Turning Point Brands, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing also reports fourth-quarter results. Financial amounts below are in U.S. dollars; annual financial statement amounts are presented in millions unless stated otherwise.
Business context
Turning Point Brands manufactures, markets and distributes adult-use consumer products through three segments: Zig-Zag Products (rolling papers, wraps and cigars), Stoker’s Products (moist snuff and chewing tobacco), and NewGen Products (vape distribution and related products). Its products reach an estimated 215,000 North American retail locations. More than 80% of net sales came from outsourced production. No customer represented 10% or more of net sales.
Financial results and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $445.5 million | $405.1 million | +10.0% |
| Gross profit / margin | $217.8 million / 48.9% | $190.0 million / 46.9% | +14.7%; +2.0 pts |
| Operating income | $90.3 million | $64.4 million | +40.2% |
| Net income attributable to TPB | $52.1 million | $38.2 million | +36.3% |
| Basic / diluted EPS | $2.75 / $2.52 | $1.97 / $1.85 | Higher |
| Operating cash flow | $68.2 million | $43.7 million | +56% |
| Capital expenditures | $6.2 million | $6.1 million | Approximately flat |
Operating cash flow less capital expenditures was approximately $62.1 million, compared with $37.5 million in 2020. Unrestricted cash was $128.3 million at year-end, up from $41.8 million; restricted assets were $34.7 million. Reported working capital, defined by the company as current assets less cash and current liabilities, was $80.5 million versus $65.0 million.
Gross debt principal totaled $422.5 million: $250.0 million of 5.625% senior secured notes due 2026 and $172.5 million of 2.50% convertible notes due 2024. Net debt carrying value was $414.2 million after deferred financing costs. The company had a $25 million revolving facility with no borrowings and $3.6 million of letters of credit outstanding. Net interest expense rose 52% to $20.5 million, primarily following the refinancing.
Fourth quarter: Net sales were $105.3 million, essentially unchanged from $105.3 million in Q4 2020. Gross profit was $50.3 million versus $52.3 million, and net income attributable to TPB was $11.5 million versus $14.4 million. Diluted EPS was $0.57 versus $0.68.
Material changes versus FY2020
- Zig-Zag sales grew 32.9% to $176.5 million, led by MYO cigar wraps and U.S. rolling papers; volume rose 29.7% and price/mix 3.2%.
- Stoker’s sales increased 7.3% to $124.3 million. Moist snuff growth and pricing offset a low-single-digit decline in loose-leaf chewing tobacco.
- NewGen sales fell 7.5% to $144.7 million, reflecting lower vape distribution sales after strong prior-year B2C demand and amid regulatory changes.
- Consolidated gross margin expanded, mainly from Stoker’s moist snuff mix and incremental margins. NewGen gross profit declined, although its margin improved to 32.5%; tariff expense was $1.1 million versus $10.1 million in 2020.
- The company issued $250 million of senior secured notes and repaid its $130 million first-lien term loan. It repurchased $38.7 million of stock during the year and paid $4.1 million of dividends.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management describes growth priorities as expanding existing brands and distribution, developing adjacent products, increasing proprietary vape-product mix, pursuing international growth and selectively evaluating acquisitions. It announced an exclusive U.S. and Canadian CLIPPER lighter distribution agreement in February 2022.
- Regulatory exposure: FDA premarket applications covered 250 products. The FDA’s September 2021 marketing denial order for certain proprietary e-liquids was rescinded in October 2021; the applications remain subject to review, and authorization is not assured. PACT Act changes extended shipping restrictions to e-cigarettes and related products, increasing logistics costs.
- Key risks: Extensive and changing tobacco and vape regulation, potential flavor restrictions and taxes, litigation and product liability, reliance on RTI for Zig-Zag papers and Swedish Match for loose-leaf tobacco, supply disruptions, competition, consumer shifts, and debt obligations. Tobacco products represented approximately 68% of 2021 net sales.
- Controls: Management and the independent auditor concluded internal control over financial reporting was ineffective at year-end because of a material weakness in IT general controls over user access and program change management. No financial-statement misstatements were identified. Management expected remediation before the end of 2022. The financial-statement audit opinion was unqualified.
- Unusual items: A $7.1 million impairment of the dosist investment reduced earnings; the company also recorded a $2.2 million gain on debt extinguishment, including forgiveness of a $7.5 million CARES Act loan. The loan forgiveness remains subject to audit through 2027, though repayment was considered not probable. The Unitabac asset acquisition cost $10.7 million; investments included $8.7 million in Docklight and an $8.0 million convertible note to Old Pal.
- The company changed inventory accounting from LIFO to FIFO retrospectively and early adopted convertible-debt accounting guidance. It also ceased to be an emerging growth company after December 31, 2021.
Important facts for investors to verify
- Progress and evidence of remediation of the IT-controls material weakness, including auditor assessment in subsequent filings.
- FDA decisions on pending PMTAs, any further orders, and the commercial impact of PACT Act shipping requirements.
- NewGen sales and profitability trends, including the shift toward proprietary products and the impact of regulatory and shipping costs.
- Cash generation relative to debt service, repurchases, dividends, acquisitions and the 2024 convertible-note maturity.
- Valuation and performance of investments, particularly dosist, Docklight and Old Pal, and the assumptions supporting impairment assessments.
- Exposure to key suppliers and the terms and continued availability of Zig-Zag licensing and distribution agreements.