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, 2013
¨ | 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 or other jurisdiction of
incorporation or organization) | | (IRS Employer ID No.) |
PO BOX 23500 Green Bay, WI 54305
(Address of principal executive offices)(Zip code)
(920) 336-0054
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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, 2014 |
Common Stock, par value $0.01 per share | | 4,308,947 |
TUFCO TECHNOLOGIES, INC.
Index
2
PART I. | FINANCIAL INFORMATION |
ITEM 1. | Condensed Consolidated Financial Statements |
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| December 31,
2013 | | | September 30,
2013 | |
Assets | | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash | $ | 134,516 | | | $ | 8,422 | |
Accounts receivable-net | | 10,422,593 | | | | 11,095,701 | |
Inventories-net | | 14,964,558 | | | | 14,872,765 | |
Prepaid expenses and other current assets | | 551,141 | | | | 287,676 | |
Income taxes receivable | | 64,871 | | | | 64,871 | |
Deferred income taxes | | 606,354 | | | | 606,354 | |
Total current assets | | 26,744,033 | | | | 26,935,789 | |
PROPERTY, PLANT AND EQUIPMENT-Net | | 14,169,792 | | | | 14,789,714 | |
OTHER ASSETS-Net | | 140,648 | | | | 138,603 | |
TOTAL | $ | 41,054,473 | | | $ | 41,864,106 | |
Liabilities and Stockholders’ Equity | | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Revolving line of credit | $ | 417,114 | | | $ | 1,166,519 | |
Current portion of note payable | | 294,700 | | | | 290,504 | |
Accounts payable | | 5,357,206 | | | | 5,094,139 | |
Accrued payroll, vacation and payroll taxes | | 345,693 | | | | 754,674 | |
Other current liabilities | | 1,026,225 | | | | 779,622 | |
Total current liabilities | | 7,440,938 | | | | 8,085,458 | |
LONG-TERM PORTION OF NOTE PAYABLE | | 127,869 | | | | 203,136 | |
DEFERRED INCOME TAXES | | 1,736,387 | | | | 1,782,402 | |
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 | | 25,673,705 | | | | 25,665,917 | |
Retained earnings | | 8,185,944 | | | | 8,237,563 | |
Treasury stock – 399,794 common shares at cost | | (2,157,457 | ) | | | (2,157,457 | ) |
Total stockholders’ equity | | 31,749,279 | | | | 31,793,110 | |
TOTAL | $ | 41,054,473 | | | $ | 41,864,106 | |
3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| THREE MONTHS ENDED
December 31, | |
| 2013 | | | 2012 | |
NET SALES | $ | 22,028,841 | | | $ | 28,348,148 | |
COST OF SALES | | 20,420,278 | | | | 25,855,557 | |
GROSS PROFIT | | 1,608,563 | | | | 2,492,591 | |
OPERATING EXPENSES: | | | | | | | |
Selling, general & administrative | | 1,676,445 | | | | 1,261,859 | |
OPERATING (LOSS) INCOME | | (67,882 | ) | | | 1,230,732 | |
OTHER (EXPENSE) INCOME: | | | | | | | |
Interest expense | | (20,766 | ) | | | (60,160 | ) |
Interest income and other income | | 15 | | | | 9,331 | |
(LOSS) INCOME BEFORE INCOME TAXES | | (88,633 | ) | | | 1,179,903 | |
INCOME TAX (BENEFIT) EXPENSE | | (37,014 | ) | | | 440,104 | |
NET (LOSS) INCOME | $ | (51,619 | ) | | $ | 739,799 | |
BASIC (LOSS) INCOME PER SHARE: | | | | | | | |
Net (Loss) Income | $ | (0.01 | ) | | $ | 0.17 | |
DILUTED (LOSS) INCOME PER SHARE: | | | | | | | |
Net (Loss) Income | $ | (0.01 | ) | | $ | 0.17 | |
WEIGHTED AVERAGE COMMON SHARES | | | | | | | |
OUTSTANDING: | | | | | | | |
Basic | | 4,308,947 | | | | 4,308,947 | |
Diluted | | 4,308,947 | | | | 4,315,872 | |
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| THREE MONTHS ENDED
December 31, | |
| 2013 | | | 2012 | |
OPERATING ACTIVITIES | | | | | | | |
Net (loss) income | $ | (51,619 | ) | | $ | 739,799 | |
Noncash items in net (loss) income: | | | | | | | |
Depreciation and amortization of property, plant and equipment | | 722,602 | | | | 709,837 | |
Deferred income taxes | | (46,015 | ) | | | 438,104 | |
Gain on sale of assets | | — | | | | (2,784 | ) |
Stock-based compensation expense | | 7,788 | | | | 9,594 | |
Changes in operating working capital: | | | | | | | |
Accounts receivable | | 673,108 | | | | 4,580,182 | |
Inventories | | (91,793 | ) | | | 537,853 | |
Prepaid expenses and other assets | | (265,510 | ) | | | (241,297 | ) |
Accounts payable | | 344,658 | | | | (3,126,430 | ) |
Accrued and other current liabilities | | (162,378 | ) | | | (184,880 | ) |
Net cash provided by operating activities | | 1,130,841 | | | | 3,459,978 | |
INVESTING ACTIVITIES | | | | | | | |
Additions to property, plant and equipment | | (184,271 | ) | | | (804,702 | ) |
Proceeds from disposals of assets | | — | | | | 4,000 | |
Net cash used in investing activities | | (184,271 | ) | | | (800,702 | ) |
FINANCING ACTIVITIES | | | | | | | |
Net repayments of revolving debt | | (749,405 | ) | | | (2,591,661 | ) |
Principal payments on note payable | | (71,071 | ) | | | (67,110 | ) |
Net cash used in financing activities | | (820,476 | ) | | | (2,658,771 | ) |
NET INCREASE IN CASH | | 126,094 | | | | 505 | |
CASH: | | | | | | | |
Beginning of period | | 8,422 | | | | 8,320 | |
End of period | $ | 134,516 | | | $ | 8,825 | |
NONCASH SUPPLEMENTAL INFORMATION: | | | | | | | |
Accounts payable incurred for the purchase of equipment | $ | 23,211 | | | $ | 47,259 | |
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended December 31, 2013 and 2012
(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, 2013 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 2013 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, 2013 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, 2013.
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, the effect of which was zero and 6,925 shares for the three months ended December 31, 2013 and 2012, respectively. During the three months ended December 31, 2013 and 2012, options to purchase 95,050 and 166,350 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:
| December 31,
2013 | | | September 30,
2013 | |
Raw materials | $ | 10,990,288 | | | $ | 11,015,680 | |
Finished goods | | 3,974,270 | | | | 3,857,085 | |
Total inventories | $ | 14,964,558 | | | $ | 14,872,765 | |
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 historically used a discounted cash flow analysis to estimate reporting unit fair values and also considered multiples of relevant companies. The Company continues to follow the guidance of ACS 820 for fair value measurement hierarchy, the objective of which is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants. Additionally, as previously disclosed, on December 20, 2013, the Company announced that it had signed a definitive merger agreement (the “Merger Agreement”) with Tufco Holdings, LLC, a Delaware limited liability company (“Parent”), and Packers Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Sub”), which are affiliates of Griffin Holdings, LLC at a price of $6.07 per share. The transaction is to be effected by a tender offer followed by a second step merger. The transaction is subject to customary closing conditions and there can be no assurance that the transaction will be consummated. Because the price paid pursuant to the Merger Agreement is less than the book value of the Company’s assets, the Company estimated a goodwill impairment of $7,211,575 for the fourth quarter of fiscal year 2013.
6
Notes to condensed consolidated financial statements—(continued)
6. Revolving Line of Credit and Note Payable
The Company amended its credit agreement effective December 20, 2013 to extend its maturity date to December 31, 2014 and modified the required level of after tax net income under its financial covenant in fiscal year 2014. However, there can be no assurances that the Company will be able to extend or refinance its credit facility upon expiration or maintain such a specified minimum level of after tax net income in such year. The credit agreement also includes a minimum tangible net worth covenant. The amount available for borrowing under the revolving line of credit facility is $10.5 million subject to borrowing base limitations as defined in the agreement. 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 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.
As of December 31, 2013, the Company had approximately $10.1 million available and $0.4 million outstanding under its revolving credit line pursuant to its credit agreement.
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, if any, plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences that will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred tax assets will include recognition of operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. When applicable, valuation allowances are recognized to limit recognition of deferred tax assets where appropriate. Such allowances may be reversed when circumstances provide evidence that the deferred tax assets will more likely than not be realized.
The Company has not recorded a valuation allowance against its deferred tax assets as of December 31, 2013 based on its evaluation of the available evidence, which includes consideration of reversal patterns for long-term deferred tax liabilities and the expected taxable income generated in future periods. 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 primarily for depreciation on property and equipment, a change in the assessment of a valuation allowance could occur. The Company’s effective tax rate approximates the statutory tax rates in the jurisdictions in which it files.
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 a variety of products and services to multinational consumer products companies. The Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.
External customer revenues attributed to foreign countries were approximately 3% of total sales for the first quarter of fiscal 2014 and 2013. The revenues are attributed to countries in Europe and to Japan. There are no long-lived assets located outside of the United States at December 31, 2013 and 2012.
Three Months Ended December 31, 2013 | | Contract
Manufacturing | | | Business
Imaging | | | Corporate
and Other | | | Consolidated | |
Net sales | | $ | 16,946,125 | | | $ | 5,082,716 | | | $ | — | | | $ | 22,028,841 | |
Gross profit | | | 1,173,482 | | | | 435,081 | | | | — | | | | 1,608,563 | |
Operating income (loss) | | | 735,586 | | | | 156,217 | | | | (959,685 | ) | | | (67,882 | ) |
Depreciation and amortization expense | | | 689,755 | | | | 32,847 | | | | — | | | | 722,602 | |
Capital expenditures | | | 175,234 | | | | 9,037 | | | | — | | | | 184,271 | |
7
Notes to condensed consolidated financial statements—(continued)
Three Months Ended December 31, 2012 | | Contract
Manufacturing | | | Business
Imaging | | | Corporate
and Other | | | Consolidated | |
Net sales | | $ | 22,272,565 | | | $ | 6,075,583 | | | $ | — | | | $ | 28,348,148 | |
Gross profit | | | 2,106,330 | | | | 386,261 | | | | — | | | | 2,492,591 | |
Operating income (loss) | | | 1,758,960 | | | | 145,061 | | | | (673,289 | ) | | | 1,230,732 | |
Depreciation and amortization expense | | | 676,329 | | | | 33,508 | | | | — | | | | 709,837 | |
Capital expenditures | | | 804,702 | | | | — | | | | — | | | | 804,702 | |
December 31, 2013 | | Contract
Manufacturing | | | Business
Imaging | | | Corporate
and Other | | | Consolidated | |
Assets: | | | | | | | | | | | | | | | | |
Inventories-net | | $ | 9,251,554 | | | $ | 5,713,004 | | | $ | — | | | $ | 14,964,558 | |
Property, plant and equipment-net | | | 12,415,314 | | | | 1,754,478 | | | | — | | | | 14,169,792 | |
Accounts receivable and other | | | 8,727,654 | | | | 2,246,079 | | | | 946,390 | | | | 11,920,123 | |
Total assets | | $ | 30,394,522 | | | $ | 9,713,561 | | | $ | 946,390 | | | $ | 41,054,473 | |
September 30, 2013 | | Contract
Manufacturing | | | Business
Imaging | | | Corporate
and Other | | | Consolidated | |
Assets: | | | | | | | | | | | | | | | | |
Inventories-net | | $ | 9,563,155 | | | $ | 5,309,610 | | | $ | — | | | $ | 14,872,765 | |
Property, plant and equipment-net | | | 13,009,375 | | | | 1,778,288 | | | | 2,051 | | | | 14,789,714 | |
Accounts receivable and other | | | 9,250,757 | | | | 2,132,620 | | | | 818,250 | | | | 12,201,627 | |
Total assets | | $ | 31,823,287 | | | $ | 9,220,518 | | | $ | 820,301 | | | $ | 41,864,106 | |
8
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 2014 results in comparison to fiscal 2013 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, non renewal or 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, the Company’s inability to benefit from any general economic improvements, react to material increases in the cost of raw materials or 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 on December 31, 2014, the Company’s ability to return to and sustain profitable operations, the Company’s ability to successfully attract new customers through its sales initiatives and strengthening its new business development efforts, the Company’s ability to improve the run rates for its products, and changes to regulations governing its operations or other factors beyond the Company’s control. Therefore, the financial data for the periods presented may not be indicative of the Company’s future financial condition or results of operations.
Further, all statements regarding the timing and the closing of the Offer and Merger transactions; the ability of Parent to complete the transactions considering the various closing conditions; and any assumptions underlying any of the foregoing, are forward looking statements. These intentions, expectations, or results may not be achieved in the future and various important factors could cause actual results or events to differ materially from the forward-looking statements that the Company makes, including uncertainties as to the timing of the Offer and Merger; uncertainties as to how many of the Company’s stockholders will tender their stock in the Offer; the possibility that competing offers may be made; the possibility that various closing conditions to the transactions may not be satisfied or waived, including that a governmental entity may prohibit or delay the consummation of the transaction; that Parent or Sub do not receive the proceeds of the financing; or that there is a material adverse change of the Company.
General Information:
Tufco is a leader in providing diversified contract wet wipe converting and printing, as well as specialty printing and finishing 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 wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging, 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.
On December 20, 2013, the Company entered into the Merger Agreement with Parent and Sub. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Sub commenced a tender offer (the “Offer”) to acquire all of the outstanding shares of common stock, par value $0.01 per share, of the Company (the “Shares”) at a price of $6.07 per Share, net to the seller in cash (the “Offer Price”). The Offer is currently scheduled to expire at 12:00 midnight, New York City time, at the end of the day on February 21, 2014.
Pursuant to the Merger Agreement, as soon as practicable after the consummation of the Offer, and upon the terms and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without any additional approval of the Company’s stockholders (the “Merger”). Upon completion of the Merger, each Share outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than Shares that are held by Parent, Sub, the Company in treasury or stockholders perfecting their appraisal rights under the Delaware General Corporation Law) will be cancelled and converted into the right to receive (upon the proper surrender of the certificate representing such Share) the Offer Price in cash (without interest). In addition, each outstanding and unexercised option to purchase Shares then in effect (the “Options”), whether or not vested, will automatically be cancelled in exchange for the right to receive in cash the excess, if any, of the Offer Price over the exercise price of such Option immediately prior to the Effective Time. In the event that the exercise price of an Option is equal to or greater than the Offer Price, such Option shall be cancelled for no consideration.
9
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued |
The Merger Agreement includes customary representations, warranties and covenants of the Company, Parent and Sub. The Company has agreed to operate its business in the ordinary course in accordance with past practices until the earlier of the termination of the Merger Agreement and the Effective Time, subject to customary exceptions. The Company has also agreed not to solicit or initiate discussions with third parties regarding other proposals to acquire the Company and to certain restrictions on its ability to respond to any such proposals. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 to the Company’s current report on Form 8-K filed on December 27, 2013, and is incorporated herein by reference.
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
December 31, | | | Period-to-Period
Change | |
| 2013 | | | 2012 | | | $ | | | % | |
Net Sales | $ | 22,029 | | | $ | 28,348 | | | $ | (6,319 | ) | | | (22 | )% |
Gross Profit | | 1,608 | | | | 2,493 | | | | (885 | ) | | | (35 | )% |
| | 7.3 | % | | | 8.8 | % | | | | | | | | |
Operating Expenses | | 1,676 | | | | 1,262 | | | | 414 | | | | 33 | % |
| | 7.6 | % | | | 4.5 | % | | | | | | | | |
Operating (Loss) Income | | (68 | ) | | | 1,231 | | | | (1,299 | ) | | | NM | |
| | (0.3 | )% | | | 4.3 | % | | | | | | | | |
Interest and Other-Net | | 21 | | | | 51 | | | | (30 | ) | | | (59 | )% |
| | 0.1 | % | | | 0.2 | % | | | | | | | | |
(Loss) Income Before Income Taxes | | (89 | ) | | | 1,180 | | | | (1,269 | ) | | | NM | |
| | (0.4 | )% | | | 4.2 | % | | | | | | | | |
Income Tax (Benefit) Expense | | (37 | ) | | | 440 | | | | (477 | ) | | | NM | |
| | (0.2 | )% | | | 1.6 | % | | | | | | | | |
Net (Loss) Income | $ | (52 | ) | | $ | 740 | | | | (792 | ) | | | NM | |
| | (0.2 | )% | | | 2.6 | % | | | | | | | | |
Basic and Diluted (Loss) Income per Share | $ | (0.01 | ) | | $ | 0.17 | | | | | | | | | |
NM = Not Meaningful
10
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued |
| Three Months Ended
December 31, | | | | |
| 2013 | | | 2012 | | | Period-to-Period
Change | |
| Amount | | | % of
Total | | | Amount | | | % of
Total | | | $ | | | % | |
Net Sales | | | | | | | | | | | | | | | | | | | | | |
Contract Manufacturing | $ | 16,946 | | | 77 | % | | $ | 22,272 | | | | 79 | % | | $ | (5,326 | ) | | (24 | )% |
Business Imaging | | 5,083 | | | 23 | % | | | 6,076 | | | | 21 | % | | | (993 | ) | | (16 | )% |
Net Sales | $ | 22,029 | | | 100 | % | | $ | 28,348 | | | | 100 | % | | $ | (6,319 | ) | | (22 | )% |
| 2013 | | | 2012 | | | Period-to-Period
Change | |
| Amount | | | Margin
% | | | Amount | | | Margin
% | | | $ | | | % | |
Gross Profit | | | | | | | | | | | | | | | | | | | | | |
Contract Manufacturing | $ | 1,173 | | | 7 | % | | $ | 2,107 | | | | 9 | % | | $ | (934 | ) | | (44 | )% |
Business Imaging | | 435 | | | 9 | % | | | 386 | | | | 6 | % | | | 49 | | | 13 | % |
Gross Profit | $ | 1,608 | | | 7 | % | | $ | 2,493 | | | | 9 | % | | $ | (885 | ) | | (35 | )% |
NM = Not Meaningful
Net Sales:
Consolidated net sales decreased $6.3 million (22%) to $22.0 million in the first quarter of fiscal 2014, when compared to the same period last year. This was due to a decrease of $5.3 million (24%) in the Contract Manufacturing segment and a decrease of $1.0 million (16%) in the Business Imaging segment.
The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 11% of the Company’s total net sales in the first quarter of fiscal 2014 compared to 8% for the same period in fiscal 2013. The other significant customer accounted for 40% of the Company’s total net sales in the first quarter of fiscal 2014 compared to 47% for the same period in fiscal 2013. The contracts with each customer expired in 2013 and the Company continues to operate under individual purchase orders, while also seeking to negotiate a longer term arrangement with one such customer. Any such longer term arrangement would not have minimum purchase requirements.
Gross Profit:
Consolidated gross profit decreased $885,000 for the first quarter of fiscal 2014 when compared to the first quarter of fiscal 2013. This was primarily due to a decrease of $934,000 in the Contract Manufacturing segment and a slight increase of $49,000 in the Business Imaging segment.
The Company saw decreased profitability in the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 primarily due to decreased sales. Additionally, the Company reduced borrowings under its credit facility by $749,000 during the first quarter of fiscal 2014.
Operating Expenses:
Selling, general and administrative expenses increased $414,000 (33%) for the first quarter of fiscal 2014 when compared to the same period in fiscal 2013 primarily due to increased non-operating administrative expenses resulting from Tufco’s pending transaction with Griffin Holdings, LLC.
Interest Expense and Other Income (Expense) net:
Interest expense and other income decreased $30,000 to $21,000 (59%) for the first quarter of fiscal 2014 compared to the same period in fiscal 2013 due to lower average debt outstanding and lower interest rates on borrowings.
Income Tax (Benefit)Expense:
Income tax benefit for the first quarter of fiscal 2014 was $(37,000), calculated based on the estimated effective tax rate for fiscal 2014, compared to income tax expense of $440,000 for the same period of fiscal 2013.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued |
Net (Loss) Income:
The Company reported a net loss of $(52,000) [per share: $(0.01) basic and diluted] for the first quarter of fiscal 2014, versus net income of $740,000 [per share: $0.17 basic and diluted] for the same period in fiscal 2013.
Liquidity and Capital Resources:
Cash flows provided by operations were $1.1 million through the first three months of fiscal 2014, compared to $3.5 million for the same period last year. Accounts receivable decreased $0.7 million and inventories increased $0.1 million offset by an increase in accounts payable of $0.3 million for the first three months of fiscal 2014. Depreciation was $0.7 million for the first three months of fiscal 2014 and 2013.
Net cash used in investing activities was $184,000 for the first three months of fiscal 2014, related to capital expenditures to support ongoing operational needs.
Net cash used in financing activities was $820,000 for the first three months of fiscal 2014. This consisted of $749,000 paid on the Company’s revolving credit line and $71,000 used for principal payments on a note related to the 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, 2013, cash recorded on the balance sheet was $134,516.
The Company amended its credit agreement effective December 20, 2013 to extend its maturity date to December 31, 2014 and modified the required level of after tax net income under its financial covenant in fiscal year 2014. However, there can be no assurances that the Company will be able to extend or refinance its credit facility upon expiration or maintain such a specified minimum level of after tax net income in such year. The credit agreement also includes a minimum tangible net worth covenant. The amount available for borrowing under the revolving line of credit facility is $10.5 million subject to borrowing base limitations as defined in the agreement. 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 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. 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.
As of February 7, 2014, the Company had approximately $9.9 million available and $0.6 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, 2013, 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.
As previously disclosed on December 20, 2013, the Company entered into the Merger Agreement. Because the aggregate price paid for the Company under the Merger Agreement was below the book value of the assets, goodwill was reviewed for impairment and an estimate was made to write down the entire $7,211,575 balance as of September 30, 2013. It is anticipated that the transaction contemplated by the Merger Agreement will close during the first calendar quarter of 2014, however there can be no assurance that such transaction will be consummated.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued |
The Merger Agreement includes customary termination provisions for both the Company and Parent and provides that, in connection with the termination of the Merger Agreement, under certain circumstances, the Company must pay Parent a termination fee of $1,500,000, including due to termination of the Merger Agreement by the Company to accept a superior acquisition proposal or termination of the Merger Agreement by Parent due to an intentional breach of the Merger Agreement by the Company. If the Parent terminates the Merger Agreement due to an unintentional breach of the Merger Agreement by the Company, the termination fee the Company will be required to pay the Parent will be $750,000. If the Merger Agreement is terminated due to an intentional breach of the Merger Agreement by Parent, Parent will be required to pay the Company a termination fee equal to $1,500,000. If the Company terminates the Merger Agreement in connection with a failure of the financing to be available to Parent or Sub or in connection with an unintentional breach of the Merger Agreement by Parent or Sub, Parent will be required to pay the Company a termination fee equal to $750,000.
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, 2013.
During the fiscal quarter ended December 31, 2013, there have been no changes in the Company’s internal control over financial reporting 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 |
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.
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
None
| 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 Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | TUFCO TECHNOLOGIES, INC. |
Date: February 14, 2014 | | /s/ James F. Robinson |
| | James F. Robinson |
| | President and Chief Executive Officer |
Date: February 14, 2014 | | /s/ Tim R. Splittgerber |
| | Tim R. Splittgerber |
| | Chief Financial Officer, Vice President and Secretary |
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