Turning Point Brands, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Turning Point Brands sells other tobacco products across smokeless, smoking and NewGen (vapor/e-cigarette) segments. The company completed its IPO in May 2016.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the prior-year period.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $51.6 | $48.0 | $101.4 | $99.1 |
| Gross profit / margin | $24.9 / 48.2% | $22.6 / 47.1% | $49.5 / 48.8% | $47.3 / 47.7% |
| Operating income | $10.8 | $7.7 | $21.7 | $19.7 |
| Net income (loss) | $0.8 | ($1.4) | $3.0 | $2.0 |
| Diluted EPS | $0.05 | ($0.20) | $0.22 | $0.24 |
| Adjusted EBITDA (non-GAAP) | $12.8 | $11.3 | $25.3 | $25.2 |
Q2 sales grew 7.5%; six-month sales grew 2.4%. Growth in smokeless and smoking products more than offset declines in NewGen. Q2 operating margin was approximately 20.9%; six-month operating margin was approximately 21.4%. Six-month diluted EPS fell despite higher net income, reflecting the substantially larger weighted-average share count following the IPO.
- Segments: Q2 smokeless sales increased 16.1% to $21.7 million, and smoking sales increased 8.8% to $26.8 million. NewGen sales declined 34.1% to $3.1 million and generated a $0.6 million operating loss. For the first half, segment sales were $40.0 million (smokeless), $54.7 million (smoking) and $6.7 million (NewGen); NewGen operating loss widened to $0.5 million from $0.3 million.
- Cash flow: First-half operating cash flow was negative $9.1 million versus negative $1.5 million a year earlier. Inventory growth used $7.4 million; the company also paid $9.9 million of accrued PIK interest when redeeming notes. Investing cash outflow was $0.9 million, primarily capital expenditures. Financing activities provided $8.7 million, including IPO proceeds.
- Liquidity: Cash was $3.6 million at June 30, down from $4.8 million at year-end. Working capital was $46.4 million, compared with $42.8 million at year-end; current assets were $70.5 million and current liabilities $24.1 million. The company reported $27.4 million of additional borrowing capacity under its revolving facility.
- Debt: Management reported total debt of $207.7 million and net debt of $204.1 million at June 30. The balance sheet reports $199.4 million of notes payable and long-term debt, plus current term-loan and revolver balances. The filing reports weighted-average rates of 7.78% on the first-lien term loan, 11.5% on the second-lien loan and 5.0% on the revolver. The company said it was in compliance with debt covenants.
Material changes and unusual items
- The IPO raised $62.1 million gross and approximately $58.2 million net. Proceeds and related transactions funded repayment of approximately $34 million of PIK Toggle Notes and $20 million of second-lien debt, and retirement of the PIK Toggle and 7% Senior Notes. Some PIK Toggle and Senior Notes were exchanged for shares. The filing records a $2.8 million debt-extinguishment loss.
- Gross margin improved year over year, supported by favorable product mix in smoking products. Smokeless margin declined slightly due to product mix and introductory discounts. NewGen margins were pressured by returns and obsolete inventory write-offs; management said trade return rates moderated in May and June.
- Q2 SG&A declined 5.2%, partly reflecting lower strategic-initiative and launch spending. First-half SG&A increased 1.1%; reported costs included $0.6 million of nonrecurring IPO compensation and $0.1 million of recurring public-company costs.
- Inventory rose to $51.8 million from $44.3 million at year-end. Management estimated smokeless trade inventories increased approximately $1.3 million from trade-show promotions.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management said operating cash flows and revolver availability should be adequate for operating requirements for the foreseeable future, and expects inflation’s effect to be minimal. Management also cited its historical ability to raise prices at or above inflation. These statements are forward-looking and not guarantees.
Risks highlighted include declining tobacco-product demand, increasing tobacco and FDA regulation (including uncertainty around NewGen products), taxes, supplier and retailer concentration, competition and illicit products, product liability, indebtedness and restrictive credit covenants, and uncertain long-term health effects of vapor products. The company had no foreign-exchange forward contracts at June 30. Management said ordinary-course legal matters were not expected to have a material adverse effect; outcomes remain uncertain. The company also disclosed that $233.4 million of consolidated assets were restricted from transfer to the parent without third-party consent.
Most important facts to verify
- Reconcile debt measures and presentation: management’s $207.7 million total-debt figure, net debt of $204.1 million, and the balance-sheet carrying amounts after deferred financing costs and current maturities.
- Assess whether improved core-segment sales and margins can offset continuing NewGen declines, returns and inventory obsolescence.
- Track operating cash conversion, inventory levels and working-capital needs after the first-half operating cash outflow.
- Review covenant headroom, borrowing-base availability and the high interest cost of the second-lien debt.
- Monitor the effects of post-IPO dilution on per-share results, and regulatory, tax and product-liability developments across the tobacco and vapor businesses.