Karat Packaging Reports 2021 Second Quarter Financial Results

Rhea-AI Summary

Karat Packaging (KRT) reported its Q2 2021 financial results, highlighting net sales of $94.5 million, an 11.6% increase year-over-year, and an impressive 69.4% increase excluding PPE sales from last year. Gross profit decreased to $28.1 million with a gross margin of 29.7%. Despite challenges from rising material and shipping costs, the company anticipates Q3 net sales between $100 million and $102 million. Net income for Q2 was $9.3 million, down from $9.9 million a year prior, with an adjusted EBITDA of $10.1 million, also down from last year.

Positive

• Net sales increased 11.6% YoY to $94.5 million.
• Net sales excluding PPE rose 69.4% YoY.
• Expected Q3 net sales forecast of $100 million to $102 million.

Negative

• Gross profit decreased to $28.1 million from $28.9 million last year.
• Gross margin fell to 29.7%, down from 34.1% YoY.
• Operating expenses surged 47.4% YoY to $21.2 million.

Net Sales Advance 11.6 Percent Over Prior Year and 69.4 Percent, Excluding Last Year’s Sales of PPE-Related Products

CHINO, Calif., Aug. 12, 2021 (GLOBE NEWSWIRE) -- Karat Packaging Inc. (Nasdaq: KRT), a specialty distributor and manufacturer of environmentally friendly, disposable foodservice products and related items, today announced financial results for its 2021 second quarter ended June 30, 2021.

Second Quarter 2021 Recent Highlights

• Net sales of $94.5 million, up 11.6 percent from same period last year.
• Net sales, excluding personal protective equipment (PPE) sales, rose 69 percent over prior year period.
• Gross profit of $28.1 million, compared with $28.9 million a year ago and $21.6 million in the preceding first quarter.
• Gross margin of 29.7 percent versus 34.1 percent in the same period last year, and 28.6 percent in the 2021 first quarter.
• Acquired a warehouse building and added a distribution facility in South Carolina.
  

Third Quarter 2021 Outlook

• Net sales expected to increase to $100 million to $102 million.
  

Alan Yu, chief executive officer, said, “Results for the 2021 second quarter continued to reflect strong demand, as well as our nimbleness as a supplier of customized solutions and our ability to provide new products to a diverse and expanding customer base. Sales exceeded expectations and increased at a double-digit pace, paced by our national, online and distributors channels. Excluding PPE products that we primarily sold in last year’s second quarter during the height of the COVID-19 pandemic, top-line growth was nearly 70 percent.

“The strong increase in sales was partially offset by freight, material and shipping costs that continued to rise throughout the globe during the second quarter. We quickly and proactively were able to increase prices to pass on these higher costs and protect our margins; as a result, our gross margin improved 110 basis points sequentially.

“Market trends remain favorable and are continuing, as more restaurants and foodservice outlets open. As a result, we’re currently targeting net sales to be in the range of $100 million to $102 million for the third quarter. In addition, expected growth in our high-margin online channel and our efforts to pass on higher freight and shipping costs gives us confidence in our ability to improve gross margin, compared to the first and second quarters of 2021.” Mr. Yu added.

Second Quarter 2021 Financial Results

Net sales for the 2021 second quarter increased 11.6 percent to $94.5 million, from $84.7 million in the same period last year. The increase primarily was driven by greater product penetration with existing customers, as well as new customers added in the quarter.

Net sales excluding PPE products, which carry higher margins, increased 69.4 percent to $93.9 million, from $55.4 million in the same period last year. Sales through Karat’s national, distributors and online channels increased significantly.

Gross profit for the 2021 second quarter decreased slightly to $28.1 million, from $28.9 million for the same period last year, primarily reflecting the increase in freight and material costs, as well as the decline in high-margin PPE products, partially offset by higher sales.

Gross margin was 29.7 percent in the 2021 second quarter, compared with 34.1 percent in the same period last year. Gross margin in the 2021 first quarter was 28.6 percent.

Operating expenses for the 2021 second quarter totaled $21.2 million, a 47.4 percent increase from $14.4 million in last year’s second quarter, when Karat was still a privately owned company. The increase was primarily due to higher shipping costs, payroll expenses associated with workforce expansion, an increase in facility costs and higher professional fees. Operating expenses for the 2021 first quarter were $17.9 million.

Operating income in the second quarter of 2021 was $6.9 million, or 7.3 percent of net sales, compared with $14.5 million, or 17.1 percent of net sales, in the same period last year. Operating income in the first quarter of 2021 was $3.8 million, or 5.0 percent of net sales.

Other income totaled $4.0 million in the 2021 second quarter, compared with other expense of approximately $737,000 in the same period last year. The increase primarily reflects a gain of $5 million in the 2021 second quarter resulting from forgiveness of the company’s Paycheck Protection Program loan that was received in 2020 as part of the Coronavirus Aid, Relief and Economic Security Act. Other income in the 2021 first quarter was approximately $465,000.

Net income was $9.3 million in the 2021 second quarter, compared with $9.9 million in the same period last year. Net income margin was 9.9 percent in the second quarter, compared with 11.7 percent a year ago. Net income was $3.1 million, and net income margin was 4.0 percent in the 2021 first quarter.

Net income attributable to Karat Packaging for the 2021 second quarter was $9.6 million, or $0.50 per diluted share, compared with $10.1 million, or $0.65 per diluted share a year ago, and $1.8 million, or $0.12 per diluted share in the 2021 first quarter.

Adjusted EBITDA totaled $10.1 million in the 2021 second quarter, compared with $16.5 million in the same period last year, and $6.8 million in the 2021 first quarter. Adjusted EBITDA margin was 10.7 percent of net sales, compared with 19.4 percent in the 2020 second quarter, and 9.0 percent in the 2021 first quarter. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. Reconciliations of GAAP to non-GAAP results are provided in the tables following this press release.

Net cash used in operating activities totaled $2.2 million in the 2021 second quarter, compared with net cash provided by operating activities of $7.2 million in the same period last year. The decrease primarily reflects working capital activity.

Six-Month 2021 Financial Results

Net sales in the first six months of 2021 increased 14.4 percent to $170.2 million, from $148.8 million in the same period last year.

Gross profit rose 6.3 percent to $49.7 million in the first half of 2021, from $46.8 million in the same period last year. Gross margin was 29.2 percent in the first six months of 2021, compared with 31.4 percent in the same period last year.

Operating expenses were $39.1 million in the 2021 year-to-date period, an increase of 38.6 percent, compared with $28.2 million in the same period last year.

Operating income was $10.6 million in the first six months of 2021, or 6.3 percent of net sales, compared with $18.6 million, or 12.5 percent of net sales, in the same period last year.

Other income totaled $4.5 million in the first half of 2021, compared with other expense of $4.1 million in the same period last year. Other income in the 2021 year-to-date period primarily reflects the $5 million gain on PPP loan debt forgiveness recorded in the second quarter. Other expense in the first six months of 2020 primarily reflects a loss of $2.3 million on interest rate swap positions.

Net income advanced to $12.4 million for the first six months of 2021, from $10.5 million in the same period last year. Net income margin rose to 7.3 percent in the first six months of 2021, from 7.1 percent in the same period last year. Net income attributable to Karat Packaging was $11.4 million, or $0.66 per diluted share, in the first six months of 2021, compared with $12.5 million, or $0.81 per diluted share, in the same period last year.

Adjusted EBITDA totaled $16.9 million in the first six months of 2021, compared with $22.4 million in the same period last year. Adjusted EBITDA margin was 9.9 percent in the 2021 year-to-date period, compared with 15.1 percent in the same period last year.

Net cash provided by operating activities totaled $2.3 million in the first six months of 2021, compared with $8.7 million in the same period last year. The decrease primarily reflects working capital activity.

Investor Conference Call

The Company will host an investor conference call today, August 12, 2021, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) to discuss its 2021 second quarter results.

Phone:	877-270-2148 (domestic); 412-902-6510 (international)
Replay:	Accessible through August 19, 2021; 877-344-7529 (domestic); 412-317-0088 (international); replay access code 10159062
Webcast:	Accessible at http://investor.karatpackaging.com/; archive available for approximately one year

About Karat Packaging Inc.

Karat Packaging Inc. is a specialty distributor and manufacturer of a wide range of environmentally friendly, disposable foodservice products and related items, primarily used by national and regional restaurants and in foodservice settings throughout the United States. Its products include food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. The company’s eco-friendly Karat Earth® line offers quality, sustainably focused products that are made from renewable resources. Karat Packaging also offers customized solutions, including new product development and design, printing, and logistics services. To learn more about Karat Packaging, please visit the company’s website at www.karatpackaging.com.

Caution Concerning Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, including, but not limited to the sales forecast for the 2021 third quarter, are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company’s registration statement for the initial public offering filed with the SEC on April 14, 2021. Copies are available on the SEC’s website at www.sec.gov. Karat Packaging undertakes no obligation to update these statements for revisions or changes after the date of this release, except as required by law.

Investor Relations and Media Contacts:
        
PondelWilkinson Inc.        
Judy Lin Sfetcu/Roger Pondel
310-279-5980        
karat@pondel.com

KARAT PACKAGING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,								Six Months Ended June 30,
		2021				2020				2021				2020
Net sales	$	94,526,000			$	84,737,000			$	170,199,000			$	148,820,000
Cost of goods sold		66,428,000				55,830,000				120,475,000				102,022,000
Gross profit		28,098,000				28,907,000				49,724,000				46,798,000
Operating expenses:
Selling expense		7,771,000				5,428,000				14,171,000				10,129,000
General and administrative expense (including $0.7 million and $0.5 million associated with variable interest entity for the three-months ended June 30, 2021 and 2020, respectively; and $1.3 million and $0.6 million for the six-months ended June 30, 2021 and 2020, respectively, associated with variable interest entity)		13,457,000				8,969,000				24,912,000				18,071,000
Total operating expenses		21,228,000				14,397,000				39,083,000				28,200,000
Operating income		6,870,000				14,510,000				10,641,000				18,598,000
Other income (expense)
Rental income (including $0.2 million and $0 associated with variable interest entity for the three-months ended June 30, 2021 and 2020, respectively; and $0.5 million and $0 for the six-months ended June 30, 2021 and 2020, respectively, associated with variable interest entity)		246,000				-				492,000				-
Other income		16,000				28,000				122,000				54,000
Loss on foreign currency transactions		(119,000	)			(68,000	)			(284,000	)			(109,000	)
Gain on sale of asset		-				8,000				-				8,000
Interest income (expense) (including $1.6 million interest income and $0.2 million interest expense associated with variable interest entity for the three-months ended June 30, 2021 and 2020, respectively; and $0.8 million and $2.6 million for the six-months ended June 30, 2021 and 2020, respectively, associated with variable interest entity)		(1,128,000	)			(705,000	)			(850,000	)			(4,011,000	)
Gain on forgiveness of debt		5,000,000				-				5,000,000				-
Total other income (expense)		4,015,000				(737,000	)			4,480,000				(4,058,000	)
Income before provision for income tax		10,885,000				13,773,000				15,121,000				14,540,000
Provision for income tax		1,547,000				3,832,000				2,733,000				4,032,000
Net income		9,338,000				9,941,000				12,388,000				10,508,000
Net income (loss) attributable to noncontrolling interest		(245,000	)			(131,000	)			1,025,000				(2,015,000	)
Net income attributable to Karat Packaging Inc.	$	9,583,000			$	10,072,000			$	11,363,000			$	12,523,000
Basic and diluted earnings per share:
Basic	$	0.51			$	0.66			$	0.67			$	0.82
Diluted	$	0.50			$	0.65			$	0.66			$	0.81
Weighted average common shares outstanding, basic		18,908,648				15,180,879				17,048,160				15,185,440
Weighted average common shares outstanding, diluted		19,025,871				15,451,879				17,165,383				15,456,440

KARAT PACKAGING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		June 30,				December 31,
		2021				2020
Assets
Current assets
Cash and cash equivalents (including $0.2 million and $0.1 million associated with variable interest entity at June 30, 2021 and December 31, 2020)		$	7,682,000			$	448,000
Accounts receivable, net of allowance for doubtful accounts of $0.3 million and $0.3 million at June 30, 2021 and December 31, 2020			32,598,000				23,838,000
Inventories			62,248,000				48,961,000
Prepaid expenses and other current assets (including $0.1 million and $0.1 million associated with variable interest entity at June 30, 2021 and December 31, 2020)			3,431,000				6,530,000
Total current assets			105,959000				79,777,000
Property and equipment, net (including $47.2 million and $47.8 million associated with variable interest entity at June 30, 2021 and December 31, 2020, respectively)			92,936,000				95,533,000
Deposits			4,151,000				2,456,000
Goodwill			3,510,000				3,113,000
Intangible assets, net			393,000				-
Deferred tax asset			64,000				64,000
Other assets (including $0 million and $0.1 million associated with variable interest entity at June 30, 2021 and December 31, 2020)			70,000				161,000
Total assets		$	207,083,000			$	181,104,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable (including $0 and $0.6 million associated with variable interest entity at June 30, 2021 and December 31, 2020, respectively)		$	24,354,000			$	20,069,000
Accrued expenses (including $0.3 million and $0.1 million associated with variable interest entity at June 30, 2021 and December 31, 2020, respectively)			6,584,000				4,959,000
Related party payable			3,608,000				5,038,000
Credit cards payable			125,000				794,000
Line of credit			3,239,000				-
Income taxes payable			-				41,000
Customer deposits (including $0.1 and $0 million associated with variable interest entity at June 30, 2021 and December 31, 2020)			1,209,000				551,000
Capital leases, current portion			307,000				321,000
Long-term debt, current portion (including $0.7 million and $0.7 million associated with variable interest entity at June 30, 2021 and December 31, 2020, respectively)			711,000				11,364,000
Total current liabilities			40,137,000				43,137,000
Deferred tax liability			6,181,000				6,181,000
Line of credit			-				33,169,000
Long-term debt, net of current portion (including $36.3 million and $36.7 million associated with variable interest entity at June 30, 2021 and December 31, 2020, respectively, and debt discount of $0.1 million and $0.1 million associated with variable interest entity at March 31, 2021 and December 31, 2020)			36,343,000				53,410,000
Capital leases, net of current portion			129,000				290,000
Other liabilities (including $3.0 million and $3.9 million associated with variable interest entity at June 30, 2021 and December 31, 2020, respectively)			4,205,000				5,049,000
Total liabilities			86,995,000				141,236,000
Karat Packaging Inc. stockholders’ equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 19,732,500 shares and 19,709,500 shares issued and outstanding, respectively, at June 30, 2021; 15,190,000 and 15,167,000 shares issued and outstanding, respectively, at December 31, 2020			20,000				15,000
Additional paid in capital			81,808,000				13,981,000
Treasury stock, $0.001 par value, 23,000 and 23,000 shares on June 30, 2021 and December 31, 2020			(248,000	)			(248,000	)
Retained earnings			30,019,000				18,656,000
Total Karat Packaging Inc. stockholders’ equity			111,599,000				32,404,000
Noncontrolling interest			8,489,000				7,464,000
Total stockholders’ equity			120,088,000				39,868,000
Total liabilities and stockholders’ equity		$	207,083,000			$	181,104,000

KARAT PACKAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Six Months Ended June 30,
		2021				2020
Cash flows from operating activities
Net income		$	12,388,000			$	10,508,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,943,000				3,869,000
Provision for bad debt			-				98,000
Gain on sales of asset			-				(8,000	)
Change in fair value of interest rate swap			(946,000	)			2,298,000
Amortization of loan fees			6,000				6,000
Stock-based compensation			240,000				-
(Increase) decrease in operating assets
Accounts receivable			(8,760,000	)			(636,000	)
Inventories			(13,134,000	)			(8,317,000	)
Prepaid expenses and other current assets			3,099,000				(598,000	)
Due from affiliated companies			-				(741,000	)
Deposits			(144,000	)			1,762,000
Other assets			91,000				(85,000	)
Increase (decrease) in operating liabilities
Accounts payable			4,285,000				(2,783,000	)
Accrued expenses			1,625,000				4,752,000
Related party payable			(1,430,000	)			(1,174,000	)
Credit cards payable			(669,000	)			(493,000	)
Income taxes payable			(41,000	)			-
Customer deposits			658,000				(16,000	)
Other liabilities			102,000				301,000
Net cash provided by operating activities		$	2,313,000			$	8,743,000
Cash flows from investing activities
Purchases of property and equipment			(957,000	)			(27,389,000	)
Proceeds on disposal of property and equipment			-				12,000
Deposits paid for property and equipment			(2,989,000	)			(3,593,000	)
Acquisition of Pacific Cup, Inc.			(893,000	)			-
Net cash used in investing activities		$	(4,839,000	)		$	(30,970,000	)
Cash flows from financing activities
Net proceeds from line of credit			(29,930,000	)			3,820,000
Proceeds from long-term debt, net of issuance cost			-				24,540,000
Payments on long-term debt			(27,726,000	)			(3,495,000	)
Issuance of common stock in connection with our initial public offering, net of issuance costs			67,592,000				-
Dividends paid to shareholders			-				(607,000	)
Payments on capital lease obligations			(176,000	)			(158,000	)
Treasury stock acquired			-				(107,000	)
Net cash provided by financing activities		$	9,760,000			$	23,993,000
Net increase in cash and cash equivalents			7,234,000				1,766,000
Cash and cash equivalents
Beginning of year		$	448,000			$	802,000
End of year		$	7,682,000			$	2,568,000

KARAT PACKAGING INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
(Unaudited)

		Three Months Ended June 30,								Three Months Ended March 31,				Six Months Ended June 30,
		2021				2020				2021				2021				2020
Reconciliation of Adjusted EBITDA:		(in thousands)												(in thousands)
Net sales		$	94,526			$	84,737			$	75,673			$	170,199			$	148,820
Net income:		$	9,338			$	9,941			$	3,050			$	12,388			$	10,508
Add (deduct):
Interest expense		1,128				705					(278	)		850					4,011
Income tax expense		1,547				3,832				1,186				2,733					4,032
Depreciation and amortization		2,479				1,977				2,464				4,943					3,869
IPO related expenses		601				—				396				997					—
Gain on forgiveness of debt			(5,000	)		—				—					(5,000	)			—
Gain on sale of asset		—				8				—				—					8
Adjusted EBITDA		$	10,093			$	16,463			$	6,818			$	16,911			$	22,428
Net income margin			9.9	%			11.7	%			4.0	%			7.3	%			7.1	%
Adjusted EBITDA margin			10.7	%			19.4	%			9.0	%			9.9	%			15.1	%

Reconciliation of Adjusted EBITDA by Entity:		Three Months Ended June 30, 2021 (in thousands)
		Karat Packaging				Global Wells				Eliminations			Consolidated
Net Sales		$	94,526			$	—			$	—		$	94,526
Net income (loss):		$	9,583			$	(284	)		$	39		$	9,338
Add (deduct):
Interest expense			287				841				—			1,128
Income tax expense			1,547				—				—			1,547
Depreciation and amortization			2,175				304				—			2,479
Gain on forgiveness of debt			(5,000	)			—				—			(5,000	)
IPO related expenses			601				—				—			601
Adjusted EBITDA		$	9,193			$	861			$	39		$	10,093

Reconciliation of Adjusted EBITDA by Entity:		Six Months Ended June 30, 2021 (in thousands)
		Karat Packaging				Global Wells				Eliminations				Consolidated
Net Sales		$	170,199			$	—			$	—			$	170,199
Net income (loss):		$	11,363			$	1,185			$	(160	)		$	12,388
Add (deduct):
Interest expense			840				10				—				850
Income tax expense			2,733				—				—				2,733
Depreciation and amortization			4,336				607				—				4,943
Gain on forgiveness of debt			(5,000	)			—				—				(5,000	)
IPO related expenses			997				—				—
Adjusted EBITDA		$	15,269			$	1,802			$	(160	)		$	16,911

We define net income margin as net income by net sales and adjusted EBITDA margin as adjusted EBITDA divided by net sales.

Note about Non-GAAP Financial Measures
Karat Packaging uses Adjusted EBITDA and Adjusted EBITDA Margin to measure its financial performance. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental non-GAAP financial measures of operating performance and are not based on any standardized methodology prescribed by GAAP. Adjusted EBITDA and Adjusted EBITDA Margin should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA and Adjusted EBITDA Margin are not necessarily comparable to similarly titled measures presented by other companies.

KARAT PACKAGING INC. AND SUBSIDIARIES
NET SALES BY CATEGORY
(Unaudited)

	Three Months Ended June 30,									Six Months Ended June 30,
	2021				2020					2021				2020
National	$	22,310,000			$	16,168,000				$	40,599,000			$	31,666,000
Distributors	50,967,000				44,526,000					90,977,000				78,460,000
Online	13,703,000				11,258,000					25,146,000				17,544,000
Retail	7,546,000				12,785,000					13,477,000				21,150,000
Net Sales	$	94,526,000			$	84,737,000				$	170,199,000			$	148,820,000

KARAT PACKAGING INC. AND SUBSIDIARIES
NET SALES EXCLUDING PPE BY CATEGORY
(Unaudited)

	Three Months Ended June 30,
	2021					2020
National	$	22,262,000					$	15,380,000
Distributors	50,500,000						24,466,000
Online	13,646,000						8,310,000
Retail	7,510,000						7,285,000
Net sales, excluding PPE	$	93,918,000					$	55,441,000

FAQ

What were Karat Packaging's Q2 2021 earnings results?

Karat Packaging reported Q2 2021 net sales of $94.5 million, a 11.6% increase from last year, and a net income of $9.3 million.

What is the outlook for Karat Packaging in Q3 2021?

Karat Packaging expects net sales in Q3 2021 to be between $100 million and $102 million.

How did gross profit change for Karat Packaging in Q2 2021?

Gross profit for Q2 2021 decreased to $28.1 million from $28.9 million in the same period last year.

What is the adjusted EBITDA for Karat Packaging in Q2 2021?

Adjusted EBITDA for Q2 2021 was $10.1 million, down from $16.5 million in the same period last year.