Karat Packaging Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Karat Packaging manufactures and distributes disposable foodservice products, including environmentally friendly and compostable options, and related specialty food and beverage products.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $114.9 million | $94.5 million | $220.3 million | $170.2 million |
| Gross profit | $34.0 million | $28.1 million | $68.3 million | $49.7 million |
| Gross margin | 29.6% | 29.7% | 31.0% | 29.2% |
| Operating income | $7.8 million | $6.9 million | $17.3 million | $10.6 million |
| Net income | $7.2 million | $9.3 million | $15.1 million | $12.4 million |
| Net income attributable to Karat Packaging | $6.3 million | $9.6 million | $13.0 million | $11.4 million |
| Diluted EPS | $0.32 | $0.50 | $0.65 | $0.66 |
| Adjusted EBITDA, non-GAAP | $11.8 million | $10.3 million | $24.8 million | $17.2 million |
| Adjusted EBITDA margin, non-GAAP | 10.3% | 10.9% | 11.3% | 10.1% |
For the first half, cash used in operating activities was $7.7 million, versus $2.7 million used in the prior-year period. Investing activities used $12.4 million; financing activities provided $17.1 million. Cash declined $3.0 million to $3.5 million.
At June 30, 2022, working capital was $96.7 million, compared with $72.1 million at year-end 2021. Inventory was $85.5 million, up from $58.5 million, and accounts receivable was $38.5 million, up from $32.8 million. Debt included $11.6 million drawn on the revolving credit line and approximately $43.2 million of term-loan principal, before debt discounts. The credit line had $28.4 million of remaining availability; the company reported compliance with loan covenants.
Changes versus the prior comparable period
- Q2 sales rose 21.5%; first-half sales rose 29.4%. Management attributed growth to higher sales to existing customers, new customers, and price increases. In Q2, $18.9 million of the $20.4 million sales increase was attributed to price increases; volume and mix contributed $0.3 million.
- Q2 gross profit increased 20.9%, while gross margin was essentially flat. First-half gross margin expanded to 31.0% from 29.2%.
- Q2 net income fell 22.9%, despite higher operating income, mainly because prior-year results included a $5.0 million gain on forgiveness of a PPP loan. First-half net income increased 22.2%.
- Freight and duty costs rose sharply: $10.9 million in Q2 and $19.6 million in the first half versus the respective prior-year periods. These costs represented 18.0% of Q2 sales and 16.3% of first-half sales in 2022.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management said cash, operating cash flows and borrowing availability should be sufficient for working capital, debt service, leases and planned capital expenditures for at least 12 months, while noting economic and supply-chain uncertainty could adversely affect liquidity and capital needs.
- Management cited raw-material inflation, elevated freight costs, supply-chain disruptions, labor costs, tariffs, foreign-exchange movements, demand forecasting and COVID-related uncertainty as risks. Pricing actions, a broader supplier network, automation and inventory adjustments are among its responses.
- The company invested $4.0 million in a planned Taiwan joint venture to manufacture bagasse-based compostable products. The agreement anticipates a total investment of approximately $6.5 million for a 49% interest; incorporation was not complete at quarter-end. Management expected manufacturing to begin in the second half of 2022.
- A June refinancing replaced a variable-rate term loan with a $20.7 million initial borrowing under a fixed-rate loan at 4.375%, with maturity in 2027 and potential additional advances. The company also terminated a Global Wells interest-rate swap and recognized $825,000 in settlement proceeds; reported foreign-currency gains were $0.9 million in Q2 and $1.0 million for the first half.
- After quarter-end, the company repaid $4.6 million on its line of credit through August 11, reducing the outstanding balance to $7.0 million.
- Management reported that disclosure controls and procedures were not effective at June 30, 2022 because previously identified material weaknesses in internal controls remained under remediation. Actions included hiring finance personnel, strengthening IT access controls and engaging a third-party provider; management said remediation would require sustained operation and testing of controls.
- The filing reports no material legal proceedings and no material changes to the risk factors in the 2021 Form 10-K.
Important facts for investors to verify
- Whether price increases can continue to offset raw-material, freight, labor and distribution costs without weakening demand or margins.
- Inventory growth, receivables and operating cash flow conversion, including whether working-capital investment moderates as planned.
- Progress, remaining funding needs and production timing for the Taiwan joint venture.
- Debt balances, borrowing availability, refinancing terms and continued compliance with financial covenants.
- Whether the disclosed internal-control material weaknesses are remediated and controls operate effectively over time.
- The sustainability of reported earnings excluding prior-year PPP forgiveness and the effects of foreign-currency and swap-related gains.