Karat Packaging Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Karat manufactures and distributes disposable foodservice products, including environmentally friendly options, and also sells personal protective equipment (PPE). The filing presents unaudited consolidated interim results.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $94.5M | $84.7M | $170.2M | $148.8M |
| Gross profit | $28.1M | $28.9M | $49.7M | $46.8M |
| Gross margin | 29.7% | 34.1% | 29.2% | 31.4% |
| Operating income | $6.9M | $14.5M | $10.6M | $18.6M |
| Net income | $9.3M | $9.9M | $12.4M | $10.5M |
| Net income attributable to Karat | $9.6M | $10.1M | $11.4M | $12.5M |
| Adjusted EBITDA (non-GAAP) | $10.1M | $16.5M | $16.9M | $22.4M |
Q2 diluted EPS was $0.50, versus $0.65; six-month diluted EPS was $0.66, versus $0.81. Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP results.
Cash flow, balance sheet and liquidity
- For the six months, operating cash flow was negative $2.7M, compared with positive $8.7M a year earlier. Higher receivables and inventory were major cash uses as sales and demand increased.
- Investing cash outflow was $4.8M, primarily for Texas manufacturing equipment and deposits and the Pacific Cup acquisition. Financing cash inflow was $14.8M, including $67.6M of net IPO proceeds, offset in part by debt repayments.
- At June 30, cash was $7.7M; working capital was $65.8M, up from $36.6M at year-end 2020. Current assets were $106.0M and current liabilities $40.1M.
- Reported line-of-credit borrowings were $3.2M, down from $33.2M at December 31, 2020. Long-term debt was $37.2M before unamortized fees and current maturities; debt and line-of-credit covenants were reported in compliance. The line of credit matures in May 2022 and has a $40M maximum, subject to a borrowing base.
- Management said available cash, operating cash flow, unused credit availability of $35.9M and IPO proceeds were expected to fund operations and obligations for at least 12 months. It anticipated approximately $6.3M of capital expenditures.
Changes and management commentary
- Sales rose 12% in Q2 and 14% for the first half, driven by existing-customer sales, new customers, online sales and logistics/shipping revenue. Management cited more than 9,000 new customers in Q2 and more than 15,000 in the first half.
- Profitability weakened at the operating level: Q2 operating income fell 53%, and first-half operating income fell 43%. Gross margin contracted as freight and duty, product costs and operating expenses increased; PPE sales, which had supported 2020 results, fell to less than 1% of sales.
- Operating expenses increased 47% in Q2 and 39% for the first half, including higher customer shipping costs, payroll, facility rent and professional services.
- Q2 and first-half GAAP net income included a $5.0M PPP loan-forgiveness gain granted June 10, 2021. The forgiveness also lowered the reported effective tax rates. The company completed its IPO in April, issuing 4.54M shares and receiving $67.6M net proceeds.
- Karat acquired Pacific Cup, a Hawaii paper-cup business, on March 1 for $1.0M. Subsequent to quarter-end, it bought a Summerville, South Carolina warehouse for $1.1M, expected to be ready for use by September.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management viewed growth in takeout, delivery, e-commerce and environmentally friendly products as favorable trends, while noting exposure to freight costs, tariffs, raw-material prices, sourcing and demand forecasting. It cautioned that the ongoing COVID-19 pandemic could materially adversely affect future results, financial position and liquidity. The company also identified a related-party supplier group, Keary Global and its affiliate, as representing 12.2% of first-half purchases. It reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30.
Key facts for investors to verify
- Whether sales growth can translate into stronger margins as freight, product and delivery costs rise.
- How much operating cash flow recovers as receivables and inventory normalize; first-half operating cash flow was negative despite positive net income.
- Underlying earnings excluding the $5.0M PPP forgiveness gain, and the basis and comparability of Adjusted EBITDA.
- Execution and returns from Pacific Cup, new distribution capacity and planned capital expenditures.
- Supplier concentration and related-party purchasing arrangements, together with exposure to overseas freight, tariffs and input costs.
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months. Investors should verify the context of that response and the company’s filing history.