |
| Net loss | | $ | (382,699 | ) | | $ | (645,206 | ) |
| | | | | | | | | |
| Noncash items in net loss: | | | | | | | | |
| Depreciation and amortization of property, plant and equipment | | | 1,350,562 | | | | 1,173,211 | |
| Deferred income taxes | | | (271,526 | ) | | | (3,042 | ) |
| Gain on sale of property, plant and equipment | | | — | | | | (37,500 | ) |
| Stock-based compensation expense | | | 13,743 | | | | 7,758 | |
| Changes in operating working capital: | | | | | | | | |
| Accounts receivable | | | (1,596,276 | ) | | | 1,704,778 | |
| Inventories | | | (1,981,612 | ) | | | 1,770,951 | |
| Prepaid expenses and other assets | | | (139,435 | ) | | | 396,890 | |
| Accounts payable | | | 2,035,491 | | | | (3,037,077 | ) |
| Accrued and other current liabilities | | | 202,003 | | | | (27,937 | ) |
| Income taxes receivable | | | — | | | | (437,353 | ) |
| | | | | | | |
| | | | | | | | | |
| Net cash (used in) provided by operating activities | | | (769,749 | ) | | | 865,473 | |
| | | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | | |
| Additions to property, plant and equipment | | | (1,487,204 | ) | | | (1,220,084 | ) |
| Proceeds from disposals of property, plant and equipment | | | — | | | | 37,500 | |
| | | | | | | |
| | | | | | | | | |
| Net cash used in investing activities | | | (1,487,204 | ) | | | (1,182,584 | ) |
| | | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | | |
| Net borrowings of revolving debt | | | 2,257,892 | | | | 763,893 | |
| Purchase of treasury stock | | | — | | | | (510,568 | ) |
| | | | | | | |
| | | | | | | | | |
| Net cash provided by financing activities | | | 2,257,892 | | | | 253,325 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH | | | 939 | | | | (63,786 | ) |
| | | | | | | | | |
| CASH: | | | | | | | | |
| Beginning of period | | | 4,092 | | | | 68,397 | |
| | | | | | | |
| | | | | | | | | |
| End of period | | $ | 5,031 | | | $ | 4,611 | |
| | | | | | | |
| | | | | | | | | |
| NONCASH SUPPLEMENTAL INFORMATION: | | | | | | | | |
| | | | | | | | | |
| Change in construction payable | | $ | 9,640 | | | $ | 59,221 | |
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months and six months ended March 31, 2010 and 2009
(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 month and six month periods ended March 31, 2010 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 2009 Annual Report on Form 10-K contains a summary of significant accounting policies and includes the consolidated financial statements and the notes to the consolidated financial statements. The same accounting policies are followed in the preparation of interim reports. The Company’s condensed consolidated balance sheet at September 30, 2009 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, 2009. |
| | | | 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 and variable interest rates. |
6
Notes to condensed consolidated financial statements—(continued)
| | | | 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. During the three and six months ended March 31, 2010 and 2009, options to purchase 296,650 and 284,650 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. |
| | | | Certain prior period amounts have been reclassified to conform to the current year presentation. |
| | | | Inventories consist of the following: |
| | | | | | | | | |
| | | March 31, | | | September 30, | |
| | | 2010 | | | 2009 | |
| Raw materials | | $ | 9,512,542 | | | $ | 8,182,736 | |
| Finished goods | | | 3,114,238 | | | | 2,462,432 | |
| | | | | | | |
| Total inventories | | $ | 12,626,780 | | | $ | 10,645,168 | |
| | | | | | | |
| | | | The Company replaced its credit agreement on March 15, 2010 with a new $8.0 million unsecured revolving line of credit facility that expires January 31, 2011. 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. |
| | | | Availability under the facility is based upon specified percentages of eligible accounts receivable and inventory. The credit agreement is unsecured. The credit agreement contains certain restrictive covenants, including requirements to maintain a minimum tangible net worth and net income (or net loss) within specified levels. |
| | 7. | | Stock Based Compensation |
| | | | There were no options granted during the three months ended March 31, 2010. During the six months ended March 31, 2010, employees of Tufco Technologies, Inc. received discretionary grants on November 30, 2009 to acquire 14,000 shares of common stock under Tufco’s 2003 Non-Qualified Stock Option Plan at an exercise price of $3.19 per share, the closing price of the Company’s common stock on the NASDAQ market as of that date. The grant date fair value of these options was estimated at $2.26 using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 0.67%, expected volatility of 121.4%, no dividend yield and an expected life of three years. |
7
Notes to condensed consolidated financial statements—(continued)
| | | | The Company operates in a single industry since it 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 does, however, separate 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. |
| | | | As previously disclosed, the Company tests goodwill annually at the reporting unit level for impairment as of June 30. 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. Management has completed the Company’s annual impairment test and determined there were no changes in the carrying amount of goodwill by reporting unit for the three months and six months ended March 31, 2010. 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. For example, lower than expected growth or an increase to the discount rate due to changes in risk premiums or other factors may suggest that an impairment has occurred under Step 1 and require the Company to proceed to Step 2 to measure the fair value of assets and liabilities of the reporting units. At the annual measurement date of June 30, 2009, the estimated fair value of Contract Manufacturing exceeded its carrying value by approximately 59%. The estimated fair value of Business Imaging exceeded its carrying value by approximately 74% at June 30, 2009. |
| | | | The Company recognizes that its common stock regularly trades below book value per share and will continue to monitor the relationship of its market capitalization to both its book value and tangible book value. While management plans to return the Company’s business fundamentals to levels that support the book value per share, there is no assurance that the plan will be successful, or that the market price of the common stock will increase to such levels in the foreseeable future. |
8
Notes to condensed consolidated financial statements—(continued)
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Contract | | | Business | | | Corporate | | | | |
| March 31, 2010 | | Manufacturing | | | Imaging | | | and Other | | | Consolidated | |
| Net sales | | $ | 15,180,951 | | | $ | 5,693,712 | | | $ | — | | | $ | 20,874,663 | |
| Gross profit | | | 500,678 | | | | 519,411 | | | | — | | | | 1,020,089 | |
| Operating income (loss) | | | 110,110 | | | | 186,850 | | | | (633,608 | ) | | | (336,648 | ) |
| Depreciation and amortization expense | | | 626,429 | | | | 50,877 | | | | 582 | | | | 677,888 | |
| Capital expenditures | | | 292,267 | | | | 16,966 | | | | — | | | | 309,233 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Contract | | | Business | | | Corporate | | | | |
| March 31, 2009 | | Manufacturing | | | Imaging | | | and Other | | | Consolidated | |
| Net sales | | $ | 14,229,162 | | | $ | 5,225,660 | | | $ | — | | | $ | 19,454,822 | |
| Gross profit | | | 13,738 | | | | 257,189 | | | | — | | | | 270,927 | |
| Operating loss | | | (341,649 | ) | | | (73,255 | ) | | | (639,594 | ) | | | (1,054,498 | ) |
| Depreciation and amortization expense | | | 552,013 | | | | 52,204 | | | | 594 | | | | 604,811 | |
| Capital expenditures | | | 722,059 | | | | 30,538 | | | | — | | | | 752,597 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | Contract | | | Business | | | Corporate | | | | |
| March 31, 2010 | | Manufacturing | | | Imaging | | | And Other | | | Consolidated | |
| Net sales | | $ | 29,128,370 | | | $ | 11,788,349 | | | $ | — | | | $ | 40,916,719 | |
| Gross profit | | | 1,178,920 | | | | 885,396 | | | | — | | | | 2,064,316 | |
| Operating income (loss) | | | 433,029 | | | | 250,923 | | | | (1,253,171 | ) | | | (569,219 | ) |
| Depreciation and amortization expense | | | 1,246,109 | | | | 103,278 | | | | 1,175 | | | | 1,350,562 | |
| Capital expenditures | | | 1,438,425 | | | | 48,779 | | | | — | | | | 1,487,204 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | Contract | | | Business | | | Corporate | | | | |
| March 31, 2009 | | Manufacturing | | | Imaging | | | And Other | | | Consolidated | |
| Net sales | | $ | 31,665,363 | | | $ | 10,975,246 | | | $ | — | | | $ | 42,640,609 | |
| Gross profit | | | 956,987 | | | | 595,547 | | | | — | | | | 1,552,534 | |
| Operating income (loss) | | | 298,658 | | | | (44,043 | ) | | | (1,260,895 | ) | | | (1,006,280 | ) |
| Depreciation and amortization expense | | | 1,067,154 | | | | 104,870 | | | | 1,187 | | | | 1,173,211 | |
| Capital expenditures | | | 1,189,546 | | | | 30,538 | | | | — | | | | 1,220,084 | |
9
Notes to condensed consolidated financial statements—(continued)
| | | | | | | | | | | | | | | | | |
| | | Contract | | | Business | | | Corporate | | | | |
| March 31, 2010 | | Manufacturing | | | Imaging | | | and Other | | | Consolidated | |
| Assets: | | | | | | | | | | | | | | | | |
| Inventories-net | | $ | 9,682,396 | | | $ | 2,944,384 | | | $ | — | | | $ | 12,626,780 | |
| Property, plant and equipment-net | | | 16,171,133 | | | | 1,863,901 | | | | 3,701 | | | | 18,038,735 | |
| Accounts receivable and other (including goodwill) | | | 14,308,462 | | | | 5,957,525 | | | | 1,123,611 | | | | 21,389,598 | |
| | | | | | | | | | | | | |
| Total assets | | $ | 40,161,991 | | | $ | 10,765,810 | | | $ | 1,127,312 | | | $ | 52,055,113 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Contract | | | Business | | | Corporate | | | | |
| September 30, 2009 | | Manufacturing | | | Imaging | | | and Other | | | Consolidated | |
| Assets: | | | | | | | | | | | | | | | | |
| Inventories-net | | $ | 8,642,397 | | | $ | 2,002,771 | | | $ | — | | | $ | 10,645,168 | |
| Property, plant and equipment-net | | | 15,969,177 | | | | 1,918,400 | | | | 4,876 | | | | 17,892,453 | |
| Accounts receivable and other (including goodwill) | | | 12,334,332 | | | | 6,200,035 | | | | 1,118,581 | | | | 19,652,948 | |
| | | | | | | | | | | | | |
| Total assets | | $ | 36,945,906 | | | $ | 10,121,206 | | | $ | 1,123,457 | | | $ | 48,190,569 | |
| | | | | | | | | | | | | |
10
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 2010 results in comparison to fiscal 2009 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 its ability to increase sales and achieve profitability in fiscal year 2010, 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 recent recession, the Company’s ability to refinance or replace its line of credit, which expires January 31, 2011, 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 including labor and waste costs in relation to net sales, the Company’s ability to increase sales and earnings as a result of new projects, including its new canister line, the Company’s ability to successfully install new equipment on a timely basis, the Company’s ability to continue to produce new products, 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 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 and printing, as well as specialty printing services and business imaging products. The Company’s business strategy is to continue to place our converting at the leading edge of existing and emerging growth opportunities. 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
| | |
| 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 |
| | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | | $ | | % |
| Net Sales | | $ | 20,875 | | | $ | 19,455 | | | $ | 1,420 | | | | 7 | % | | $ | 40,917 | | | $ | 42,641 | | | $ | (1,724 | ) | | | (4 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | | 1,020 | | | | 271 | | | | 749 | | | NM | | | 2,064 | | | | 1,553 | | | | 511 | | | | 33 | |
| | | | 4.9 | % | | | 1.4 | % | | | | | | | | | | | 5.0 | % | | | 3.6 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Expenses | | | 1,357 | | | | 1,325 | | | | 32 | | | | 2 | | | | 2,634 | | | | 2,559 | | | | 75 | | | | 3 | |
| | | | 6.5 | % | | | 6.8 | % | | | | | | | | | | | 6.4 | % | | | 6.0 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Loss | | | (337 | ) | | | (1,055 | ) | | | 718 | | | | (68 | ) | | | (569 | ) | | | (1,006 | ) | | | 437 | | | | (43 | ) |
| | | | (1.6 | %) | | | (5.4 | %) | | | | | | | | | | | (1.4 | %) | | | (2.4 | %) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and Other-Net | | | 34 | | | | 26 | | | | 8 | | | | 31 | | | | 41 | | | | 55 | | | | (14 | ) | | | (25 | ) |
| | | | 0.2 | % | | | 0.1 | % | | | | | | | | | | | 0.1 | % | | | 0.1 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss Before Income Taxes | | | (371 | ) | | | (1,080 | ) | | | 709 | | | | (66 | ) | | | (610 | ) | | | (1,061 | ) | | | 451 | | | | (43 | ) |
| | | | (1.8 | %) | | | (5.6 | %) | | | | | | | | | | | (1.5 | %) | | | (2.5 | %) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income Tax Benefit | | | (138 | ) | | | (423 | ) | | | 285 | | | | (67 | ) | | | (228 | ) | | | (416 | ) | | | 188 | | | | (45 | ) |
| | | | (0.7 | %) | | | (2.2 | %) | | | | | | | | | | | (0.6 | %) | | | (1.0 | %) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss | | $ | (232 | ) | | $ | (657 | ) | | | 425 | | | | (65 | ) | | $ | (383 | ) | | $ | (645 | ) | | | 262 | | | | (41 | ) |
| | | | (1.1 | %) | | | (3.4 | %) | | | | | | | | | | | (0.9 | %) | | | (1.5 | %) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic and Diluted Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per Share | | $ | (0.05 | ) | | $ | (0.15 | ) | | | | | | | | | | $ | (0.09 | ) | | $ | (0.15 | ) | | | | | | | | |
12
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Continued
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | | March 31, | | | | |
| | | 2010 | | | 2009 | | | Period-to-Period | |
| | | | | | | % of | | | | | | | % of | | | Change | |
| | | Amount | | | Total | | | Amount | | | Total | | | $ | | | % | |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Manufacturing and printing | | $ | 15,181 | | | | 73 | % | | $ | 14,229 | | | | 73 | % | | $ | 952 | | | | 7 | % |
| Business Imaging paper products | | | 5,694 | | | | 27 | | | | 5,226 | | | | 27 | | | | 468 | | | | 9 | % |
| | | | | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 20,875 | | | | 100 | % | | $ | 19,455 | | | | 100 | % | | $ | 1,420 | | | | 7 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Period-to-Period | |
| | | | | | | % of | | | | | | | Margin | | | Change | |
| | | Amount | | | Total | | | Amount | | | % | | | $ | | | % | |
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Manufacturing and printing | | $ | 501 | | | | 3 | % | | $ | 14 | | | | 0.1 | % | | $ | 487 | | | NM |
| Business Imaging paper products | | | 519 | | | | 9 | % | | | 257 | | | | 5 | % | | | 262 | | | | 102 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | $ | 1,020 | | | | 5 | % | | $ | 271 | | | | 1 | % | | $ | 749 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | |
| | | March 31, | | | | |
| | | 2010 | | | 2009 | | | Period-to-Period | |
| | | | | | | % of | | | | | | | % of | | | Change | |
| | | Amount | | | Total | | | Amount | | | Total | | | $ | | | % | |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Manufacturing and printing | | $ | 29,129 | | | | 71 | % | | $ | 31,666 | | | | 74 | % | | $ | (2,537 | ) | | | (8 | %) |
| Business Imaging paper products | | | 11,788 | | | | 29 | | | | 10,975 | | | | 26 | | | | 813 | | | | 7 | % |
| | | | | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 40,917 | | | | 100 | % | | $ | 42,641 | | | | 100 | % | | $ | (1,724 | ) | | | (4 | %) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | Period-to-Period | |
| | | | | | | % of | | | | | | | Margin | | | Change | |
| | | Amount | | | Total | | | Amount | | | % | | | $ | | | % | |
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Manufacturing and printing | | $ | 1,179 | | | | 4 | % | | $ | 957 | | | | 3 | % | | $ | 222 | | | | 23 | % |
| Business Imaging paper products | | | 885 | | | | 8 | % | | | 596 | | | | 5 | % | | | 289 | | | | 48 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Gross Profit | | $ | 2,064 | | | | 5 | % | | $ | 1,553 | | | | 4 | % | | $ | 511 | | | | 33 | % |
| | | | | | | | | | | | | | | | | | | | | | |
13
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued
Net Sales:
Consolidated net sales increased $1.4 million (7%) to $20.9 million in the second quarter of fiscal 2010, when compared to the same period last year. This was due to an increase of $0.9 million (7%) in the Contract Manufacturing segment and an increase of $0.5 million (9%) in the Business Imaging segment.
For the six months ended March 31, 2010, net sales decreased $1.7 million (4%) when compared to the first six months of fiscal 2009. This was due to a decrease of $2.5 million (8%) in the Contract Manufacturing segment, partially offset by an increase of $0.8 million (7%) in the Business Imaging segment.
The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 22% of the Company’s total net sales in the second quarter of fiscal 2010 compared to 25% for the same period in fiscal 2009. This same customer accounted for 22% of the Company’s total net sales in the first six months of fiscal 2010, compared to 26% for the same period last year. The other significant customer accounted for 31% of the Company’s total net sales in the second quarter of fiscal 2010 compared to 32% for the same period in fiscal 2009. This customer accounted for 28% of the Company’s total net sales in the first six months of fiscal 2010, compared to 35% for the same period last year.
In Contract Manufacturing, the Company is attracting new customers and new business from existing customers. The Company is cautiously optimistic that it has turned the corner, but knows that its recovery is dependent on the speed and extent of the overall consumer market recovery and the ability of its customers to participate in that recovery. In the Business Imaging segment, the increase in sales for the six months was primarily due to increased sales to several of the segment’s Hamco brand distributors as well as several of its large retail accounts. Both segments have been affected by the overall slowdown in the economic environment.
Gross Profit:
Consolidated gross profit increased $0.7 million for the second quarter of fiscal 2010 when compared to the second quarter of fiscal 2009. This was due to an increase of $0.5 million in the Contract Manufacturing segment and an increase of $0.3 million (102%) in the Business Imaging segment.
For the six months ended March 31, 2010, gross profit increased $0.5 million (33%) when compared to the same period last year. This was due to an increase of $0.2 million (23%) in the Contract Manufacturing segment and an increase of $0.3 million (48%) in the Business Imaging segment.
In Contract Manufacturing, the increase in gross profit for the three and six months was primarily due to reductions in labor and overhead costs as a result of the Company’s continuing Lean Manufacturing, Six Sigma and cost cutting initiatives. In Business Imaging, the increase in gross profit for the three and six months of fiscal 2010 was largely due to increased sales volume and increased utilization of assets. The effect of the overall economic slowdown had a negative impact on both segments.
Operating Expenses:
Selling, general and administrative expenses increased $31,000 (2.4%) for the second quarter of fiscal 2010 when compared to the same period in fiscal 2009, and increased $37,000 (1.4%) when compared to the first six months of fiscal 2009.
14
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Continued
Interest Expense and Other Income (Expense) net:
Interest expense decreased $12,000 to $57,000 for the first six months of fiscal 2010 when compared to the same period in fiscal 2009 due to lower average debt outstanding and lower interest rates on borrowings.
Net Income:
The Company reported a net loss of $(232,000) [per share: $(0.05) basic and diluted] for the second quarter of fiscal 2010, versus a net loss of $(657,000) [per share: ($0.15) basic and diluted] for the same period in fiscal 2009. For the six months ended March 31, 2010, the net loss was $(383,000) [per share: $(0.09) basic and diluted] compared to a net loss of $(645,000) [per share: $(0.15) basic and diluted] for the first six months of fiscal 2009. The income tax benefit represents a net operating loss carryforward that the Company expects to realize in the future.
Liquidity and Capital Resources:
Cash flows used in operations were $0.8 million through the first six months of fiscal 2010, compared to cash provided by operations of $0.9 million for the same period last year. Accounts receivable increased $1.6 million, resulting from increased revenues. Accounts payable increased $2.0 million in the first six months of fiscal 2010 compared to the same period last year, primarily due to an increase in materials purchased. Inventories increased $2.0 million, primarily as a result of inventory buildups associated with new sales and in anticipation of significant raw material price increases. Depreciation was $1.4 million for the first six months of fiscal 2010.
Net cash used in investing activities was $1.5 million for the first six months of fiscal 2010, primarily related to the purchase of a W&H 8-color press for $0.8 million, previously accounted for as an operating lease. The balance was related to capital expenditures to support ongoing operational needs.
Net cash provided by financing activities was $2.3 million for the first six months of fiscal 2010, as a result of the Company borrowing from its revolving credit line to fund a portion of its increased working capital and equipment needs.
The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of March 31, 2010, cash recorded on the balance sheet was $5,031.
The Company replaced its credit agreement on March 15, 2010 with a new $8.0 million unsecured revolving line of credit facility that expires January 31, 2011. Accordingly, the Company’s revolving line of credit is classified as a current liability on the accompanying balance sheet. 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.
Availability under the facility is based upon specified percentages of eligible accounts receivable and inventory. The credit agreement is unsecured. The credit agreement contains certain restrictive covenants, including requirements to maintain a minimum tangible net worth and net income (or net loss) within specified levels. As of March 31, 2010, the Company was in compliance with all of its covenants under the credit agreement.
As of May 13, 2010, the Company had approximately $3.0 million available and $5.0 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, 2010.
The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future.
15
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(T). 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, 2010.
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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. [Removed and Reserved]
ITEM 5. Other Information
None
16
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 |
17
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 14, 2010 | /s/ Louis LeCalsey, III | |
| | Louis LeCalsey, III | |
| | President and Chief Executive Officer | |
| |
| | | |
| Date: May 14, 2010 | /s/ Michael B. Wheeler | |
| | Michael B. Wheeler | |
| | Executive Vice President, Chief Financial Officer and Chief Operating Officer | |
| |
18
