Turning Point Brands, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed April 27, 2022. TPB manufactures, markets, and distributes consumer products through Zig-Zag, Stoker’s, and NewGen segments.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $100.9 million | $107.6 million | Down 6.3% |
| Gross profit / margin | $51.8 million / 51.3% | $53.3 million / 49.5% | Profit down 2.8%; margin up |
| SG&A | $32.6 million | $28.9 million | Up 12.6% |
| Operating income | $19.2 million | $24.3 million | Down 21.0% |
| Net income attributable to TPB | $11.0 million | $11.8 million | Down 6.7% |
| Diluted EPS | $0.55 | $0.57 | Down $0.02 |
| Operating cash flow | $13.0 million | $24.2 million | Down $11.2 million |
| Adjusted EBITDA | $25.3 million | $28.0 million | Down 9.8% |
Adjusted EBITDA is a non-GAAP measure. The filing reports $20.9 million of EBITDA for Q1 2022, before $4.4 million in listed adjustments.
Segments and material changes
- Zig-Zag: Sales rose 11.4% to $45.7 million, supported by U.S. rolling papers and e-commerce growth. Segment gross margin declined to 57.7% from 60.7%, partly reflecting the lower-margin Canadian distribution business.
- Stoker’s: Sales rose 8.4% to $31.7 million; gross margin increased to 55.8% from 54.3%, with management citing strong incremental margin from moist snuff tobacco.
- NewGen: Sales fell 37.1% to $23.5 million, primarily from declines in vape distribution. Gross profit fell 37.7% to $7.8 million; segment operating income was $0.7 million versus $2.0 million.
Lower NewGen sales drove the consolidated revenue decline. Gross margin improved overall due to Stoker’s margin growth and a less favorable-margin mix in the prior period. Operating income was also pressured by higher SG&A and interest expense. Q1 2021 included a $5.7 million debt-extinguishment loss, which did not recur in Q1 2022.
Cash, liquidity, debt, and capital returns
- At March 31, 2022, cash was $126.0 million; total cash including restricted cash was $132.7 million. Working capital, as defined by the company, was $81.5 million, versus $80.5 million at year-end 2021.
- Operating cash flow was $13.0 million. Investing activities used $11.3 million, including $2.8 million of capital expenditures and $8.5 million of MSA escrow deposits. Financing activities used $12.5 million, including $10.6 million for share repurchases.
- Gross debt was $422.5 million: $250.0 million of 5.625% senior secured notes due 2026 and $172.5 million of 2.50% convertible senior notes due 2024. Revolver borrowings were zero; approximately $21.4 million of availability remained, with $3.6 million of letters of credit outstanding. The company reported covenant compliance.
- TPB repurchased 310,224 shares under its program for $10.6 million, at an average $34.24 per share; $45.8 million remained available. The latest dividend was $0.06 per share, paid April 8, 2022.
Outlook, risks, and unusual items
- The filing provides no numerical full-year guidance. Management said cash on hand, operating cash flow, and revolver availability should meet operating cash requirements for the foreseeable future.
- Management noted inflation and rising fuel prices are reducing consumer purchasing power. It has implemented price increases where feasible and cited relatively stable variable costs from procurement and supply agreements.
- New legislation brings non-tobacco nicotine products under FDA jurisdiction, effective April 14, 2022. Relevant products required PMTA filings by May 14; timely-filed products without negative FDA action could remain on the market until July 13. Approval, enforcement timing, and competitive effects remain uncertain. FDA review and regulation of tobacco, vapor, and flavored products more broadly are significant risks.
- Other cited risks include supplier concentration and shipping delays, reliance on major retailers, competition and illicit products, product-liability litigation, tobacco taxes, and consumer sensitivity to economic conditions. The filing describes pending stockholder, vapor-device injury, and former-franchisee matters; outcomes are uncertain.
- SG&A included $1.3 million of restructuring expense, $1.1 million of PMTA costs, $0.4 million of transaction expense, and $0.3 million related to ERP/CRM scoping. A new CEO led to a change in segment cost allocation; prior-year segment amounts were not adjusted.
- Disclosure controls were deemed ineffective because of a previously reported material weakness involving IT general controls. Management expected remediation by year-end 2022; the weakness was not considered remediated at quarter-end.
Important facts for investors to verify
- Whether NewGen sales stabilize and whether FDA decisions or enforcement materially affect vapor and non-tobacco nicotine products.
- Whether inventory growth and working-capital timing continue to affect operating cash flow.
- Debt service capacity, revolver availability, covenant headroom, and the 2024 convertible-note maturity.
- Progress and testing evidence for remediation of the IT-controls material weakness.
- Developments in pending litigation and the impact of inflation, regulation, and supplier or freight disruptions.