Tufco (TFCO) 10-Q 2007 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, 2007

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, 2007
Common Stock, par value $0.01 per share	4,535,644

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, 2007 and September 30, 2006		3
Condensed Consolidated Statements of Income for the three months and six months ended March 31, 2007 and 2006		4
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006		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		15
Item 4. Controls and Procedures		16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings		16
Item 1a. Risk Factors		16
Item 6. Exhibits		16
SIGNATURES		17
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 Furnished Pursuant to 18 U.S.C. Section 1350
Certification Furnished Pursuant to 18 U.S.C. Section 1350

2

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,
	2007			September 30,
	(Unaudited)			2006*
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	8,161		$	5,267
Accounts receivable-net		13,629,467			15,078,707
Inventories		15,859,731			14,125,417
Prepaid expenses and other current assets		1,128,378			635,243
Income tax receivable		—			46,893
Deferred income taxes		490,637			490,637
Total current assets		31,116,374			30,382,164
PROPERTY, PLANT AND EQUIPMENT-Net		19,602,376			18,940,513
GOODWILL		7,211,575			7,211,575
OTHER ASSETS-Net		138,019			154,466
TOTAL	$	58,068,344		$	56,688,718
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable	$	10,116,725		$	9,922,742
Accrued payroll, vacation and payroll taxes		547,635			507,923
Other current liabilities		584,776			542,366
Income taxes payable		79,889			—
Total current liabilities		11,329,025			10,973,031
LONG-TERM DEBT		7,900,000			7,073,011
DEFERRED INCOME TAXES		2,091,042			2,102,950
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		25,256,901			25,226,526
Retained earnings		12,586,099			12,407,923
Treasury stock, 173,097 common shares at cost		(1,141,806	)		(1,141,806	)
Total stockholders’ equity		36,748,277			36,539,726
TOTAL	$	58,068,344		$	56,688,718

*    Condensed from audited financial statements

See notes to condensed consolidated financial statements.

3

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	THREE MONTHS ENDED						SIX MONTHS ENDED
	March 31,						March 31,
	2007			2006			2007			2006
NET SALES	$	27,587,328		$	23,089,194		$	54,604,740		$	44,402,088
COST OF SALES		26,401,398			21,729,053			52,126,672			42,041,535
GROSS PROFIT		1,185,930			1,360,141			2,478,068			2,360,553
OPERATING EXPENSES:
Selling, general & administrative		951,397			1,044,116			1,952,531			2,011,587
Gain on sale of property, plant and equipment		—			—			(145	)		—
OPERATING INCOME		234,533			316,025			525,682			348,966
OTHER INCOME (EXPENSE):
Interest expense		(158,408	)		(64,773	)		(249,449	)		(84,801	)
Interest income and other income		428			41,034			16,815			66,336
INCOME BEFORE INCOME TAXES		76,553			292,286			293,048			330,501
INCOME TAX EXPENSE		30,010			94,520			114,875			109,500
NET INCOME	$	46,543		$	197,766		$	178,173		$	221,001
BASIC EARNINGS PER SHARE:
Net Income	$	0.01		$	0.04		$	0.04		$	0.05
DILUTED EARNINGS PER SHARE:
Net Income	$	0.01		$	0.04		$	0.04		$	0.05
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		4,535,244			4,535,353			4,535,244			4,541,036
Diluted		4,563,171			4,543,219			4,558,411			4,547,865

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,
	2007			2006
OPERATING ACTIVITIES
Net Income	$	178,173		$	221,001
Noncash items in net income:
Depreciation and amortization of property, plant and equipment		1,071,212			917,732
Amortization		10,572			10,572
Non-monetary reimbursement of cost		(515,000	)		—
Deferred income taxes		(11,908	)		(15,400	)
Gain on sale of property, plant and equipment		(145	)		—
Stock-based compensation expense		30,378			39,288
Changes in operating working capital:
Accounts receivable		1,449,240			(1,660,875	)
Inventories		(1,734,314	)		(3,141,687	)
Prepaid expenses and other assets		(487,260	)		(73,915	)
Accounts payable		594,901			2,714,796
Accrued and other current liabilities		82,122			(105,598	)
Income taxes payable/receivable		126,782			616,941
Net cash provided (used) by operating activities		794,753			(477,145	)
INVESTING ACTIVITIES
Additions to property, plant and equipment		(1,218,430	)		(3,057,154	)
Proceeds from disposals of property, plant and equipment		500			—
Payment of construction payable		(400,918	)		(309,249	)
Net cash used by investing activities		(1,618,848	)		(3,366,403	)
FINANCING ACTIVITIES
Net borrowings of long-term debt		826,989			3,912,812
Purchase of treasury stock		—			(68,538	)
Net cash provided by financing activities		826,989			3,844,274
NET INCREASE IN CASH AND CASH EQUIVALENTS		2,894			726
CASH AND CASH EQUIVALENTS:
Beginning of period		5,267			5,672
End of period	$	8,161		$	6,398
NONCASH SUPPLEMENTAL INFORMATION:
Construction payable		—			149,086

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, 2007 and 2006

(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, 2007 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 2006 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, 2006 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, 2006.
2.	Recently Issued Accounting Standards
	In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. Under SFAS No. 159, a business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is in the process of determining the effect, if any, the adoption of SFAS No. 159 will have on its consolidated financial statements.
	In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements in the Current Year Financial Statements.” SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires an entity to evaluate misstatements using a balance sheet and income statement approach and evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The requirements of SAB No. 108 are effective for fiscal years ending after November 15, 2006. The Company is in the process of determining the effect, if any, the adoption of SAB No. 108 will have on its consolidated financial statements.
	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

6

Notes to condensed consolidated financial statements—(continued)

	opening retained earnings. The Company is in the process of determining the effect, if any, the adoption of FIN 48 will have on its consolidated financial statements.
	In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for the Company beginning October 1, 2008, with early adoption permitted. The Company is in the process of evaluating SFAS No. 157.
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 27,927 and 7,866 shares for the three months ended March 31, 2007 and 2006, respectively. For the six months ended March 31, 2007 and 2006, the common stock equivalents from dilutive stock options outstanding were 23,167 and 6,829, respectively. During the three months ended March 31, 2007 and 2006, options to purchase 52,500 and 331,950 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, 2007 and 2006, options to purchase 67,500 and 295,750 shares, respectively, were excluded from the diluted earnings per share computation.
4.	Reclassifications
	Certain prior year amounts have been reclassified to conform to the current year presentation.
5.	Inventories
	Inventories consist of the following:

	March 31,		September 30,
	2007		2006
Raw materials	$	12,252,839	$	11,021,598
Finished goods		3,606,892		3,103,819
Total inventories	$	15,859,731	$	14,125,417

6.	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 336,000 shares are available for future grants as of March 31, 2007.
	The Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective-transition method as of October 1, 2005. Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on the Company’s historical experience and future expectations. The Company recognizes compensation expense on a straight-line basis.

7

Notes to condensed consolidated financial statements—(continued)

A summary of stock option activity under the Company’s share-based compensation plan for the six months ended March 31, 2007 is presented below:

				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at September 30, 2006		460,950		$	7.47
New grants		2,000			6.76
Exercised		—			—
Forfeited or expired		(181,250	)		8.72
Outstanding at March 31, 2007		281,700		$	6.67
Exercisable at March 31, 2007		271,867		$	6.63

The following table summarizes the Company’s share-based compensation awards during the six months ended March 31, 2007 and 2006:

	2007		2006
Total pre-tax share-based compensation	$	30,378	$	39,288
Weighted-average grant date fair value	$	3.88		—
Total unrecognized compensation cost	$	18,102	$	65,613
Remaining weighted-average period cost will be recognized over	6 Months		18 Months

7.	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, at which time it expired. A total of 49,100 shares were purchased under the plan through June 30, 2006.
8.	Segment Information
	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 expense are recorded under the Corporate and Other segment. Such market segment information is summarized below. The Contract Manufacturing segment provides services to large 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.

8

Notes to condensed consolidated financial statements—(continued)

Three Months Ended	Contract		Business		Corporate
March 31, 2007	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	21,730,623	$	5,856,705		—		$	27,587,328
Gross profit		706,441		479,489		—			1,185,930
Operating income (loss)		36,624		224,354		(26,445	)		234,533
Depreciation and amortization expense		481,145		54,988		15,165			551,298
Capital expenditures		752,700		14,527		—			767,227

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 income (loss)		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

Six Months Ended	Contract		Business		Corporate
March 31, 2007	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	42,310,810	$	12,293,930	$	—		$	54,604,740
Gross profit		1,558,733		919,335		—			2,478,068
Operating income (loss)		303,119		414,409		(191,846	)		525,682
Depreciation and amortization expense		941,695		109,760		30,329			1,081,784
Capital expenditures		1,184,551		33,879		—			1,218,430

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

9

Notes to condensed consolidated financial statements—(continued)

Three Months Ended	Contract		Business		Corporate
March 31, 2007	Manufacturing		Imaging		and Other		Consolidated
Assets:
Inventories	$	13,418,829	$	2,440,902	$	—	$	15,859,731
Property, plant and equipment-net		17,312,981		2,265,919		23,476		19,602,376
Accounts receivable and other (including goodwill)		15,261,567		5,479,475		1,865,195		22,606,237
Total assets	$	45,993,377	$	10,186,296	$	1,888,671	$	58,068,344

Twelve Months Ended	Contract		Business		Corporate
September 30, 2006	Manufacturing		Imaging		and Other		Consolidated
Assets:
Inventories	$	12,162,242	$	1,963,175	$	—	$	14,125,417
Property, plant and equipment-net		16,556,278		2,341,799		42,436		18,940,513
Accounts receivable and other (including goodwill)		16,519,894		5,770,388		1,332,506		23,622,788
Total assets	$	45,238,414	$	10,075,362	$	1,374,942	$	56,688,718

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 2007 results in comparison to fiscal 2006 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 and waste costs in relation to net sales without damaging the long-term direction of the Company, the Company’s ability to increase sales and earnings 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 improve the run rates for its products. 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’s technical proficiencies include 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 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
	2007			2006			$			%			2007			2006			$			%
Net Sales	$	27,587		$	23,089		$	4,498			19		$	54,605		$	44,402		$	10,203			23
Gross Profit		1,186			1,360			(174	)		(13	)		2,478			2,361			117			5
		4.3	%		5.9	%								4.5	%		5.3	%
Operating Expenses		951			1,044			(93	)		(9	)		1,952			2,012			(60	)		(3	)
		3.4	%		4.5	%								3.6	%		4.5	%
Operating Income		235			316			(81	)		(26	)		526			349			177			51
		0.9	%		1.4	%								1.0	%		0.8	%
Interest Expense		158			65			93			143			250			85			165			194
		0.6	%		0.3	%								0.5	%		0.2	%
Income Before Income Taxes		77			292			(215	)		(74	)		293			331			(38	)		(11	)
		0.3	%		1.3	%								0.5	%		0.7	%
Income Tax Expense		30			95			(65	)		(68	)		115			110			5			5
		0.1	%		0.4	%								0.2	%		0.2	%
Net Income	$	47		$	198			(151	)		(76	)	$	178		$	221			(43	)		(19	)
		0.2	%		0.9	%								0.3	%		0.5	%

12

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

	Three Months Ended
	March 31,
	2007					2006					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$			%
Net Sales
Contract Manufacturing and printing	$	21,730		79	%	$	16,528		72	%	$	5,202			31	%
Business Imaging paper products		5,857		21			6,561		28			(704	)		(11	%)
Net Sales	$	27,587		100	%	$	23,089		100	%	$	4,498			19	%

	2007					2006					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	706		3	%	$	751		5	%	$	(45	)		(6	%)
Business Imaging paper products		480		8	%		609		9	%		(129	)		(21	%)
Gross Profit	$	1,186		4	%	$	1,360		6	%	$	(174	)		(13	%)

	Six Months Ended
	March 31,
	2007					2006					Period-to-Period
			% of					% of			Change
	Amount		Change			Amount		Total			$			%
Net Sales
Contract Manufacturing and printing	$	42,311		77	%	$	31,065		70	%	$	11,246			36	%
Business Imaging paper products		12,294		23			13,337		30			(1,043	)		(8	%)
Net Sales	$	54,605		100	%	$	44,402		100	%	$	10,203			23	%

	2007					2006					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	1,559		4	%	$	1,180		4	%	$	379			32	%
Business Imaging paper products		919		7	%		1,181		9	%		(262	)		(22	%)
Gross Profit	$	2,478		5	%	$	2,361		5	%	$	117			5	%

13

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

Net Sales:

Consolidated net sales increased $4.5 million (19%) to $27.6 million in the second quarter of fiscal 2007, when compared to the same period last year. This was due to an increase of $5.2 million (31%) in the Contract Manufacturing segment and a decrease of $0.7 million (11%) in the Business Imaging segment.

For the six months ended March 31, 2007, sales increased $10.2 million (23%) when compared to the first six months of fiscal 2006. This was due to an increase of $11.2 million (36%) in the Contract Manufacturing segment and a decrease of $1.0 million (8%) in the Business Imaging segment.

In Contract Manufacturing, the increase in revenues was primarily due to new wipes converting contracts that were not in production during the first half of fiscal 2006. The decrease in revenue in the Business Imaging segment was primarily due to decreased sales to several large retail accounts and decreased sales to several of the segment’s Hamco brand distributors.

Gross Profit:

Consolidated gross profit decreased $174,000 (13%) for the second quarter of fiscal 2007 when compared to the second quarter of fiscal 2006. The Contract Manufacturing segment decreased $45,000 (6%) despite an increase in toll revenue of $1.1 million, offset by increases in labor and overhead. Labor and overhead were higher than standard due to start-up and manual operations while awaiting automation equipment. Toll revenue is revenue which does not include a pass through of material costs. Gross profit decreased $129,000 (21%) in the Business Imaging segment, largely due to the decrease in net sales and strong price competition for the segment’s products.

For the six months ended March 31, 2007, gross profit increased $117,000 (5%) when compared to the same period last year. Contract Manufacturing increased $379,000 (32%), due to an increase in toll revenue of $3.0 million offset by higher than standard labor and overhead as mentioned above. Business Imaging decreased $262,000 (22%) as a result of decreased net sales and strong price competition for the segment’s products.

Operating Expenses:

Selling, general and administrative expenses decreased $93,000 (9%) for the second quarter of fiscal 2007 when compared to the same period of fiscal 2006 and decreased $60,000 (3%) when compared to the first six months of fiscal 2006.

Interest Expense and Other Income (Expense) net:

Interest expense increased $93,000 to $158,000 for the second quarter of fiscal 2007 compared to the same period of fiscal 2006 and increased $165,000 in comparing the six 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.

Net Income:

The Company reported net income of $47,000 (per share: $0.01 basic and diluted) for the second quarter of fiscal 2007, versus net income of $198,000 (per share: $0.04 basic and diluted) for the same period of fiscal 2006.

For the six months ended March 31, 2007, net income was $178,000 (per share: $0.04 basic and diluted) compared to net income of $221,000 (per share: $0.05 basic and diluted) for the first six months of fiscal 2006.

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

Liquidity and Capital Resources:

The Company generated $0.8 million in cash from operations through the first six months of fiscal 2007, compared to cash used by operations of $0.5 million for the same period last year. Increases in inventories were $1.7 million as a result of establishing safety stock levels related to the start-up of new projects. Increased cash resulted from a reduction of accounts receivable of $1.4 million. Accounts payable increased $0.6 million in the first six months of fiscal 2007, compared to the same period last year, primarily due to an increase in materials purchased.

Net cash used in investing activities was $1.6 million for the first six months of fiscal 2007, primarily related to the purchase of automation equipment to support two new wipe converting lines installed in fiscal 2006.

Net cash provided by financing activities was $0.8 million for the first six months of fiscal 2007, 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 49,100 shares were purchased for an aggregate purchase price of $0.3 million from approval of the plan through June 30, 2006, at which time the plan expired.

The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of March 31, 2007, cash recorded on the balance sheet was $8,161.

As of May 14, 2007, the Company had approximately $8.0 million available and $7.0 million outstanding under the revolving credit line pursuant to its 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, 2007, the Company was in compliance with all of its debt covenants under the credit facility. The credit facility expires on May 18, 2008.

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, 2007 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.

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 23 in Item 7A, Quantitative and Qualitative Disclosure About Market Risk, of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission for the year ended September 30, 2006. Management believes that as of March 31, 2007, 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, 2007.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2007 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

The Company has not identified any material changes from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended September 30, 2006.

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, 2007	/s/ Louis LeCalsey, III
	Louis LeCalsey, III
	President and Chief Executive Officer
Date: May 15, 2007	/s/ Michael B. Wheeler
	Michael B. Wheeler
	Executive Vice President, Chief Financial Officer and
	Chief Operating Officer

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