Turning Point Brands, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Turning Point Brands manufactures, markets and distributes branded consumer products through Zig-Zag Products, Stoker’s Products and NewGen Products. Its portfolio includes rolling papers and cigars, smokeless tobacco, and vapor and other next-generation products.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $102.9 | $122.6 | $203.8 | $230.3 |
| Gross profit | $51.5 | $60.0 | $103.3 | $113.2 |
| Gross margin | 50.0% | 48.9% | 50.7% | 49.2% |
| Operating income | $18.1 | $24.9 | $37.4 | $49.2 |
| Net income attributable to TPB | $5.4 | $15.4 | $16.4 | $27.1 |
| Diluted EPS | $0.30 | $0.73 | $0.86 | $1.30 |
| Adjusted EBITDA | $24.7 | $30.0 | $50.0 | $58.0 |
Q2 sales fell 16.1% and six-month sales fell 11.5% year over year, primarily because of lower NewGen vape distribution sales. NewGen revenue declined 45.1% in Q2 and 41.3% for the first half. Six-month Zig-Zag and Stoker’s revenue rose 4.2% and 4.3%, respectively. Gross margin improved, reflecting mix—NewGen generally carries lower margins—but gross profit and operating income declined. Adjusted EBITDA is a company-defined non-GAAP measure.
Q2 results included a $6.3 million noncash impairment of the dosist investment, recognized in investment loss; the quarter recorded a $6.2 million investment loss versus $0.1 million investment income a year earlier. First-half 2022 also had no debt-extinguishment loss, compared with $5.7 million in first-half 2021.
Cash flow, liquidity and debt
- First-half operating cash flow was $7.1 million, down from $37.4 million. Management cited lower earnings and working-capital timing, particularly annual tobacco inventory purchases.
- Investing cash outflow was $15.7 million; financing cash outflow was $22.5 million, including $19.4 million of share repurchases and $2.2 million of dividends paid.
- At June 30, cash was $107.4 million, inventories were $115.1 million (up from $87.6 million at year-end 2021), and current liabilities were $49.0 million. Working capital, defined by the company as current assets less cash and current liabilities, was $102.6 million.
- Gross debt principal was $422.5 million: $250.0 million of 5.625% senior secured notes due 2026 and $172.5 million of 2.50% convertible notes due July 2024. Debt net of deferred financing costs was $415.4 million. No revolver borrowings were outstanding; approximately $21.4 million was available, with $3.6 million of letters of credit outstanding.
- The company reported compliance with debt covenants. Management said cash, operating cash flows and revolver availability should be adequate for operating requirements for the foreseeable future.
Changes, outlook and risks
- NewGen’s decline was attributed principally to regulatory pressures on vape distribution. The company filed premarket applications for certain non-tobacco nicotine products by the May 14, 2022 deadline; products subject to timely filings and without negative FDA action could remain on the market until July 13, 2022, after which they became subject to enforcement. FDA review and enforcement outcomes remain uncertain.
- Management cited double-digit U.S. rolling-paper growth, particularly through e-commerce, while cigar-wrap sales faced trade inventory reduction. Stoker’s moist-snuff growth and pricing/mix gains were partly offset by lower loose-leaf chewing tobacco volume.
- Inflation and consumer purchasing power are risks; management said it had historically passed on most cost increases but could not assure continued success. Supply-chain costs, tobacco demand, competition, and evolving regulation also remain risks.
- The company continued its share-repurchase program: 301,662 shares were repurchased in Q2 for $8.8 million at an average $29.16 per share; $37.0 million remained authorized at quarter-end. A $0.06-per-share dividend was paid July 8, 2022.
- Disclosure controls were deemed ineffective as of June 30 because of a previously identified material weakness in internal control over financial reporting related to information-technology general controls. Management expected remediation by year-end 2022, subject to controls operating effectively and successful testing.
- Pending matters include stockholder litigation, vapor-device personal-injury claims and a former franchisee arbitration. The filing states outcomes could adversely affect the company but does not provide a clear quantified exposure.
- No specific revenue or earnings guidance was provided in the supplied filing text. The filing also highlights FDA product-rulemaking and authorization risks, product-liability exposure, and possible effects of tobacco and vapor regulation.
Important facts for investors to verify
- Whether NewGen sales stabilize as FDA review and enforcement of vapor and non-tobacco nicotine products evolve.
- Whether operating cash flow improves after the first-half inventory build and whether inventory converts to sales without material discounting or write-downs.
- The status and effectiveness testing of the IT-controls remediation plan, including whether the expected year-end 2022 timeline was achieved.
- Cash needs and covenant headroom relative to $422.5 million of gross debt, including the July 2024 convertible-note maturity and revolver availability.
- Potential further impairment or recovery in the dosist investment, and developments in pending litigation and regulatory matters.