Tufco (TFCO) 10-Q 2007 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, 2007

Commission file number0-21018

TUFCO TECHNOLOGIES, INC.

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

PO BOX 23500 Green Bay, WI 54305
(Address of principal executive offices)(Zip code)

(920) 336-0054
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

TUFCO TECHNOLOGIES, INC.

Index

		Page
		Number
PART I:	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2007 and September 30, 2006		3
	Condensed Consolidated Statements of Income for the three months and nine months ended June 30, 2007 and 2006		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 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 2.	Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 3.	Defaults Upon Senior Securities		16
Item 4.	Submission of Matters to a Vote of Security Holders		17
Item 5.	Other Information		17
Item 6.	Exhibits		17
SIGNATURES			18
Third Amendment to the Credit Agreement
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

	June 30,
	2007			September 30,
	(Unaudited)			2006*
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	6,368		$	5,267
Accounts receivable-net		13,678,286			15,078,707
Inventories		18,070,227			14,125,417
Prepaid expenses and other current assets		969,187			635,243
Income tax receivable		—			46,893
Deferred income taxes		490,637			490,637
Total current assets		33,214,705			30,382,164
PROPERTY, PLANT AND EQUIPMENT-Net		19,432,905			18,940,513
GOODWILL		7,211,575			7,211,575
OTHER ASSETS-Net		132,926			154,466
TOTAL	$	59,992,111		$	56,688,718
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable	$	13,555,078		$	9,922,742
Accrued payroll, vacation and payroll taxes		760,485			507,923
Other current liabilities		646,769			542,366
Income taxes payable		245,709			—
Total current liabilities		15,208,041			10,973,031
LONG-TERM DEBT		5,633,333			7,073,011
DEFERRED INCOME TAXES		2,076,856			2,102,950
STOCKHOLDERS’ EQUITY:
Common Stock: $.01 par value: 9,000,000 shares authorized; 4,708,741 and 4,708,341 shares issued		47,087			47,083
Additional paid-in capital		25,295,370			25,226,526
Retained earnings		12,873,230			12,407,923
Treasury stock, 173,097 common shares at cost		(1,141,806	)		(1,141,806	)
Total stockholders’ equity		37,073,881			36,539,726
TOTAL	$	59,992,111		$	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						NINE MONTHS ENDED
	June 30,						June 30,
	2007			2006			2007			2006
NET SALES	$	29,814,897		$	27,428,347		$	84,419,637		$	71,830,435
COST OF SALES		28,164,798			25,777,027			80,291,470			67,818,562
GROSS PROFIT		1,650,099			1,651,320			4,128,167			4,011,873
OPERATING EXPENSES:
Selling, general & administrative		1,075,256			1,100,623			3,027,787			3,112,209
Gain on sale of property, plant and equipment		—			—			(145	)		—
OPERATING INCOME		574,843			550,697			1,100,525			899,664
OTHER INCOME (EXPENSE):
Interest expense		(132,862	)		(106,213	)		(382,311	)		(191,014	)
Interest income and other income (expense)		1,494			(4,476	)		18,310			61,859
INCOME BEFORE INCOME TAXES		443,475			440,008			736,524			770,509
INCOME TAX EXPENSE		156,342			126,483			271,217			235,983
NET INCOME	$	287,133		$	313,525		$	465,307		$	534,526
BASIC EARNINGS PER SHARE:
Net Income	$	0.06		$	0.07		$	0.10		$	0.12
DILUTED EARNINGS PER SHARE:
Net Income	$	0.06		$	0.07		$	0.10		$	0.12
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		4,535,640			4,535,244			4,535,376			4,539,105
Diluted		4,572,142			4,553,085			4,562,988			4,549,605

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,
	2007			2006
OPERATING ACTIVITIES
Net income	$	465,307		$	534,526
Noncash items in net income:
Depreciation and amortization of property, plant and equipment		1,624,604			1,441,170
Amortization		15,858			15,858
Non-monetary reimbursement of cost		(515,000	)		—
Deferred income taxes		(26,094	)		(44,309	)
Gain on sale of property, plant and equipment		(145	)		—
Stock-based compensation expense		66,564			113,037
Changes in operating working capital:
Accounts receivable		1,400,421			(5,372,582	)
Inventories		(3,944,810	)		(6,100,077	)
Prepaid expenses and other assets		(328,262	)		(287,453	)
Accounts payable		4,019,024			7,514,451
Accrued and other current liabilities		356,965			183,378
Income taxes payable/receivable		292,602			986,333
Net cash provided (used) by operating activities		3,427,034			(1,015,668	)
INVESTING ACTIVITIES
Additions to property, plant and equipment		(1,588,121	)		(4,493,140	)
Proceeds from disposals of property, plant and equipment		500			—
Payment of construction payable		(400,918	)		(309,249	)
Net cash used by investing activities		(1,988,539	)		(4,802,389	)
FINANCING ACTIVITIES
Net (repayments) borrowings of debt		(1,439,678	)		6,037,364
Proceeds from exercise of stock options		2,284			—
Purchase of treasury stock		—			(68,539	)
Net cash (used) provided by financing activities		(1,437,394	)		5,968,825
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,101			150,768
CASH AND CASH EQUIVALENTS:
Beginning of period		5,267			5,672
End of period	$	6,368		$	156,440
NONCASH SUPPLEMENTAL INFORMATION:
Construction payable	$	14,230		$	267,594

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, 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 nine-month periods ended June 30, 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 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.

6

Notes to condensed consolidated financial statements—(continued)

	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 36,502 and 17,841 shares for the three months ended June 30, 2007 and 2006, respectively. For the nine months ended June 30, 2007 and 2006, the common stock equivalents from dilutive stock options outstanding were 27,612 and 10,500, respectively. During the three months ended June 30, 2007 and 2006, options to purchase 40,500 and 255,750 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, 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:

	June 30,		September 30,
	2007		2006
Raw materials	$	12,432,094	$	11,021,598
Finished goods		5,638,133		3,103,819
Total inventories	$	18,070,227	$	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 321,000 shares are available for future grants as of June 30, 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 nine months ended June 30, 2007 is presented below:

				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at September 30, 2006		460,950		$	7.47
New grants		17,000		$	7.90
Exercised		(400	)	$	5.71
Forfeited or expired		(181,250	)
Outstanding at June 30, 2007		296,300		$	6.74
Exercisable at June 30, 2007		286,467		$	6.70

The following table summarizes the Company’s share-based compensation awards during the three and nine months ended June 30, 2007 and 2006:

	Three Months Ended				Nine Months Ended
	June 30		June 30,		June 30,		June 30,
	2007		2006		2007		2006
Total pre-tax share-based compensation	$	36,189	$	73,749	$	66,564	$	113,037
Weighted-average grant date fair value	$	8.05	$	6.60	$	2.05	$	3.86
Total unrecognized compensation cost	$	9,051	$	15,332	$	9,051	$	50,055
Remaining weighted-average period cost will be recognized over	3 Months		3 Months		3 Months		15 Months
Proceeds from options exercise	$	2,284		—	$	2,284		—
Intrinsic value of options exercise	$	968		—	$	968		—

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
June 30, 2007	Manufacturing		Imaging		and Other			Consolidated
Net sales	$	24,228,368	$	5,586,529	$	—		$	29,814,897
Gross profit		1,204,136		445,963		—			1,650,099
Operating income (loss)		457,456		223,761		(106,374	)		574,843
Depreciation and amortization expense		488,748		54,766		15,164			558,678
Capital expenditures		369,691		—		—			369,691

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

Nine Months Ended	Contract		Business		Corporate
June 30, 2007	Manufacturing		Imaging		And Other			Consolidated
Net sales	$	66,539,178	$	17,880,459	$	—		$	84,419,637
Gross profit		2,762,869		1,365,298		—			4,128,167
Operating income (loss)		760,576		638,170		(298,221	)		1,100,525
Depreciation and amortization expense		1,430,443		164,526		45,493			1,640,462
Capital expenditures		1,554,242		33,879		—			1,588,121

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		4,412,605		80,535		—			4,493,140

9

Notes to condensed consolidated financial statements—(continued)

	Contract		Business		Corporate
June 30, 2007	Manufacturing		Imaging		and Other		Consolidated
Assets:
Inventories	$	15,443,028	$	2,627,199	$	—	$	18,070,227
Property, plant and equipment-net		17,208,156		2,211,152		13,597		19,432,905
Accounts receivable and other (including goodwill)		15,418,542		5,471,319		1,599,118		22,488,979
Total assets	$	48,069,726	$	10,309,670	$	1,612,715	$	59,992,111

	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 Company depends on two Contract Manufacturing customers for a significant portion of its business. 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						Nine Months Ended						Period-to-Period
	June 30,						Change						June 30,						Change
	2007			2006			$			%			2007			2006			$			%
Net Sales	$	29,815		$	27,428		$	2,387			9		$	84,420		$	71,830		$	12,590			18
Gross Profit		1,650			1,651			(1	)		(0.1	)		4,128			4,012			116			3
		5.5	%		6.0	%								4.9	%		5.6	%
Operating Expenses		1,075			1,101			(26	)		(2	)		3,028			3,112			(84	)		(3	)
		3.6	%		4.0	%								3.6	%		4.3	%
Operating Income		575			551			24			4			1,100			900			200			22
		1.9	%		2.0	%								1.3	%		1.3	%
Interest Expense		133			106			27			25			382			191			191			100
		0.4	%		0.4	%								0.5	%		0.3	%
Income Before Income Taxes		443			440			3			1			737			771			(34	)		(4	)
		1.5	%		1.6	%								0.9	%		1.1	%
Income Tax Expense		156			126			30			24			271			236			35			15
		0.5	%		0.5	%								0.3	%		0.3	%
Net Income	$	287		$	314			(27	)		(9	)	$	465		$	535			(70	)		(13	)
		1.0	%		1.1	%								0.6	%		0.7	%

12

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

	Three Months Ended
	June 30,
	2007					2006					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$			%
Net Sales
Contract Manufacturing and printing	$	24,228		81	%	$	21,051		77	%	$	3,177			15	%
Business Imaging paper products		5,587		19	%		6,377		23	%		(790	)		(12	%)
Net Sales	$	29,815		100	%	$	27,428		100	%	$	2,387			9	%

	2007					2006					Period-to-Period
			% of					Margin			Change
	Amount		Total			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	1,204		5	%	$	1,015		5	%	$	189			19	%
Business Imaging paper products		446		8	%		636		10	%		(190	)		(30	%)
Gross Profit	$	1,650		6	%	$	1,651		6	%	$	(1	)		(0.1	%)

	Nine Months Ended
	June 30,
	2007					2006					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$			%
Net Sales
Contract Manufacturing and printing	$	66,539		79	%	$	52,116		73	%	$	14,423			28	%
Business Imaging paper products		17,881		21	%		19,714		27	%		(1,833	)		(9	%)
Net Sales	$	84,420		100	%	$	71,830		100	%	$	12,590			18	%

	2007					2006						Period-to-Period
			% of					Margin			Change
	Amount		Total			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	2,763		4	%	$	2,195		4	%	$	568			26	%
Business Imaging paper products		1,365		8	%		1,817		9	%		(452	)		(25	%)
Gross Profit	$	4,128		5	%	$	4,012		6	%	$	116			3	%

13

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

Net Sales:

Consolidated net sales increased $2.4 million (9%) to $29.8 million in the third quarter of fiscal 2007, when compared to the same period last year. This was due to an increase of $3.2 million (15%) in the Contract Manufacturing segment and a decrease of $0.8 million (12%) in the Business Imaging segment.

For the nine months ended June 30, 2007, sales increased $12.6 million (18%) when compared to the first nine months of fiscal 2006. This was due to an increase of $14.4 million (28%) in the Contract Manufacturing segment and a decrease of $1.8 million (9%) in the Business Imaging segment.

The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 29% of the Company’s total net sales in the third quarter of fiscal 2007 and 32% for the first nine months of fiscal 2007, compared to 43% and 49% for the same periods in fiscal 2006. The second customer accounted for 44% of the Company’s total net sales in the third quarter of fiscal 2007 and 37% for the first nine months of fiscal 2007, compared to 20% and 11% for the same periods in fiscal 2006.

In Contract Manufacturing, the increase in revenues was primarily due to new wipes converting contracts that were not in production for the entire first nine months 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 remained relatively unchanged for the third quarter of fiscal 2007 when compared to the third quarter of fiscal 2006. Gross profit of the Contract Manufacturing segment increased $189,000 (19%) due to an increase in toll revenue of $0.8 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 $190,000 (30%) in the Business Imaging segment, largely due to the decrease in net sales and strong price competition for the segment’s products.

For the nine months ended June 30, 2007, gross profit increased $116,000 (3%) when compared to the same period last year. Contract Manufacturing increased $568,000 (26%), due to an increase in toll revenue of $3.9 million offset by higher than standard labor and overhead as mentioned above. Business Imaging decreased $452,000 (25%) as a result of decreased net sales and strong price competition for the segment’s products.

Operating Expenses:

Selling, general and administrative expenses decreased $26,000 (2%) for the third quarter of fiscal 2007 when compared to the same period of fiscal 2006 and decreased $84,000 (3%) when compared to the first nine months of fiscal 2006.

Interest Expense and Other Income (Expense) net:

Interest expense increased $27,000 to $133,000 for the third quarter of fiscal 2007 compared to the same period of fiscal 2006 and increased $191,000 to $382,000 for the first nine months of fiscal 2007 compared to the same period of fiscal 2006 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.

14

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

Net Income:

The Company reported net income of $287,000 (per share: $0.06 basic and diluted) for the third quarter of fiscal 2007, versus net income of $314,000 (per share: $0.07 basic and diluted) for the same period of fiscal 2006.

For the nine months ended June 30, 2007, net income was $465,000 (per share: $0.10 basic and diluted) compared to net income of $535,000 (per share: $0.12 basic and diluted) for the first nine months of fiscal 2006.

Liquidity and Capital Resources:

The Company generated $3.4 million in cash from operations through the first nine months of fiscal 2007, compared to cash used by operations of $1.0 million for the same period last year. Increases in inventories were $3.9 million, primarily related to an inventory build-up associated with a new product launch. This was offset by an increase in accounts payable of $4.0 million in the first nine months of fiscal 2007, compared to the same period last year, primarily due to the increase in materials purchased. Increased cash from operations resulted from a reduction of accounts receivable of $1.4 million.

Net cash used in investing activities was $2.0 million for the first nine 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 used by financing activities was $1.4 million for the first nine months of fiscal 2007, as a result of the Company paying down its revolving credit line. 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 June 30, 2007, cash recorded on the balance sheet was $6,368.

On August 14, 2007, 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, 2009.

As of August 14, 2007, the Company had approximately $7.5 million available and $7.5 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 June 30, 2007, 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, 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 June 30, 2007, there has been no material change to this information.

15

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, 2007.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3. Defaults Upon Senior Securities

None

16

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, 2007.
(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		4,529,560		103,911
Samuel J. Bero		4,536,132		97,339
C. Hamilton Davison, Jr.		4,614,480		18,991
Louis LeCalsey, III		4,548,227		85,244
Brian Kelly		4,613,818		19,653
Seymour S. Preston, III		4,615,480		17,991

(d) Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. Exhibits

10.1	Third 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

17

SIGNATURES

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

	TUFCO TECHNOLOGIES, INC.
Date: August 14, 2007	/s/ Louis LeCalsey, III
	Louis LeCalsey, III
	President and Chief Executive Officer

Date: August 14, 2007	/s/ Michael B. Wheeler
	Michael B. Wheeler
	Executive Vice President, Chief Financial Officer and Chief Operating Officer

18