Turning Point Brands(TPB) - 2021 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited consolidated financial statements, including balance sheets, income, cash flows, and equity, with notes detailing significant asset, liability, and net sales growth Consolidated Financial Statements Consolidated financial statements reveal strong Q2 and H1 2021 performance with significant growth in net sales, net income, total assets, and liabilities Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $288,107 | $163,403 | | Total assets | $629,399 | $496,049 | | Total current liabilities | $61,243 | $56,629 | | Total liabilities | $495,131 | $378,562 | | Total stockholders' equity | $134,268 | $117,487 | Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $122,643 | $104,963 | $230,284 | $195,652 | | Gross profit | $59,973 | $47,936 | $113,234 | $89,367 | | Operating income | $24,879 | $17,180 | $49,228 | $26,217 | | Net income attributable to TPB | $15,355 | $10,295 | $27,137 | $14,794 | | Diluted EPS | $0.73 | $0.49 | $1.30 | $0.73 | Consolidated Cash Flow Highlights - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,415 | $17,534 | | Net cash used in investing activities | ($34,391) | ($39,728) | | Net cash provided by (used in) financing activities | $92,189 | ($8,864) | | Net increase (decrease) in cash | $95,213 | ($31,058) | Notes to Consolidated Financial Statements Detailed notes explain accounting policies, business segments, inventory method change, recent acquisitions, significant financing activities, and subsequent events - The company operates in three segments: Zig-Zag Products (rolling papers, cigars), Stoker's Products (smokeless tobacco), and NewGen Products (vapor and alternative products) and sells products in over 210,000 retail outlets in North America[30] - Effective January 1, 2021, the company changed its inventory accounting method from LIFO to FIFO, applying the change retrospectively to better reflect current costs and align with management's performance assessment[38][85] - In February 2021, the company issued $250 million of 5.625% senior secured notes due 2026 and entered a new $25 million revolving credit facility, with proceeds used to repay all obligations under the 2018 First Lien Credit Facility[94][102] Net Sales by Segment - Three & Six Months Ended June 30 (in thousands) | Segment | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Zig-Zag products | $47,202 | $27,403 | $88,206 | $56,317 | | Stoker's products | $33,369 | $30,822 | $62,624 | $57,317 | | NewGen products | $42,072 | $46,738 | $79,454 | $82,018 | | Total | $122,643 | $104,963 | $230,284 | $195,652 | - Subsequent to the quarter's end, the company acquired assets from Unitabac for $9.6 million on July 23, 2021, and invested $8 million in Old Pal Holding Company LLC on July 21, 2021[170][171] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q2 2021 performance driven by Zig-Zag segment growth, improved gross margin, strategic investments, and increased Adjusted EBITDA Results of Operations Q2 and H1 2021 saw consolidated net sales growth, primarily from the Zig-Zag segment, with improved gross profit margin and increased net income Q2 2021 vs Q2 2020 Performance Summary (in thousands) | Metric | Q2 2021 | Q2 2020 | % Change | | :--- | :--- | :--- | :--- | | Total net sales | $122,643 | $104,963 | 16.8% | | Total gross profit | $59,973 | $47,936 | 25.1% | | Operating income | $24,879 | $17,180 | 44.8% | | Net income attributable to TPB | $15,355 | $10,295 | 49.2% | - Zig-Zag Products segment net sales increased 72.3% in Q2 2021, driven by a 64.6% increase in volume and a 7.7% increase in price/mix, led by a doubling in sales of MYO cigar wraps[193] - Stoker's Products segment net sales grew 8.3% in Q2 2021, with a 2.4% volume increase and 5.9% price/mix increase, driven by continued double-digit volume growth in Stoker's® MST[194] - NewGen Products segment net sales decreased 10.0% in Q2 2021, primarily due to declines in vape distribution businesses compared to strong B2C orders during stay-at-home provisions in the prior year[195] EBITDA and Adjusted EBITDA The company utilizes non-GAAP EBITDA and Adjusted EBITDA to assess operating performance, showing significant increases for Q2 and H1 2021 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to TPB | $15,355 | $10,295 | $27,137 | $14,794 | | EBITDA | $26,538 | $18,542 | $52,430 | $29,033 | | Adjusted EBITDA | $30,004 | $22,778 | $58,002 | $40,560 | Liquidity and Capital Reserves The company maintained strong liquidity with $157.5 million cash, increased working capital, and significant cash flow from operations and financing activities - As of June 30, 2021, the company had $157.5 million of cash on hand and $21.4 million of availability under the 2021 Revolving Credit Facility[229] - Net cash provided by operating activities increased to $37.4 million for the first six months of 2021, up from $17.5 million in the same period of 2020, primarily due to higher net income[232] - Net cash provided by financing activities was $92.2 million for the first six months of 2021, a $101.1 million increase from the prior year, mainly due to net proceeds from the Senior Secured Notes offering[235] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes in market risk exposure, with fixed-rate debt instruments mitigating interest rate risk on financial statements - There have been no material changes in the company's exposure to foreign currency exchange rate fluctuation risk or credit risk during the period[267][268] - The company's Senior Secured Notes and Convertible Senior Notes bear interest at a fixed rate, eliminating financial statement risk from interest rate changes for these instruments[269] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[271] - No changes in internal control over financial reporting occurred during the quarter that were likely to materially affect such controls[272] PART II—OTHER INFORMATION Item 1. Legal Proceedings Refers to Note 16 for material pending legal proceedings, including a stockholder complaint and product liability lawsuits - For details on material pending legal proceedings, the report directs readers to Note 16, which discusses a stockholder lawsuit regarding the SDI merger and other product liability claims[145][146][274] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the 2020 Annual Report on Form 10-K - There have been no material changes to the Risk Factors previously disclosed in the company's 2020 Annual Report on Form 10-K[276] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details Q2 2021 share repurchase activity, with 175,000 shares bought for $8.4 million, leaving $25.7 million available under the program Share Repurchase Activity - Q2 2021 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | April 2021 | - | $- | - | | May 2021 | 184,090 | $47.71 | 170,000 | | June 2021 | 5,000 | $42.87 | 5,000 | | Total Q2 | 189,090 | - | 175,000 | - As of June 30, 2021, $25.7 million remains available for share repurchases under the company's $50.0 million program[169][278]