Karat Packaging Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are to FY2020. The company distributes and selectively manufactures disposable foodservice packaging and related products. Its Nasdaq ticker is KRT. Results are reported as one operating segment.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $364.2 million | $295.5 million | +23.3% |
| Gross profit / margin | $107.8 million / 29.6% | $89.1 million / 30.2% | Profit +21.0%; margin down 0.6 percentage points |
| Operating income / margin | $23.1 million / 6.4% | $27.7 million / 9.4% | Operating income down 16.4% |
| Net income | $22.4 million | $16.7 million | +34.6% |
| Net income attributable to Karat / diluted EPS | $20.8 million / $1.12 | $17.5 million / $1.13 | Diluted EPS down from $1.13 |
| Adjusted EBITDA (non-GAAP) / margin | $37.0 million / 10.2% | $36.0 million / 12.2% | EBITDA +3%; margin down 2.0 points |
| Cash from operations | $8.7 million | $14.5 million | Down $5.9 million |
| Cash and cash equivalents at year-end | $6.5 million | $0.4 million | Increased $6.0 million |
| Working capital at year-end | $72.1 million | $36.6 million | Increased $35.5 million |
Gross margin was pressured by elevated ocean freight and duty costs, which rose to 12.1% of sales from 6.8%. Operating expenses increased 37.9%, including higher shipping and transportation, payroll, marketing, stock compensation and professional fees. The net-income increase was substantially supported by a $5.0 million gain from forgiveness of the company’s PPP loan and lower net interest expense.
Cash, debt and liquidity
- Net cash used in investing activities was $13.3 million, principally for equipment, the South Carolina warehouse and the Pacific Cup acquisition. Financing activities provided $10.6 million, including $67.6 million of net IPO proceeds, offset by debt repayments.
- At year-end, the company reported no balance on its $40 million revolving credit line. Gross term-loan principal was approximately $36.7 million; the balance sheet reports $35.3 million of long-term debt, net of current maturities and debt discount. The loans are secured, and certain obligations are guaranteed by the company or shareholders.
- Management said cash, operating cash flows and available borrowing capacity should be sufficient for working capital, debt service and planned capital spending for at least the next 12 months. The company reported covenant compliance at December 31, 2021.
- Subsequent to year-end, Global Wells drew the remaining $6.9 million available under its term loan in February 2022, and the company drew $10.2 million on its line of credit through the financial-statement issuance date.
Business mix and changes versus FY2020
- Sales increased $68.7 million. Management attributed the increase to growth with existing customers, new customers, pricing, new SKUs, volume and logistics services. The filing assigns approximately $32.9 million of the increase to price increases, $12.6 million to new SKUs, $15.0 million primarily to volume and $8.2 million to logistics and shipping revenue.
- Revenue by customer channel: distributors $199.9 million (up from $157.2 million); national and regional chains $86.0 million (up from $67.9 million); online $50.3 million (up from $33.2 million); retail $28.1 million (down from $37.3 million).
- Online net sales grew 51.4%; the channel served more than 73,000 customers. The company reported more than 77,000 total customers, up from approximately 45,000 in 2020, and a 95% retention rate among its top 200 customers.
- Distribution represented approximately 75% of sales and in-house manufacturing approximately 25%. Karat Earth product sales grew 19.2%. PPE sales declined from $38.1 million in 2020 to $2.7 million in 2021.
- The company completed its IPO in April 2021, raising approximately $67.6 million net, acquired Pacific Cup’s Hawaii assets for $1.0 million, and invested $12.4 million in logistics and manufacturing infrastructure. It also paid off most prior borrowings and all capital lease obligations.
Outlook, risks and notable matters
- No formal numerical revenue, earnings or margin guidance is provided. Management expects manufacturing to remain a relatively small portion of sales in 2022 and views e-commerce, customer expansion, eco-friendly products and distribution capacity as growth opportunities. It may evaluate acquisitions but reported no specific target or current acquisition plan.
- Management expects supply-chain and logistics challenges to continue into 2022. Key exposures include elevated freight and raw-material costs, product availability and lead times, labor costs, port delays, tariffs, foreign sourcing and currency movements. Price increases have historically helped offset higher costs, but timing lags can pressure margins.
- COVID-19 effects remain uncertain. The pandemic contributed to supply and labor constraints, inflation and shipping disruption; the sharp reduction in PPE sales also makes comparisons with 2020 less representative.
- Management concluded disclosure controls and procedures were not effective at December 31, 2021 because of material weaknesses involving the control environment and risk assessment, IT access controls, underlying data controls, and review controls for areas including taxes, receivables and inventory. Remediation began in 2022; the company’s auditor did not attest to internal-control effectiveness.
- Related-party sourcing is significant: Keary Global and its affiliate accounted for 12% of 2021 purchases and are related parties. The company also consolidates Global Wells, which owns facilities leased to the operating business.
- Legal proceedings are described as ordinary-course matters; management did not expect currently pending proceedings to have a material adverse effect. The company reported $10.3 million of minimum operating lease obligations and $10.9 million of purchase obligations at year-end.
Key facts for investors to verify
- Whether freight, duty, product and labor cost pressures ease, and whether pricing can continue to offset inflation without weakening demand or margins.
- Whether the strong sales growth and online expansion persist as PPE sales normalize and retail-channel sales remain lower.
- Operating cash generation and working-capital requirements, especially inventory and receivables growth, alongside subsequent borrowing and planned capital spending.
- Debt maturities, collateral and guarantees, covenant compliance, and the effect of the 2022 line-of-credit and term-loan draws.
- Progress in remediating the disclosed internal-control material weaknesses and strengthening financial reporting processes.
- The economics and governance of related-party supplier and facility arrangements, including the company’s dependence on overseas sourcing.