Karat Packaging Reports Fourth Quarter and Full Year 2022 Financial Results

–Record Full Year Gross Margin with Continued Margin Expansion–

CHINO, Calif., March 16, 2023 (GLOBE NEWSWIRE) — Karat Packaging Inc. (Nasdaq: KRT) (“Karat”), a specialty distributor and manufacturer of disposable foodservice products and related items, today announced financial results for its fourth quarter and full year ended December 31, 2022.

Fourth Quarter 2022 Highlights

• Net sales of $92.7 million, up 1.5 percent from the prior-year quarter.
• Gross profit of $29.7 million, negatively impacted by an out-of-period inventory write-off of $1.7 million, up 4.8 percent from the prior-year quarter.
• Gross margin of 32.0 percent, an improvement of 100 basis points over the prior-year quarter.
• Net income of $4.5 million (net income margin of 4.9 percent), versus $6.0 million (net income margin of 6.5 percent) in the prior-year quarter.
• Adjusted EBITDA of $9.9 million, negatively impacted by a deposit write-off of $0.5 million related to a pre-pandemic capital investment project, versus $10.9 million in the prior-year quarter.
• Adjusted EBITDA margin of 10.7 percent, versus 11.9 percent in the prior-year quarter.
• Strong quarterly operating cash flow of $17.0 million.

2023 Outlook

• Net sales for the full year 2023 expected to increase high single digit.
• Gross margin goal for the 2023 full year: 32 percent to 33 percent.
• Sales for the first half of 2023 anticipated to be lower due, in part, to price reductions and destocking for certain inventories, compared with the prior year period.

“Gross margin continued to improve during the 2022 fourth quarter, with a significant reduction of ocean freight costs versus the same quarter last year. This, in turn, allowed us to proactively pass on savings to our customers,” said Alan Yu, chief executive officer. “Ocean freight costs have essentially now stabilized, which we believe will enable us to further expand margins for 2023.

“Net sales grew during the fourth quarter, despite multiple price reductions. Additionally, we added a number of new contracts with chain accounts and expanded our product offerings to existing customers. We expect these new agreements to materialize and add to our top line in the second half of 2023. We continue to see solid growth for our eco-friendly product lines, with sales having increased 24 percent in the most recent fourth quarter over the prior year period, and demand remains strong into 2023.

“We are implementing a number of growth strategies in 2023, including improving inventory management and fill-rate by adding warehouses in Chicago and Houston, as well as expanding rack space in our current warehouses. We also are modifying our model to be more asset-light, by scaling back manufacturing production in California, while expanding import products, which carry higher margins. We intend to increase the size of our sales team by approximately 35 percent and target geographical expansion into the East Coast and Midwest regions. Lastly, we are upgrading our e-commerce platform and initiating online sales in Hawaii and Canada,” Mr. Yu added.

Fourth Quarter 2022 Financial Results

Net sales for the 2022 fourth quarter increased 1.5 percent to $92.7 million, from $91.3 million in the 2021 fourth quarter, which was a particularly strong quarter as a result of COVID re-openings and price increases implemented due to extraordinarily higher ocean freight and other costs during this period.

Gross profit for the 2022 fourth quarter increased 4.8 percent to $29.7 million, from $28.3 million in the prior-year quarter.

Gross margin for the 2022 fourth quarter expanded 100 basis points to 32.0 percent, from 31.0 percent in the prior-year quarter. Gross margin was favorably impacted by lower and stabilized ocean freight and related costs, at 9.8 percent of net sales, compared with 12.3 percent of net sales in the 2021 fourth quarter. The gross margin was negatively impacted by an inventory write-off of $1.7 million, which represented an out-of-period adjustment to correct immaterial errors in the accounting for certain inventory items in the previously issued quarterly and annual financial statements.

Operating expenses in the 2022 fourth quarter were $24.9 million, or 26.8 percent of net sales, compared with $21.2 million, or 23.2 percent of net sales, in the prior-year quarter. The increase primarily resulted from higher labor costs of $1.5 million due to workforce expansion, higher production costs of $1.0 million due to unexpected machinery repair and an increase in rental expense of $0.6 million primarily from the two additional warehouses added in May 2022. Operating expense in the 2022 fourth quarter also included a deposit write-off of $0.5 million related to a pre-pandemic capital investment project.

Net income for the 2022 fourth quarter decreased to $4.5 million, from $6.0 million for the same quarter last year. Net income margin was 4.9 percent for the 2022 fourth quarter versus 6.5 percent in the prior year quarter. Net income attributable to Karat for the 2022 fourth quarter was $4.5 million, or $0.23 per diluted share, compared with $5.6 million, or $0.28 per diluted share, in the prior-year quarter.

Adjusted EBITDA, a non-GAAP measure defined below, was $9.9 million in the 2022 fourth quarter, versus $10.9 million in the prior-year quarter. Adjusted EBITDA margin, a non-GAAP measure defined below, was 10.7 percent of net sales, versus 11.9 percent in the prior-year quarter.

Adjusted diluted earnings per common share, a non-GAAP measure defined below, was $0.30 per share for the 2022 fourth quarter, versus $0.32 per share in the prior-year quarter.

2022 Full Year Results

Net sales for 2022 increased 16.1 percent to $423.0 million, from $364.2 million in the prior year.

Gross profit for 2022 increased 22.5 percent to $132.1 million, from $107.8 million in the prior year. Gross margin was 31.2 percent, an increase from 29.6 percent in the same period last year. The increase in gross margin was primarily due to margin expanding factors including a shift to higher margin items such as eco-friendly products, price increases implemented during the first half of the current year to partially offset higher ocean freight, product and labor costs, favorable foreign currency exchange rate from the strengthening of the United States Dollar against Taiwan New Dollar and improved operating efficiencies and productivity improvements. The increase was offset by an out-of-period inventory adjustment of $0.9 million to correct immaterial errors in the accounting for certain inventory items in the previously issued quarterly and annual financial statements.

Operating expenses for the full 2022 year were $102.1 million, compared with $84.7 million in the prior year. The increase of $17.4 million primarily included $6.0 million in payroll costs due to workforce expansion, $5.4 million in shipping and transportation costs largely during the first three quarters, $2.4 million in lease expense primarily attributable to two new properties leased starting May 2022, and $2.1 million in production expense due to higher repairs and maintenance costs.

Other income totaled $2.5 million in 2022, compared with $4.4 million for the prior year. Other income for the 2022 year primarily related to interest income of $2.2 million from the gain associated with the interest rate swap, a gain on foreign currency transactions of $1.6 million, and rental income of $0.9 million, partially offset by interest expense on the line of credit and term loans totaling $2.0 million. Other income for the 2021 year primarily related to gain on forgiveness of debt of $5.0 million, interest income of $1.5 million due to the change in the fair value of the interest rate swap, and rental income of $0.9 million, partially offset by interest expense incurred primarily on the line of credit and term loans totaling $2.9 million.

The effective tax rate for the full 2022 year was 20.5 percent, compared with 18.5 percent for the prior year. The effective tax rate was lower in the prior year, primarily due to the gain on forgiveness of debt of $5.0 million, which was a discrete item not presented for 2022.

Net income increased to $25.8 million for 2022, from $22.4 million in the prior year, which included the $5.0 million gain on forgiveness of debt recorded in the second quarter of 2021.

Net income margin was 6.1 percent in 2022, versus 6.2 percent in the prior year. Net income attributable to Karat was $23.6 million, or $1.19 per diluted share, in 2022, compared with $20.8 million, or $1.12 per diluted share, in the prior year.

Adjusted EBITDA, a non-GAAP measure defined below, increased to $45.6 million in 2022, compared with $37.0 million in the prior year. Adjusted EBITDA margin, a non-GAAP measure defined below, was 10.8 percent for the full 2022 year, compared with 10.2 percent in 2021.

Adjusted diluted earnings per common share, a non-GAAP measure defined below, rose to $1.30 per share in 2022, from $1.00 per share in the prior year.

Investor Conference Call

The Company will host an investor conference call today, March 16, 2023, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) to discuss its fourth quarter and full year 2022 results.

About Karat Packaging Inc.

Karat Packaging Inc. is a specialty distributor and manufacturer of a wide range of 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

Statements made in this release that are not statements of historical or current facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements, including, but not limited to, achieving continued increases in customer demand, along with achieving third quarter and full year financial guidance, are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including the risks discussed under the heading “Risk Factors” discussed under the caption “Item 1A. Risk Factors” in Part I of our most recent Annual Report on Form 10-K, as amended, or any updates discussed under the caption “Item 1A. Risk Factors” in Part II of our Quarterly Reports on Form 10-Q and in our other filings with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that occur after that date, except as required by law.

Investor Relations and Media Contacts:

PondelWilkinson Inc.  
Judy Lin Sfetcu/Roger Pondel
310-279-5980
ir@karatpackaging.com

(1) The out-of-period adjustment represented an inventory write-off recorded during the year ended December 31, 2022, which management believes was not representative of our underlying operating performance. The adjustment was to correct immaterial errors in the accounting for certain inventory items in our previously issued quarterly and annual financial statements. The impact of the inventory write-off was an increase to cost of goods sold of $1.7 million and $0.9 million for the three and twelve months ended December 31, 2022, respectively.

Use of Non-GAAP Financial Measures

Karat utilizes certain financial measures and key performance indicators that are not defined by, or calculated in accordance with, GAAP to assess our financial and operating performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of operations; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable GAAP measure so calculated and presented. The following non-GAAP measures are presented in this press release:

• Adjusted EBITDA is calculated as net income before interest income, interest expense and income taxes, depreciation and amortization, stock-based compensation expense, IPO related expenses, gain on forgiveness of debt and out-of-period adjustment.
• Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net sales.
• Adjusted diluted earnings per common share is calculated as diluted earnings per common share, plus the per share impact of stock-based compensation, IPO related expense, gain on forgiveness of debt, and out-of-period adjustment, and adjusted for the related tax effects of these adjustments.

We believe the above-mentioned non-GAAP measures, which are used by management to assess the core performance of Karat, provide useful information and additional clarity of our operating results to our investors in their own evaluation of the core performance of Karat and facilitate a comparison of such performance from period to period. These are not measurements of financial performance or liquidity under GAAP and should not be considered in isolation or construed as substitutes for net income or other cash flow data prepared in accordance with GAAP for purposes of analyzing our profitability or liquidity. These measures should be considered in addition to, and not as a substitute for, revenue, net income, earnings per share, cash flows or other measures of financial performance prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies, as other companies may calculate such financial results differently.