Turning Point Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Unless noted otherwise, amounts are in millions of dollars. Turning Point Brands sells smokeless tobacco, smoking products, and NewGen products, including liquid vapor and tobacco vaporizer products. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $51.0 | $51.4 | $152.4 | $150.5 |
| Gross profit / margin | $24.6 / 48.3% | $25.4 / 49.3% | $74.1 / 48.6% | $72.6 / 48.3% |
| Operating income / margin | $11.9 / 23.3% | $13.5 / 26.3% | $33.6 / 22.0% | $33.2 / 22.1% |
| Net income | $6.8 | $4.8 | $9.8 | $6.8 |
| Basic / diluted EPS | $0.38 / $0.34 | $0.66 / $0.57 | $0.64 / $0.58 | $0.94 / $0.81 |
Q3 sales declined 0.9%, while net income rose, principally as interest and financing costs fell to $5.6 million from $8.7 million; operating income and gross margin declined. Nine-month sales increased 1.3% and net income increased to $9.8 million. Results include a $2.8 million loss on debt extinguishment related to the IPO debt transactions. EPS comparisons are materially affected by the IPO and increased weighted-average shares.
Segments and material changes
- Smokeless: Q3 sales increased 1.2% to $18.9 million; nine-month sales rose 7.4% to $58.9 million, driven by Stoker moist-snuff expansion and pricing. Q3 volume was down 8.7%, partly reflecting sales shifted into Q2 and comparison with prior-year introductory shipments; price/mix increased 9.9%.
- Smoking: Q3 sales declined 1.5% to $28.8 million, with lower cigarette-paper order timing and cigar volumes partly offset by cigar-wrap growth. Nine-month sales rose 1.9% to $83.4 million; volume fell 1.2% while price/mix increased 3.0%.
- NewGen: Q3 sales fell 7.3% to $3.3 million; nine-month sales fell 27.0% to $10.0 million. Management cited competition and vapor-product sales shifting from traditional retail to vape and accessory shops. Returns and obsolete inventory weighed on nine-month margins; trade returns remained elevated.
Cash, liquidity and debt
- At September 30, cash was $4.4 million, working capital was $53.3 million, and current assets and liabilities were $68.8 million and $15.5 million, respectively. Inventory rose to $51.7 million from $44.3 million at year-end 2015.
- For the nine months, operating cash flow was negative $0.5 million versus positive $12.6 million a year earlier, primarily reflecting $9.9 million of PIK-note interest paid and a $7.4 million inventory increase. Capital expenditures were $1.2 million; ending cash was $4.4 million.
- Balance-sheet debt, net of deferred financing charges and current maturities, was $199.5 million. The company separately reported $201.1 million of gross debt and $196.7 million of net debt in its MD&A. First- and second-lien term loan balances were $146.8 million and $59.1 million; the revolving facility had no balance.
- The May 2016 IPO raised $62.1 million gross and approximately $58.2 million net. Proceeds and cash on hand funded debt repayments and conversions, warrant and option repurchases, and IPO costs. PIK Toggle Notes and 7% Senior Notes were retired; $20 million of second-lien debt was prepaid. Stockholders’ equity moved from an $81.6 million deficit at year-end to positive $17.8 million.
- The $40 million revolving facility had $30 million available to borrow at September 30, subject to its borrowing base. Management said operating cash flow and facility availability should meet operating cash requirements for the foreseeable future. The company reported compliance with debt covenants at quarter-end; leverage-ratio limits tighten beginning October 2016.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management cited continued investment in sales and regulatory infrastructure and ongoing product launches.
- The FDA deeming regulation became effective August 8, 2016. Beginning October 1, FDA user fees also applied to newly deemed products such as cigars and pipe tobacco; the company estimated about $0.3 million of fees for Q4 2016.
- Key disclosed risks include tobacco regulation and taxation, declining or shifting consumer demand, NewGen channel changes and competition, dependence on suppliers and large retailers, product liability, brand and license risks, and substantial indebtedness and restrictive covenants.
- Approximately $31.9 million was held in MSA escrow at September 30. Management stated that ordinary-course legal claims were not expected to have a material adverse effect. No material changes to the prospectus risk factors were reported.
- Management concluded disclosure controls were effective and reported no materially affecting change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether NewGen sales, returns, and margins stabilize as distribution shifts to alternative retail channels.
- Inventory growth and negative year-to-date operating cash flow, including the timing and drivers of working-capital needs.
- Debt service capacity, facility availability, covenant compliance, and the effect of tightening leverage limits and high term-loan interest rates.
- The actual cost and business impact of expanded FDA regulation and user fees.
- How much of reported earnings improvement reflects lower financing costs and IPO-related capital changes versus underlying operating performance.