Karat Packaging Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company manufactures and distributes disposable foodservice products, including environmentally friendly and compostable offerings, and related specialty food and beverage products. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $110.0 | $102.7 | $330.3 | $272.9 |
| Gross profit | $34.2 | $29.8 | $102.4 | $79.5 |
| Gross margin | 31.1% | 29.0% | 31.0% | 29.1% |
| Operating income | $7.9 | $5.4 | $25.2 | $16.0 |
| Net income, consolidated | $6.2 | $4.1 | $21.3 | $16.5 |
| Net income attributable to Karat | $6.1 | $3.8 | $19.1 | $15.1 |
| Diluted EPS | $0.31 | $0.19 | $0.96 | $0.84 |
| Adjusted EBITDA (non-GAAP) | $11.7 | $9.0 | $36.6 | $26.2 |
| Adjusted EBITDA margin (non-GAAP) | 10.7% | 8.8% | 11.1% | 9.6% |
Cash flow: For the first nine months, operating activities provided $12.5 million, versus $1.2 million used in the prior-year period. Investing activities used $16.6 million, including $11.5 million of equipment deposits and $4.0 million invested in the Taiwan joint venture. Financing activities provided $5.1 million; cash rose $1.0 million to $7.5 million. Management separately reported record quarterly operating cash flow of $20.2 million and $11.6 million of line-of-credit repayments in Q3.
Balance sheet and liquidity: At September 30, cash was $7.5 million, accounts receivable $36.7 million, inventory $73.3 million, current assets $124.8 million and current liabilities $34.8 million. Working capital was $90.0 million, up from $72.1 million at December 31, 2021. Total assets were $239.5 million and stockholders’ equity $154.1 million. Debt carrying value was approximately $42.7 million, including current maturities; there were no line-of-credit borrowings and $38.9 million of remaining borrowing capacity, with $1.1 million issued under a standby letter of credit. The company reported financial liquidity of $54.5 million.
Changes versus the prior comparable periods
- Q3 sales increased 7.1%; nine-month sales increased 21.0%. Management attributed growth to pricing, sales to existing customers and new-customer additions. For Q3, favorable pricing added about $12.2 million, partly offset by a $4.6 million decline primarily from volume and mix.
- Gross margin expanded 2.1 percentage points in Q3 and 1.9 points year to date. Management cited product mix, prior price increases, U.S. dollar strength and operating efficiencies; higher freight and duty costs were a partial offset.
- Q3 operating income rose 47.4% and consolidated net income rose 51.1%. Nine-month operating income rose 57.5%, while consolidated net income rose 29.4%.
- Nine-month cash from operations improved from a $1.2 million outflow to a $12.5 million inflow, despite inventory and receivables absorbing cash. Prior-year nine-month results included a $5.0 million debt-forgiveness gain; 2022 results included a $2.2 million interest-rate-swap gain, including settlement proceeds.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. Management expects available cash, operating cash flows and borrowing capacity to cover working capital, debt service, leases and planned capital expenditures for at least the next 12 months.
- Management cited potential exposure to supply-chain and shipping disruption, freight and raw-material inflation, tariffs, pricing delays, foreign-exchange changes, demand forecasting, competition and public-health or other catastrophic events. It said COVID-19 impacts were expected to become less significant, while a worsening global environment could affect liquidity and capital needs.
- In Q3, the company added more than 4,000 customers. Freight and duty costs were $16.3 million, or 14.8% of sales, compared with $14.4 million, or 14.1%, a year earlier.
- The company had invested $4.0 million in a Taiwan compostable-products joint venture by September 30 and paid the remaining $1.876 million on November 9. On November 8, the board declared a special dividend of $0.35 per share, payable on or around November 30 to shareholders of record November 21.
- Related-party supplier Keary Global and its affiliate represented 14.3% of purchases for the first nine months and 21% of accounts payable at September 30. The company also disclosed supplier concentration above 10% of purchases and payables.
- Management concluded disclosure controls were not effective at quarter-end because previously identified material weaknesses remained under remediation. Weaknesses included the control environment and risk assessment, data completeness and accuracy, and review controls for income taxes, receivables and inventory. Management said the statements fairly present results and described remediation underway.
- The company reported no material legal proceedings and no material changes to the risk factors in its 2021 Form 10-K. It disclosed $19.6 million of future minimum lease obligations and conditional government grants subject to operating, employment and other requirements.
Important facts for investors to verify
- Whether margin gains and customer growth persist as freight, raw-material and labor costs, pricing, product mix and demand change.
- Whether working-capital investment—particularly inventory—and cash generation remain manageable, and how the special dividend and Taiwan investment affect liquidity.
- Debt terms, covenant compliance, available revolver capacity and the effect of interest rates; the filing states the company was in compliance at September 30.
- Progress and testing results for remediation of the disclosed material weaknesses in internal controls.
- Related-party supplier purchasing and payable balances, supplier concentration, and the Taiwan joint venture’s completion, funding and operating plans.