Summary of TUFCO TECHNOLOGIES INC

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 2009 results in comparison to fiscal 2008 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 changes in customer demand for its products, cancellation of production agreements by significant customers including two Contract Manufacturing customers it depends upon for a significant portion of its business, its ability to renew its production agreements with one of these customers, the effects of the economy in general including the recent economic decline, material increases in the cost of base paper stock, competition in the Company's product areas, an inability of management to successfully reduce operating expenses including labor and waste costs in relation to net sales, the Company's ability to increase sales and earnings as a result of new projects, the Company's ability to successfully install new equipment on a timely basis, the Company's ability to produce new products, the Company's ability to continue to improve profitability, the Company's ability to successfully attract new customers through its sales initiatives and the Company's ability to improve the run rates for its products. Therefore, the financial data for the periods presented may not be indicative of the Company's future financial condition or results of operations.
General Information:
Tufco is a leader in providing diversified contract wet and dry wipes converting and printing, as well as specialty printing services and business imaging products. The Company's business strategy is to continue to place our wipes converting at the leading edge of existing and emerging wipes growth opportunities. The Company works closely with its Contract Manufacturing clients to develop products or perform services which meet or exceed the customers' quality standards, and then uses the Company's operating efficiencies and technical expertise to supplement or replace its customers' own production and distribution functions.
The Company's technical proficiencies include wide web flexographic printing, wet and dry wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging and quality and microbiological process management and the manufacture and distribution of business imaging paper products. The Company has manufacturing operations in Green Bay, WI, which is ISO certified, and Newton, NC. The Company's corporate headquarters, including corporate support services, are located in Green Bay, WI.

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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-Period
                                            December 31,                 Change
                                         2008          2007           $            %
         Net Sales                     $ 23,186     $ 24,818      $  (1,632 )      (7 )

         Gross Profit                     1,037        1,105            (68 )      (6 )
                                            4.5 %        4.5 %

         Operating Expenses                 989          970             19         2
                                            4.3 %        3.9 %

         Operating Income                    48          135            (87 )     (64 )
                                            0.2 %        0.5 %

         Interest Expense                    43           87            (44 )     (51 )
                                            0.2 %        0.4 %

         Income Before Income Taxes          19           66            (47 )     (71 )
                                            0.1 %        0.3 %

         Income Tax Expense                   7           26            (19 )     (73 )
                                            0.0 %        0.1 %

         Net Income                    $     12     $     40            (28 )     (70 )
                                            0.1 %        0.2 %



                                             Three Months Ended
                                                December 31,
                                    2008                           2007
                                            % of                           % of              Period-to-Period Change
                            Amount          Total          Amount          Total               $                    %
Net Sales
Contract
Manufacturing and
printing                   $ 17,436             75 %      $ 19,099             77 %      $       (1,663 )              (9 %)
Business Imaging
paper products                5,750             25 %         5,719             23 %                  31               0.5 %

Net Sales                  $ 23,186            100 %      $ 24,818            100 %      $       (1,632 )              (7 %)




                                    2008                           2007
                                           Margin                         Margin             Period-to-Period Change
                           Amount            %            Amount            %                  $                   %
Gross Profit
Contract
Manufacturing and
printing                   $   799               5 %      $   729               4 %      $          70                10 %
Business Imaging
paper products                 238               4 %          376               7 %               (138 )             (37 %)

Gross Profit               $ 1,037               4 %      $ 1,105               4 %      $         (68 )              (6 %)

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Continued
Net Sales:
Consolidated net sales decreased $1.6 million (7%) to $23.2 million in the first quarter of fiscal 2009, when compared to the same period last year. This was due to a decrease of $1.7 million (9%) in the Contract Manufacturing segment partially offset by a slight increase of $31,000 (0.5%) in the Business Imaging segment.
The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 27% of the Company's total net sales in the first quarter of fiscal 2009 compared to 39% for the same period in fiscal 2008. The second customer accounted for 37% of the Company's total net sales in the first quarter of fiscal 2009 compared to 30% for the same period in fiscal 2008.
In Contract Manufacturing, the decrease in revenues was primarily related to a drop in sales of a product which benefited from a market launch in the first quarter of fiscal 2008. In addition, sales of an existing product were lost due to a customer required packaging conversion which was outside of Tufco's then current capabilities. These decreases were partially offset by increases in consumer demand for other existing products and business from new customers. The Business Imaging segment remained relatively flat for the first three months primarily due to continued strong price competition for the segment's products. Both segments were affected by the overall slowdown in the economic environment. Gross Profit:
Consolidated gross profit decreased $68,000 (6%) for the first quarter of fiscal 2009 when compared to the first quarter of fiscal 2008. This was due to an increase of $70,000 (10%) in the Contract Manufacturing segment and a decrease of $138,000 (37%) in the Business Imaging segment.
In Contract Manufacturing, the increase in gross profit for the three months was primarily due to operational gains made as a result of the Company's continuing LEAN Manufacturing and Six Sigma initiatives. In addition, other operational expenses were reduced to reflect the decrease in net sales. In Business Imaging, the decrease in gross profit for the three months was largely due to strong price competition for the segment's products. The effect of the overall economic slowdown had a negative impact on both segments. Operating Expenses:
Selling, general and administrative expenses increased $57,000 (6%) for the first quarter of fiscal 2009 when compared to the same period in fiscal 2008, due to an increase in sales staffing and the filling of the General Manager position for the Business Imaging sector. Operating expenses for the three months ended December 31, 2008 were reduced by $37,500, reflecting the gain on the sale of a bag sealer and case packer that was completed in the first quarter of fiscal 2009.
Interest Expense and Other Income (Expense) net:
Interest expense decreased $44,000 to $43,000 for the first quarter of fiscal 2009 compared to the same period in fiscal 2008 due to lower average debt outstanding and lower interest rates on borrowings.

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Continued
Net Income:
The Company reported net income of $12,000 (per share: $0.00 basic and diluted) for the first quarter of fiscal 2009, versus net income of $40,000 (per share:
$0.01 basic and diluted) for the same period in fiscal 2008. Liquidity and Capital Resources:
Cash flows (used in) operations were $0.6 million through the first three months of fiscal 2009, compared to cash provided by operations of $0.5 million for the same period last year. Cash used in operations for the first three months of fiscal 2009 resulted from an increase in accounts receivable of $0.5 million. Accounts payable decreased $1.0 million in the first three months of fiscal 2009 compared to the same period last year, primarily due to the decrease in materials purchased. Inventories decreased $0.7 million as a result of efforts to reduce average on hand inventory levels for major raw material components and decreases in net sales. Depreciation was $0.6 million for the first three months.
Net cash used in investing activities was $0.4 million for the first three months of fiscal 2009, primarily related to capital expenditures to support ongoing operational needs and for payments on a canister line and associated packaging equipment to support the Company's growth in the expanding disposable nonwovens wipes market.
Net cash provided by financing activities was $1.0 million for the first three months of fiscal 2009 as a result of the Company borrowing from its revolving credit line to fund a portion of its increased working capital and equipment needs. In February 2008, the Company's Board of Directors approved a program for open market stock repurchases through December 31, 2008 for up to 100,000 shares of its common stock at prevailing market prices after concluding that the Company's cash and debt position would enable these purchases without impairment to the Company's capital. On October 15, 2008, the Company's Board of Directors approved an extension of its February 2008 stock repurchase program through June 2009 and an increase in the number of shares from 100,000 to 200,000. A total of 160,646 shares were purchased under the plan for an aggregate purchase price of $0.8 million from approval of the plan through December 31, 2008. For the three months ended December 31, 2008, a total of 81,706 shares were purchased under the plan for an aggregate purchase price of $0.3 million. On January 22, 2009 the Company's Board of Directors approved a further extension of its February 2008 stock repurchase program through September 2009 and an increase in the number of shares from 200,000 to 300,000.
The Company's primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of December 31, 2008, cash recorded on the balance sheet was $6,767.
The credit agreement governing the Company's revolving credit line, as amended on February 9, 2007 and March 18, 2008, includes a $14.0 million revolving line of credit facility as well as a $1.0 million swing line available for overdrafts and expires on May 18, 2010.
As of February 13, 2008, the Company had approximately $10.8 million available and $4.2 million outstanding under the revolving credit line pursuant to its credit agreement. According to the terms of the credit agreement, the Company is subject to certain financial and operational covenants. As of December 31, 2008, the Company was in compliance with all of its covenants under the 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 long term obligations as of December 31, 2008 and any budgeted capital expenditures.
The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future.
Off Balance Sheet Arrangements:
The Company has no Off Balance Sheet Arrangements (as defined in Item 303(a)(4) of Regulation S-K).

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