Turning Point Brands, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Unless noted, amounts are in U.S. dollars.
Business context and reporting period
Turning Point Brands sells other tobacco products (OTP), including smokeless tobacco, cigarette papers and wraps, cigars, and vapor products. It reports three segments: Smokeless, Smoking, and NewGen. The company does not sell cigarettes. Its VaporBeast and Vapor Shark acquisitions expanded NewGen distribution and drove much of 2017’s sales growth.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $285.8 million | $206.2 million |
| Gross profit / margin | $124.9 million / 43.7% | $100.4 million / 48.7% |
| Operating income | $49.5 million | $43.6 million |
| Net income attributable to TPB | $20.2 million | $26.9 million |
| Diluted earnings per share | $1.04 | $1.49 |
| Adjusted EBITDA (non-GAAP) | $60.0 million | $52.4 million |
| Cash from operating activities | $29.7 million | $9.1 million |
| Capital expenditures | $2.0 million | $3.2 million |
Fourth-quarter 2017 net sales were $73.6 million, gross profit was $32.3 million, and net income attributable to TPB was $3.5 million; diluted EPS was $0.18.
At December 31, 2017, cash was $2.6 million and working capital was $41.3 million. Gross debt, including revolving borrowings and the VaporBeast note, was approximately $205.6 million; the company reported a 3.3x leverage ratio, calculated using net debt and Adjusted EBITDA. The filing states the company was in compliance with its 2017 credit-facility covenants. Restricted MSA escrow assets were $30.8 million and are not ordinary operating cash.
Material changes versus the prior comparable period
- Sales increased 38.6%, reflecting 34.2% volume growth and 4.4% price/mix improvement. NewGen sales rose 427.2% to $91.3 million, primarily due to VaporBeast and Vapor Shark; Smokeless sales rose 8.5% to $84.6 million.
- Smoking sales declined 0.9% to $110.0 million, as lower cigar investment and volume declines outweighed improved price/mix.
- Gross margin fell five percentage points to 43.7%, mainly because the acquired VaporBeast distribution business has lower margins. Segment NewGen gross margin improved to 27.5% from 23.8%.
- Operating income increased, but attributable net income fell 24.9%. Results included a $6.1 million debt-extinguishment loss and $7.3 million income-tax expense, compared with a $12.0 million tax benefit in 2016. Interest expense decreased to $16.9 million from $26.6 million.
- Operating cash flow rose to $29.7 million; investing activities used $1.9 million and financing activities used $28.0 million. The company initiated a $0.04-per-share quarterly dividend in December 2017.
Outlook, commentary, risks, and unusual items
Management provided no specific revenue or earnings guidance. It described plans to grow existing brands and distribution, develop products, expand internationally, pursue acquisitions, and build the NewGen platform. Management said operating cash flows and borrowing availability under the 2018 revolving facility were expected to meet operating needs for the foreseeable future.
- Subsequent refinancing: On March 7, 2018, TPB amended and extended its $250 million credit facility. Maturities were extended to 2023 for first-lien term debt and 2024 for second-lien term debt; the company expected an approximately $2.4 million extinguishment loss in first-quarter 2018. As of March 1, 2018, it reported $199.1 million outstanding and $46.5 million of additional revolver capacity.
- Regulatory and tax exposure: FDA oversight of tobacco and newly deemed vapor, cigar, and pipe products could raise compliance costs or constrain sales. State and local tobacco taxes, including taxes on vapor products, may also affect demand.
- Supply and brand concentration: The company depends on key producers, including Swedish Match, Bolloré, Durfort, and JJA. Bolloré pricing was under a temporary structure as of March 1, 2018, with no assurance of a satisfactory new agreement. The company also relies on licensed Zig-Zag products.
- Debt and other risks: Debt covenants restrict certain actions, and variable-rate debt exposes earnings to interest-rate changes. Other disclosed risks include declining tobacco consumption, competition, product-liability litigation, uncertain NewGen demand and regulation, and acquisition-integration challenges.
- Contingencies and unusual items: TPB disclosed lawsuits alleging injuries from malfunctioning vaporizer devices; it said it was evaluating claims and defenses. The company also recorded a $0.9 million 2017 charge related to buying out an option on Vapor Shark retail stores. It discontinued its remaining MYO cigarette-tobacco line in 2017 and expected no MSA escrow deposits after the final deposit relating to 2017 sales.
Important facts for investors to verify
- How much of NewGen’s growth and profitability is sustainable, and how acquisition-related results compare with organic growth.
- Whether gross margins recover as NewGen expands and whether operating cash flow continues to support debt service, investment, and dividends.
- The final Bolloré pricing agreement and ongoing supply continuity for other key outsourced products.
- FDA authorization timelines, compliance costs, and any material developments in vaporizer-product litigation.
- The precise debt and liquidity position after the March 2018 refinancing, including covenant headroom and future interest costs.