UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2011
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-21018
TUFCO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| 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.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 February 14, 2012 | |
| Common Stock, par value $0.01 per share | 4,308,947 |
Index
2
| ITEM 1. | Condensed Consolidated Financial Statements |
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | September 30, | |||||||
| December 31, | September 30, | |||||||
| 2011 | 2011 | |||||||
Assets | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 9,745 | $ | 8,300 | ||||
Accounts receivable-net | 13,597,827 | 15,362,710 | ||||||
Inventories-net | 17,765,644 | 14,200,576 | ||||||
Prepaid expenses and other current assets | 969,073 | 831,000 | ||||||
Deferred income taxes | 503,683 | 503,683 | ||||||
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Total current assets | 32,845,972 | 30,906,269 | ||||||
PROPERTY, PLANT AND EQUIPMENT-Net | 16,878,416 | 17,027,006 | ||||||
GOODWILL | 7,211,575 | 7,211,575 | ||||||
OTHER ASSETS-Net | 133,592 | 136,047 | ||||||
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TOTAL | $ | 57,069,555 | $ | 55,280,897 | ||||
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Liabilities and Stockholders’ Equity | ||||||||
CURRENT LIABILITIES: | ||||||||
Revolving line of credit | $ | 6,499,985 | $ | 6,449,133 | ||||
Current portion of note payable | 262,758 | 259,017 | ||||||
Accounts payable | 11,904,794 | 8,968,222 | ||||||
Accrued payroll, vacation and payroll taxes | 544,508 | 571,319 | ||||||
Other current liabilities | 308,356 | 452,186 | ||||||
Income taxes payable | 17,858 | 17,858 | ||||||
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Total current liabilities | 19,538,259 | 16,717,735 | ||||||
LONG-TERM PORTION OF NOTE PAYABLE | 700,841 | 767,950 | ||||||
DEFERRED INCOME TAXES | 1,720,961 | 2,085,432 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Common stock, $.01 par value—9,000,000 shares authorized; 4,708,741 shares issued | 47,087 | 47,087 | ||||||
Non-voting common stock, $.01 par value – 2,000,000 shares authorized and unissued | — | — | ||||||
Preferred stock, $.01 par value – 1,000,000 shares authorized and unissued | — | — | ||||||
Additional paid-in capital | 25,558,422 | 25,549,239 | ||||||
Retained earnings | 11,661,442 | 12,270,911 | ||||||
Treasury stock—399,794 common shares at cost | (2,157,457 | ) | (2,157,457 | ) | ||||
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Total stockholders’ equity | 35,109,494 | 35,709,780 | ||||||
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TOTAL | $ | 57,069,555 | $ | 55,280,897 | ||||
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3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| September 30, | September 30, | |||||||
| THREE MONTHS ENDED DECEMBER 31, | ||||||||
| 2011 | 2010 | |||||||
NET SALES | $ | 25,676,600 | $ | 24,161,110 | ||||
COST OF SALES | 25,242,257 | 23,058,234 | ||||||
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GROSS PROFIT | 434,343 | 1,102,876 | ||||||
OPERATING EXPENSES: | ||||||||
Selling, general & administrative | 1,346,670 | 1,339,916 | ||||||
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OPERATING LOSS | (912,327 | ) | (237,040 | ) | ||||
OTHER (EXPENSE) INCOME: | ||||||||
Interest expense | (67,591 | ) | (64,365 | ) | ||||
Interest income and other income | 7,879 | 17,166 | ||||||
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LOSS BEFORE INCOME TAXES | (972,039 | ) | (284,239 | ) | ||||
INCOME TAX BENEFIT | (362,570 | ) | (106,021 | ) | ||||
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NET LOSS | $ | (609,469 | ) | $ | (178,218 | ) | ||
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BASIC LOSS PER SHARE: | ||||||||
Net Loss | $ | (0.14 | ) | $ | (0.04 | ) | ||
DILUTED LOSS PER SHARE: | ||||||||
Net Loss | $ | (0.14 | ) | $ | (0.04 | ) | ||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
Basic | 4,308,947 | 4,308,947 | ||||||
Diluted | 4,308,947 | 4,308,947 | ||||||
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| September 30, | September 30, | |||||||
| THREE MONTHS ENDED December 31, | ||||||||
| 2011 | 2010 | |||||||
OPERATING ACTIVITIES | ||||||||
Net loss | $ | (609,469 | ) | $ | (178,218 | ) | ||
Noncash items in net loss: | ||||||||
Depreciation and amortization of property, plant and equipment | 734,524 | 715,875 | ||||||
Deferred income taxes | (364,471 | ) | (106,020 | ) | ||||
Stock-based compensation expense | 9,183 | 5,658 | ||||||
Changes in operating working capital: | ||||||||
Accounts receivable | 1,764,883 | 860,756 | ||||||
Inventories | (3,565,068 | ) | (3,080,958 | ) | ||||
Prepaid expenses and other assets | (135,618 | ) | (207,008 | ) | ||||
Accounts payable | 2,936,572 | 212,913 | ||||||
Accrued and other current liabilities | (170,641 | ) | (65,597 | ) | ||||
Income taxes receivable | — | 87 | ||||||
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Net cash provided by (used in) operating activities | 599,895 | (1,842,512 | ) | |||||
INVESTING ACTIVITIES | ||||||||
Additions to property, plant and equipment | (585,934 | ) | (267,675 | ) | ||||
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Net cash used in investing activities | (585,934 | ) | (267,675 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net borrowings of revolving debt | 50,852 | 2,168,965 | ||||||
Principal payments on note payable | (63,368 | ) | (59,835 | ) | ||||
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Net cash (used in) provided by financing activities | (12,516 | ) | 2,109,130 | |||||
NET INCREASE (DECREASE) IN CASH | 1,445 | (1,057 | ) | |||||
CASH: | ||||||||
Beginning of period | 8,300 | 7,899 | ||||||
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End of period | $ | 9,745 | $ | 6,842 | ||||
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NONCASH SUPPLEMENTAL INFORMATION: | ||||||||
Change in construction payable | $ | — | $ | 116,658 | ||||
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended December 31, 2011 and 2010
(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 period ended December 31, 2011 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 2011 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 December 31, 2011 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, 2011.
| 2. | Financial Instruments |
Financial instruments consist of cash, receivables, payables, debt, and letters of credit. Their carrying values are estimated to approximate their fair values unless otherwise indicated due to their short maturities, variable interest rates plus a margin applicable to the credit risk associated with the revolving line of credit and comparable borrowing costs for equipment loans.
| 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. During the three months ended December 31, 2011 and 2010, options to purchase 247,800 and 331,150 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive.
| 4. | Inventories |
Inventories consist of the following:
| September 30, | September 30, | |||||||
| December 31, 2011 | September 30, 2011 | |||||||
Raw materials | $ | 13,810,825 | $ | 10,908,178 | ||||
Finished goods | 3,954,819 | 3,292,398 | ||||||
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Total inventories | $ | 17,765,644 | $ | 14,200,576 | ||||
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6
Notes to condensed consolidated financial statements–(continued)
| 5. | Goodwill |
As previously disclosed, the Company tests goodwill annually at the reporting unit level for impairment as of July 1. The operating segments herein also represent the Company’s reporting units for goodwill purposes. The Company uses a discounted cash flow analysis to estimate reporting unit fair values and also considers multiples of relevant companies. In determining the fair values of the reporting units, the Company was required to make certain assumptions and cannot predict what future events may occur that could adversely affect the reported value of its goodwill.
At Contract Manufacturing, reduced sales volume and shifts in the segment’s product sales mix and related operating inefficiencies resulted in reduced gross margin. Also, Green Bay relocated its warehouse operation from a third party warehouse to a self-operated warehouse. Savings from this move are expected to begin in the second quarter and continue thereafter. The Business Imaging segment experienced escalating paper and operating costs, which resulted in reduced gross margin. The Company is focused on increasing sales volume, improving sales product mix, new product development and cost reduction activities. Some activities will result in one-time expenses, but increased profitability in the long-term is expected.
Management noted no indicators of impairment during the three months ended December 31, 2011 to indicate that the annual goodwill impairment test should be accelerated. However, there can be no assurance that valuation multiples will not decline, growth rates will not be lower than expected, discount rates will not increase, or the projected cash flows of the individual reporting units will not decline.
7
Notes to condensed consolidated financial statements–(continued)
| 6. | Revolving Line of Credit and Note Payable |
The Company amended its credit agreement effective September 30, 2011 to extend its termination date to January 31, 2013 and modified the required levels of after tax net income (or loss) under its financial covenants for periods commencing September 30, 2011 and thereafter. The amount available for borrowing under the revolving line of credit facility is $10.0 million. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. Borrowings under the new credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.
Availability under the facility is based upon specified percentages of eligible accounts receivable and inventory. The credit agreement is unsecured. The credit agreement contains certain covenants, including requirements to maintain a minimum tangible net worth and net income (or net loss) within specified levels.
For the fiscal quarter ended December 31, 2011, the Company received a waiver from its lender of compliance with a covenant under its credit agreement requiring it to maintain a specified level of after tax net income. In consideration of the waiver, the Company has agreed to grant a security interest to the lender in its receivables and inventory in a form reasonably acceptable to the lender. The Company is in discussions with its lender to modify financial covenants for future quarters. If the Company is unable to obtain a modification of its covenants for future periods, the Company may require future waivers and there can be no assurance that any such future waivers can be obtained.
As of December 31, 2011, the Company had approximately $3.5 million available and $6.5 million outstanding under its revolving credit line pursuant to its credit agreement.
| 7. | Segment Information |
The Company 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 separates its operations and prepares information for management use by the market segment aligned with the Company’s products and services. Corporate costs, such as interest income, interest expense and income tax (benefit) expense are recorded under the Corporate and Other segment. Such market segment information is summarized below. The Contract Manufacturing segment provides services to multinational consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.
Substantially all of the Company’s revenues are attributed to domestic external customers. There are no long-lived assets located outside of the United States.
8
Notes to condensed consolidated financial statements–(continued)
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Three Months Ended | Contract | Business | Corporate | |||||||||||||
December 31, 2011 | Manufacturing | Imaging | and Other | Consolidated | ||||||||||||
Net sales | $ | 18,124,609 | $ | 7,551,991 | $ | — | $ | 25,676,600 | ||||||||
Gross profit | 169,519 | 264,824 | — | 434,343 | ||||||||||||
Operating (loss) | (179,574 | ) | (55,578 | ) | (677,175 | ) | (912,327 | ) | ||||||||
Depreciation and amortization expense | 697,429 | 36,972 | 123 | 734,524 | ||||||||||||
Capital expenditures | 585,934 | — | — | 585,934 | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Three Months Ended | Contract | Business | Corporate | |||||||||||||
December 31, 2010 | Manufacturing | Imaging | and Other | Consolidated | ||||||||||||
Net sales | $ | 18,596,760 | $ | 5,564,350 | $ | — | $ | 24,161,110 | ||||||||
Gross profit | 815,935 | 286,941 | — | 1,102,876 | ||||||||||||
Operating income (loss) | 417,093 | (6,960 | ) | (647,173 | ) | (237,040 | ) | |||||||||
Depreciation and amortization expense | 685,737 | 29,938 | 200 | 715,875 | ||||||||||||
Capital expenditures | 142,500 | 125,175 | — | 267,675 | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Contract | Business | Corporate | ||||||||||||||
December 31, 2011 | Manufacturing | Imaging | and Other | Consolidated | ||||||||||||
Assets: | ||||||||||||||||
Inventories-net | $ | 13,552,642 | $ | 4,213,002 | $ | — | $ | 17,765,644 | ||||||||
Property, plant and equipment-net | 14,866,398 | 2,009,844 | 2,174 | 16,878,416 | ||||||||||||
Accounts receivable and other (including goodwill) | 15,132,655 | 6,645,821 | 647,019 | 22,425,495 | ||||||||||||
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Total assets | $ | 43,551,695 | $ | 12,868,667 | $ | 649,193 | $ | 57,069,555 | ||||||||
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| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Contract | Business | Corporate | ||||||||||||||
September 30, 2011 | Manufacturing | Imaging | and Other | Consolidated | ||||||||||||
Assets: | ||||||||||||||||
Inventories-net | $ | 11,010,125 | $ | 3,190,451 | $ | — | $ | 14,200,576 | ||||||||
Property, plant and equipment-net | 14,977,893 | 2,046,816 | 2,297 | 17,027,006 | ||||||||||||
Accounts receivable and other (including goodwill) | 16,837,134 | 6,568,152 | 648,029 | 24,053,315 | ||||||||||||
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Total assets | $ | 42,825,152 | $ | 11,805,419 | $ | 650,326 | $ | 55,280,897 | ||||||||
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9
| 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 2012 results in comparison to fiscal 2011 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 the Company’s ability to increase sales, changes in customer demand for its products, cancellation of production agreements by significant customers including two Contract Manufacturing customers it depends upon for a significant portion of its business, its ability to meet competitors’ prices on products to be sold under these production agreements, the effects of the economy in general, including the slow economic recovery from the recent economic downturn, the Company’s ability to comply with the financial covenants in its credit facility, the Company’s inability to benefit from any general economic improvements, material increases in the cost of raw materials, competition in the Company’s product areas, the ability of management to successfully reduce operating expenses, the Company’s ability to increase sales and earnings as a result of new projects and services, the Company’s ability to successfully install new equipment on a timely basis and to improve productivity through equipment upgrades, the Company’s ability to continue to produce new products, the Company’s ability to return to profitability and then continue to improve profitability, the Company’s ability to successfully attract new customers through its sales initiatives and strengthening its new business development efforts, and the Company’s ability to improve the run rates for its products. Therefore, the financial data for the periods presented may not be indicative of the Company’s future financial condition or results of operations.
General Information:
Tufco is a leader in providing diversified contract wet and dry wipes converting, as well as specialty printing services and business imaging products. The Company works closely with its customers to develop products or perform services which meet or exceed the customers’ quality standards, and then uses the Company’s operating efficiencies and technical expertise to supplement or replace its customers’ own production and distribution functions.
The Company’s technical proficiencies include wide web flexographic printing, wet and dry wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging and quality and microbiological process management and the manufacture and distribution of business imaging paper products.
The Company has manufacturing operations in Green Bay, WI, which is ISO certified, and Newton, NC. The Company’s corporate headquarters, including corporate support services, are located in Green Bay, WI.
10
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Result 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):
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Three Months Ended | Period-to-Period | |||||||||||||||
| December 31, | Change | |||||||||||||||
| 2011 | 2010 | $ | % | |||||||||||||
Net Sales | $ | 25,677 | $ | 24,161 | $ | 1,516 | 6 | % | ||||||||
Gross Profit | 434 | 1,103 | (669 | ) | (61 | %) | ||||||||||
| 1.7 | % | 4.6 | % | |||||||||||||
Operating Expenses | 1,347 | 1,340 | 7 | 1 | % | |||||||||||
| 5.2 | % | 5.5 | % | |||||||||||||
Operating Loss | (912 | ) | (237 | ) | (675 | ) | NM | |||||||||
| (3.6 | %) | (1.0 | %) | |||||||||||||
Interest and Other-Net | 60 | 47 | 13 | 28 | % | |||||||||||
| 0.2 | % | 0.2 | % | |||||||||||||
Loss Before Income Taxes | (972 | ) | (284 | ) | (688 | ) | NM | |||||||||
| (3.8 | %) | (1.2 | %) | |||||||||||||
Income Tax Benefit | (363 | ) | (106 | ) | (257 | ) | NM | |||||||||
| (1.4 | %) | (0.4 | %) | |||||||||||||
Net Loss | $ | (609 | ) | $ | (l78 | ) | (431 | ) | NM | |||||||
| (2.4 | %) | (0.7 | %) | |||||||||||||
Basic and Diluted Loss per Share | $ | (0.14 | ) | $ | (0.04 | ) | ||||||||||
NM = Not Meaningful
| September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | Period-to-Period | ||||||||||||||||||||||
| % of | % of | Change | ||||||||||||||||||||||
| Amount | Total | Amount | Total | $ | % | |||||||||||||||||||
Net Sales | ||||||||||||||||||||||||
Contract Manufacturing and printing | $ | 18,125 | 71 | % | $ | 18,597 | 77 | % | $ | (472 | ) | (3 | %) | |||||||||||
Business Imaging paper products | 7,552 | 29 | % | 5,564 | 23 | % | 1,988 | 36 | % | |||||||||||||||
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Net Sales | $ | 25,677 | 100 | % | $ | 24,161 | 100 | % | $ | 1,516 | 6 | % | ||||||||||||
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| September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
| 2011 | 2010 | Period-to-Period | ||||||||||||||||||||||
| Margin | % of | Change | ||||||||||||||||||||||
| Amount | % | Amount | Total | $ | % | |||||||||||||||||||
Gross Profit | ||||||||||||||||||||||||
Contract Manufacturing and printing | $ | 169 | 1 | % | $ | 816 | 4 | % | $ | (647 | ) | (79 | %) | |||||||||||
Business Imaging paper products | 265 | 4 | % | 287 | 5 | % | (22 | ) | (8 | %) | ||||||||||||||
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Gross Profit | $ | 434 | 2 | % | $ | 1,103 | 5 | % | $ | (669 | ) | (61 | %) | |||||||||||
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11
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Result of Operations-continued |
Net Sales:
Consolidated net sales increased $1.5 million (6%) to $25.7 million in the first quarter of fiscal 2012, when compared to the same period last year. This was due to an increase of $2.0 million (36%) in the Business Imaging segment, partially offset by a decrease of $0.5 million (3%) in the Contract Manufacturing segment.
The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 19% of the Company’s total net sales in the first quarter of fiscal 2012 compared to 21% for the same period in fiscal 2011. The other significant customer accounted for 26% of the Company’s total net sales in the first quarter of fiscal 2012 compared to 38% for the same period in fiscal 2011.
The major contributor to the Company’s sales growth was increased seasonal demand within its Newton Business Imaging segment. In Contract Manufacturing, the decrease in sales was the result of reduced sales volume and shifts in the segment’s product sales mix.
Gross Profit:
Consolidated gross profit decreased $669,000 (61%) for the first quarter of fiscal 2012 when compared to the first quarter of fiscal 2011. This was primarily due to a decrease of $647,000 (79%) in the Contract Manufacturing segment and a slight decrease of $22,000 (8%) in the Business Imaging segment.
At Contract Manufacturing, reduced sales volume and shifts in the segment’s product sales mix and related operating inefficiencies resulted in reduced gross margin. Also, Green Bay relocated its warehouse operation from a third party warehouse to a self-operated warehouse. Savings from this move are expected to begin in the second quarter and continue thereafter. The Business Imaging segment experienced escalating paper and operating costs, which resulted in reduced gross margin. The Company is focused on increasing sales volume, improving sales product mix, new product development and cost reduction activities. Some activities will result in one-time expenses, but increased profitability in the long-term is expected.
Operating Expenses:
Selling, general and administrative expenses remained relatively unchanged with a slight increase of $7,000 (1%) for the first quarter of fiscal 2012 when compared to the same period in fiscal 2011.
Interest Expense and Other Income (Expense) net:
Interest expense increased $4,000 to $68,000 for the first quarter of fiscal 2012 compared to the same period in fiscal 2011 due to higher average debt outstanding as a result of the Company borrowing from its revolving credit line and obtaining a note payable to fund a portion of its increased working capital and equipment needs.
Income Tax Benefit:
Income tax benefit for the first quarter of fiscal 2012 was $363,000, compared to an income tax benefit of $106,000 for the same period of fiscal 2011. The income tax benefit for the first three months of 2012 represents a net operating loss carryforward that the Company expects to realize in the future as the deferred tax liabilities reverse.
Net Income:
The Company reported a net loss of $609,000 [per share: $(0.14) basic and diluted] for the first quarter of fiscal 2012, versus a net loss of $178,000 [per share: $(0.04) basic and diluted] for the same period in fiscal 2011.
12
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Result of Operations-continued |
Liquidity and Capital Resources:
Cash flows provided by operations were $0.6 million through the first three months of fiscal 2012, compared to cash used in operations of $1.8 million for the same period last year. Accounts receivable decreased $1.8 million for the first three months of fiscal 2012 while accounts payable increased $2.9 million in the first three months of fiscal 2012 compared to the same period last year, largely due to an increase in the volume of raw materials purchased. Inventories increased $3.6 million, primarily related to a planned build-up in inventory to cover the change out period during the startup of a new component for the canister line in the second quarter and to support customer demand. Depreciation was $0.7 million for the first three months of fiscal 2012.
Net cash used in investing activities was $0.6 million for the first three months of fiscal 2012, primarily related to capital expenditures to support ongoing operational needs.
Net cash used in financing activities was $13,000 for the first three months of fiscal 2012, consisting of $51,000 of cash provided to the Company from borrowing under its revolving credit line to fund a portion of its increased working capital and equipment needs and $63,000 of cash used to make principal payments on a note payable related to a purchase of equipment made in June, 2010.
The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of December 31, 2011, cash recorded on the balance sheet was $9,745.
The Company amended its credit agreement effective September 30, 2011 to extend its termination date to January 31, 2013 and modified the required levels of after tax net income (or loss) under its financial covenants for periods commencing September 30, 2011 and thereafter. The amount available for borrowing under the revolving line of credit facility is $10.0 million. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. It is also the Company’s policy to classify borrowings under the revolving line of credit as current based on how it manages working capital. Borrowings under the new credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.
Availability under the facility is based upon specified percentages of eligible accounts receivable and inventory. The credit agreement is unsecured. The credit agreement contains certain covenants, including requirements to maintain a minimum tangible net worth and net income (or net loss) within specified levels. For the fiscal quarter ended December 31, 2011, the Company received a waiver from its lender of compliance with a covenant under its credit agreement requiring it to maintain a specified level of after tax net income. In consideration of the waiver, the Company has agreed to grant a security interest to the lender in its receivables and inventory in a form reasonably acceptable to the lender. The Company is in discussions with its lender to modify financial covenants for future quarters. If the Company is unable to obtain a modification of its covenants for future periods, the Company may require future waivers and there can be no assurance that any such future waivers can be obtained. As of December 31, 2011, the Company was otherwise in compliance with all of its covenants under the credit agreement, as amended.
As of February 10, 2012, the Company had approximately $1.7 million available and $8.3 million outstanding under its revolving credit line pursuant to its credit agreement.
Management believes that the Company’s operating cash flow, together with amounts available under its credit agreement, are adequate to service the Company’s current obligations as of December 31, 2011.
The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future.
Off Balance Sheet Arrangements:
The Company has no Off Balance Sheet Arrangements (as defined in Item 303(a)(4) of Regulation S-K).
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| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
A smaller reporting company is not required to provide the information required by this Item.
| ITEM 4. | Controls and Procedures |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) were effective as of the end of the Company’s fiscal quarter ended December 31, 2011.
There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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| PART II. | OTHER INFORMATION |
| ITEM 1. | Legal Proceedings |
The Company is subject to lawsuits, investigations, and potential claims arising out of the ordinary conduct of its business. The Company is not currently involved in any material litigation.
| ITEM 1A. | Risk Factors |
A smaller reporting company is not required to provide the information required by this Item.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| None |
| ITEM 3. | Defaults Upon Senior Securities |
| None |
| ITEM 4. | [Removed and Reserved] |
| ITEM 5. | Other Information |
| None |
| 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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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: February 14, 2012 | /s/ James F. Robinson | |||
James F. Robinson President and Chief Executive Officer | ||||
| Date: February 14, 2012 | /s/ Michael B. Wheeler | |||
| Michael B. Wheeler | ||||
Executive Vice President, Chief Financial Officer and Chief Operating Officer | ||||
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