Turning Point Brands, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless noted. TPB sells branded tobacco, smoking-accessory and NewGen products through Zig-Zag, Stoker’s and NewGen segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $109.9 | $104.2 | $340.2 | $299.8 |
| Gross profit / margin | $54.3 / 49.4% | $48.3 / 46.4% | $167.5 / 49.2% | $137.7 / 45.9% |
| Operating income | $22.4 | $16.0 | $71.6 | $42.2 |
| Net income attributable to TPB | $13.5 | $9.0 | $40.6 | $23.8 |
| Diluted EPS | $0.65 | $0.44 | $1.95 | $1.17 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $49.6 | $33.2 |
Q3 sales rose 5.5%, operating income 39.7%, and attributable net income 49.3%. For the nine-month period, sales rose 13.5%, operating income 69.5%, and attributable net income 70.5%. Gross margin expansion was led by improved NewGen and Stoker’s margins in Q3; year-to-date improvement also reflected Zig-Zag and the Durfort transaction. Nine-month Adjusted EBITDA, a non-GAAP measure, was $84.3 million versus $64.3 million.
- Q3 segment sales: Zig-Zag $42.2 million, up 17.4%; Stoker’s $30.5 million, up 2.4%; NewGen $37.2 million, down 3.2%.
- Nine-month segment sales: Zig-Zag $130.4 million, up 41.3%; Stoker’s $93.1 million, up 6.9%; NewGen $116.7 million, down 3.2%.
- Quarterly operating margin was approximately 20.4%, versus 15.4%; nine-month operating margin was approximately 21.0%, versus 14.1%.
Liquidity, cash flow and debt
At September 30, TPB had $130.6 million of unrestricted cash, $20.1 million of restricted cash, and $264.8 million of current assets against $54.1 million of current liabilities. Management-defined working capital was $80.2 million, up from $65.0 million at year-end 2020. The company reported $21.4 million of availability under its $25 million revolving facility, with approximately $3.6 million of letters of credit outstanding and no revolver borrowings. Management said cash, operating cash flow and borrowing availability should meet operating needs for the foreseeable future.
Nine-month operating cash flow was $49.6 million. Investing activities used $52.2 million, including acquisitions, investments and MSA escrow activity; financing activities provided $76.3 million, principally reflecting the new notes issuance. Cash increased by $73.6 million during the period.
Gross debt principal was approximately $430.0 million, including $250.0 million of 5.625% senior secured notes due 2026, $172.5 million of 2.50% convertible senior notes due 2024, and a $7.5 million unsecured loan. Balance-sheet debt carrying value, including current maturities and net of deferred financing costs, was approximately $421.0 million. The company refinanced and repaid its $130.0 million 2018 first-lien term loan in Q1; debt extinguishment and related refinancing items produced a $5.3 million nine-month loss. TPB reported compliance with debt covenants.
Material changes, outlook and risks
- Growth and mix: Zig-Zag was the main sales growth driver, benefiting from MYO cigar wraps, U.S. rolling papers and Canadian distribution. Stoker’s growth reflected moist snuff, partly offset by declining loose-leaf chewing tobacco. NewGen sales declined as prior-year stay-at-home conditions had boosted B2C orders, although NewGen margins improved.
- Costs: Shipping costs increased, reflecting PACT Act requirements for vape shipments, higher freight rates and increased sales. Management stated it had historically been able to raise prices in line with or above inflation and expected current inflation effects to be minimal, while warning materially higher inflation could hurt results.
- Financing and capital allocation: TPB issued $250 million of senior secured notes and established the new revolver. It repurchased $20.5 million of stock in the first nine months and paid $3.1 million in dividends. The board increased the repurchase authorization by $30.7 million on October 25, 2021. The October 8 dividend was $0.055 per share.
- Acquisitions and investments: The company acquired Unitabac cigar assets for $10.7 million, and its consolidated ReCreation business acquired Canadian distributor Direct Value Wholesale. TPB also invested $8.0 million in a convertible note to Old Pal and $8.7 million in Docklight Brands.
- FDA matters: TPB submitted PMTAs covering 250 products. The FDA issued an MDO for certain proprietary e-liquids in September, then rescinded it on October 7 after identifying additional information that had not been assessed; TPB withdrew its court petition and stay motion. Approximately $0.7 million of affected inventory had been quarantined and was subsequently released. Applications remain subject to regulatory review, and authorization is not assured.
- Other regulatory exposure: The October 21 USPS rule extends mailing restrictions to ENDS products, with exceptions; management anticipated a transition as logistics are adjusted. FDA, state and local restrictions, including potential flavor bans and NewGen product requirements, could increase costs or constrain sales.
- Contingencies: The filing describes shareholder litigation related to the SDI merger, vapor-product injury claims, and franchisee disputes. TPB says it believes it has defenses but cannot assure favorable outcomes. MSA escrow assets had a fair value of $31.8 million and are restricted; the company said it no longer sells MSA-covered products and, absent a legal change, expects no further deposits.
- Subsequent event: On October 15, the company received full approval for forgiveness of its $7.5 million CARES Act loan and anticipated a Q4 debt-extinguishment gain of $7.5 million.
- No formal financial guidance or quantified forward outlook is stated in the filing. Principal risks include tobacco and NewGen regulation, FDA authorization outcomes, supplier and freight disruption, product liability, competition, consumer demand, indebtedness, and COVID-19 impacts.
Important facts for investors to verify
- Whether the FDA grants marketing authorization for the company’s pending PMTAs and whether further enforcement actions or product restrictions occur.
- How PACT Act/USPS mailing rules and higher freight costs affect NewGen sales, margins and distribution capabilities.
- Debt-service capacity and covenant headroom following the increase in debt and interest expense; confirm the differing gross-principal and carrying-value presentations.
- Whether NewGen sales stabilize and margin gains persist, and whether growth in Zig-Zag and Stoker’s offsets weakness in NewGen.
- Results of the disclosed litigation and any material product-liability, regulatory or MSA-related developments.
- Execution and returns on recent acquisitions and investments, and the effects of ongoing buybacks and dividends on liquidity and share count.