Turning Point Brands, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. The company manufactures, markets and distributes adult-use tobacco, smoking-accessory and vapor products through Zig-Zag Products, Stoker’s Products and NewGen Products.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $415.0 million | $445.5 million |
| Gross profit / margin | $205.5 million / 49.5% | $217.8 million / 48.9% |
| Operating income / margin | $75.5 million / 18.2% | $90.3 million / 20.3% |
| Net income attributable to TPB | $11.6 million | $52.1 million |
| Operating cash flow | $30.3 million | $68.2 million |
| Capital expenditures | $7.7 million | $6.2 million |
| Unrestricted cash at year-end | $106.4 million | $128.3 million |
| Gross debt principal | $412.5 million | $422.5 million |
Gross margin improved by 0.6 percentage points, but operating income fell 16.4% and net income attributable to TPB fell 77.6%. The 2022 effective tax rate was 30.3%. Adjusted EBITDA, a non-GAAP measure, was $97.6 million versus $108.1 million; the 2022 calculation added back $41.1 million of non-cash asset impairment.
Operating cash flow declined 56%, primarily due to working-capital changes, including a $32.7 million increase in inventory. The company reported working capital, defined as current assets less cash and current liabilities, of $109.9 million, up from $80.5 million. It had a $25 million revolving facility with no borrowings and approximately $3.6 million of letters of credit outstanding. Management said cash flow and revolver availability should meet operating cash requirements for the foreseeable future.
Debt comprised $250 million of 5.625% senior secured notes due 2026 and $162.5 million of 2.50% convertible notes due July 2024. A subsidiary repurchased $10 million principal of convertible notes for $9 million during 2022. The notes carry covenants and the secured notes are backed by liens on substantially all assets of the company and guarantors.
Material changes and unusual items
- Net sales declined 6.8%. Zig-Zag revenue rose 7.9% to $190.4 million, and Stoker’s rose 5.3% to $130.8 million. NewGen revenue dropped 35.2% to $93.8 million, primarily due to vape distribution declines amid regulatory change.
- NewGen gross profit fell 41.1% to $27.7 million; its operating income was $1.5 million. The company fully impaired NewGen goodwill ($25.6 million) and recorded further intangible impairment, bringing total goodwill and intangible impairment expense to $27.6 million.
- Investment loss increased to $13.3 million, including impairments of investments. SG&A included $4.6 million of PMTA costs, $3.4 million of restructuring expense and $2.0 million of ERP/CRM costs.
- Fourth-quarter net sales were $103.4 million and net loss attributable to TPB was $16.3 million, primarily reflecting impairment charges.
- NewGen was reorganized under Creative Distribution Solutions in December 2022 and removed as a guarantor and covenant party under the company’s debt facilities. Graham Purdy became CEO in October 2022; David Glazek became Executive Chair in January 2023.
- The company repurchased 1.02 million shares for $29.2 million during 2022 and paid $4.3 million in dividends. At year-end, $27.2 million remained authorized for repurchases.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management describes growth opportunities in existing brands, new products such as CLIPPER lighters, e-commerce, international markets and selective acquisitions. It also points to inflation, consumer purchasing power, supply costs and regulatory costs as pressures.
- FDA and market access: FDA authorization for many vapor and novel nicotine products remains pending. The company has spent approximately $24 million on PMTA filings and says there is no assurance applications will be authorized. Regulatory changes, enforcement, flavor restrictions, taxes and shipping rules could affect sales and costs.
- Control weaknesses: Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2022 due to two material weaknesses: IT general controls over user access and program changes, and risk-assessment controls including segregation of duties. The auditor nevertheless issued an unqualified opinion on the financial statements. Management outlined remediation actions, including a new ERP system and added training and personnel.
- Supply and brand dependence: Key relationships include RTI for Zig-Zag papers and related products and Swedish Match, now owned by Philip Morris International, for all loose-leaf chewing tobacco production. Disruption or loss of these arrangements could materially affect operations. Certain Zig-Zag products rely on licensed marks and agreements.
- Legal matters: The company faces lawsuits alleging injuries from malfunctioning vaporizer devices and a franchise arbitration claim; it says outcomes could be adverse, but the filing does not provide a clear quantified exposure. A shareholder action related to a prior transaction reached a tentative settlement, with no material impact expected.
- Other risks: Tobacco-market decline, competition, illicit products, product liability, cyber incidents, tariffs, currency movements and economic conditions may affect results. The company reported $32.1 million of MSA escrow deposits at cost, with fair value of $28.0 million after unrealized losses; it expects releases to begin in 2024.
Important facts for investors to verify
- Whether NewGen sales and profitability stabilize, and the assumptions underpinning the $25.6 million goodwill impairment.
- The status and potential outcomes of pending FDA applications, enforcement actions and compliance costs.
- Progress in remediating both material weaknesses and the effect of ERP implementation on reporting controls.
- Cash generation and inventory levels: year-end inventory rose to $119.9 million from $87.6 million while operating cash flow declined.
- Debt repayment or refinancing plans ahead of the convertible notes’ July 2024 maturity, including the effect of debt covenants and the NewGen separation.
- Exposure from vaporizer-device litigation and continued reliance on RTI and Swedish Match for critical products.