Karat Packaging Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Karat manufactures and distributes disposable foodservice products, including environmentally friendly options, and also sells related products and services. The figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $102.7 | $76.3 | $272.9 | $225.1 |
| Gross profit | $29.8 | $23.0 | $79.5 | $69.8 |
| Gross margin | 29.0% | 30.2% | 29.1% | 31.0% |
| Operating income | $5.4 | $7.0 | $16.0 | $25.6 |
| Net income | $4.1 | $4.6 | $16.5 | $15.1 |
| Net income attributable to Karat | $3.8 | $4.1 | $15.1 | $16.6 |
| Diluted EPS | $0.19 | $0.26 | $0.84 | $1.07 |
| Adjusted EBITDA (non-GAAP) | $8.2 | $9.1 | $25.1 | $31.5 |
Q3 changes: Sales rose 35%, driven by existing-customer sales, more than 8,000 new customers, online sales, and logistics and shipping revenue. Gross profit increased, but margin fell as higher freight and duty costs outweighed some benefits from the higher-margin online channel. Operating expenses rose 53%, notably from customer delivery costs and workforce expansion; operating income declined 22%, net income 11%, and adjusted EBITDA 10%.
Nine-month changes: Sales rose 21%, including growth from existing and new customers and logistics services. Operating income declined 38% as freight costs and operating expenses grew faster than gross profit. Net income increased 9% despite lower operating income, primarily because of improved other income, including a $5.0 million PPP loan-forgiveness gain and a favorable change in interest-swap fair value. Adjusted EBITDA declined 20%; it excludes the PPP gain and includes specified adjustments, so it does not track GAAP net income directly.
PPE products, which had benefited from pandemic demand, were less than 1% of sales in both the Q3 and nine-month 2021 periods. Diluted weighted-average shares increased following the April 2021 IPO, contributing to lower per-share results versus the prior periods.
Cash flow, balance sheet, and debt
- Cash flow, nine months: Operating activities used $1.2 million, compared with $12.3 million provided in 2020. Management attributed the outflow mainly to inventory build and higher receivables. Investing activities used $8.6 million; financing activities provided $11.1 million, including $67.6 million of net IPO proceeds and substantial debt repayments.
- Liquidity: September 30 cash was $1.7 million. Working capital was $68.3 million, up from $36.6 million at year-end 2020, largely due to higher receivables and inventories. The company reported no line-of-credit borrowings at quarter-end, with stated availability of up to $40 million under the then-existing facility.
- Debt: Long-term debt was $37.0 million before unamortized fees and current portion; the balance-sheet carrying amount of long-term debt, net of current portion, was $35.6 million. Total debt declined from $64.9 million at December 31, 2020, and line-of-credit borrowings fell from $33.2 million to zero. Debt reduction included repayments funded in part by IPO proceeds and a September refinancing of a Global Wells loan. The company remained in compliance with stated financial covenants.
- Capital and assets: Total assets were $203.5 million and stockholders’ equity was $125.0 million at September 30, 2021. Inventories were $60.2 million, up from $49.0 million at year-end; accounts receivable rose to $33.3 million from $23.8 million.
Outlook, risks, and notable items
- No specific numerical revenue or earnings guidance is provided. Management said it expected available cash, operating cash flow, and borrowing capacity to fund operations, debt and lease service, and expected capital expenditures of about $6.9 million for at least the next 12 months. The filing’s separate contractual-obligations table lists $33.1 million of estimated future capital expenditures, while noting that most are not commitments; investors should clarify the scope and timing of these estimates.
- Management cited continued growth opportunities in takeout and delivery, e-commerce, and environmentally friendly products. It also identified freight costs, tariffs and trade policy, and fluctuating raw-material prices as factors that could help or hurt results.
- The company warned that port congestion, international shipping delays, inflation, and higher freight costs could continue into 2022. Disruptions could raise costs, delay deliveries, or impair the ability to meet customer demand. COVID-19’s duration and effects on demand, operations, suppliers, and liquidity remained uncertain.
- A related-party supplier and purchasing agent, Keary Global and its affiliate, accounted for 14.3% of purchases for the first nine months of 2021; related-party payables were $2.6 million at September 30. This creates supplier and related-party exposure to monitor.
- In October 2021, after quarter-end, the company renewed its $40 million line of credit through October 2023 and removed the borrowing-base restriction. It changed certain covenants, including adding a minimum fixed-charge coverage ratio. The company also granted 430,000 stock options and paid off approximately $0.3 million of capital lease obligations.
- The company completed its $5.0 million PPP loan forgiveness in June 2021. It disclosed no material legal proceedings and stated that disclosure controls were effective as of September 30, 2021.
Key facts for investors to verify
- Whether higher freight, duty, shipping, and product costs can be passed through to customers, and the effect on gross margins.
- Whether inventory and receivables growth converts into operating cash flow, given the nine-month cash use from operations.
- Current borrowing availability, covenant headroom, and the implications of the company’s guarantees for Global Wells debt under the renewed credit facility.
- The composition and timing of expected capital expenditures, reconciling management’s approximately $6.9 million outlook with the larger nonbinding estimate in the obligations table.
- The sustainability of earnings excluding the one-time PPP forgiveness gain, and the assumptions and adjustments used in non-GAAP Adjusted EBITDA.
- Ongoing reliance on the related-party supplier and any effects of supply-chain disruption, customer demand changes, and the decline in PPE sales.