Turning Point Brands, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Unaudited consolidated results. The company manufactures, markets, and distributes branded consumer products through Zig-Zag Products, Stoker’s Products, and Creative Distribution Solutions (CDS).
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $101.0 million | $100.9 million | Up 0.1% |
| Gross profit / margin | $48.6 million / 48.2% | $51.8 million / 51.3% | Profit down 6.1%; margin down 3.1 points |
| Operating income | $17.8 million | $19.2 million | Down 7.2% |
| Net income attributable to TPB | $7.6 million | $11.0 million | Down 30.9% |
| Diluted EPS | $0.41 | $0.55 | Down $0.14 |
| Adjusted EBITDA (non-GAAP) | $20.8 million | $25.3 million | Down 17.7% |
| Operating cash flow | $15.4 million | $13.0 million | Up $2.3 million |
| Capital expenditures | $2.4 million | $2.8 million |
Sales were nearly flat, but gross profit and earnings declined. The largest below-operating-income item was a $4.8 million investment loss, principally a $4.9 million impairment of the Docklight investment. This was partly offset by a $0.8 million gain on extinguishment of debt. Net interest expense fell to $4.0 million from $5.2 million, reflecting note repurchases and higher interest income on cash.
Segments and material changes
- Zig-Zag Products: Sales fell 8.3% to $41.9 million; volume declined 8.6%, partly offset by 0.3% favorable price/mix. Management cited anticipated U.S. rolling-paper and wraps declines and reduced trade inventory, partly offset by Canadian and other accessories growth. Gross margin fell to 53.5% from 57.7%, with mix including lower-margin CLIPPER lighters contributing.
- Stoker’s Products: Sales rose 6.2% to $33.7 million, with volume up 0.3% and price/mix up 5.9%. Gross margin increased to 57.8% from 55.8%; management cited strong incremental margin from moist snuff tobacco.
- CDS: Sales increased 8.0% to $25.4 million, primarily on improved vape-distribution volumes. Gross profit declined 12.9% to $6.8 million and segment gross margin fell to 26.6% from 33.0%, primarily due to product mix. Business-to-business sales increased, while online business-to-consumer sales declined.
Cash, liquidity, and debt
- At March 31, cash was $104.8 million; total current assets were $247.1 million and current liabilities $36.3 million. Working capital, defined by the company excluding cash, was $105.9 million, down from $109.9 million at year-end 2022.
- Cash from operations was $15.4 million. Investing activities used $2.4 million and financing activities used $14.6 million; cash decreased $1.6 million during the quarter.
- Long-term debt carrying value was $393.6 million, comprising $250.0 million of 5.625% senior secured notes due 2026 and $148.6 million of 2.50% convertible notes due July 2024, net of financing costs. Gross principal debt was $398.6 million. The company repurchased $13.9 million face value of convertible notes for $13.0 million during the quarter. Cash less gross principal debt was approximately $293.8 million, before considering restricted cash and other obligations.
- The $25 million revolving facility had no borrowings; approximately $1.4 million of letters of credit were outstanding and reported availability was $23.6 million. The company said it was in compliance with debt covenants at quarter-end and believed cash, operating cash flow, and revolver availability were adequate for foreseeable operating needs.
Outlook, commentary, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management described growth opportunities in acquisitions, joint ventures, product launches, and market penetration, while noting consumer price sensitivity, inflation, and pressure on purchasing power. It said price increases had been implemented where feasible and variable costs were relatively stable.
- Regulatory uncertainty is significant: FDA review of tobacco-derived and non-tobacco nicotine product applications remains ongoing, and the company cautioned that applications may not succeed. CDS also depends in part on third-party products and manufacturers’ regulatory compliance. Proposed flavor restrictions and changing federal, state, and local rules could affect products and sales.
- The company recognized a $4.9 million Docklight investment impairment based on operating difficulties and lower comparable-company revenue multiples; further impairment is possible if performance or market conditions worsen. The Old Pal investment’s first-quarter qualitative assessment found no change in fair value.
- Reported controls and procedures were not effective at March 31, 2023, due to previously disclosed material weaknesses in IT general controls and financial-reporting risk assessment, including segregation-of-duties risks. No resulting financial-statement misstatements were identified; remediation had not yet been demonstrated through sufficient testing.
- Contingencies include vapor-device product-liability claims, franchise arbitrations, and regulatory inquiries involving the vapor industry. A tentative settlement in a shareholder lawsuit was reached; the company did not expect a material impact. The filing cautions that litigation outcomes are uncertain.
- The $0.065-per-share quarterly dividend was paid April 7, 2023. Dividend and repurchase activity is subject to debt restrictions. The filing’s reported 38,863 share purchases in the quarter were shares withheld for award-related taxes, not purchases under the public repurchase authorization.
Important facts for investors to verify
- Whether FDA decisions, enforcement priorities, or state and local restrictions affect the company’s products, applications, or third-party CDS distribution.
- Whether CDS can improve gross margin as sales grow, and whether Zig-Zag sales and trade inventories stabilize.
- Whether Docklight’s valuation requires further impairment and how the investment loss affects future reported earnings.
- The company’s plan and progress for remediating material weaknesses, including evidence that controls operate effectively.
- Convertible-note maturity and refinancing or repayment plans, covenant headroom, and the conditions governing dividends and share repurchases.