Tufco (TFCO) 10-Q 2006 Q3 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 June 30, 2006

Commission file number 0-21018

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 August 14, 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 June 30, 2006 and September 30, 2005		3
	Condensed Consolidated Statements of Income for the three months and nine months ended June 30, 2006 and 2005		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 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 4.	Submission of Matters to a Vote of Security Holders		17
Item 6.	Exhibits		18
SIGNATURES			19
First Amendment to Credit Agreement
Certification Pursuant to Rule 13a-14(a)/15d-14(a)
Certification Pursuant to Rule 13a-14(a)/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

	June 30,
	2006			September 30,
	(Unaudited)			2005*
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	156,440		$	5,672
Accounts receivable-net		15,101,000			9,728,418
Inventories		16,237,848			10,137,771
Prepaid expenses and other current assets		737,190			170,555
Income tax receivable		—			585,390
Deferred income taxes		499,947			499,947
Total current assets		32,732,425			21,127,753
PROPERTY, PLANT AND EQUIPMENT-Net		18,976,592			15,657,028
GOODWILL		7,211,575			7,211,575
OTHER ASSETS-Net		194,622			489,662
TOTAL	$	59,115,214		$	44,486,018
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable	$	12,161,683		$	4,688,887
Accrued payroll, vacation and payroll taxes		594,247			367,336
Other current liabilities		619,430			662,963
Income taxes payable		400,943			—
Total current liabilities		13,776,303			5,719,186
LONG-TERM DEBT		7,150,000			1,112,636
DEFERRED INCOME TAXES		1,693,008			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		25,210,948			25,097,911
Retained earnings		12,379,678			11,845,152
Treasury stock, 173,097 and 161,197 common shares at cost, respectively		(1,141,806	)		(1,073,267	)
Total stockholders’ equity		36,495,903			35,916,879
TOTAL	$	59,115,214		$	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						NINE MONTHS ENDED
	June 30,						June 30,
	2006			2005			2006			2005
NET SALES	$	27,428,347		$	18,612,243		$	71,830,435		$	59,831,681
COST OF SALES		25,777,027			17,412,885			67,818,562			55,789,759
GROSS PROFIT		1,651,320			1,199,358			4,011,873			4,041,922
OPERATING EXPENSES:
Selling, general & administrative		1,100,623			1,140,497			3,112,209			3,476,413
Gain on sale of property, plant and equipment		—			(25,889	)		—			(441,670	)
OPERATING INCOME		550,697			84,750			899,664			1,007,179
OTHER INCOME (EXPENSE):
Interest expense		(106,213	)		(23,760	)		(191,014	)		(45,338	)
Interest income and other income (expense)		(4,476	)		5,987			61,859			25,495
INCOME BEFORE INCOME TAXES		440,008			66,977			770,509			987,336
INCOME TAX EXPENSE		126,483			14,176			235,983			387,036
NET INCOME	$	313,525		$	52,801		$	534,526		$	600,300
BASIC EARNINGS PER SHARE:
Net Income	$	0.07		$	0.01		$	0.12		$	0.13
DILUTED EARNINGS PER SHARE:
Net Income	$	0.07		$	0.01		$	0.12		$	0.13
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		4,535,244			4,549,811			4,539,105			4,568,477
Diluted		4,553,085			4,557,468			4,549,605			4,591,224

See notes to condensed consolidated financial statements.

4

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	NINE MONTHS ENDED
	June 30,
	2006			2005
OPERATING ACTIVITIES
Net Income	$	534,526		$	600,300
Noncash items in net income:
Depreciation and amortization of property, plant and equipment		1,441,170			1,506,385
Amortization		15,858			15,858
Deferred income taxes		(44,309	)		81,826
Gain on sale of property, plant and equipment		—			(441,670	)
Stock compensation expense		113,037			—
Changes in operating working capital:
Accounts receivable		(5,372,582	)		3,552,667
Inventories		(6,100,077	)		(2,233,706	)
Prepaid expenses and other assets		(287,453	)		(31,457	)
Accounts payable		7,514,451			(1,286,028	)
Accrued and other current liabilities		183,378			(527,421	)
Income taxes payable/receivable		986,333			(227,715	)
Net cash (used) provided by operating activities		(1,015,668	)		1,009,039
INVESTING ACTIVITIES
Additions to property, plant and equipment		(4,760,734	)		(871,339	)
Change in construction payables		(41,655	)		(61,000	)
Proceeds from disposals of property, plant and equipment		—			647,042
Net cash (used) by investing activities		(4,802,389	)		(285,297	)
FINANCING ACTIVITIES
Repayment of long-term debt		—			(2,500,000	)
Borrowings of long-term debt		6,037,364			2,000,000
Purchase of treasury stock		(68,539	)		(224,972	)
Net cash provided (used) by financing activities		5,968,825			(724,972	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		150,768			(1,230	)
CASH AND CASH EQUIVALENTS:
Beginning of period		5,672			7,692
End of period	$	156,440		$	6,462
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 nine months ended June 30, 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 nine-month periods ended June 30, 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.
2.	Recent Accounting Pronouncements
	In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,Accounting For Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109(“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The accounting provisions of FIN 48 will be effective for the Company beginning October 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is in the process of determining the effect, if any, the adoption of FIN 48 will have on its financial statements.
3.	Earnings Per Share
	Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share includes common stock equivalents from dilutive stock options outstanding during the year, the effect of which was 17,841 and 7,657 shares for the three months ended June 30, 2006 and 2005, respectively. For the nine months ended June 30, 2006 and 2005, the common stock equivalents from dilutive stock options outstanding were 10,500 and 22,747, respectively. During the three months ended June 30, 2006 and 2005, options to purchase 255,750 and 422,767 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 nine months ended June 30, 2006 and 2005, options to purchase 295,750 and 278,906 shares, respectively, were excluded from the diluted earnings per share computation.

6

Notes to condensed consolidated financial statements — (continued)

4.	Inventories
	Inventories consist of the following:

	June 30,		September 30,
	2006		2005
Raw materials	$	13,331,680	$	7,470,774
Finished goods		2,906,168		2,666,997
Total inventories	$	16,237,848	$	10,137,771

5.	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 0.3 million shares are available for future grants.
	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 June 30, 2006, was $73,749, or $44,839 net of taxes. For the nine months ended June 30, 2006, the total stock compensation expense recognized by the Company was $113,037, or $68,726 net of taxes. The Company expects that total stock compensation expense for the year ending September 30, 2006 will be approximately $80,000 to $100,000 on an after-tax basis. As of June 30, 2006, total unrecognized compensation costs related to share-based compensation awards was approximately $50,035, net of estimated forfeitures, which we expect to recognize over a weighted average period of approximately one and one quarter 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 nine months ended June 30, 2005.

7

Notes to condensed consolidated financial statements — (continued)

	Three Months Ended			Nine Months Ended
	June 30,			June 30,
	2005			2005
Net income as reported	$	52,801		$	600,300
Less total stock-based employee compensation expense determined under fair value based method of all awards, net of related tax effects		(56,286	)		(152,640	)
Pro forma net income	$	(3,485	)	$	447,660
Earnings per share:
Basic – as reported	$	0.01		$	0.13
Basic – pro forma	$	0.00		$	0.10
Diluted – as reported	$	0.01		$	0.13
Diluted – pro forma	$	0.00		$	0.10

On May 16, 2006, the Company granted 15,000 non-employee director stock options at a grant price of $6.60. No other stock options were granted during the three and nine months ended June 30, 2006.

The Company estimates fair value using the Black-Scholes 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 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. The weighted-average assumptions used in the Black-Scholes valuation model as of June 30, 2006 are as follows:

Expected option life (in years)	7
Expected volatility	50.6	%
Dividend yield	0	%
Risk-free interest rate	5.07	%

A summary of stock option activity under the Company’s share-based compensation plan for the nine months ended June 30, 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		15,000		$	6.60
Exercised		—			—
Forfeited or expired		(95,850	)	$	6.90
Outstanding at June 30, 2006		460,950		$	7.47		3.6	$	3,445,346
Exercisable at June 30, 2006		429,217		$	7.51		3.3	$	3,221,668

The weighted-average grant date fair value of options granted during the nine months ended June 30, 2006 and June 30, 2005 was $6.60 and $7.39, respectively.

8

Notes to condensed consolidated financial statements — (continued)

6.	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. No shares were purchased under the plan during the quarter ended June 30, 2006. A total of 49,100 shares were purchased under the plan from approval of the plan through June 30, 2006.
7.	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.

Three Months Ended	Contract		Business		Corporate
June 30, 2006	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	21,050,865	$	6,377,482	$	—		$	27,428,347
Gross profit		1,014,881		636,439		—			1,651,320
Operating income (loss)		385,825		390,751		(225,879	)		550,697
Depreciation and amortization expense		428,741		58,458		41,525			528,724
Capital expenditures		1,509,066		45,428		—			1,554,494
Assets:
Inventories		13,623,106		2,614,742		—			16,237,848
Property, plant and equipment-net		16,506,061		2,393,071		77,460			18,976,592
Accounts receivable and other (including goodwill)		16,517,571		5,795,004		1,588,199			23,900,774
Total assets	$	46,646,738	$	10,802,817	$	1,665,659		$	59,115,214

9

Notes to condensed consolidated financial statements — (continued)

Three Months Ended	Contract		Business		Corporate
June 30, 2005	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	12,380,342	$	6,231,901	$	—		$	18,612,243
Gross profit		700,192		499,166		—			1,199,358
Operating income (loss)		110,812		308,985		(335,047	)		84,750
Depreciation and amortization expense		346,794		76,484		70,271			493,549
Capital expenditures		370,966		10,150		10,773			391,889
Assets:
Inventories		9,397,856		2,460,813		—			11,858,669
Property, plant and equipment-net		12,528,048		2,595,083		270,786			15,393,917
Accounts receivable and other (including goodwill)		10,335,639		5,962,658		1,191,659			17,489,956
Total assets	$	32,261,543	$	11,018,554	$	1,462,445		$	44,742,542

Nine Months Ended	Contract		Business		Corporate
June 30, 2006	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	52,116,188	$	19,714,247	$	—		$	71,830,435
Gross profit		2,194,640		1,817,233		—			4,011,873
Operating income (loss)		497,913		1,121,935		(720,184	)		899,664
Depreciation and amortization expense		1,134,156		178,583		144,289			1,457,028
Capital expenditures		4,680,199		80,535		—			4,760,734

Nine Months Ended	Contract		Business		Corporate
June 30, 2005	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	41,936,216	$	17,895,465	$	—		$	59,831,681
Gross profit		2,665,022		1,376,900		—			4,041,922
Operating income (loss)		1,293,554		788,218		(1,074,593	)		1,007,179
Depreciation and amortization expense		1,055,714		239,344		227,185			1,522,243
Capital expenditures		765,884		94,682		10,773			871,339

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 including labor costs 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 produce new products, the Company’s ability to continue to improve profitability and the Company’s ability to continue the run rates for its product. 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						Nine Months Ended						Period-to-Period
	June 30,						Change						June 30,						Change
	2006			2005			$			%			2006			2005			$			%
Net Sales	$	27,428		$	18,612		$	8,816			47		$	71,830		$	59,832		$	11,998			20
Gross Profit		1,651			1,199			452			38			4,012			4,042			(30	)		(1	)
		6.0	%		6.4	%								5.6	%		6.8	%
Operating Expenses		1,101			1,115			(14	)		(1	)		3,112			3,035			77			3
		4.0	%		6.0	%								4.3	%		5.1	%
Operating Income		551			85			466			548			900			1,007			(107	)		(11	)
		2.0	%		0.5	%								1.3	%		1.7	%
Interest Expense		106			24			82			342			191			45			146			324
		0.4	%		0.1	%								0.3	%		0.1	%
Income Before Income Taxes		440			67			373			557			771			987			(216	)		(22	)
		1.6	%		0.4	%								1.1	%		1.6	%
Income Tax Expense		126			14			112			800			236			387			(151	)		(39	)
		0.5	%		0.1	%								0.3	%		0.6	%
Net Income	$	314		$	53			261			492		$	535		$	600			(65	)		(11	)
		1.1	%		0.3	%								0.7	%		1.0	%

12

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

	Three Months Ended
	June 30,
	2006					2005					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$		%
Net Sales
Contract Manufacturing and printing	$	21,051		77	%	$	12,380		67	%	$	8,671		70	%
Business Imaging paper products		6,377		23			6,232		33			145		2	%
Net Sales	$	27,428		100	%	$	18,612		100	%	$	8,816		47	%

	2006					2005					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$		$
Gross Profit
Contract Manufacturing and printing	$	1,015		5	%	$	700		6	%	$	315		45	%
Business Imaging paper products		636		10	%		499		8	%		137		27	%
Gross Profit	$	1,651		6	%	$	1,199		6	%	$	452		38	%

	Nine Months Ended
	June 30,
	2006					2005					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$		%
Net Sales
Contract Manufacturing and printing	$	52,116		73	%	$	41,936		70	%	$	10,180		24	%
Business Imaging paper products		19,714		27			17,896		30			1,818		10	%
Net Sales	$	71,830		100	%	$	59,832		100	%	$	11,998		20	%

	2006					2005					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	2,195		4	%	$	2,665		6	%	$	(470	)		(18	%)
Business Imaging paper products		1,817		9	%		1,377		8	%		440			32	%
Gross Profit	$	4,012		6	%	$	4,042		7	%	$	(30	)		(1	%)

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

Net Sales:

Consolidated net sales increased $8.8 million (47%) to $27.4 million in the third quarter of fiscal 2006, when compared to the same period last year. This was due to an increase of $8.7 million (70%) in the Contract Manufacturing segment and an increase of $0.1 million (2%) in the Business Imaging segment.

For the nine months ended June 30, 2006, sales increased $12.0 million (20%) when compared to the first nine months of fiscal 2005. This was due to an increase of $10.2 million (24%) in the Contract Manufacturing segment and an increase of $1.8 million (10%) in the Business Imaging segment.

In Contract Manufacturing, the increase in revenues was primarily due to an increase in new sales related to the start-up of new multi-year contracts in 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 sales to the Company’s Hamco brand distributors as well as direct sales to several large retail customers.

Gross Profit:

Consolidated gross profit increased $452,000 (38%) for the third quarter of fiscal 2006 when compared to the third quarter of fiscal 2005. The Contract Manufacturing segment increased $315,000 (45%) due to higher toll revenues related to new product start-ups. Toll revenue is revenue which does not include a pass through of material costs. Excess labor costs of $275,000 negatively impacted gross profit. Labor increases were higher during the short term as a result of running with manual downstream packaging on our newly acquired converting machines and will continue over the next several months until automated equipment is installed. Gross profit increased $137,000 (27%) in Business Imaging, largely due to the recovery of increased material costs.

For the nine months ended June 30, 2006, gross profit decreased $30,000 (1%) when compared to the same period last year. Contract Manufacturing decreased $470,000 (18%); although toll revenues increased compared to the same period last year, excess labor costs of $405,000, contracted labor of $65,000 and equipment repair parts of $20,000 were significantly higher due to start-up costs related to the installation and qualification of two new production lines. Gross margin percentage was down, particularly in Contract Manufacturing as a result of the material cost mix to net sales which increased 2% for the nine months ended June 30, 2006 when compared to the same period last year. Business Imaging increased $440,000 (32%) as a result of the recovery of increased material costs in comparison to 2005.

Operating Expenses:

Selling, general and administrative expenses decreased $40,000 (4%) for the third quarter of fiscal 2006 when compared to the same period of fiscal 2005, due to decreases in legal and audit of $75,000 and depreciation of $36,000 offset by increases in stock compensation expense of $74,000 related to the adoption of SFAS 123(R). Operating expenses for the three months ended June 30, 2005 were reduced by $26,000, reflecting the gain on the sale of a rewinder that was completed in the third quarter of fiscal 2005.

For the first nine months of fiscal 2006, selling general and administrative expenses decreased $364,000 (10%) compared to the first nine months of fiscal 2005 due to decreases in legal and audit of $225,000, salaries of $55,000, bad debt of $104,000 and depreciation of $101,000 offset by increases in stock compensation expense of $113,000 related to the adoption of SFAS 123(R). Operating expenses for the first nine 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 $82,000 to $106,000 for the third quarter of fiscal 2006 compared to the same period of fiscal 2005 and increased $146,000 in comparing the nine months due to higher average debt outstanding as a result of the Company borrowing from its revolving credit line to fund a portion of its increased working capital and equipment needs.

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Income Tax Expense:

The effective tax rates for the three and nine months ended June 30, 2006, were reduced following completion of IRS audits for fiscal years 2003 and 2004.

Net Income

The Company reported net income of $0.3 million (per share: $0.07 basic and diluted) for the third quarter of fiscal 2006, versus net income of $0.1 million (per share: $0.01 basic and diluted) for the same period of fiscal 2005.

For the nine months ended June 30, 2006, net income was $0.5 million (per share: $0.12 basic and diluted) compared to net income of $0.6 million (per share: $0.13 basic and diluted of which $0.05 per share of the $0.13 was attributable to a gain from an asset sale) for the first nine months of fiscal 2005.

Negatively impacting the current year (fiscal 2006) first nine months results were costs to build, install, train and start-up new production lines for recently announced new multi-year contracts. Also, the after-tax expense for options under SFAS 123(R) was $44,800, or $0.01 per share for the third quarter of fiscal 2006 and $68,700, or $0.02 per share for the first nine months ended June 30, 2006. There was no comparable expense reported in fiscal 2005.

Liquidity and Capital Resources:

The Company used $1.0 million in cash from operations through the first nine months of fiscal 2006, compared to cash provided by operations of $1.0 million for the same period last year. Increases in inventories ($6.1 million) represented inventory builds primarily related to the support of increased wet wipes business that began during the second quarter of fiscal 2006. An increase in accounts receivable ($5.4 million) resulted from the increased sales. Accounts Payable increased ($7.5 million) in the first nine months of fiscal 2006, compared to the same period last year.

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 $4.8 million for the first nine 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 $6.0 million for the first nine 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. No shares were purchased under the plan during the quarter ended June 30, 2006. A total of 49,100 shares have been purchased for an aggregate purchase price of $0.3 million from approval of the plan through June 30, 2006.

The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of June 30, 2006, cash recorded on the balance sheet was $156,440.

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

On June 20, 2006, the Company entered into an amendment to the Credit Facility pursuant to which the term of the Credit Facility was extended by one year to May 18, 2008.

As of August 11, 2006, the Company had approximately $3.3 million available and $6.7 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 June 30, 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 June 30, 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.

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. No shares were purchased under the plan during the quarter ended June 30, 2006. A total of 49,100 shares were purchased under the plan from approval of the plan through June 30, 2006.

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 June 30, 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 June 30, 2006.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)	The Annual Meeting of Shareholders of the Company was held on May 16, 2006.
(b)	See the response to Item 4(c) below.
(c)	At the Annual Meeting, shareholders elected the following individuals to the Board of Directors for one-year terms:

Director	For		Withheld
Robert J. Simon		4,573,720		63,636
Samuel J. Bero		4,572,639		64,717
C. Hamilton Davison, Jr.		4,619,967		17,389
Louis LeCalsey, III		4,579,339		58,017
William J. Malooly		4,613,912		23,444
Seymour S. Preston, III		4,620,093		17,263

(d) Not applicable

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ITEM 6. Exhibits

10.1	First Amendment to the Credit Agreement dated May 22, 2006.
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: August 14, 2006	/s/ Louis LeCalsey, III
	Louis LeCalsey, III
	President and Chief Executive Officer
Date: August 14, 2006	/s/ Michael B. Wheeler
	Michael B. Wheeler
	Executive Vice President, Chief Financial Officer and Chief Operating Officer

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