Turning Point Brands, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in millions of dollars unless stated otherwise. TPB manufactures, markets and distributes branded consumer products through Zig-Zag Products, Stoker’s Products and NewGen Products.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $107.8 | $109.9 | $311.6 | $340.2 |
| Gross profit | $52.7 | $54.3 | $156.0 | $167.5 |
| Gross margin | 48.9% | 49.4% | 50.1% | 49.2% |
| Operating income | $19.8 | $22.4 | $57.2 | $71.6 |
| Net income attributable to TPB | $11.5 | $13.5 | $28.0 | $40.6 |
| Diluted EPS | $0.60 | $0.65 | $1.45 | $1.95 |
| Operating cash flow | Not presented separately | Not presented separately | $16.4 | $49.6 |
Q3 sales declined 1.9%, operating income 11.4% and attributable net income 14.3% year over year. For the first nine months, sales fell 8.4%, operating income 20.1% and attributable net income 31.1%. Nine-month adjusted EBITDA, a non-GAAP measure, was $74.5 million versus $84.3 million. Q3 adjusted EBITDA was $24.5 million versus $26.3 million.
- Segment trends: Q3 Zig-Zag sales increased 23.3% to $52.1 million and Stoker’s increased 10.0% to $33.5 million. NewGen sales fell 40.3% to $22.2 million. For the nine months, NewGen sales declined 41.0% to $68.8 million, while Zig-Zag and Stoker’s grew 10.4% and 6.1%, respectively.
- Management attributed NewGen’s decline to vape distribution weakness amid the regulatory environment. Q3 NewGen gross margin fell to 28.8% from 36.2%, reflecting product mix and competition.
- Management said approximately $5 million of Zig-Zag sales were pulled forward from Q4, including from timing shifts in Canadian deliveries. This supported Q3 performance but may affect the comparison in the following quarter.
Cash, liquidity and debt
- At September 30, cash was $105.7 million; current assets were $255.8 million and current liabilities $41.9 million. Working capital, defined by the company as current assets less cash and current liabilities, was $108.2 million, up from $80.5 million at year-end 2021, primarily due to annual tobacco purchases.
- Nine-month operating cash flow was $16.4 million, down from $49.6 million. Management cited lower net income and working-capital timing, especially inventory purchases. Capital expenditures were $6.7 million.
- Gross debt principal was $422.5 million: $250.0 million of 5.625% secured notes due February 2026 and $172.5 million of 2.50% convertible notes due July 2024. Debt carrying value, net of deferred financing costs, was $416.0 million.
- The $25 million revolving facility had no borrowings; approximately $3.6 million of letters of credit were outstanding and reported availability was $21.4 million. TPB reported compliance with debt covenants. The facility may mature 91 days before the convertible notes’ maturity if those notes remain outstanding.
- TPB repurchased 307,207 shares during Q3 for $7.6 million, at an average $24.78 per share; $29.4 million remained under the program. The latest quarterly dividend was $0.06 per share, paid October 7, 2022.
Outlook, commentary and notable items
- The filing provides no specific financial guidance. Management said cash on hand, operating cash flow and revolver availability should meet operating cash needs for the foreseeable future.
- TPB recorded a $6.3 million impairment of its dosist investment in Q2 2022, contributing to a $6.1 million investment loss for the nine months. The impairment was non-cash.
- In October 2022, Graham A. Purdy was appointed CEO after Yavor Efremov’s departure. TPB expected to record approximately $2.2 million of severance expense in Q4 2022.
- FDA review and authorization remain significant uncertainties for tobacco-derived and non-tobacco nicotine product applications. The filing describes potential effects from flavor restrictions, enforcement against unauthorized products and third-party vapor products’ regulatory status. TPB also cited PACT Act shipping compliance requirements.
- Other risks include consumer purchasing pressure from inflation, dependence on third-party suppliers and major retailers, tobacco-industry decline and regulation, and product-liability and other litigation. Disclosed matters include vapor-device injury claims, a stockholder suit, and a former-franchisee arbitration; outcomes and potential exposure are uncertain.
- Disclosure controls were deemed ineffective as of September 30 due to a previously reported material weakness in internal controls over financial reporting. Management expected remediation by year-end 2022, subject to controls operating effectively and testing.
- MSA escrow deposits had a carrying fair value of $27.8 million versus $31.7 million at December 31, 2021, reflecting unrealized investment losses. TPB stated it has no remaining product lines covered by the MSA and expects no future deposits absent a change in legislation.
Most important facts for investors to verify
- Whether NewGen sales and margins stabilize, and how FDA decisions or enforcement affect TPB’s own and third-party products.
- How much of the approximately $5 million in Zig-Zag sales pulled forward from Q4 affects subsequent-period results.
- Whether operating cash generation improves as inventory and other working-capital needs normalize.
- Plans for the July 2024 convertible notes and the related revolving-facility maturity provision; also monitor covenant compliance and liquidity.
- Progress in remediating the internal-control material weakness and the actual Q4 severance charge.
- Developments in disclosed litigation and the value and restrictions on MSA escrow assets.