Turning Point Brands, Inc. annual report, FY2020

全文

Turning Point Brands, Inc. — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual report; fourth-quarter figures are noted separately below. Amounts are in U.S. dollars.

Business context

Turning Point Brands manufactures, markets and distributes adult-use consumer products through Zig-Zag Products (rolling papers and cigar wraps), Stoker’s Products (moist snuff and chewing tobacco), and NewGen Products (vapor, CBD, nutraceutical and related products and distribution). The company describes its model as largely asset-light, with more than 80% of net sales from outsourced production. Its products reach an estimated 210,000 North American retail locations.

Financial performance

  • Revenue: $405.1 million, up 11.9% from $362.0 million in 2019. Zig-Zag sales grew 22.1% to $132.8 million; Stoker’s grew 16.0% to $115.9 million; NewGen grew 2.0% to $156.4 million.
  • Profit and margins: Gross profit was $189.6 million, up 38.7%, with gross margin of 46.8% versus 37.8%. Operating income was $64.1 million versus $26.9 million; net income was $33.0 million versus $13.8 million. Diluted EPS was $1.67 versus $0.69.
  • Segment profitability: Zig-Zag operating income was $61.9 million and Stoker’s was $44.7 million. NewGen recorded $5.8 million of operating income, compared with a $20.6 million loss in 2019.
  • Cash flow: Operating cash flow was $43.7 million, investing cash flow was negative $64.8 million, and financing cash flow was negative $29.3 million. Capital expenditures were $6.1 million.
  • Liquidity: Year-end unrestricted cash was $41.8 million, versus $95.3 million a year earlier. Working capital, defined by the company as current assets less cash and current liabilities, was $58.9 million, up from $38.1 million. Restricted assets were $35.1 million, including $32.1 million of MSA escrow deposits.
  • Debt: At year-end, gross notes payable and debt were approximately $320.0 million; net carrying value was $278.0 million after discounts, financing costs and current maturities. The debt included $172.5 million of 2.50% convertible notes, a $130.0 million term loan, and acquisition- and CARES-related notes.
  • Fourth quarter: Sales were $105.3 million, gross profit $51.8 million, net income $12.7 million and diluted EPS $0.65. In Q4 2019, sales were $80.2 million, gross profit $12.3 million and net loss $12.3 million.

Material changes and unusual items

  • Revenue increased across all segments. Management attributed the strongest growth to Zig-Zag papers and wraps and Stoker’s moist snuff; NewGen growth came from Nu-X and vape distribution.
  • The gross-margin comparison benefited substantially from the absence of approximately $23.0 million of 2019 restructuring costs, primarily inventory reserves, and $1.2 million of 2019 launch costs. NewGen’s 2019 results were particularly affected by vape-business write-offs and reserves.
  • 2020 SG&A included $14.4 million of FDA premarket tobacco application costs, versus $2.2 million in 2019. Adjusted EBITDA, a non-GAAP measure, was $90.2 million versus $67.3 million; the filing’s reconciliation adds back specified costs, including PMTA and restructuring expenses.
  • Investing cash outflows reflected acquisitions and investments, including the $47.7 million Durfort transaction, a $15.0 million investment in dosist, and a $2.5 million minority investment in Wild Hempettes. The company increased its ReCreation Marketing ownership to 50% and began consolidating it in November 2020.
  • The SDI merger closed in July 2020; 244,214 TPB shares were retired, and the company said the transaction eliminated its controlling holding-company structure.
  • After year-end, on February 11, 2021, the company issued $250 million of 5.625% senior secured notes due 2026, using proceeds in part to repay and terminate the 2018 first-lien facility. It also entered a $25 million revolving facility, with no borrowings and approximately $3.6 million of letters of credit outstanding at the filing date. These transactions were subsequent events, not year-end debt balances.

Outlook, risks and contingencies

The filing provides no quantified forward revenue, earnings or cash-flow guidance. Management said operating cash flows and availability under the new revolver were expected to meet operating cash requirements for the foreseeable future. It highlighted growth plans in existing products, adjacent categories, proprietary vape products, distribution, international markets and acquisitions.

  • Regulation: The company submitted PMTAs covering 250 products by the September 2020 deadline. FDA review and authorization are uncertain; the filing describes potential enforcement and continued-marketing risks if applications are denied, delayed or incomplete. Federal, state and local tobacco, vapor, flavor, tax and online-sales rules may change.
  • Suppliers and brands: The company relies on a limited number of suppliers, including Swedish Match for all loose-leaf chewing tobacco and RTI for Zig-Zag papers and related products. RTI acquired the Zig-Zag agreements in November 2020. Approximately $66 million of 2020 Zig-Zag sales were from products sold under the relevant license agreements; termination could trigger a five-year non-compete restriction.
  • Debt and liquidity: Management cites substantial indebtedness and restrictive covenants. The post-year-end refinancing changed maturities and interest terms; investors should distinguish those terms from the December 31, 2020 balance sheet.
  • COVID-19: Management reported elevated B2C sales and market-share gains, alongside higher safety and fulfillment costs, temporary wage increases and a temporary shutdown at a Dominican Republic cigar-wrap supplier. It cautioned that future effects on supply, workforce and liquidity remained uncertain.
  • Legal matters: Pending matters include product-liability claims involving tobacco and vapor products, franchise disputes, and a stockholder lawsuit concerning the SDI merger. The company says it believes it has defenses but cannot assure outcomes.
  • Other exposures: Risks include tobacco-market decline, taxes, tariffs, competition, illicit products, currency movements, acquisition integration and the limited long-term health data for some NewGen products. No goodwill impairment was recorded in 2020, but the filing identifies NewGen goodwill as potentially sensitive to future revenue and discount-rate assumptions.

The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; ReCreation was excluded from the internal-control assessment, representing approximately 0% of revenue and 2% of total assets at year-end. The auditor was not required to attest to internal-control effectiveness while the company remained an emerging growth company.

Important facts for investors to verify

  1. Track FDA decisions, application completion requirements and any enforcement actions affecting the 250 PMTA-covered products and third-party vapor products.
  2. Review the post-year-end refinancing terms, covenant headroom, cash interest burden and the maturity interaction with the $172.5 million convertible notes due 2024.
  3. Assess how much of NewGen’s improved 2020 gross profit reflects sustainable mix and operations versus the unusually weak 2019 reserve and restructuring comparison.
  4. Monitor ongoing sales, margins and integration outcomes from the Durfort assets, ReCreation consolidation and cannabinoid-related investments.
  5. Follow Zig-Zag license and supply arrangements with RTI, including pricing, renewal and termination provisions.
  6. Check subsequent filings for developments in the disclosed lawsuits, COVID-19 effects, and any changes to dividends or the share-repurchase program.