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Turning Point Brands, Inc. Announces Second Quarter 2018 Results

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Turning Point Brands, Inc. (NYSE:TPB), a leading provider of Other
Tobacco Products ("OTP"), today announced financial results for the
second quarter ended June 30, 2018.

Second Quarter 2018 Results at a Glance
(Comparisons vs.
same period year-ago)

  • Net sales increased 12.5% to a record $81.1 million
  • Gross profit increased 11.8% to a record $35.8 million
  • Net income attributable to Turning Point Brands, Inc. increased 25.3%
    to $9.3 million
  • Adjusted EBITDA was $17.2 million (see Schedule A for a reconciliation
    to net income)
  • Diluted EPS of $0.47 and Adjusted Diluted EPS of $0.50 as compared to
    $0.38 and $0.35, respectively (see Schedule D for a reconciliation to
    Diluted EPS)
  • Other highlights from the second quarter:
    • Stoker's MST sets another record share on strong distribution gains
    • Zig-Zag delivers double-digit sales gains in MYO cigar wraps,
      Canadian rolling papers and U.S. papers on new product launches
    • Vapor Shark e-liquid manufacturing and logistics integrated into
      Louisville facility

Recent Events

The second quarter saw significant developments for the company
surrounding strategic initiatives and working capital progression. In
the quarter, TPB had one-time cash outflows including:

  • Completed the Vapor Supply acquisition, with purchase price
    consideration of $4.8 million, $1.0 million for related transaction
    expenses and $1.8 million to normalize depleted inventories at Vapor
    Supply
  • $6.5 million for a one-year loan made to a TPB supplier
  • $3.5 million to paydown the $2.0 million VaporBeast seller note and
    $1.5 million for escrow associated with the November 2016 VaporBeast
    acquisition
  • $2.0 million amortization on the 2018 Credit Facility

In June 2018, TPB distributed $1.9 million to former employees from
assets within its defined benefit pension plan. The lump sum payments
were to certain former employees who opted to participate in the defined
benefit pension plan buy-out program. The second quarter non-cash charge
for the lump sum payment distribution was $0.3 million and recorded as
other pension costs in the quarter. After the distribution our defined
benefit pension plan is overfunded by approximately $1.3 million.

On August 7, 2018, the TPB board of directors declared a quarterly
dividend of $0.04 per common share which will be paid on October 12,
2018, to shareholders of record on the close of business on September
21, 2018.

Management Observations on the Second Quarter 2018

"We are especially pleased with our achievements in the quarter and our
progress thus far in 2018," said Larry Wexler, President and CEO. "Our
focus brands, Stoker's in smokeless, Zig-Zag in smoking and VaporBeast
in NewGen each performed exceptionally well, as evidenced by robust
increases in net sales and gross profit across all three of our
segments, as compared to the year-ago quarter."

Smokeless Products Segment (30% of total net sales in the quarter)

For the second quarter, Smokeless products net sales increased 10.8% to
a record $24.4 million on the continuing growth of Stoker's MST. In the
quarter, total Smokeless segment volume increased 6.5% and price/mix
increased 4.3%.

Year-over-year industry volumes for chewing tobacco declined by
approximately 3% in the quarter, while industry MST1 volumes
were soft by approximately 1% to year-ago, according to MSAi. Stoker's
outpaced the smokeless industry in the quarter, growing its MSAi share
in both chewing tobacco and MST. Stoker's MST cases shipped in the
quarter rose by greater than 10%.

For the quarter, gross profit for the Smokeless segment increased 8.5%
to a record $12.5 million. Segment gross margin contracted 120 basis
points to 51.3% due to a year-ago LIFO expense of ($0.4) million. Absent
the LIFO expense, gross margin increased 70 basis points from the
year-ago quarter (see Schedule B for reconciliation).

"In the quarter, we continued to expand the retail distribution of
Stoker's MST products with good success, including a chain-wide
expansion into Dollar General," said Wexler. "While the average dollar
store is not equivalent to a standard c-store in terms of category
volume, it is a growing channel and the distribution strengthens our
position against a growing body of smokeless enthusiasts. Furthermore,
our early read on replenishment shipments to the chain is highly
encouraging."

1 TPB measures industry MST volumes excluding pouch and snus
products.

Smoking Products Segment (36% of total net sales in the quarter)

For the second quarter, net sales of Smoking products increased 8.5% to
$29.3 million. Sales in the quarter for our focus Zig-Zag papers and
cigar wraps were up $3.8 million, offset by a $1.2 million decrease
related to our strategic decision to deemphasize the low margin cigar
products business and our previously announced line rationalization of
MYO tobacco. In the quarter, Smoking products volume increased 3.4% and
price/mix increased 5.1%.

In the quarter, Zig-Zag retained its share leadership position in both
premium cigarette papers and MYO cigar wraps. Distribution expansion of
the new Canadian paper products continues and was supplemented with
additional products in the second quarter. In the U.S., the new Zig-Zag
Hemp papers introduction in late first quarter continues with positive
trade enthusiasm.

According to MSAi, second quarter industry volumes for U.S. cigarette
papers decreased by low-single-digits, while industry MYO cigar wraps
generated mid-single-digit category expansion.

Smoking products gross profit for the quarter increased $1.1 million to
$15.2 million, despite an adverse year-over-year euro exchange rate
impact of $0.6 million. Gross margin decreased to 51.8% compared with
52.2% for the year-ago quarter due principally to adverse exchange rates.

NewGen (New Generation) Products Segment (34% of total net sales in
the quarter)

For the second quarter, NewGen segment net sales grew 18.7% to a record
$27.4 million on continued VaporBeast momentum and two months of Vapor
Supply sales.

Gross profit for the NewGen segment increased by $1.7 million over the
year-ago quarter to a record $8.1 million. Gross margin for the quarter
expanded by 200 basis points to 29.5%, compared to the year-ago quarter.

For the quarter, VaporBeast's key sales performance metrics indicate
continued progress against our goal to grow sales in the existing store
base, as evidenced by increases in both order sizes and order frequency.
Additionally, we continue to drive process improvements across the Vapor
Shark platform to strengthen sales performance in both the company and
franchise branded stores. The Vapor Shark e-liquid manufacturing and
warehouse operations were integrated into our Louisville facility late
in the second quarter. At Vapor Supply, we are working towards
integration and efficiency initiatives which we expect to realize in
late fourth quarter of 2018.

"As we move into the third and fourth quarters, we will continue to
focus on vapor integration and financial synergies," said Wexler.
"Optimizing the platform efficiency and effectiveness is job one for the
entire NewGen team."

Other Events and Performance Measures in the Second Quarter

Second quarter 2018 consolidated SG&A expenses were $21.0 million
compared to $18.3 million in 2017 due primarily to the inclusion of the
Vapor Supply SG&A, transaction expenses and higher legal and litigation
expenses associated with the previously announced anti-counterfeiting
initiative.

2018 second quarter SG&A included $1.1 million of non-recurring charges
including $1.0 million of Strategic expenses as compared to $0.4 million
of Strategic a year-ago. These Strategic Initiatives include an
investment banking fee of $0.5 million related to the Vapor Supply
acquisition and $0.5 million of legal and financial due diligence
expenses related primarily to the acquisition.

Absent the immediately aforementioned charges, SG&A as a percent of net
sales was 24.6%.

Interest expense for the quarter dropped to $3.6 million, which is $0.5
million, or 11.6%, lower than the year-ago period. The reduction is
principally attributable to lower interest rates as a result of the
first quarter 2018 refinancing in conjunction with lower debt levels as
compared to 2017.

For the quarter, fully diluted weighted average shares outstanding were
19.8 million.

Second quarter 2018 diluted EPS was $0.47 while Adjusted diluted EPS was
$0.50 (see Schedule D for reconciliation).

Second quarter 2018 Adjusted EBITDA of $17.2 million was up 9.4% to the
year-ago period (See Schedule A for a reconciliation).

Capital expenditures in the second quarter 2018 totaled $0.6 million.

Total debt at June 30, 2018 was $210.3 million. Net debt at June 30,
2018 was $206.9 million, compared to $199.4 million as of December 31,
2017, an increase of $7.5 million, primarily due to the spend described
in Recent Events. Net debt at June 30, 2018 to rolling twelve months
Adjusted EBITDA was 3.4x (see Schedule C for a reconciliation).

2018 Outlook Update

As previously announced and based upon the current understanding of the
2018 FDA schedule, the company has identified products for 2018
rationalization and estimates that SKU discontinuations will unfavorably
impact year-over-year net sales by approximately $3.5 million. Sales
impact from SKU discontinuations were $0.8 million in the first quarter
and $0.8 million in the second quarter. The company anticipates 2018 net
sales growth of 12% to 16%.

Excluding any acquisition related expenses, SG&A as a percent of net
sales for the full year is expected to be in the 25% to 27% range.
Interest expense is currently expected to be $14 million, which includes
$1 million non-cash deferred financing charges.

New product launch costs, including the $0.7 million recorded in the
first quarter and $0.0 million in the second quarter are estimated to be
approximately $1.9 million for the year.

The company now expects 2018 effective income tax rate to be 20%, down
from the previously announced 24% due to state tax reform and higher
stock option exercises. We expect to fully utilize our Federal net
operating losses during 2018 when we will begin paying cash federal
income taxes.

Capital expenditures for 2018 are expected to be on the lower end of the
previously announced $2 to $3 million, due to capacity synergies from
the Vapor Supply acquisition. These expenditures include one-time
investments associated with logistics efficiency and integration
activities.

Earnings Conference Call

As previously disclosed, a conference call with the investment community
to review TPB's financial results has been scheduled for 10 a.m.
Wednesday, August 8, 2018. Investment community participants should dial
in ten minutes ahead of time using the toll free number 844-889-4324 (International
participants should call 412-317-9262). A live listen-only webcast of
the call is available from the Events and Presentations section of the
investor relations portion of the company website (www.turningpointbrands.com).
A replay of the webcast will be available on the site one hour following
the call.

Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with generally
accepted accounting principles in the United States (GAAP), this press
release includes certain non-GAAP financial measures including Adjusted
EBITDA, Adjusted diluted EPS, Net Debt and Gross Profit excluding LIFO.
A reconciliation of these non-GAAP financial measures accompanies this
release.

About Turning Point Brands, Inc.

Louisville, Kentucky-based Turning Point Brands, Inc. (NYSE:TPB) is a
leading U.S. provider of Other Tobacco Products. TPB, through its three
focus brands, Stoker's® in Smokeless products, Zig-Zag®
in Smoking products and the VaporBeast® distribution engine
in NewGen products, generates solid cash flow which it uses to finance
acquisitions, increase brand support and strengthen its capital
structure. TPB does not sell cigarettes. More information about the
company is available at its corporate website, www.turningpointbrands.com.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements may
generally be identified by the use of words such as "anticipate,"
"believe," "expect," "intend," "plan" and "will" or, in each case, their
negative, or other variations or comparable terminology. These
forward-looking statements include all matters that are not historical
facts. By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on circumstances
that may or may not occur in the future. As a result, actual events may
differ materially from those expressed in or suggested by the
forward-looking statements. Any forward-looking statement made by TPB in
this press release speaks only as of the date hereof. New risks and
uncertainties come up from time to time, and it is impossible for TPB to
predict these events or how they may affect it. TPB has no obligation,
and does not intend, to update any forward-looking statements after the
date hereof, except as required by federal securities laws. Factors that
could cause these differences include, but are not limited to:

  • declining sales of tobacco products, and expected continuing decline
    of sales, in the tobacco industry overall;
  • our dependence on a small number of third-party suppliers and
    producers;
  • the possibility that we will be unable to identify or contract with
    new suppliers or producers in the event of a supply or product
    disruption;
  • the possibility that our licenses to use certain brands or trademarks
    will be terminated, challenged or restricted;
  • failure to maintain consumer brand recognition and loyalty of our
    customers;
  • substantial and increasing U.S. regulation;
  • regulation of our products by the FDA, which has broad regulatory
    powers;
  • uncertainty related to the regulation and taxation of our NewGen
    products;
  • possible significant increases in federal, state and local municipal
    tobacco-related taxes;
  • possible increasing international control and regulation;
  • our reliance on relationships with several large retailers and
    national chains for distribution of our products;
  • our amount of indebtedness;
  • the terms of our credit facilities, which may restrict our current and
    future operations;
  • intense competition and our ability to compete effectively;
  • uncertainty and continued evolution of markets containing our NewGen
    products;
  • significant product liability litigation;
  • the scientific community's lack of information regarding the long-term
    health effects of electronic cigarettes, vaporizer and e-liquid use;
  • requirement to maintain compliance with master settlement agreement
    escrow account;
  • competition from illicit sources;
  • our reliance on information technology;
  • security and privacy breaches;
  • contamination of our tobacco supply or products;
  • infringement on our intellectual property;
  • third-party claims that we infringe on their intellectual property;
  • failure to manage our growth;
  • failure to successfully integrate our acquisitions or otherwise be
    unable to benefit from pursuing acquisitions;
  • fluctuations in our results;
  • exchange rate fluctuations;
  • adverse U.S. and global economic conditions;
  • sensitivity of end-customers to increased sales taxes and economic
    conditions;
  • failure to comply with certain regulations;
  • departure of key management personnel or our inability to attract and
    retain talent;
  • imposition of significant tariffs on imports into the U.S.;
  • reduced disclosure requirements applicable to emerging growth
    companies may make our common stock less attractive to investors,
    potentially decreasing our stock price;
  • failure to maintain our status as an emerging growth company before
    the five-year maximum time period a company may retain such status;
  • our principal stockholders will be able to exert significant influence
    over matters submitted to our stockholders and may take certain
    actions to prevent takeovers;
  • our certificate of incorporation and bylaws, as well as Delaware law
    and certain regulations, could discourage or prohibit acquisition bids
    or merger proposals, which may adversely affect the market price of
    our common stock;
  • our certificate of incorporation limits the ownership of our common
    stock by individuals and entities that are Restricted Investors. These
    restrictions may affect the liquidity of our common stock and may
    result in Restricted Investors being required to sell or redeem their
    shares at a loss or relinquish their voting, dividend and distribution
    rights;
  • future sales of our common stock in the public market could reduce our
    stock price, and any additional capital raised by us through the sale
    of equity or convertible securities may dilute your ownership in us;
  • we may issue preferred stock whose terms could adversely affect the
    voting power or value of our common stock; and
  • our status as a "controlled company" could make our common stock less
    attractive to some investors or otherwise harm our stock price.

Financial Statements Follow:

 
Turning Point Brands, Inc.

Consolidated Statement of Income

(dollars in thousands except share data)

 
      Three Months Ended
June 30,
2018     2017
Net sales $ 81,101 $ 72,086
Cost of sales   45,306     40,076  
Gross profit 35,795 32,010
Selling, general, and administrative expenses   20,993     18,351  
Operating income 14,802 13,659
Interest expense 3,579 4,050
Interest income (124 ) (4 )
Investment income (144 ) (89 )
Net periodic benefit expense, excluding service cost   264     24  
Income before income taxes 11,227 9,678
Income tax expense   1,908     2,795  
Consolidated net income 9,319 6,883
Net loss attributable to non-controlling interest   -     (556 )
Net income attributable to Turning Point Brands, Inc. $ 9,319   $ 7,439  
 
Basic income per common share:
Net income attributable to Turning Point Brands, Inc. $ 0.48   $ 0.39  
Diluted income per common share:
Net income attributable to Turning Point Brands, Inc. $ 0.47   $ 0.38  
Weighted average common shares outstanding:
Basic 19,268,625 18,886,418
Diluted 19,788,865 19,585,069
 
Supplemental disclosures of statement of income information:
Excise tax expense $ 5,466   $ 5,028  
FDA fees $ 142   $ 150  
 
 
Turning Point Brands, Inc.
Consolidated Statement of Income

(dollars in thousands except share data)

 
      Six Months Ended
June 30,
2018     2017
Net sales $ 155,043 $ 138,874
Cost of sales   87,439     79,136  
Gross profit 67,604 59,738
Selling, general, and administrative expenses   43,061     35,230  
Operating income 24,543 24,508
Interest expense 7,237 8,983
Interest income (128 ) (4 )
Investment income (239 ) (203 )
Loss on extinguishment of debt 2,384 6,116
Net periodic benefit expense, excluding service cost   221     116  
Income before income taxes 15,068 9,500
Income tax expense   2,717     740  
Consolidated net income 12,351 8,760
Net loss attributable to non-controlling interest   -     (556 )
Net income attributable to Turning Point Brands, Inc. $ 12,351   $ 9,316  
 
Basic income per common share:
Net income attributable to Turning Point Brands, Inc. $ 0.64   $ 0.49  
Diluted income per common share:
Net income attributable to Turning Point Brands, Inc. $ 0.62   $ 0.48  
Weighted average common shares outstanding:
Basic 19,245,388 18,829,130
Diluted 19,787,846 19,565,522
 
Supplemental disclosures of statement of income information:
Excise tax expense $ 10,351   $ 10,107  
FDA fees $ 294   $ 299  
 
 

Turning Point Brands, Inc.

Consolidated Balance Sheet

(dollars in thousands except share data)

 
      (unaudited)    
June 30, December 31,
ASSETS 2018 2017
Current assets:
Cash $ 3,433 $ 2,607
Accounts receivable, net of allowances of $47 in 2018 and $17 in 2017 5,688 3,248
Inventories 76,870 63,296
Other current assets   19,173     10,342  
Total current assets 105,164 79,493
Property, plant, and equipment, net 9,243 8,859
Deferred income taxes - 450
Deferred financing costs, net 974 630
Goodwill 134,620 134,620
Other intangible assets, net 27,224 26,436
Master Settlement Agreement (MSA) escrow deposits 30,229 30,826
Other assets   1,087     963  
Total assets $ 308,541   $ 282,277  
 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 13,733 $ 3,686
Accrued liabilities 14,104 18,694
Current portion of long-term debt 8,000 7,850
Revolving credit facility   16,000     8,000  
Total current liabilities 51,837 38,230
Notes payable and long-term debt 186,349 186,190
Deferred income taxes 951 -
Postretirement benefits 3,932 3,962
Other long-term liabilities   379     571  
Total liabilities   243,448     228,953  
 
Commitments and contingencies
 
Stockholders' equity:
Preferred stock; $0.01 par value; authorized shares 40,000,000;
issued and outstanding shares -0-
- -

Common stock, voting, $0.01 par value; authorized shares,
190,000,000; issued and outstanding shares - 19,312,720 at June
30, 2018, and 19,210,633 at December 31, 2017

193 192

Common stock, nonvoting, $0.01 par value; authorized shares,
10,000,000; issued and outstanding shares -0-

- -
Additional paid-in capital 104,892 103,640
Accumulated other comprehensive loss (3,227 ) (2,973 )
Accumulated deficit   (36,765 )   (47,535 )
Total stockholders' equity   65,093     53,324  
Total liabilities and stockholders' equity $ 308,541   $ 282,277  
 
 
Turning Point Brands, Inc.
Consolidated Statement of Cash Flows
(dollars in thousands)
      Six Months Ended
June 30,
2018     2017
Cash flows from operating activities:
Consolidated net income $ 12,351 $ 8,760
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on extinguishment of debt 2,384 6,116
Loss on sale of property, plant, and equipment - 17
Depreciation expense 1,117 771
Amortization of other intangible assets 351 351
Amortization of deferred financing costs 474 530
Amortization of original issue discount - 66
Deferred income taxes 1,443 371
Stock compensation expense 691 272
Changes in operating assets and liabilities:
Accounts receivable (2,440 ) (621 )
Inventories (10,348 ) (4,035 )
Other current assets (4,463 ) 612
Other assets 249 (72 )
Accounts payable 10,047 (629 )
Accrued liabilities and other (5,820 ) (6,140 )
Accrued postretirement liabilities   (71 )   (3 )
Net cash provided by operating activities $ 5,965   $ 6,366  
 
Cash flows from investing activities:
Capital expenditures $ (1,003 ) $ (567 )
Restricted cash, MSA escrow deposits (1,735 ) 1,012
Acquisitions, net of cash acquired (4,797 ) 268
Issuance of note receivable   (6,500 )   -  
Net cash provided by (used in) investing activities $ (14,035 ) $ 713  
 
 
Turning Point Brands, Inc.
Consolidated Statement of Cash Flows (Cont.)
(dollars in thousands)
 
      Six Months Ended
June 30,
2018     2017
Cash flows from financing activities:
Proceeds from (payments of) 2018 first lien term loan, net $ 158,000 $ -
Proceeds from 2018 second lien term loan 40,000 -
Proceeds from 2018 revolving credit facility 16,000 -
Payment of dividends (768 ) -
Proceeds from (payments of) 2017 first lien term loans, net (140,613 ) 143,538
Proceeds from (payments of) 2017 second lien term loan, net (55,000 ) 55,000
Proceeds from (payments of) 2017 revolving credit facility, net (8,000 ) 25,000
Payments of VaporBeast Note Payable (2,000 ) -
Proceeds from release of restricted funds 1,107 -
Payments of first lien term loan - (147,362 )
Payments of second lien term loan - (60,000 )
Payments of revolving credit facility - (15,083 )
Payments of financing costs (3,279 ) (4,765 )
Payments of Vapor Shark loans - (1,867 )
Prepaid equity issuance costs - (164 )
Exercise of options 607 1,097
Surrender of options - (1,000 )
Redemption of options - (1,636 )
Distribution to non-controlling interest   -     (4 )
Net cash provided by (used in) financing activities $ 6,054   $ (7,246 )
 
Net decrease in cash: $ (2,016 ) $ (167 )
 
Cash, beginning of period:
Unrestricted 2,607 2,865
Restricted   4,709     3,889  
Total cash at beginning of period   7,316     6,754  
 
Cash, end of period:
Unrestricted 3,433 1,686
Restricted   1,867     4,901  
Total cash at end of period $ 5,300   $ 6,587  
 

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with
generally accepted accounting principles in the United States, or U.S.
GAAP, we use non-U.S. GAAP financial measures, including EBITDA,
Adjusted EBITDA, Adjusted diluted EPS, Net Debt and Gross Profit
excluding LIFO. We believe Adjusted EBITDA provides useful information
to management and investors regarding certain financial and business
trends relating to our financial condition and results of operations.
Adjusted EBITDA, Adjusted diluted EPS, Net Debt and Gross Profit
excluding LIFO are used by management to compare our performance to that
of prior periods for trend analyses and planning purposes and are
presented to our board of directors. We believe that EBITDA, Adjusted
EBITDA, Adjusted diluted EPS and Gross Profit excluding LIFO are
appropriate measures of operating performance because they eliminate the
impact of expenses that do not relate to business performance.

We define "EBITDA" as net income before interest expense, loss on
extinguishment of debt, provision for income taxes, depreciation and
amortization. We define "Adjusted EBITDA" as net income before interest
expense, loss on extinguishment of debt, provision for income taxes,
depreciation, amortization, other non-cash items and other items that we
do not consider ordinary course in our evaluation of ongoing operating
performance. We define "Adjusted diluted EPS" as diluted earnings per
share excluding items that we do not consider ordinary course in our
evaluation of ongoing operating performance. We define "Net Debt" as
total debt less cash. We define "Gross Profit excluding LIFO" as gross
profit less LIFO charges.

Non-U.S. GAAP measures should not be considered a substitute for, or
superior to, financial measures calculated in accordance with U.S. GAAP.
EBITDA, Adjusted EBITDA and Adjusted diluted EPS exclude significant
expenses that are required by U.S. GAAP to be recorded in our financial
statements and is subject to inherent limitations. In addition, other
companies in our industry may calculate this non-U.S. GAAP measure
differently than we do or may not calculate it at all, limiting its
usefulness as a comparative measure.

In accordance with SEC rules, we have provided, in the supplemental
information attached, a reconciliation of the non-GAAP measures to the
next directly comparable GAAP measures.

 
Schedule A
 
 
Turning Point Brands, Inc.
Reconciliation of GAAP Net Income to Adjusted EBITDA
(dollars in thousands)
      Three Months Ended
June 30,
2018     2017
Net income attributable to Turning Point Brands, Inc. $ 9,319 $ 7,439
Add:
Interest expense 3,579 4,050
Interest income (124 ) (4 )
Income tax expense 1,908 2,795
Depreciation expense 557 417
Amortization expense   176     176  
EBITDA $ 15,415   $ 14,873  
Components of Adjusted EBITDA
LIFO adjustment (a) - (302 )
Pension/postretirement expense (b) 290 50
Stock options, restricted stock, and incentives expense (c) 492 175
Foreign exchange hedging (d) (46 ) (21 )
Strategic initiatives (e) 1,030 444
New product launch costs (f) - 533
Organizational development (g)   44     -  
Adjusted EBITDA $ 17,225   $ 15,752  
 
               
(a) Represents expense related to an inventory valuation allowance
for last-in, first-out ("LIFO") reporting.
(b) Represents our non-cash Pension/postretirement expense.
(c) Represents non-cash stock options, restricted stock and
incentives expense.
(d) Represents non-cash gain and loss stemming from our foreign
exchange hedging activities.
(e) Represents the fees incurred for the study of strategic
initiatives and acquisition expenses.
(f) Represents product launch costs of our new product lines.
(g) Represents costs associated with departmental restructuring.
 
 
Schedule A
 
 
Turning Point Brands, Inc.
Reconciliation of GAAP Net Income to Adjusted EBITDA
(dollars in thousands)
      Six Months Ended
June 30,
2018     2017
Net income attributable to Turning Point Brands, Inc. $ 12,351 $ 9,316
Add:
Interest expense 7,237 8,983
Interest income (128 ) (4 )
Loss on extinguishment of debt 2,384 6,116
Income tax expense 2,717 740
Depreciation expense 1,117 771
Amortization expense   351     351  
EBITDA $ 26,029   $ 26,273  
Components of Adjusted EBITDA
LIFO adjustment (a) (57 ) 887
Pension/postretirement expense (b) 273 168
Stock options, restricted stock, and incentives expense (c) 689 220
Foreign exchange hedging (d) - (90 )
Product line rationalizations (e) 1,008 -
Strategic initiatives (f) 1,629 771
New product launch costs (g) 682 1,161
Organizational development (h)   680     -  
Adjusted EBITDA $ 30,933   $ 29,390  
 
               
(a) Represents expense related to an inventory valuation allowance
for last-in, first-out ("LIFO") reporting.
(b) Represents our non-cash Pension/postretirement expense.
(c) Represents non-cash stock options, restricted stock and
incentives expense.
(d) Represents non-cash gain and loss stemming from our foreign
exchange hedging activities.
(e) Represents costs associated with discontinued products related
to product line rationalization.
(f) Represents the fees incurred for the study of strategic
initiatives and acquisition expenses.
(g) Represents product launch costs of our new product lines.
(h) Represents costs associated with departmental restructuring.
 
 
Schedule B
 
Turning Point Brands, Inc.
Reconciliation of GAAP Gross Profit to Gross Profit excluding LIFO
(dollars in thousands)
                   
Consolidated Consolidated
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2018 2017 2018 2017
Net sales $ 81,101 $ 72,086 $ 155,043 $ 138,874
Cost of sales   45,306     40,076     87,439     79,136  
Gross profit 35,795 32,010 67,604 59,738
Gross margin 44.1 % 44.4 % 43.6 % 43.0 %
 
LIFO adjustment (a)   -     (302 )   (57 )   887  
Gross profit excluding LIFO $ 35,795   $ 31,708   $ 67,547   $ 60,625  
 
Gross margin excluding LIFO 44.1 % 44.0 % 43.6 % 43.7 %
 
 
Smokeless Segment Smokeless Segment
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2018 2017 2018 2017
Net sales $ 24,410 $ 22,021 $ 45,157 $ 42,269
Cost of sales   11,877     10,468     21,631     21,400  
Gross profit 12,533 11,553 23,526 20,869
Gross margin 51.3 % 52.5 % 52.1 % 49.4 %
 
LIFO adjustment (a)   -     (402 )   (57 )   722  
Gross profit excluding LIFO $ 12,533   $ 11,151   $ 23,469   $ 21,591  
 
Gross margin excluding LIFO 51.3 % 50.6 % 52.0 % 51.1 %
 
 
Smoking Segment Smoking Segment
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2018 2017 2018 2017
Net sales $ 29,328 $ 27,019 $ 56,324 $ 54,196
Cost of sales   14,148     12,902     27,980     26,379  
Gross profit 15,180 14,117 28,344 27,817
Gross margin 51.8 % 52.2 % 50.3 % 51.3 %
 
LIFO adjustment (a)   -     100     -     165  
Gross profit excluding LIFO $ 15,180   $ 14,217   $ 28,344   $ 27,982  
 
Gross margin excluding LIFO 51.8 % 52.6 % 50.3 % 51.6 %
 
                             
(a) Represents expense related to an inventory valuation allowance
for last-in, first-out ("LIFO") reporting.
 
         
Schedule C
 
Turning Point Brands, Inc.
Reconciliation of GAAP Total Debt to Net Debt
(dollars in thousands)
 
June 30, December 31,
2018 2017
 
Cash $ 3,433 $ 2,607
 
Total Debt $ 210,349 $ 202,040
 
Net Debt $ 206,916 $ 199,433
 
Leverage Ratio (a) 3.4x 3.3x
 
(a) Leverage ratio is calculated by net debt / adjusted EBITDA.
 
 
Turning Point Brands, Inc.
Reconciliation of GAAP Net Income to Adjusted EBITDA
July 1, 2017 - June 30, 2018
(dollars in thousands)
 
      Rolling     2nd Quarter     1st Quarter     4th Quarter     3rd Quarter
12 Months 2018 2018 2017 2017
 
Net income attributable to Turning Point Brands, Inc. $ 23,244 $ 9,319 $ 3,032 $ 3,519 $ 7,374
Add:
Interest expense 15,158 3,579 3,658 3,894 4,027
Interest income (139 ) (124 ) (4 ) (7 ) (4 )
Loss on extinguishment of debt 2,384 - 2,384 - -
Income tax expense 9,257 1,908 809 3,430 3,110
Depreciation expense 1,972 557 560 434 421
Amortization expense   702     176     175     176     175  
 
EBITDA $ 52,578 $ 15,415 $ 10,614 $ 11,446 $ 15,103
Components of Adjusted EBITDA
LIFO adjustment 179 - (57 ) 877 (641 )
Pension/Postretirement expense 389 290 (17 ) 32 84
Stock option and incentives expense 1,137 492 197 222 226
Foreign exchange hedging (gain) loss - (46 ) 46 - -
Strategic initiatives 2,991 1,030 599 1,143 219
New product launch costs 1,935 - 682 687 566
Product line rationalization 1,571 - 1,008 249 314
Bonus 107 - - 107 -
Organizational development   680     44     636     -     -  
Adjusted EBITDA $ 61,567   $ 17,225   $ 13,708   $ 14,763   $ 15,871  
 
 
Net Debt / 12 months ended June 30, 2018, rolling Adjusted EBITDA 3.4x
 
 
Schedule D
 
Turning Point Brands
Reconciliation of GAAP diluted EPS to Adjusted diluted EPS
(dollars in thousands except share data)       Three Months Ended
June 30,
2018     2017
GAAP EPS $ 0.47 $ 0.38
LIFO adjustment (a) - (0.01 )
Lump sum pension payment (b) 0.01 -
Strategic initiatives (c) 0.03 0.01
New product launch costs (d) - 0.02
Impact of quarterly tax items to effective tax rate   (0.01 )   (0.05 )
Adjusted diluted EPS $ 0.50 $ 0.35
               
(a) Represents expense related to an inventory valuation allowance
for last-in, first-out ("LIFO") reporting tax effected at the
quarterly effective tax rate.
(b) Represents our non-cash curtailment expense of $306 tax effected
at the quarterly effective tax rate.
(c) Represents the fees incurred for the study of strategic
initiatives and acquisition expenses tax effected at the quarterly
effective tax rate.
(d) Represents product launch costs of our new product lines tax
effected at the quarterly effective tax rate.

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