Karat Packaging Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. Karat is a specialty distributor and select U.S. manufacturer of disposable foodservice products. Distribution generated about 74% of 2022 sales and manufacturing about 26%. The filing reports one operating segment.
Key financial results
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net sales | $423.0 million | $364.2 million | +16.1%; growth reflected higher pricing, volume/product mix, logistics revenue, and new customers. |
| Gross profit / margin | $132.1 million / 31.2% | $107.8 million / 29.6% | Margin expanded 160 basis points. |
| Operating income | $30.0 million | $23.1 million | +30%. |
| Net income, consolidated | $25.8 million | $22.4 million | +15.1%; 2022 included a $3.5 million inventory write-off. |
| Net income attributable to Karat | $23.6 million | $20.8 million | Basic EPS was $1.19 versus $1.13; diluted EPS was $1.19 versus $1.12. |
| Adjusted EBITDA (non-GAAP) | $45.6 million; 10.8% margin | $37.0 million; 10.2% margin | +23.2%; not a GAAP measure. |
| Operating cash flow | $29.5 million | $8.7 million | Higher than prior year; inventory buildup used cash. |
| Cash and working capital | $16.0 million cash; $84.5 million working capital | $6.5 million cash; $72.1 million working capital | Current assets $123.8 million and current liabilities $39.3 million at year-end. |
| Debt | $42.7 million term debt; no line-of-credit borrowings | $36.7 million term debt | $40 million revolving facility; $1.1 million of letters of credit outstanding. |
Changes, cash, and capital
- Sales rose $58.7 million: $43.7 million from favorable pricing, $13.3 million from volume and product mix, and $1.7 million from logistics and shipping revenue. Management attributed $48.3 million of growth to existing customers and $10.4 million to more than 15,000 new customers.
- Gross margin improved despite elevated freight, duties, product and labor costs. Management cited price increases, favorable product mix including eco-friendly items, improved operating efficiency, and foreign-exchange benefits.
- Operating expenses increased 21% to $102.1 million, including higher payroll, shipping/transportation, rent and production costs.
- Investing cash outflow was $17.8 million, including $12.1 million of property/equipment deposits and $4.0 million net investment in the Bio Earth joint venture. Financing cash outflow was $2.1 million, including a $7.0 million special dividend.
- Year-end debt comprised $22.2 million on a 2026 term loan at 3.50% fixed and $20.6 million on a 2027 term loan at 4.375% fixed. The 2027 loan refinanced variable-rate debt. The company reported compliance with debt covenants.
- Operating lease liabilities were $16.1 million. Purchase obligations were $6.9 million, due in 2023.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said cash, operating cash flows, and available borrowing capacity should meet working-capital, debt-service, lease, and planned capital needs for at least 12 months.
- Management expects manufacturing to remain a relatively small share of sales in 2023. In February 2023, it committed to sell certain manufacturing equipment as part of a shift toward a more asset-light model; expected proceeds are approximately $2.6 million over 12–24 months.
- Karat expects the Taiwan Bio Earth joint-venture factory to produce about 7,500 tons annually, with first customer shipments expected in June 2023. The planned investment is approximately $6.5 million for a 49% interest; $4.0 million had been invested by year-end, and the filing expected remaining net investment payments of $2.5 million in 2023. Bio Earth’s incorporation and registration were not complete at year-end.
- FY2022 included a $3.5 million inventory write-off, of which $0.879 million was an out-of-period correction of immaterial prior-period errors. The correction reduced 2022 net income by $0.664 million. The company stated the errors did not require a restatement.
- FY2021 benefited from a $5.0 million gain on forgiveness of a PPP loan, making other income and tax comparisons less comparable. FY2022 other income included a $2.159 million interest-rate-swap-related gain/income and a $1.568 million foreign-currency gain; the swap was terminated in June 2022.
- Key risks include reliance on overseas suppliers and freight routes, raw-material and labor inflation, inventory forecasting, tariffs and trade policy, evolving restrictions on disposable plastics, competition, and exposure to foreign exchange. A related-party supplier accounted for 11% of purchases; the company disclosed ongoing related-party transactions.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2022 due to material weaknesses across the control environment, IT access/change management, revenue, inventory, procurement, and management review controls. Remediation was underway. The auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal controls. Management said the weaknesses did not affect the accuracy of the current-period financial statements.
- The March 2023 amendment extended the $40 million credit facility’s maturity to March 14, 2025 and changed its borrowing rate to one-month SOFR plus 2.50%, with a 1.0% SOFR floor. The company paid a $0.35-per-share special dividend in November 2022 and does not anticipate regular dividends in the foreseeable future.
Important facts for investors to verify
- Whether margin gains persist as freight and raw-material costs normalize, and whether price reductions or competition pressure selling prices.
- Inventory levels, aging, and the adequacy of reserves following the $3.5 million write-off and the increase in inventory to $71.2 million.
- Progress and costs for remediating material weaknesses, particularly inventory, revenue, procurement, and IT controls.
- Bio Earth’s completion, additional funding requirements, production start, and customer shipments; also confirm the projected equipment-sale proceeds and asset-light transition.
- Debt covenant compliance, refinancing and liquidity needs, and the impact of lease and purchase commitments on cash availability.
- Supplier concentration and related-party purchasing terms, alongside exposure to overseas shipping, tariffs, and foreign exchange.