Tufco (TFCO) 10-Q 2006 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC

Form 10-Q

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

For the quarterly period ended March 31, 2006

Commission file number0-21018

TUFCO TECHNOLOGIES, INC.

Delaware	39-1723477
(State of other jurisdiction of incorporation of organization)	(IRS Employer ID No.)

PO BOX 23500 Green Bay, WI 54305
(Address of principal executive offices)(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ

     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 15, 2006
Common Stock, par value $0.01 per share	4,535,244

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

Index

		Page
		Number
PART I:	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2006 and September 30, 2005		3
	Condensed Consolidated Statements of Income for the three months and six months ended March 31, 2006 and 2005		4
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2006 and 2005		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		17
PART II:	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 6.	Exhibits		18
SIGNATURES			19
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification Pursuant to Section 906
Certification Pursuant to Section 906

2

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,
	2006			September 30,
	(Unaudited)			2005*
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	6,398		$	5,672
Accounts receivable-net		11,389,293			9,728,418
Inventories		13,279,458			10,137,771
Prepaid expenses and other current assets		391,221			170,555
Income tax receivable		88,996			585,390
Deferred income taxes		499,947			499,947
Total current assets		25,655,313			21,127,753
PROPERTY, PLANT AND EQUIPMENT-Net		17,945,536			15,657,028
GOODWILL		7,211,575			7,211,575
OTHER ASSETS-Net		332,338			489,662
TOTAL	$	51,144,762		$	44,486,018
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable	$	7,243,520		$	4,688,887
Accrued payroll, vacation and payroll taxes		480,916			367,336
Other current liabilities		443,785			662,963
Income taxes payable		120,547			—
Total current liabilities		8,288,768			5,719,186
LONG-TERM DEBT		5,025,448			1,112,636
DEFERRED INCOME TAXES		1,721,917			1,737,317
STOCKHOLDERS’ EQUITY:
Common Stock: $.01 par value: 9,000,000 shares authorized:
4,708,341 shares issued		47,083			47,083
Additional paid-in capital		25,137,199			25,097,911
Retained earnings		12,066,153			11,845,152
Treasury stock, 173,097 and 161,197 common shares at cost,
respectively		(1,141,806	)		(1,073,267	)
Total stockholders’ equity		36,108,629			35,916,879
TOTAL	$	51,144,762		$	44,486,018

See notes to condensed consolidated financial statements.

*Condensed from audited financial statements

3

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	THREE MONTHS ENDED						SIX MONTHS ENDED
	March 31,						March 31,
	2006			2005			2006			2005
NET SALES	$	23,089,194		$	21,215,449		$	44,402,088		$	41,219,438
COST OF SALES		21,729,053			19,823,989			42,041,535			38,376,874
GROSS PROFIT		1,360,141			1,391,460			2,360,553			2,842,564
OPERATING EXPENSES:
Selling, general & administrative		1,044,116			1,157,932			2,011,587			2,335,916
Gain on sale of property, plant and equipment		—			—			—			(415,781	)
OPERATING INCOME		316,025			233,528			348,966			922,429
OTHER INCOME (EXPENSE):
Interest expense		(64,773	)		(8,058	)		(84,801	)		(21,578	)
Interest income and other income		41,034			5,324			66,336			19,508
INCOME BEFORE INCOME TAXES		292,286			230,794			330,501			920,359
INCOME TAX EXPENSE		94,520			91,293			109,500			372,860
NET INCOME	$	197,766		$	139,501		$	221,001		$	547,499
BASIC EARNINGS PER SHARE:
Net Income	$	0.04		$	0.03		$	0.05		$	0.12
DILUTED EARNINGS PER SHARE:
Net Income	$	0.04		$	0.03		$	0.05		$	0.12
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic
Diluted		4,535,353			4,573,277			4,541,036			4,577,811
		4,543,219			4,598,096			4,547,865			4,606,707

See notes to condensed consolidated financial statements.

4

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	SIX MONTHS ENDED
	March 31,
	2006			2005
OPERATING ACTIVITIES
Net Income	$	221,001		$	547,499
Noncash items in net income:
Depreciation and amortization of property, plant and equipment		917,732			1,018,122
Amortization		10,572			10,572
Deferred income taxes		(15,400	)		81,826
Gain on sale of property, plant and equipment		—			(415,781	)
Stock compensation expense		39,288			—
Changes in operating working capital:
Accounts receivable		(1,660,875	)		2,910,621
Inventories		(3,141,687	)		(1,345,124	)
Prepaid expenses and other assets		(73,915	)		(72,271	)
Accounts payable		2,714,796			(41,612	)
Accrued and other current liabilities		(105,598	)		(530,216	)
Income taxes payable/receivable		616,941			33,529
Net cash (used) provided by operating activities		(477,145	)		2,197,165
INVESTING ACTIVITIES
Additions to property, plant and equipment		(3,206,240	)		(479,450	)
Change in construction payables		(160,163	)		—
Proceeds from disposals of property, plant and equipment		—			462,042
Net cash (used) by investing activities		(3,366,403	)		(17,408	)
FINANCING ACTIVITIES
Repayment of long-term debt		—			(2,500,000	)
Borrowings of long-term debt		3,912,812			500,000
Purchase of treasury stock		(68,538	)		(181,552	)
Net cash provided (used) by financing activities		3,844,274			(2,181,552	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		726			(1,795	)
CASH AND CASH EQUIVALENTS:
Beginning of period		5,672			7,692
End of period	$	6,398		$	5,897
NONCASH SUPPLEMENTAL INFORMATION:
Deferred gain on sale of equipment	$	—		$	95,000

See notes to condensed consolidated financial statements.

5

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and six months ended March 31, 2006 and 2005

(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, 2006 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 2005 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 except for the adoption of Statement of Financial Accounting Standard (“SFAS”) 123 Revised “Share Based Payments”. The Company’s condensed consolidated balance sheet at September 30, 2005 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, 2005.
	Earnings Per Share
	Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share includes common stock equivalents from dilutive stock options outstanding during the year, the effect of which was 7,866 and 24,819 shares for the three months ended March 31, 2006 and 2005, respectively. For the six months ended March 31, 2006 and 2005, the common stock equivalents from dilutive stock options outstanding were 12,472 and 28,896, respectively. During the three months ended March 31, 2006 and 2005, options to purchase 331,950 and 257,200 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. For the six months ended March 31,2006 and 2005, options to purchase 295,750 and 206,975 shares, respectively, were excluded from the diluted earnings per share computation.
2.	Inventories
	Inventories consist of the following:

	March 31,		September 30,
	2006		2005
Raw materials	$	10,957,406	$	7,470,774
Finished goods		2,322,052		2,666,997
Total inventories	$	13,279,458	$	10,137,771

3.

Stock Based Compensation

The Company has an incentive stock plan under which the Board of Directors may grant non-qualified stock options to employees. Additionally, the Company has a Non-Qualified Stock Option Plan for Non-Employee Directors, under which shares are available for grant. The options have an exercise price equal to the fair market value of the underlying stock at the date of grant. Employee stock options vest ratably over a three-year period and non-employee director stock options vest immediately. Options issued under these plans generally expire ten years from the date of grant. Approximately 0.4 million shares are available for future grants.

6

Notes to condensed consolidated financial statements—(continued)

Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment”. In accordance with this standard, the Company has elected to recognize the compensation cost of all share-based awards on a straight-line basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the three months ended March 31, 2006, was $15,233, or $9,262 net of taxes. For the six months ended March 31, 2006, the total stock compensation expense recognized by the Company was $39,288, or $23,887 net of taxes. The Company expects that total stock compensation expense for the year ending September 30, 2006 will be approximately $75,000 to $100,000 on an after-tax basis. As of March 31, 2006, total unrecognized compensation costs related to share-based compensation awards was approximately $65,613, net of estimated forfeitures, which we expect to recognize over a weighted average period of approximately one and one half years.

The Company adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.

Prior to October 1, 2005, the Company accounted for employee stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, no employee stock-option based compensation expense was recorded in the income statement prior to October 1, 2005.

The following table illustrates the effect on net income and related earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) to stock-based compensation, for the three and six months ended March 31, 2005.

	Three Months Ended			Six Months Ended
	March 31,			March 31,
	2005			2005
Net income as reported	$	139,501		$	547,499
Less total stock-based employee compensation expense determined under fair value based method of all awards, net of related tax effects		(77,268	)		(96,354	)
Pro forma net income	$	62,233		$	451,145
Earnings per share:
Basic — as reported	$	0.03		$	0.12
Basic — pro forma	$	0.01		$	0.10
Diluted — as reported	$	0.03		$	0.12
Diluted — pro forma	$	0.01		$	0.10

The Company did not grant any stock options during the three and six months ended March 31, 2006.

The Company estimates fair value using the Black-Sholes option valuation model. The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options

7

Notes to condensed consolidated financial statements—(continued)

granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option.

A summary of stock option activity under the Company’s share-based compensation plan for the six months ended March 31, 2006 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at September 30, 2005		541,800	$	7.40
New grants		—		—
Exercised		—		—
Forfeited or expired		95,850	$	6.90
Outstanding at March 31, 2006		445,950	$	7.50		3.7	$	3,346,346
Exercisable at March 31, 2006		414,217	$	7.54		3.3	$	3,122,668

The weighted-average grant date fair value of options granted during the six months ended March 31, 2005 was $6.23.

4.	Stock Repurchase Plan
	In March 2005, the Company’s Board of Directors approved the purchase by the Company of up to 300,000 of its shares of common stock given that the Company’s cash and debt position would enable these purchases without impairment to the Company’s capital. On December 16, 2005, the Company’s Board of Directors extended the plan through June 30, 2006. A total of 2,800 shares were purchased under the plan during the quarter ended March 31, 2006. Since the plan was approved, a total of 49,100 shares were purchased under the plan as of March 31, 2006.
5.	Segment Information
	The Company operates in a single industry since it manufactures and distributes business forms, 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. Such market segment information is summarized below. The Contract Manufacturing segment provides services to large national consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.

8

Notes to condensed consolidated financial statements—(continued)

Three Months Ended	Contract		Business		Corporate
March 31, 2006	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	16,528,068	$	6,561,126	$	—		$	23,089,194
Gross profit		751,349		608,792		—			1,360,141
Operating (loss) income		164,955		380,427		(229,357	)		316,025
Depreciation and amortization expense		364,271		59,306		48,190			471,767
Capital expenditures		1,924,189		29,989		—			1,954,178
Assets:
Inventories		10,367,325		2,912,133		—			13,279,458
Property, plant and equipment-net		15,398,447		2,433,287		113,802			17,945,536
Accounts receivable and other (including goodwill)		12,322,905		6,081,661		1,515,202			19,919,768
Total assets	$	38,088,677	$	11,427,081	$	1,629,004		$	51,144,762

Three Months Ended	Contract		Business		Corporate
March 31, 2005	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	15,328,405	$	5,887,044	$	—		$	21,215,449
Gross profit		890,690		500,770		—			1,391,460
Operating income (loss)		723,168		421,890		(911,530	)		233,528
Depreciation and amortization expense		358,035		81,816		73,425			513,276
Capital expenditures		317,610		76,027		—			393,637
Assets:
Inventories		8,922,483		2,047,604		—			10,970,087
Property, plant and equipment-net		12,503,477		2,820,528		325,397			15,649,402
Accounts receivable and other (including goodwill)		11,183,038		5,734,047		1,260,452			18,177,537
Total assets	$	32,608,998	$	10,602,179	$	1,585,849		$	44,797,026

9

Notes to condensed consolidated financial statements—(continued)

Six Months Ended	Contract		Business		Corporate
March 31, 2006	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	31,065,323	$	13,336,765	$	—		$	44,402,088
Gross profit		1,179,759		1,180,794		—			2,360,553
Operating income (loss)		112,088		731,184		(494,306	)		348,966
Depreciation and amortization expense		705,415		120,125		102,764			928,304
Capital expenditures		3,171,133		35,107		—			3,206,240

Six Months Ended	Contract		Business		Corporate
March 31, 2005	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	29,555,874	$	11,663,564	$	—		$	41,219,438
Gross profit		1,964,830		877,734		—			2,842,564
Operating income (loss)		1,182,742		479,233		(739,546	)		922,429
Depreciation and amortization expense		708,920		162,860		156,914			1,028,694
Capital expenditures		394,918		84,532		—			479,450

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 2006 quarterly results in comparison to fiscal 2005 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 changes in customer demand for its products, cancellation of production agreements by significant customers, material increases in the cost of base paper stock, competition in the Company’s product areas, an inability of management to successfully reduce operating expenses in relation to net sales without damaging the long-term direction of the Company, the Company’s ability to increase sales as a result of new projects, the Company’s ability to successfully install new equipment on a timely basis, the Company’s ability to continue the run rates for its product and to support increased production levels, or the Company’s ability to successfully integrate its western region warehouse facility. Therefore, the selected 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 wipes converting at the leading edge of existing and emerging wipes growth opportunities. The Company works closely with its Contract Manufacturing clients 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 provides integrated production services including wide web flexographic printing, wet and dry wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging and on-site quality and microbiological process management, and manufactures and distributes 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
	2006			2005			$			%			2006			2005			$			%
Net Sales	$	23,089		$	21,215		$	1,874			9		$	44,402		$	41,219		$	3,183			8
Gross Profit		1,360			1,391			(31	)		(2	)		2,361			2,843			(482	)		(17	)
		5.9	%		6.6	%								5.3	%		6.9	%
Operating Expenses		1,044			1,158			(114	)		(10	)		2,012			1,920			92			5
		4.5	%		5.5	%								4.5	%		4.7	%
Operating Income		316			234			82			35			349			922			(573	)		(62	)
		1.4	%		1.1	%								0.8	%		2.2	%
Interest Expense		65			8			57			713			85			22			63			286
		0.3	%		0.04	%								0.2	%		0.1	%
Income Before Income Taxes		292			231			61			26			331			920			(589	)		(64	)
		1.3	%		1.1	%								0.7	%		2.2	%
Income Tax Expense		95			91			4			4			110			373			(263	)		(71	)
		0.4	%		0.4	%								0.2	%		0.9	%
Net Income	$	198		$	140			58			41		$	221		$	547			(326	)		(60	)
		0.9	%		0.7	%								0.5	%		1.3	%

12

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

	Three Months Ended
	March 31,
	2006					2005					Period-to-Period
											Change
			% of					% of
	Amount		Total			Amount		Total			$		%
Net Sales
Contract Manufacturing and printing	$	16,528		72	%	$	15,328		72	%	$	1,200		8	%
Business Imaging paper products		6,561		28			5,887		28			674		11	%
Net Sales	$	23,089		100	%	$	21,215		100	%	$	1,874		9	%

	2006					2005					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	751		5	%	$	891		6	%	$	(140	)		(16	%)
Business Imaging paper products		609		9	%		500		9	%		109			22	%
Gross Profit	$	1,360		6	%	$	1,391		7	%	$	(31	)		(2	%)

	Six Months Ended
	March 31,
	2006					2005					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$		%
Net Sales
Contract Manufacturing and printing	$	31,065		70	%	$	29,556		72	%	$	1,509		5	%
Business Imaging paper products		13,337		30			11,663		28			1,674		14	%
Net Sales	$	44,402		100	%	$	41,219		100	%	$	3,183		8	%

	2006					2005					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	1,180		4	%	$	1,965		7	%	$	(785	)		(40	%)
Business Imaging paper products		1,181		9	%		878		8	%		303			35	%
Gross Profit	$	2,361		5	%	$	2,843		7	%	$	(482	)		(17	%)

13

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

Net Sales:

Consolidated net sales increased $1.9 million (9%) to $23.1 million in the second quarter of fiscal 2006, when compared to the same period last year. This was due to an increase of $1.2 million (8%) in the Contract Manufacturing segment and an increase of $0.7 million (11%) in the Business Imaging segment.

For the six months ended March 31, 2006, sales increased $3.2 million (8%) when compared to the first six months of fiscal 2005. This was due to an increase of $1.5 million (5%) in the Contract Manufacturing segment and an increase of $1.7 million (14%) in the Business Imaging segment.

In Contract Manufacturing, the increase in revenues was primarily due to an increase in new sales related to the wet wipes market. The increase in revenue in the Business Imaging segment was primarily due to increased sales to point of sale (POS) customers, including increased direct sales to several large retail customers, as well as several of the Company’s Hamco brand distributors.

Gross Profit:

Consolidated gross profit decreased $31,000 (2%) for the second quarter of fiscal 2006 when compared to the second quarter of fiscal 2005. The Contract Manufacturing segment decreased $140,000 (16%) due to higher labor costs related to the start-up of a new production line needed to support the growth of wet wipes sales. In addition, manufacturing support expenses such as supplies, utilities, parts and warehouse costs also increased. Gross profit increased $109,000 (22%) in Business Imaging, largely due to the pass through of increased material costs.

For the six months ended March 31, 2006, gross profit decreased $0.5 million (17%) when compared to the same period last year. Contract Manufacturing decreased $0.8 million (40%); although converting revenue remained relatively flat, an increase in labor cost and manufacturing support expenses such as supplies and warehousing negatively impacted gross profit. Business Imaging increased $0.3 million (35%) as a result of stabilized raw material costs in comparison to 2005.

Operating Expenses:

Selling, general and administrative expenses decreased $114,000 (10%) for the second quarter of fiscal 2006 when compared to the same period of fiscal 2005, primarily related to decreases in legal and audit of $75,000, bad debt of $34,000 and depreciation of $33,000 offset by increases in stock compensation expense of $15,000 related to the adoption of SFAS 123(R).

For the first six months of fiscal 2006, selling general and administrative expenses decreased $324,000 (14%) compared to the first six months of fiscal 2005 due to decreases in legal and audit of $150,000, salaries of $104,000, bad debt of $89,000 and depreciation of $66,000 offset by increases in stock compensation expense of $39,000 related to the adoption of SFAS 123(R) and selling expenses of $36,000. Operating expenses for the first six months of fiscal 2005 were reduced by $416,000, reflecting the gain on the sale of the Company’s thermal bond laminator that was completed in the first quarter of fiscal 2005.

Interest Expense and Other Income (Expense) net:

Interest expense increased $57,000 to $65,000 for the second quarter of fiscal 2006 compared to the same period of fiscal 2005 and increased $63,000 in comparing the six months due to higher average debt outstanding.

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

Net Income:

The Company reported net income of $0.2 million (per share: $0.04 basic and diluted) for the second quarter of fiscal 2006, versus net income of $0.1 million (per share: $0.03 basic and diluted) for the same period of fiscal 2005.

For the six months ended March 31, 2006, net income was $0.2 million (per share: $0.05 basic and diluted) compared to net income of $0.5 million (per share: $0.12 basic and diluted of which $0.05 per share of the $0.12 was attributable to a gain from an asset sale) for the first six months of fiscal 2005.

Impacting the current year (fiscal 2006) first-half results were costs to build, install, train and start-up new equipment for recently announced new multi-year contracts.

Liquidity and Capital Resources:

The Company used $0.5 million in cash from operations through the first six months of fiscal 2006, compared to cash provided by operations of $2.2 million for the same period last year. Increases in inventories ($3.1 million) primarily represented inventory builds related to the support of increased wet and dry wipes business that began during the first half of fiscal 2006. An increase in accounts receivable ($1.7 million) resulted from the increased revenues. Accounts Payable increased ($2.7 million) in the first six months of fiscal 2006, compared to the same period last year, primarily due to an increase in materials purchased.

During the third quarter of fiscal 2004, the Company announced it had entered into a definitive agreement to sell its thermal bond laminator for $475,000. In connection with such agreement, the Company received a $95,000 non-refundable deposit. The sale was completed in the first quarter of fiscal 2005. Consistent with accounting principles for revenue recognition, the Company accounted for and reported a gain of approximately $416,000 (which includes the non-refundable deposit) from this sale when it was completed in the first quarter of fiscal 2005.

Net cash used in investing activities was $3.4 million for the first six months of fiscal 2006, primarily related to the purchase of two new wipe converting lines to support the Company’s growth in the expanding disposable, nonwovens wipes market.

Net cash provided by financing activities was $3.8 million for the first six months of fiscal 2006, as a result of the Company borrowing from its revolving credit line to fund a portion of its increased working capital and equipment needs. In March 2005, the Company’s Board of Directors approved the purchase by the Company of up to 300,000 of its shares of common stock and, on December 16, 2005, the board extended the plan through June 30, 2006. A total of 2,800 shares were purchased for $16,000 under the plan during the quarter ended March 31, 2006. Since the plan was approved, a total of 49,100 shares have been purchased for $0.3 million through March 31, 2006.

The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of March 31, 2006, cash recorded on the balance sheet was $6,398.

The Company’s credit facility is effective through May 18, 2007.

As of May 12, 2006, the Company had approximately $5.8 million available and $4.2 million outstanding under the revolving credit line pursuant to the Credit Facility. According to the terms of the Credit Facility, the Company is required to maintain certain financial and operational covenants. As of March 31, 2006, the Company was in compliance with all of its debt covenants under the Credit Facility.

Management believes that the Company’s operating cash flow, together with amounts available under its Credit Facility, are adequate to service the Company’s long term obligations as of March 31, 2006 and any budgeted capital expenditures.

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

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

Stock Repurchase Plan:

In March 2005, the Company’s Board of Directors approved the purchase by the Company of up to 300,000 of its shares of common stock given that the Company’s cash and debt position would enable these purchases without impairment to the Company’s capital. On December 16, 2005, the Company’s Board of Directors extended the plan through June 30, 2006. A total of 2,800 shares were purchased under the plan during the quarter ended March 31, 2006. Since the plan was approved, a total of 49,100 shares were purchased under the plan as of March 31, 2006. See Part II, Item 2 of this Report.

Critical Accounting Policies:

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to the Company’s critical accounting policies which the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained on pages 18-19 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K, filed with the SEC for the fiscal year ended September 30, 2005. The Company has not made any changes in estimates or assumptions that have had a significant effect on the reported amounts.

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

Information with respect to the Company’s exposure to interest rate risk, foreign currency exchange risk, commodity price risk and other relevant market risks is contained on page 21 in Item 7A, Quantative and Qualitative Disclosure About Market Risk, of the Company’s Annual Report on Form 10-K, filed with the SEC for the year ended September 30, 2005. Management believes that as of March 31, 2006, there has been no material change to this information.

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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, is recorded, processed, summarized, and reported within the time periods specified in the SEC’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, 2006.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

Issuer Purchases of Equity Securities

The following table presents the number of shares purchased monthly under the Company’s stock repurchase program for the quarter ended March 31, 2006.

							Maximum Number
					Total Number of		Of Shares That
	Total Number				Shares Purchased as		May Yet Be
	Of Shares		Average Price		Part of Publicly		Purchased Under
Period	Purchased		Paid per Share		Announced Plan		The Plan
January
(1/1/06-1/31/06)		2,800	$	5.66		49,100		250,900

In March 2005, the Company’s Board of Directors approved the purchase by the Company of up to 300,000 of its shares of common stock given that the Company’s cash and debt position would enable these purchases without impairment to the Company’s capital. On December 16, 2005, the Company’s Board of Directors extended the plan through June 30, 2006. A total of 2,800 shares were purchased under the plan during the quarter ended March 31, 2006. Since the plan was approved, a total of 49,100 shares were purchased under the plan as of March 31, 2006.

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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

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SIGNATURES

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

		TUFCO TECHNOLOGIES, INC.
Date:	May 15, 2006	/s/ Louis LeCalsey, IIILouis LeCalsey, III
		President and Chief Executive Officer
Date:	May 15, 2006	/s/ Michael B. WheelerMichael B. Wheeler
		Vice President and Chief Financial Officer

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