Tufco (TFCO) 10-Q 2012 Q2 Quarterly report

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 endedMarch 31, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number0-21018

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 May 15, 2012
Common Stock, par value $0.01 per share	4,308,947

TUFCO TECHNOLOGIES, INC.

Index

		Page
		Number
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011		3
	Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011		4
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		16
Item 4	Controls and Procedures		16
PART II:	OTHER INFORMATION
Item 1	Legal Proceedings		17
Item 1A.	Risk Factors		17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 3.	Defaults Upon Senior Securities		17
Item 4.	Mine Safety Disclosures		17
Item 5.	Other Information		17
Item 6.	Exhibits		17
SIGNATURES			18

2

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			September 30,
	2012			2011
Assets
CURRENT ASSETS:
Cash	$	9,382		$	8,300
Accounts receivable-net		12,084,922			15,362,710
Inventories-net		17,513,866			14,200,576
Prepaid expenses and other current assets		1,023,749			831,000
Deferred income taxes		503,683			503,683
Total current assets		31,135,602			30,906,269
PROPERTY, PLANT AND EQUIPMENT-Net		16,727,250			17,027,006
GOODWILL		7,211,575			7,211,575
OTHER ASSETS-Net		131,137			136,047
TOTAL	$	55,205,564		$	55,280,897
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Revolving line of credit	$	7,032,812		$	6,449,133
Current portion of note payable		266,553			259,017
Accounts payable		10,100,057			8,968,222
Accrued payroll, vacation and payroll taxes		680,636			571,319
Other current liabilities		428,858			452,186
Income taxes payable		17,858			17,858
Total current liabilities		18,526,774			16,717,735
LONG-TERM PORTION OF NOTE PAYABLE		632,762			767,950
DEFERRED INCOME TAXES		1,423,537			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		25,567,605			25,549,239
Retained earnings		11,165,256			12,270,911
Treasury stock—399,794 common shares at cost		(2,157,457	)		(2,157,457	)
Total stockholders’ equity		34,622,491			35,709,780
TOTAL	$	55,205,564		$	55,280,897

3

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	THREE MONTHS ENDED						SIX MONTHS ENDED
	March 31,						March 31,
	2012			2011			2012			2011
NET SALES	$	24,139,087		$	28,611,305		$	49,815,687		$	52,772,415
COST OF SALES		23,416,364			26,885,917			48,658,621			49,944,150
GROSS PROFIT		722,723			1,725,388			1,157,066			2,828,265
OPERATING EXPENSES:
Selling, general & administrative		1,444,468			1,488,842			2,791,138			2,828,759
OPERATING (LOSS) INCOME		(721,745	)		236,546			(1,634,072	)		(494	)
OTHER (EXPENSE) INCOME:
Interest expense		(69,673	)		(67,900	)		(137,264	)		(132,265	)
Interest income and other income		54			31,122			7,933			48,287
(LOSS) INCOME BEFORE INCOME TAXES		(791,364	)		199,768			(1,763,403	)		(84,472	)
INCOME TAX (BENEFIT) EXPENSE		(295,178	)		74,513			(657,748	)		(31,508	)
NET (LOSS) INCOME	$	(496,186	)	$	125,255		$	(1,105,655	)	$	(52,964	)
BASIC (LOSS) INCOME PER SHARE:
Net (Loss) Income	$	(0.12	)	$	0.03		$	(0.26	)	$	(0.01	)
DILUTED (LOSS) INCOME PER SHARE:
Net (Loss) Income	$	(0.12	)	$	0.03		$	(0.26	)	$	(0.01	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		4,308,947			4,308,947			4,308,947			4,308,947
Diluted		4,308,947			4,309,609			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)

	SIX MONTHS ENDED March 31,
OPERATING ACTIVITIES	2012			2011
Net loss	$	(1,105,655	)	$	(52,964	)
Noncash items in net loss:
Depreciation and amortization of property, plant and equipment		1,473,053			1,438,822
Deferred income taxes		(661,895	)		(33,510	)
Stock-based compensation expense		18,366			11,316
Changes in operating working capital:
Accounts receivable		3,277,788			1,639,355
Inventories		(3,313,290	)		(3,720,250	)
Prepaid expenses and other assets		(187,839	)		(101,522	)
Accounts payable		1,131,835			(204,506	)
Accrued and other current liabilities		85,989			288,586
Income taxes receivable		—			87
Net cash provided by (used in) operating activities		718,352			(734,586	)
INVESTING ACTIVITIES
Additions to property, plant and equipment		(1,173,297	)		(809,528	)
Net cash used in investing activities		(1,173,297	)		(809,528	)
FINANCING ACTIVITIES
Net borrowings of revolving debt		583,679			1,664,296
Principal payments of note payable		(127,652	)		(120,534	)
Net cash provided by financing activities		456,027			1,543,762
NET INCREASE (DECREASE) IN CASH		1,082			(352	)
CASH:
Beginning of period		8,300			7,899
End of period	$	9,382		$	7,547
NONCASH SUPPLEMENTAL INFORMATION:
Change in construction payable	$	—		$	62,015

5

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and six months ended March 31, 2012 and 2011

(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, 2012 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 March 31, 2012 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. There was no effect for the three months ended March 31, 2012 and the effect was 662 shares for the three months ended March 31, 2011. During the three months ended March 31, 2012 and 2011, options to purchase 236,225 and 294,625 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. During the six months ended March 31, 2012 and 2011, options to purchase 236,225 and 296,650 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:

	March 31, 2012		September 30, 2011
Raw materials	$	13,238,398	$	10,908,178
Finished goods		4,275,468		3,292,398
Total inventories	$	17,513,866	$	14,200,576

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, shifts in product sales mix and operating inefficiencies resulted in reduced gross profit. The Business Imaging segment continues to experience increased paper costs, which have resulted in reduced gross profit. These factors at the reporting units have contributed to recurring losses for the Company as a whole. The impact of increased paper costs on gross profit has lasted longer than expected, although management still believes it to be temporary. However, a recently implemented price increase is expected to improve margins. The Company continues to focus on increasing sales volume, improving product sales mix, new product development and cost reduction activities. Some of these initiatives and activities have required start-up or one-time expenses. Business conditions have required that the Company review its estimates in the second quarter, including short-term forecasting, customer backlog, and profit initiatives.

Management noted no indicators of impairment existed during the three months and six months ended March 31, 2012, which 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. Although management’s plans and projections over the long-term have not changed, if the initiatives implemented in the second quarter do not improve operations as expected in the third quarter, it will have to reconsider whether impairment has occurred and accelerate testing during the next interim period.

6. Revolving Line of Credit

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.

On April 3, 2012, the Company entered into a Commercial Security Agreement in favor of the lender to secure obligations under the First Amended and Restated Credit Agreement. The Commercial Security Agreement grants to the lender a security interest in all of the accounts and inventory of Tufco, L.P., a subsidiary of the Company.

For the fiscal quarter ended March 31, 2012, 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 in substantially all of the assets of Tufco, L.P. to the lender in a form reasonably acceptable to the lender. The Company may require a modification or waiver of this financial covenant for future quarters. The inability to either obtain any such required modification or waiver or to refinance its credit facility, is likely to have a material adverse effect on the financial condition of the Company.

As of March 31, 2012, the Company had approximately $3.0 million available and $7.0 million outstanding under its revolving credit line pursuant to its credit agreement.

7

Notes to condensed consolidated financial statements—(continued)

7. Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due, plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets include recognition of operating losses that are available to offset future taxable income. Valuation allowances are recorded when, based on an evaluation of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realized.

As a result of the taxable loss generated for the three and six months ended March 31, 2012, the Company has recorded a long-term deferred tax asset for net operating loss carryforwards. The Company has not recorded a valuation allowance against its deferred tax assets as of March 31, 2012 based on its evaluation of the available evidence, which includes consideration of reversal patterns for long-term deferred tax liabilities. The assessment of a valuation allowance is an estimate and changes in future taxable income or loss can result in change in the assessment of a valuation allowance. In addition, if net operating loss carryforwards will not reverse and be realized over the same long-term period as the difference for depreciation on property and equipment, a change in the assessment of a valuation allowance could occur. If the Company continues to experience operating losses, it is possible that it will be necessary to reconsider its expected reversal patterns and whether the offset of the net operating loss carryforward and the deferred tax liability is still appropriate.

8. 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)

Three Months Ended	Contract		Business			Corporate
March 31, 2012	Manufacturing		Imaging			and Other			Consolidated
Net sales	$	17,761,414	$	6,377,673		$	—		$	24,139,087
Gross profit		548,374		174,349			—			722,723
Operating income (loss)		199,280		(178,541	)		(742,484	)		(721,745	)
Depreciation and amortization expense		701,792		36,615			122			738,529
Capital expenditures		582,655		4,708			—			587,363
Three Months Ended	Contract		Business			Corporate
March 31, 2011	Manufacturing		Imaging			and Other			Consolidated
Net sales	$	22,351,204	$	6,260,101		$	—		$	28,611,305
Gross profit		1,379,321		346,067			—			1,725,388
Operating income (loss)		940,107		3,868			(707,429	)		236,546
Depreciation and amortization expense		693,329		29,495			123			722,947
Capital expenditures		438,167		103,686			—			541,853
Six Months Ended	Contract		Business			Corporate
March 31, 2012	Manufacturing		Imaging			And Other			Consolidated
Net sales	$	35,886,023	$	13,929,664		$	—		$	49,815,687
Gross profit		717,893		439,173			—			1,157,066
Operating income (loss)		19,706		(234,119	)		(1,419,659	)		(1,634,072	)
Depreciation and amortization expense		1,399,221		73,587			245			1,473,053
Capital expenditures		1,168,589		4,708			—			1,173,297
Six Months Ended	Contract		Business			Corporate
March 31, 2011	Manufacturing		Imaging			And Other			Consolidated
Net sales	$	40,947,964	$	11,824,451		$	—		$	52,772,415
Gross profit		2,195,257		633,008			—			2,828,265
Operating income (loss)		1,357,200		(3,092	)		(1,354,602	)		(494	)
Depreciation and amortization expense		1,379,065		59,435			322			1,438,822
Capital expenditures		580,667		228,861			—			809,528

9

Notes to condensed consolidated financial statements—(continued)

	Contract		Business		Corporate
March 31, 2012	Manufacturing		Imaging		and Other		Consolidated
Assets:
Inventories-net	$	13,433,035	$	4,080,831	$	—	$	17,513,866
Property, plant and equipment-net		14,747,262		1,977,937		2,051		16,727,250
Accounts receivable and other (including goodwill)		14,451,323		5,868,923		644,202		20,964,448
Total assets	$	42,631,620	$	11,927,691	$	646,253	$	55,205,564
	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
Total assets	$	42,825,152	$	11,805,419	$	650,326	$	55,280,897

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 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 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 comply with the financial covenants in its credit facility, the Company’s ability to extend or refinance its credit facility upon expiration, 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.

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
	2012			2011			$			%			2012			2011			$			%
Net Sales	$	24,139		$	28,611		$	(4,472	)		(16	%)	$	49,816		$	52,772		$	(2,956	)		(6	%)
Gross Profit		723			1,725			(1,002	)		(58	%)		1,157			2,828			(1,671	)		(59	%)
		3.0	%		6.0	%								2.3	%		5.4	%
Operating Expenses		1,444			1,489			(45	)		(3	%)		2,791			2,829			(38	)		(1	%)
		6.0	%		5.2	%								5.6	%		5.4	%
Operating (Loss) Income		(721	)		237			(958	)		NM			(1,634	)		(1	)		(1,633	)		NM
		(3.0	%)		0.8	%								(3.3	%)		0.0	%
Interest and Other-Net		70			37			33			89	%		129			84			45			54	%
		0.3	%		0.1	%								0.3	%		0.2	%
(Loss) Income Before Income Taxes		(791	)		200			(991	)		NM			(1,763	)		(84	)		(1,679	)		NM
		(3.3	%)		0.7	%								(3.5	%)		(0.2	%)
Income Tax (Benefit) Expense		(295	)		75			(370	)		NM			(658	)		(31	)		(627	)		NM
		(1.2	%)		0.3	%								(1.3	%)		(0.1	%)
Net (Loss) Income	$	(496	)	$	125			(621	)		NM		$	(1,105	)	$	(53	)		(1,052	)		NM
		(2.1	%)		0.4	%								(2.2	%)		(0.1	%)
Basic and Diluted (Loss)
Income Per Share	$	(0.12	)	$	0.03								$	(0.26	)	$	(0.01	)

NM = Not Meaningful

12

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

	Three Months Ended
	March 31,
	2012					2011					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$			%
Net Sales
Contract Manufacturing and printing	$	17,761		74	%	$	22,351		78	%	$	(4,590	)		(21	%)
Business Imaging paper products		6,378		26			6,260		22			118			2	%
Net Sales	$	24,139		100	%	$	28,611		100	%	$	(4,472	)		(16	%)
	2012					2011					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	549		3	%	$	1,379		6	%	$	(830	)		(60	%)
Business Imaging paper products		174		3	%		346		6	%		(172	)		(50	%)
Gross Profit	$	723		3	%	$	1,725		6	%	$	(1,002	)		(58	%)
	Six Months Ended
	March 31,
	2012					2011					Period-to-Period
			% of					% of			Change
	Amount		Total			Amount		Total			$			%
Net Sales
Contract Manufacturing and printing	$	35,886		72	%	$	40,948		78	%	$	(5,062	)		(12	%)
Business Imaging paper products		13,930		28			11,824		22			2,106			18	%
Net Sales	$	49,816		100	%	$	52,772		100	%	$	(2,956	)		(6	%)
	2012					2011					Period-to-Period
			Margin					Margin			Change
	Amount		%			Amount		%			$			%
Gross Profit
Contract Manufacturing and printing	$	718		2	%	$	2,195		5	%	$	(1,477	)		(67	%)
Business Imaging paper products		439		3	%		633		5	%		(194	)		(31	%)
Gross Profit	$	1,157		2	%	$	2,828		5	%	$	(1,671	)		(59	%)

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

Net Sales:

Consolidated net sales decreased $4.5 million (16%) to $24.1 million in the second quarter of fiscal 2012, when compared to the same period last year. This was due to a decrease of $4.6 million (21%) in the Contract Manufacturing segment and a slight increase of $0.1 million (2%) in the Business Imaging segment.

For the six months ended March 31, 2012, net sales decreased $2.9 million (6%) when compared to the first six months of fiscal 2011. This was due to a decrease of $5.0 million (12%) in the Contract Manufacturing segment and an increase of $2.1 million (18%) in the Business Imaging segment.

The Company depends on two Contract Manufacturing customers for a significant portion of its revenue. One customer accounted for 17% of the Company’s total net sales in the second quarter of fiscal 2012 compared to 19% for the same period in fiscal 2011. This same customer accounted for 18% of the Company’s total net sales in the first six months of fiscal 2012, compared to 20% for the same period last year. The other significant customer accounted for 27% of the Company’s total net sales in the second quarter of fiscal 2012 compared to 37% for the same period in fiscal 2011. This customer accounted for 26% of the Company’s total net sales in the first six months of fiscal 2012 compared to 37% for the same period last year.

In Contract Manufacturing, the decrease in sales was the result of reduced sales volume and shifts in the segment’s product sales mix. In Business Imaging, the increase in sales was the result of increased sales to several of the segments Hamco Distributors and direct customers.

Gross Profit:

Consolidated gross profit decreased $1.0 million (58%) for the second quarter of fiscal 2012 when compared to the second quarter of fiscal 2011. This was due to a decrease of $0.8 million (60%) in the Contract Manufacturing segment and a decrease of $0.2 million (50%) in the Business Imaging segment.

For the six months ended March 31, 2012, gross profit decreased $1.7 million (59%) when compared to the same period last year. This was due to a decrease of $1.5 million (67%) in the Contract Manufacturing segment and a decrease of $0.2 million (31%) in the Business Imaging segment.

At Contract Manufacturing, reduced sales volume, shifts in product sales mix and operating inefficiencies resulted in reduced gross profit. The Business Imaging segment continues to experience increased paper costs, which have resulted in reduced gross profit. However, a recently implemented price increase is expected to improve margins. The Company continues to focus on increasing sales volume, improving product sales mix, new product development and cost reduction activities. Some of these initiatives and activities have required start-up or one-time expenses.

Operating Expenses:

Selling, general and administrative expenses decreased $45,000 (3%) for the second quarter of fiscal 2012 when compared to the same period in fiscal 2011, and decreased $38,000 (1%) when compared to the first six months of fiscal 2011 as a result of the Company’s overall cost reduction activities.

Interest Expense and Other Income (Expense) net:

Interest expense and other income increased $33,000 to $70,000 for the second quarter of fiscal 2012 when compared to the same period in fiscal 2011 and increased $45,000 to $129,000 for the first six months of fiscal 2012 when 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.

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

Income Tax (Benefit) Expense:

Income tax benefit for the second quarter of fiscal 2012 was $295,000, compared to an income tax expense of $75,000 for the same period of fiscal 2011. For the first six months of fiscal 2012, the Company had an income tax benefit of $658,000 compared to an income tax benefit of $31,000 for the same period of fiscal 2011. The income tax expense recognized in the second quarter of fiscal 2011 was the result of increased profits. The income tax benefit for the first six 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 $496,000 [per share: $(0.12) basic and diluted] for the second quarter of fiscal 2012, versus net income of $125,000 [per share: $0.03 basic and diluted] for the same period in fiscal 2011. For the six months ended March 31, 2012, the net loss was $1,106,000 [per share: $(0.26) basic and diluted] compared to a net loss of $53,000 [per share: $(0.01) basic and diluted] for the first six months of fiscal 2011.

Liquidity and Capital Resources:

Cash flows provided by operations were $0.7 million through the first six months of fiscal 2012, compared to cash used in operations of $0.7 million for the same period last year. Accounts receivable decreased $3.3 million for the first six months of fiscal 2012 while accounts payable increased $1.1 million in the first six 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 $3.3 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 longer lead times in the supply change. Depreciation was $1.5 million for the first six months of fiscal 2012.

Net cash used in investing activities was $1.2 million for the first six months of fiscal 2012, primarily related to capital expenditures to support ongoing operational needs.

Net cash provided by financing activities was $456,000 for the first six months of fiscal 2012, consisting of $584,000 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 $128,000 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 March 31, 2012, cash recorded on the balance sheet was $9,382.

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.

On April 3, 2012, the Company entered into a Commercial Security Agreement in favor of the lender to secure obligations under the First Amended and Restated Credit Agreement. The Commercial Security Agreement grants to the lender a security interest in all of the accounts and inventory of Tufco, L.P., a subsidiary of the Company.

For the fiscal quarter ended March 31, 2012, 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 in substantially all of the assets of Tufco, L.P. to the lender in a form reasonably acceptable to the lender. The Company may require a modification or waiver of this financial covenant for future quarters. The inability to either obtain any such required modification or waiver or to refinance its credit facility, is likely to have a material adverse effect on the financial condition of the Company.

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

As of May 14, 2012, the Company had approximately $2.2 million available and $7.8 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 March 31, 2012, assuming the Company is able to extend or refinance its credit agreement upon expiration.

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).

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 March 31, 2012.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2012, 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. Mine Safety Disclosures

Not applicable

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.
101.INS†	XBRL Report Instance Document
101.SCH†	XBRL Taxonomy Extension Schema Document
101.CAL†	XBRL Taxonomy Calculation Linkbase Document
101.LAB†	XBRL Taxonomy Label Linkbase Document
101.PRE†	XBRL Presentation Linkbase Document
101.DEF†	XBRL Taxonomy Extension Definition Linkbase Document

† Indicates furnished herewith

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: May 15, 2012	/s/ James F. Robinson
	James F. Robinson
	President and Chief Executive Officer
Date: May 15, 2012	/s/ Michael B. Wheeler
	Michael B. Wheeler Executive Vice President, Chief Financial Officer and Chief Operating Officer

18