##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-21018
 TUFCO TECHNOLOGIES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    39-1723477(State of other jurisdiction 
of incorporation of organization)
    
    (IRS Employer ID No.)
 PO BOX 23500 Green Bay, WI 54305
 (920) 336-0054
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding as of February 14, 2011Common Stock, par value $0.01 per share
    
    4,308,947




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##### 



TUFCO TECHNOLOGIES, INC.
 Index
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of December 31,
2010 and September 30, 2010
    
    
    3Condensed Consolidated Statements of Operations for the
three months ended December 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    12Item 4 Controls and Procedures
    
    
    13PART II: OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    14Item 1A. Risk Factors
    
    
    14Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 3. Defaults Upon Senior Securities
    
    
    14Item 4. [Removed and Reserved]
    
    
    14Item 5. Other Information
    
    
    14Item 6. Exhibits
    
    
    14SIGNATURES
    
    
    15EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Condensed Consolidated Financial Statements
 TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 December 31,
    
    
    September 30,2010
    
    
    2010AssetsCURRENT ASSETS:Cash
    
    $
    6,842
    
    
    $
    7,899Accounts receivable-net
    
    
    13,350,519
    
    
    
    14,211,275Inventories-net
    
    
    17,410,815
    
    
    
    14,329,857Prepaid expenses and other current assets
    
    
    363,731
    
    
    
    157,269Income taxes receivable
    
    
    16,343
    
    
    
    16,430Deferred income taxes
    
    
    364,680
    
    
    
    364,680Total current assets
    
    
    31,512,930
    
    
    
    29,087,410PROPERTY, PLANT AND EQUIPMENT-Net
    
    
    18,308,721
    
    
    
    18,640,263GOODWILL
    
    
    7,211,575
    
    
    
    7,211,575OTHER ASSETS-Net
    
    
    136,411
    
    
    
    135,865TOTAL
    
    $
    57,169,637
    
    
    $
    55,075,113Liabilities and Stockholders EquityCURRENT LIABILITIES:Revolving line of credit
    
    $
    6,645,701
    
    
    $
    4,476,736Current portion of note payable
    
    
    248,110
    
    
    
    244,577Accounts payable
    
    
    10,304,131
    
    
    
    9,974,560Accrued payroll, vacation and payroll taxes
    
    
    541,706
    
    
    
    554,967Other current liabilities
    
    
    382,831
    
    
    
    435,167Total current liabilities
    
    
    18,122,479
    
    
    
    15,686,007LONG-TERM PORTION OF NOTE PAYABLE
    
    
    963,598
    
    
    
    1,026,966DEFERRED INCOME TAXES
    
    
    2,151,051
    
    
    
    2,257,071COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value - 9,000,000 shares
authorized; 4,708,741 shares issued
    
    
    47,087
    
    
    
    47,087Non-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
    
    
    25,503,472
    
    
    
    25,497,814Retained earnings
    
    
    12,539,407
    
    
    
    12,717,625Treasury stock  399,794 common shares at cost
    
    
    (2,157,457
    )
    
    
    (2,157,457
    )Total stockholders equity
    
    
    35,932,509
    
    
    
    36,105,069TOTAL
    
    $
    57,169,637
    
    
    $
    55,075,113
 3




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 THREE MONTHS ENDEDDECEMBER 31,2010
    
    
    2009NET SALES
    
    $
    24,161,110
    
    
    $
    20,042,056COST OF SALES
    
    
    23,058,234
    
    
    
    18,997,829GROSS PROFIT
    
    
    1,102,876
    
    
    
    1,044,227OPERATING EXPENSES:Selling, general & administrative
    
    
    1,339,916
    
    
    
    1,276,798OPERATING LOSS
    
    
    (237,040
    )
    
    
    (232,571
    )OTHER (EXPENSE) INCOME:Interest expense
    
    
    (64,365
    )
    
    
    (22,531
    )Interest income and other income
    
    
    17,166
    
    
    
    15,387LOSS BEFORE INCOME TAXES
    
    
    (284,239
    )
    
    
    (239,715
    )INCOME TAX BENEFIT
    
    
    (106,021
    )
    
    
    (89,413
    )NET LOSS
    
    $
    (178,218
    )
    
    $
    (150,302
    )BASIC LOSS PER SHARE:Net Loss
    
    $
    (0.04
    )
    
    $
    (0.03
    )DILUTED LOSS PER SHARE:Net Loss
    
    $
    (0.04
    )
    
    $
    (0.03
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    4,308,947
    
    
    
    4,308,947Diluted
    
    
    4,308,947
    
    
    
    4,308,947
  4




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 THREE MONTHS ENDEDDecember 31,2010
    
    
    2009OPERATING ACTIVITIESNet loss
    
    $
    (178,218
    )
    
    $
    (150,302
    )Noncash items in net loss:Depreciation and amortization of property, plant and
equipment
    
    
    715,875
    
    
    
    672,674Deferred income taxes
    
    
    (106,020
    )
    
    
    (2,369
    )Stock-based compensation expense
    
    
    5,658
    
    
    
    6,349Changes in operating working capital:Accounts receivable
    
    
    860,756
    
    
    
    (28,854
    )Inventories
    
    
    (3,080,958
    )
    
    
    (2,160,167
    )Prepaid expenses and other assets
    
    
    (207,008
    )
    
    
    (297,703
    )Accounts payable
    
    
    212,913
    
    
    
    878,821Accrued and other current liabilities
    
    
    (65,597
    )
    
    
    10,167Income taxes receivable
    
    
    87
    
    
    
    (89,045
    )Net cash used in operating activities
    
    
    (1,842,512
    )
    
    
    (1,160,429
    )INVESTING ACTIVITIESAdditions to property, plant and equipment
    
    
    (267,675
    )
    
    
    (1,177,971
    )Net cash used in investing activities
    
    
    (267,675
    )
    
    
    (1,177,971
    )FINANCING ACTIVITIESNet borrowings of revolving debt
    
    
    2,168,965
    
    
    
    2,340,879Principal payments on note payable
    
    
    (59,835
    )
    
    
    Net cash provided by financing activities
    
    
    2,109,130
    
    
    
    2,340,879NET (DECREASE) INCREASE IN CASH
    
    
    (1,057
    )
    
    
    2,479CASH:Beginning of period
    
    
    7,899
    
    
    
    4,092End of period
    
    $
    6,842
    
    
    $
    6,571NONCASH SUPPLEMENTAL INFORMATION:Change in construction payable
    
    $
    116,658
    
    
    $
    54,663
 5




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended December 31, 2010 and 2009
(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, 2010 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 2010 Annual Report on
Form 10-K contains a summary of significant accounting policies and includes the consolidated
financial statements and the notes to the consolidated financial statements. The same
accounting policies are followed in the preparation of interim reports. The Companys
condensed consolidated balance sheet at September 30, 2010 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, 2010.
 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 and
comparable borrowing costs for equipment loans.
 3.
    
    Earnings Per Share
 Basic earnings per share is computed using the weighted average number of common shares
outstanding. Diluted earnings per share includes common stock equivalents from dilutive
stock options outstanding during the year. During the three months ended December 31, 2010
and 2009, options to purchase 331,150 and 310,650 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:
 December 31,
    
    
    September 30,2010
    
    
    2010Raw materials
    
    $
    13,386,786
    
    
    $
    11,368,089Finished goods
    
    
    4,024,029
    
    
    
    2,961,768Total inventories
    
    $
    17,410,815
    
    
    $
    14,329,857
 6




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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 June 30. 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. Management noted no indicators of
impairment during the three months ended December 31, 2010 to
indicate that the annual goodwill impairment test should be
accelerated. However, there can be no assurance that
valuation multiples will not decline, growth rates will not be lower than expected, discount rates will not increase, or the projected cash flows of the
individual reporting units will not decline.
 6.
    
    Revolving Line of Credit and Note Payable
 On March 15, 2010, the Company entered into an $8.0 million amended and restated unsecured
revolving line of credit facility with a termination date of January 31, 2011. On December
28, 2010, the Company further amended its credit agreement to increase the revolving credit
availability from $8.0 million to $10.0 million, extend its termination date to January 31,
2012 and modify the required levels of after tax net income (or loss) under its financial
covenants for periods commencing December 31, 2010 and
thereafter. The Companys revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and
a material adverse effect covenant which is subjective in nature. Borrowings under the new
credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to
pay a non-usage fee of .50% per annum on the unused portion of the facility.
 Availability under the facility is based upon specified percentages of eligible accounts
receivable and inventory. The credit agreement is unsecured. The credit agreement contains
certain covenants, including requirements to maintain a minimum tangible net worth and net
income (or net loss) within specified levels.
 As of December 31, 2010, the Company had approximately $3.4 million available and $6.6
million outstanding under its revolving credit line pursuant to its credit agreement.
 7.
    
    Stock Based Compensation
 During the three months ended December 31, 2009 employees of Tufco Technologies Inc. received
discretionary grants on November 30, 2009 to acquire 14,000 shares of common stock under
Tufcos 2003 Non-Qualified Stock Option Plan at an exercise price of $3.19 per share, the
closing price of the Companys common stock on the Nasdaq market as of that date. The grant
date fair value of these options was estimated at $2.26 using the Black-Sholes option-pricing
model with the following assumptions: risk-free interest rate of 0.67%, expected volatility
of 121.4%, no dividend yield and an expected life of three years. No options were granted to
employees during the three months ended December 31, 2010.
 8.
    
    Segment Information
 The Company operates in a single industry since it manufactures and distributes custom
paper-based and nonwoven products, and provides contract manufacturing, specialty printing
and related services on these types of products. The Company does, however, separate its
operations and prepares information for management use by the market segment aligned with the
Companys products and services. Corporate costs, such as interest income, interest expense
and income tax (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.
 7




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Notes to condensed consolidated financial statements(continued)
 Three Months Ended
    
    Contract
    
    
    Business
    
    
    CorporateDecember 31, 2010
    
    Manufacturing
    
    
    Imaging
    
    
    and Other
    
    
    ConsolidatedNet sales
    
    $
    18,596,760
    
    
    $
    5,564,350
    
    
    $
    
    
    
    $
    24,161,110Gross profit
    
    
    815,935
    
    
    
    286,941
    
    
    
    
    
    
    
    1,102,876Operating income (loss)
    
    
    417,093
    
    
    
    (6,960
    )
    
    
    (647,173
    )
    
    
    (237,040
    )Depreciation and
amortization expense
    
    
    685,737
    
    
    
    29,938
    
    
    
    200
    
    
    
    715,875Capital expenditures
    
    
    142,500
    
    
    
    125,175
    
    
    
    
    
    
    
    267,675
 Three Months Ended
    
    Contract
    
    
    Business
    
    
    CorporateDecember 31, 2009
    
    Manufacturing
    
    
    Imaging
    
    
    and Other
    
    
    ConsolidatedNet sales
    
    $
    13,947,418
    
    
    $
    6,094,638
    
    
    $
    
    
    
    $
    20,042,056Gross profit
    
    
    678,243
    
    
    
    365,984
    
    
    
    
    
    
    
    1,044,227Operating income (loss)
    
    
    322,919
    
    
    
    64,073
    
    
    
    (619,563
    )
    
    
    (232,571
    )Depreciation and
amortization expense
    
    
    619,680
    
    
    
    52,401
    
    
    
    593
    
    
    
    672,674Capital expenditures
    
    
    1,146,158
    
    
    
    31,813
    
    
    
    
    
    
    
    1,177,971
 Contract
    
    
    Business
    
    
    CorporateDecember 31, 2010
    
    Manufacturing
    
    
    Imaging
    
    
    and Other
    
    
    ConsolidatedAssets:Inventories-net
    
    $
    13,526,436
    
    
    $
    3,884,379
    
    
    $
    
    
    
    $
    17,410,815Property, plant and
equipment-net
    
    
    16,368,170
    
    
    
    1,937,887
    
    
    
    2,664
    
    
    
    18,308,721Accounts receivable
and other (including
goodwill)
    
    
    14,861,637
    
    
    
    6,064,188
    
    
    
    524,276
    
    
    
    21,450,101Total assets
    
    $
    44,756,243
    
    
    $
    11,886,454
    
    
    $
    526,940
    
    
    $
    57,169,637
 Contract
    
    
    Business
    
    
    CorporateSeptember 30, 2010
    
    Manufacturing
    
    
    Imaging
    
    
    and Other
    
    
    ConsolidatedAssets:Inventories-net
    
    $
    11,096,525
    
    
    $
    3,233,332
    
    
    $
    
    
    
    $
    14,329,857Property, plant and
equipment-net
    
    
    16,798,025
    
    
    
    1,839,374
    
    
    
    2,864
    
    
    
    18,640,263Accounts receivable
and other (including
goodwill)
    
    
    15,333,831
    
    
    
    6,246,288
    
    
    
    524,874
    
    
    
    22,104,993Total assets
    
    $
    43,228,381
    
    
    $
    11,318,994
    
    
    $
    527,738
    
    
    $
    55,075,113
 8




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward Looking Statements
  General Information:
    9




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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-PeriodDecember 31,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Net Sales
    
    $
    24,161
    
    
    $
    20,042
    
    
    $
    4,119
    
    
    
    21
    %Gross Profit
    
    
    1,103
    
    
    
    1,044
    
    
    
    59
    
    
    
    6
    %4.6
    %
    
    
    5.2
    %Operating Expenses
    
    
    1,340
    
    
    
    1,277
    
    
    
    63
    
    
    
    5
    %5.5
    %
    
    
    6.4
    %Operating Loss
    
    
    (237
    )
    
    
    (233
    )
    
    
    (4
    )
    
    
    2
    %(1.0
    %)
    
    
    (1.2
    %)Interest and Other-Net
    
    
    47
    
    
    
    7
    
    
    
    40
    
    
    NM0.2
    %
    
    
    0.0
    %Loss Before Income Taxes
    
    
    (284
    )
    
    
    (240
    )
    
    
    (44
    )
    
    
    18
    %(1.2
    %)
    
    
    (1.2
    %)Income Tax Benefit
    
    
    (106
    )
    
    
    (90
    )
    
    
    (16
    )
    
    
    18
    %(0.4
    %)
    
    
    (0.4
    %)Net Loss
    
    $
    (178
    )
    
    $
    (l50
    )
    
    
    (28
    )
    
    
    19
    %(0.7
    %)
    
    
    (0.7
    %)Basic and Diluted Loss per
Share
    
    $
    (0.04
    )
    
    $
    (0.03
    )
 
 NM
    
    = Not Meaningful Three Months EndedDecember 31,2010
    
    
    2009% of
    
    
    
    
    
    
    % of
    
    
    Period-to-Period ChangeAmount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    $
    
    
    %Net SalesContract Manufacturing and printing
    
    $
    18,597
    
    
    
    77
    %
    
    $
    13,947
    
    
    
    70
    %
    
    $
    4,650
    
    
    
    33
    %Business Imaging paper products
    
    
    5,564
    
    
    
    23
    %
    
    
    6,095
    
    
    
    30
    %
    
    
    (531
    )
    
    
    (9
    %)Net Sales
    
    $
    24,161
    
    
    
    100
    %
    
    $
    20,042
    
    
    
    100
    %
    
    $
    4,119
    
    
    
    21
    %
 2010
    
    
    2009Margin
    
    
    
    
    
    
    % of
    
    
    Period-to-Period ChangeAmount
    
    
    %
    
    
    Amount
    
    
    Total
    
    
    $
    
    
    %Gross ProfitContract Manufacturing and printing
    
    $
    816
    
    
    
    4
    %
    
    $
    678
    
    
    
    5
    %
    
    $
    138
    
    
    
    20
    %Business Imaging paper products
    
    
    287
    
    
    
    5
    %
    
    
    366
    
    
    
    6
    %
    
    
    (79
    )
    
    
    (22
    %)Gross Profit
    
    $
    1,103
    
    
    
    5
    %
    
    $
    1,044
    
    
    
    5
    %
    
    $
    59
    
    
    
    6
    %
 10




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
OperationsContinued
 Net Sales :
    Gross Profit :
   Operating Expenses :
  Interest Expense and Other Income (Expense) net :
  Net Income
  11




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
OperationsContinued
 Liquidity and Capital Resources:
          Off Balance Sheet Arrangements:
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  12




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ITEM 4. Controls and Procedures
    13




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PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. [Removed and Reserved]
 
 ITEM 5. Other Information
  
 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
 14




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SIGNATURES
  TUFCO TECHNOLOGIES, INC.Date:         February 14, 2011
    /s/ Louis LeCalsey, IIILouis LeCalsey, IIIPresident and Chief Executive OfficerDate:         February 14, 2011
    /s/ Michael B. WheelerMichael B. WheelerExecutive Vice President, Chief Financial Officer and
Chief Operating Officer 15