Turning Point Brands, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the same 2019 periods unless otherwise noted. Amounts are in U.S. dollars. TPB manufactures, markets and distributes adult consumer products across Smokeless, Smoking and NewGen segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $104.2 million | $96.8 million | $299.8 million | $281.8 million |
| Gross profit | $48.3 million | $42.8 million | $137.8 million | $124.5 million |
| Gross margin | 46.4% | 44.2% | 46.0% | 44.2% |
| Operating income | $16.0 million | $13.0 million | $42.4 million | $45.0 million |
| Net income | $7.8 million | $6.3 million | $20.3 million | $26.0 million |
| Diluted EPS | $0.40 | $0.31 | $1.02 | $1.32 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $33.2 million | $20.0 million |
- Q3 sales rose 7.6%; Smokeless grew 13.7% and Smoking 19.0%, while NewGen declined 4.8%. For the nine-month period, sales rose 6.4%, with Smokeless up 16.3%, Smoking up 13.8%, and NewGen down 4.2%.
- Q3 gross margin expanded to 46.4%, driven by improved Smokeless and Smoking margins. NewGen gross margin weakened amid temporary pricing pressure. Nine-month gross margin was 46.0%, versus 44.2%.
- Nine-month operating income fell 5.8% and net income fell 22.0%, despite higher sales and gross profit. SG&A rose 20.1%, including $14.4 million of PMTA-related expense; net interest expense also increased.
- Adjusted EBITDA, a non-GAAP measure, was $23.9 million in Q3 versus $18.8 million, and $64.5 million for nine months versus $53.1 million. The 2020 measure includes substantial PMTA expense add-backs; assess the company’s reconciliation and exclusions when comparing performance.
Cash, liquidity and debt
- At September 30, cash was $67.4 million; current assets were $170.5 million and current liabilities $55.0 million, for reported working capital of $115.5 million, down from $133.4 million at year-end 2019.
- Nine-month operating cash flow was $33.2 million. Investing used $41.2 million, principally reflecting $37.7 million of cash consideration for the Durfort asset acquisition; financing used $16.9 million. Cash declined $24.8 million from the start of the year.
- Gross debt principal was $328.0 million, including $138.0 million on the first-lien term loan, $172.5 million of 2.50% convertible notes due 2024, a $10.0 million Durfort promissory note, and a $7.5 million unsecured loan. Reported notes payable and long-term debt, after discounts, financing costs and current maturities, was $283.8 million.
- TPB reported $46.4 million available on its $50 million revolving facility after letters of credit. It said it was in compliance with credit-facility covenants and believed operating cash flow and revolver availability were adequate for foreseeable operating needs. No revolver borrowings were outstanding.
Material developments, outlook and risks
- TPB completed the SDI merger in July 2020, retiring 244,214 TPB shares and eliminating its controlling-shareholder structure. It acquired Durfort tobacco assets and distribution rights for $47.7 million total consideration, including a $10.0 million note.
- Management cited COVID-19-related safety and fulfillment costs, temporary shutdown of a Dominican Republic cigar-wrap supplier, delayed selected price increases, and higher demand and market share on B2C online platforms. The company reported its broader supply chain remained operational.
- TPB filed PMTAs covering 250 products by the September 9, 2020 deadline. FDA review and authorization remain uncertain; management said applications may require further supplementation and prioritization, with possible effects on product availability, revenue, costs and competition. The filing provides no formal earnings or revenue guidance.
- Other risks include evolving tobacco and vapor regulation, potential flavor restrictions, dependence on third-party suppliers and distributors, product-liability claims, and competition from unauthorized products. The filing describes a shareholder lawsuit concerning the SDI merger, vapor-product injury lawsuits, a franchisee dispute, and regulatory information requests; outcomes and financial exposure are uncertain.
- Subsequent events include a $2.5 million investment for a 20% stake in Wild Hempettes, sale of the remaining seven Vapor Shark stores, and a $15.0 million investment in dosist with an option for a further $15.0 million investment. These occurred after quarter-end.
Investor verification points
- Review segment-level trends, particularly continued Smokeless and Smoking growth against NewGen sales and margin pressure.
- Check the composition of SG&A, PMTA costs and Adjusted EBITDA add-backs, and whether regulatory spending or pricing pressure persists.
- Reconcile cash and restricted-cash disclosures: the balance sheet reports $32.1 million of MSA escrow deposits, while the cash-flow schedule lists $35.1 million of restricted cash at period-end.
- Assess debt service, covenant headroom, convertible-note accounting and the terms and repayment dates of acquisition-related notes.
- Monitor FDA decisions and deadlines, litigation developments, and the performance and funding commitments associated with post-quarter investments.