1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
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)
4800 Simonton Road, Dallas, Texas 75244
(Address of principal executive offices)
(972)789-1079
(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 the number of shares outstanding of each or the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 7, 2001
----- -----------------------------
Common Stock, par value $0.01 per share 4,621,844
Page 1 of 16
2
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
Page
Number
------
PART I: CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2001 (Unaudited) and September 30, 2000 3
Condensed Consolidated Statements of Income for the three months
and nine months ended June 30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2001 and 2000 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II: OTHER INFORMATION 15
SIGNATURES 16
</Table>
2
3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
June 30, September 30,
2001 2000
--------------- ---------------
Assets (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 928,227 $ 930,388
Restricted cash ................................................... 12,254 31,717
Accounts receivable, net .......................................... 11,589,024 12,697,187
Inventories ....................................................... 11,858,345 7,912,482
Prepaid expenses and other current assets ......................... 806,126 740,383
Deferred income taxes ............................................. 796,174 796,174
Income taxes receivable ........................................... 194,756 560,444
--------------- ---------------
Total current assets ........................................ 26,184,906 23,668,775
PROPERTY, PLANT AND EQUIPMENT-Net .................................... 19,792,792 20,182,838
GOODWILL -Net ........................................................ 16,894,341 17,341,724
OTHER ASSETS- Net .................................................... 772,458 939,811
--------------- ---------------
TOTAL ................................................................ $ 63,644,497 $ 62,133,148
=============== ===============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt ................................. $ 1,771,432 $ 1,771,432
Accounts payable .................................................. 6,816,569 6,964,711
Accrued payroll, vacation and payroll taxes ....................... 1,210,004 1,544,867
Other current liabilities ......................................... 1,192,001 1,435,450
--------------- ---------------
Total current liabilities ................................... 10,990,006 11,716,460
LONG-TERM DEBT- Less current portion ................................. 12,769,550 11,335,704
DEFERRED INCOME TAXES ................................................ 2,473,004 2,502,223
STOCKHOLDERS' EQUITY
Voting Common Stock: $.01 par value; 9,000,000 shares authorized;
4,700,341 and 4,675,019 shares issued, respectively ........... 47,003 46,750
Additional paid-in capital ........................................ 25,052,391 24,879,246
Retained earnings ................................................. 13,173,046 12,383,489
Treasury stock at cost, 78,497 voting common shares ............... (534,045) (534,045)
Stock purchase plan notes ......................................... (280,757) (196,679)
Accumulated other comprehensive loss .............................. (45,701) --
--------------- ---------------
Total stockholders' equity ................................... 37,411,937 36,578,761
--------------- ---------------
TOTAL ............................................................. $ 63,644,497 $ 62,133,148
=============== ===============
</Table>
See notes to condensed consolidated financial statements.
3
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
NET SALES .............................. $ 22,420,884 $ 19,391,637 $ 61,048,900 $ 59,875,846
COST OF SALES .......................... 18,984,482 17,354,066 53,724,696 50,767,197
-------------- -------------- -------------- --------------
GROSS PROFIT ........................... 3,436,402 2,037,571 7,324,204 9,108,649
OPERATING EXPENSES:
Selling, general and administrative
................................. 1,566,499 1,282,190 4,717,549 4,960,660
Amortization and other post-
acquisition expenses ................ 269,434 226,849 796,942 741,259
(Gain) loss on asset sales ........... (5) 35,222 (147,877) (253,466)
-------------- -------------- -------------- --------------
OPERATING INCOME ....................... 1,600,474 493,310 1,957,590 3,660,196
OTHER INCOME (EXPENSE):
Interest expense .................... (255,659) (264,390) (765,867) (769,849)
Interest and other income (expense) . 169,972 8,869 219,528 (28,267)
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES ............. 1,514,787 237,789 1,411,251 2,862,080
INCOME TAX EXPENSE ..................... 584,820 151,371 621,694 1,122,437
-------------- -------------- -------------- --------------
NET INCOME ............................. $ 929,967 $ 86,418 $ 789,557 $ 1,739,643
============== ============== ============== ==============
EARNINGS PER SHARE:
Basic .............................. $ 0.20 $ 0.02 $ 0.17 $ 0.39
Diluted ............................ $ 0.20 $ 0.02 $ 0.17 $ 0.38
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic .............................. 4,619,869 4,567,093 4,609,693 4,472,657
Diluted ............................ 4,660,026 4,662,567 4,640,176 4,609,695
</Table>
See notes to condensed consolidated financial statements.
4
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
June 30,
----------------------------------
2001 2000
--------------- ---------------
OPERATING ACTIVITIES
Net Income ................................................... $ 789,557 $ 1,739,643
Noncash items in net income:
Depreciation and amortization ............................. 2,770,143 2,642,178
Provision for bad debts ................................... (32,188) 321,850
Gains on asset sales ...................................... (147,877) (253,466)
Changes in operating working capital:
Accounts receivable ....................................... 1,140,351 (1,883,217)
Inventories ............................................... (3,945,863) (1,242,760)
Prepaid expenses and other assets ......................... 86,125 (356,613)
Accounts payable .......................................... (148,142) 5,732,396
Accrued and other current liabilities ..................... (578,312) (1,251,001)
Income taxes payable/receivable ........................... 365,688 (197,028)
--------------- ---------------
Net cash from operations ..................................... 299,482 5,251,982
INVESTING ACTIVITIES
Additions to property, plant and equipment ................... (1,923,011) (5,795,245)
Proceeds from disposition of property, plant and equipment ... 168,195 807,820
(Increase) decrease in advances to shareholders .............. (14,536) 126,214
Decrease in restricted cash .................................. 19,463 8,222
--------------- ---------------
Net cash used in investing activities ........................ (1,749,889) (4,852,989)
FINANCING ACTIVITIES
Issuance of long-term debt ................................... 1,358,926 1,214,840
Decrease in stock purchase plan notes ........................ 25,195 5,000
Issuance of common stock ..................................... 64,125 789,345
--------------- ---------------
Net cash from financing activities ........................... 1,448,246 2,009,185
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (2,161) 2,408,178
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................ 930,388 692,002
--------------- ---------------
End of period .................................................. $ 928,227 $ 3,100,180
=============== ===============
</Table>
See notes to condensed consolidated financial statements.
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6
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and Rule 10-01 of Regulation S-X. In the opinion
of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Some adjustments involve estimates which may require revision
in subsequent interim periods or at year end. The unaudited financial
statements and footnotes should be read in conjunction with the
Company's financial statements for the year ended September 30, 2000
that are included in Form 10-K that was filed with the Securities and
Exchange Commission on December 22, 2000. Operating results for the
three and nine-month periods are not necessarily indicative of results
expected for the remainder of the year.
2. INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
June 30, September 30,
2001 2000
--------------- ---------------
Raw materials ................................ $ 7,702,987 $ 4,485,263
Finished goods ............................... 4,155,358 3,427,219
--------------- ---------------
Total inventories ............................ $ 11,858,345 $ 7,912,482
=============== ===============
</Table>
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<Table>
<Caption>
Three months Nine months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Net income $ 929,967 $ 789,557
Other comprehensive income net of tax:
Interest rate swap as hedge of future variable interest on
debt:
Cumulative effective of
implementing SFAS 133 -- 39,650
Change in fair value (828) (85,351)
------------- -------------
Other comprehensive loss (828) (45,701)
------------- -------------
Comprehensive income $ 929,139 $ 743,856
============= =============
</Table>
Comprehensive income was the same as net income for the three months
and nine months ended June 30, 2000.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
4. SEGMENT INFORMATION
The Company operates in a single industry since it manufactures and
distributes custom paper-based and woven products, and provides
contract manufacturing, specialty printing and related services on
these types of products. The Company does, however, separate its
operations and prepare information for management use by the market
sectors aligned with the Company's products and services. Such market
sector information is summarized below. The Contract Manufacturing
sector provides services to large national consumer products companies
while the remaining sectors manufacture and distribute products ranging
from paper goods to paint sundries. Accounts receivable and certain
other assets are not assignable to specific sectors and, therefore, are
included in the intersector column below.
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2001 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 11,832,084 $ 5,141,488 $ 5,447,312 $ -- $ 22,420,884
Gross Profit 2,288,938 468,756 678,708 -- 3,436,402
Operating Income (loss) 1,886,071 92,895 76,236 (454,728) 1,600,474
Assets:
Inventories 1,399,042 4,896,894 5,562,409 -- 11,858,345
Property, plant and
equipment-net 9,410,042 5,914,169 1,835,905 2,632,676 19,792,792
Accounts receivable
and other
(including goodwill) 31,993,360 31,993,360
------------- ------------- ------------- ------------- -------------
Total assets $ 10,809,084 $ 10,811,063 $ 7,398,314 $ 34,626,036 $ 63,644,497
============= ============= ============= ============= =============
</Table>
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2000 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 7,902,847 $ 6,756,850 $ 4,731,940 $ -- $ 19,391,637
Gross Profit 1,207,600 747,836 82,135 -- 2,037,571
Operating Income (loss) 1,007,681 182,436 (446,859) (249,948) 493,310
Assets:
Inventories 782,362 4,523,638 4,185,636 -- 9,491,636
Property, plant and
equipment-net 9,735,789 6,823,836 602,574 2,587,895 19,750,094
Accounts receivable
and other
(including goodwill) 37,894,281 37,894,281
------------- ------------- ------------- ------------- -------------
Total assets $ 10,518,151 $ 11,347,474 $ 4,788,210 $ 40,482,176 $ 67,136,011
============= ============= ============= ============= =============
</Table>
7
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
<Table>
<Caption>
NINE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2001 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 30,096,797 $ 15,889,125 $ 15,062,978 $ -- $ 61,048,900
Gross Profit 4,546,043 1,348,111 1,430,050 -- 7,324,204
Operating Income (loss) 3,266,469 198,836 (243,727) (1,263,988) 1,957,590
Assets:
Inventories 1,399,042 4,896,894 5,562,409 -- 11,858,345
Property, plant and
equipment-net 9,410,042 5,914,169 1,835,905 2,632,676 19,792,792
Accounts receivable
and other
(including goodwill) 31,993,360 31,993,360
------------- ------------- ------------- ------------- -------------
Total assets $ 10,809,084 $ 10,811,063 $ 7,398,314 $ 34,626,036 $ 63,644,497
============= ============= ============= ============= =============
</Table>
<Table>
<Caption>
NINE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2000 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 26,677,063 $ 19,288,971 $ 13,909,812 $ -- $ 59,875,846
Gross Profit 5,699,359 2,237,923 1,171,367 -- 9,108,649
Operating Income (loss) 4,456,242 902,346 (585,665) (1,112,727) 3,660,196
Assets:
Inventories 782,362 4,523,638 4,185,636 -- 9,491,636
Property, plant and
equipment-net 9,735,789 6,823,836 602,574 2,587,895 19,750,094
Accounts receivable
and other
(including goodwill) 37,894,281 37,894,281
------------- ------------- ------------- ------------- -------------
Total assets $ 10,518,151 $ 11,347,474 $ 4,788,210 $ 40,482,176 $ 67,136,011
============= ============= ============= ============= =============
</Table>
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. These standards establish accounting and reporting
for business combinations, goodwill and other intangibles. SFAS No. 141
requires all business combinations entered into subsequent to June 30,
2001 to be accounted for using the purchase method of accounting. SFAS
No. 142 provides that goodwill and other intangible assets deemed to
have indefinite lives will not be amortized, but will be tested for
impairment on an annual basis. These standards are effective for the
Company beginning October 1, 2001. The Company has not quantified the
impact resulting from the adoption of these statements including the
impact, in any, of completion of the annual impairment test. However,
the historical impact of not amortizing goodwill would have been to
increase Company's net income for the nine months ended June 30, 2001
and 2000 by $447,000 for each respective period.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL INFORMATION:
Tufco Technologies, Inc. has locations in Green Bay, WI, Dallas, TX,
Newton, NC, Manning, SC and St. Louis, MO.
The Company, through its wholly owned subsidiaries, provides
diversified Contract Manufacturing and specialty printing services,
manufactures and distributes Business Imaging paper products and
distributes Paint Sundry products used in home improvement projects.
The Company normally operates at lower operating levels during the
first and second quarters of its fiscal year which ends September 30.
This occurs because of the seasonal demand for certain printed products
displaying a holiday theme as well as products which are used by
customers in conjunction with end-of-year activities. These products
are normally shipped during the Company's third and fourth fiscal
quarters. Demand for its Paint Sundry products is generally lower
during the first and second fiscal quarters as cold weather restricts
the amount of new construction and remodeling projects that require the
Company's products.
9
10
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 YEAR-TO-YEAR CHANGES IN
THESE ITEMS ARE AS FOLLOWS:
($000s)
<Table>
<Caption>
Three Months Ended Period-to-Period Nine Months Ended Period-to-Period
June 30, Change June 30, Change
---------------------- ---------------------
2001 2000 $ % 2001 2000 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
Net Sales $ 22,421 $ 19,392 3,029 16 $ 61,049 $ 59,876 1,173 2
Gross Profit 3,436 2,038 1,398 69 7,324 9,109 (1,785) -20
15.3% 10.5% 12.0% 15.2%
Operating Expenses 1,836 1,545 290 19 5,366 5,449 (83) -2
8.2% 8.0% 8.8% 9.1%
Operating Income 1,600 493 1,107 225 1,958 3,660 (1,702) -47
7.1% 2.5% 3.2% 6.1%
Interest Expense 256 264 (8) -3 766 770 (4) -1
1.1 1.4% 1.3% 1.3%
Net Income $ 930 $ 86 844 981 790 1,740 (950) -55
4.1% 0.4% 1.3% 2.9%
</Table>
Analysis of net sales and gross profit, percentages of total net sales, and
year-to-year changes in the Company's primary market sectors are as follows
(dollars in thousands):
<Table>
<Caption>
Three Months Ended
June 30,
--------------------------------------------------
2001 2000
----------------------- -----------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
---------- ---------- ---------- ---------- ---------- ----------
Net Sales
Contract manufacturing and printing $ 11,832 53% $ 7,903 41% 3,929 50
Business imaging paper products 5,141 23 6,757 35 -1,616 -24
Paint sundry products 5,448 24 4,732 24 716 15
---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 22,421 100% $ 19,392 100% 3,029 16
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit
Contract manufacturing and printing $ 2,289 19% $ 1,208 15% 1,081 89
Business imaging paper products 469 9 748 11 -279 -37
Paint sundry products 678 12 82 2 596 727
---------- ---------- ---------- ---------- ---------- ----------
Gross profit $ 3,436 15% $ 2,038 11% 1,398 69
========== ========== ========== ========== ========== ==========
</Table>
10
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS --CONTINUED
<Table>
<Caption>
Nine Months Ended
June 30,
--------------------------------------------------
2001 2000
----------------------- -----------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
---------- ---------- ---------- ---------- ---------- ----------
Net Sales
Contract manufacturing and printing $ 30,097 49% $ 26,677 45% 3,420 13
Business imaging paper products 15,889 26 19,289 32 -3,400 -18
Paint sundry products 15,063 25 13,910 23 1,153 8
---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 61,049 100% $ 59,876 100% 1,173 2
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit
Contract manufacturing and printing $ 4,546 15% $ 5,700 21% -1,154 -20
Business imaging paper products 1,348 8 2,238 12 -890 -40
Paint sundry products 1,430 9 1,171 8 259 22
---------- ---------- ---------- ---------- ---------- ----------
Gross profit $ 7,324 12% $ 9,109 15% - 1,785 -20
========== ========== ========== ========== ========== ==========
</Table>
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS --CONTINUED
NET SALES:
Net sales increased $3.0 million (16%) for the three-month period, and for the
fiscal year to date, sales were up $1.2 million (2%). For the second consecutive
quarter, sales of Contract Manufacturing services showed double-digit growth
over prior year, up $3.9 million (50%) for the three months ended June 30, 2001,
and up 13% for the year to date. The increase is primarily the result of the
successful start-up and stabilized operations of two new manufacturing
agreements with the Company's largest customer. In addition, the Company has
continued to promote sales of its printing services, and has experienced steady
growth in that area. Based on volume forecasts provided by Tufco's largest
customer for multiple production lines currently in varying stages of
operations, and on continued growth in sales of printing services, Management
believes that the Contract Manufacturing sector will continue to experience year
to year sales increases for several quarters to come. In addition to the sales
growth in Contract Manufacturing, the Company's Paint Sundry product sales
increased 15% for the quarter and are up 8% for the year. The Company has been
successful in marketing two new product groups to its largest customer in the
sector, the nation's largest chain of home improvement centers. A new line of
paper-poly drop cloths, manufactured by the Company, was introduced into the
market in the second fiscal quarter of 2001, accounting for a large portion of
the increase in sales. A second new product line will be launched in September,
and Management is optimistic that sales of this second product will exceed sales
of the new drop cloth line. Finally, sales of Business Imaging products declined
24% for the quarter and are down 18% for the year to date. Strong competition
and price discounting continue to depress sales and profit in this sector.
GROSS PROFIT:
Gross profit increased $1.4 million (69%) for the quarter, partially offsetting
declines in the first two quarters, and is down $1.8 million (20%)for the year
to date. In addition, the gross profit margin for the quarter increased to 15%
compared to 11% a year ago. For the nine-month period to date, gross profit is
down $1.8 million due primarily to the first quarter of fiscal 2001 in which the
Company incurred very high start up costs associated with the two Contract
Manufacturing projects now in commercial operation. The increase in sales in the
Contract Manufacturing and Paint Sundry sectors contributed to the overall
increase in gross profit for the quarter, and to the increased margin
percentage. Contract Manufacturing gross profit increased $1.1 million (89%) for
the quarter, helped by the sales volume under the two active production
agreements and by increased printing sales, and is down $1.1 million (20%) for
the year to date, a result of the start up costs incurred in the first quarter.
Paint Sundry gross profit increased $0.6 million (727%)for the quarter due to a
combination of increased sales and reduced operating costs as a result of the
consolidation of Tufco's Paint Sundry operations into the Manning, South
Carolina facility, and increased $0.3 million (22%) for the year to date.
Offsetting these gains, gross profit from Business Imaging sales declined $0.3
million (37%) and the margin declined from 11% to 9% for the quarter versus one
year ago.
OPERATING EXPENSES:
Operating expenses for the quarter increased $0.3 million (19%) versus prior
year due to higher accruals for incentive compensation costs in fiscal 2001
compared to fiscal 2000. For the nine-month period, operating expenses declined
$0.1 million (2%) versus the same period one year ago, and as a percent of
sales, operating expenses were 8.8% through nine months of fiscal 2001 compared
to 9.1% in the prior year.
OPERATING INCOME:
Operating income increased $1.1 million (225%) for the quarter due to the
increased sales and gross profit in the Contract Manufacturing and Paint Sundry
sectors. For the nine-month
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
period, operating profit was down $1.7 million (47%) as a result of the high
start-up costs and low sales volume experienced in the Contract Manufacturing
sector during the first quarter of fiscal 2001.
INTEREST EXPENSE:
Interest expense is virtually unchanged from a year ago. Reductions in interest
rates have offset increases in average borrowings which resulted from the
operating loss experienced in the first quarter of fiscal 2001.
NET INCOME AND EARNINGS PER SHARE:
For the quarter, net income increased to $0.9 million (up 981%) and earnings per
share increased to $0.20 (basic and diluted) compared to $0.02 (basic and
diluted) a year ago. For the nine-month period, the Company earned $0.8 million
($0.17 per share: basic and diluted), compared to $1.7 million and earnings per
share of $0.39 (basic) and $0.38 (diluted) in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
For the nine months ended June 30, 2001, the Company generated $0.3 million in
net cash from operations, compared to the same period in fiscal 2000, in which
the Company generated $5.3 million in cash from operations. Net income, after
adjustment for non-cash items was $3.4 million in 2001, down from $4.4 million
in the prior year. The principal cause for the decline in income, adjusted for
non-cash items, was the decrease in gross profit during the first quarter of
2001 resulting from project start-up costs and low sales volumes. Aside from the
reduction in income, cash from operations declined as a result of investment in
inventories for three major initiatives. Two new product groups were added to
the Paint Sundry inventory portfolio to facilitate roll-outs to the largest
customer in that sector. The first of the two roll-outs is underway with initial
stocking orders going into stores during the third and fourth quarters of fiscal
2001. The second new product offering will launch in September of fiscal 2001.
As the Company ascertains the customer's buying trends for these two new product
arrays, inventory levels will be adjusted accordingly. Additionally, Tufco began
purchasing raw materials for one of the two new production agreements with its
largest customer, contributing to the increase in inventories. The principal raw
material supplier for this new product requires that the Company pay for product
purchases in less than 15 days, so accounts payable did not increase in direct
correlation with the increase in inventories. Partially offsetting the increase
in inventories, the Company reduced its accounts receivable balance from a year
ago by reducing its average daily sales outstanding to 43 days from 56 days.
Net cash used in investing activities was $1.7 million for the first nine months
of fiscal 2001, compared to $4.8 million for the same period of fiscal 2000. In
fiscal 2001, the Company incurred capital costs associated with the expansion of
its Manning, South Carolina facility, into which all Paint Sundry operations
were consolidated during the third fiscal quarter. During the prior year, the
Company had expanded its Green Bay plant to make room for one of the two new
Contract Manufacturing projects, accounting for a large portion of the prior
year's capital expenditures.
Net cash from financing activities totaled $1.4 million, resulting from
increased borrowings under the Company's revolving line.
As of August 7, 2001, the Company had approximately $3.5 million available under
its revolving credit line.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS --CONTINUED
During the first and second quarter of fiscal 2001, the Company was in violation
of certain covenants involving debt and cash flow (as defined in the agreement),
resulting from the start-up costs incurred during the first quarter of fiscal
2001. The Company requested, and the Banks granted, a waiver from these required
covenants for the first and second quarter of fiscal 2001. The Company was in
compliance with all loan covenants at the end of the third quarter, and
management projects that the Company will be in compliance with all covenants
for the foreseeable future.
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future. In addition, the Company's primary lender must approve the payment of
any dividends.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2001 quarterly periods in comparison to
2000, contains forward-looking statements regarding current expectations, risks
and uncertainties for future periods. The actual results could differ materially
from those discussed here. As well as those factors discussed in this report,
other factors that could cause or contribute to such differences include, among
other items, cancellation of production agreements by significant customers,
material increases in the cost of base paper stock, competition in the Company's
product areas, or an inability of management to successfully reduce operating
expenses in relation to net sales without damaging the long-term direction of
the Company. Therefore, the condensed financial data for the periods presented
may not be indicative of the Company's future financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk- The Company has entered into an interest rate swap
contract as a hedge under which the interest rate on its term debt is fixed at
5.87%, plus a profit spread for the lender of between 100 and 150 basis points,
depending on certain financial ratios achieved by the Company (see Note 7 to the
Company's Financial Statements for its fiscal year ended September 30, 2000). At
June 30, 2001, prevailing market interest rates were lower than the fixed rate
in the Company's swap agreement, and the Company would have paid a premium to
its lender if the debt under the swap were to have been paid in full at that
time. Accordingly, the Company has accrued an unrealized loss of approximately
$45,000 at June 30, 2001 as required by SFAS 133. Prior to entering into the
swap agreement, management had reviewed the 40-year history of interest rates
and had determined, and still believes, that the Company's risk of potential
future liability resulting from a material decline in interest rates below the
fixed level under the swap was not significant.
Foreign Currency Exchange Risk-The Company had no transactions in
foreign currencies, nor had it entered into any foreign currency futures
contracts as of June 30, 2001.
Commodity Price Risk-The Company had not entered into any forward
buying agreements for the raw materials it uses to produce its goods and
services as of June 30, 2001.
Other Relevant Market Risks-The Company does not own any marketable
securities, and management has not identified any other relevant market risks.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
None.
B. Reports on Form 8-K
None.
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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: August 7, 2001 /s/ Louis LeCalsey, III
--------------------------------------------
Louis LeCalsey, III
President/Chief Executive Officer
Date: August 7, 2001 /s/ Greg Wilemon
--------------------------------------------
Greg Wilemon
Chief Financial Officer/Chief Operating Officer,
Secretary, Treasurer and Vice President - Finance
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