Karat Packaging Reports Fourth Quarter and Full Year 2023 Financial Results

Record Full Year Gross Margin and Net Income as Business Continues to Expand

CHINO, Calif., March 14, 2024 (GLOBE NEWSWIRE) -- Karat Packaging Inc. (Nasdaq: KRT) (“Karat” or the “Company”), a specialty distributor and manufacturer of environmentally friendly, disposable foodservice products and related items, today announced financial results for its fourth quarter and full year ended December 31, 2023.

Fourth Quarter 2023 Highlights

• Fourth quarter 2023 financial results included:
  • Change of estimate on import duty reserve totaling $2.3 million, an increase to cost of goods sold.
  • Write-off of $1.1 million of a vendor prepayment upon the resolution of a legal contingency, an increase to general and administrative expenses.
  • Out-of-period tax adjustment of $0.3 million, an increase to provision for income taxes.
  • Misclassification adjustments for the full year amounts within the income statement with no impact on net income:
    • Adjustment of $6.4 million online sales platform fees, an increase to net sales, offset by the same increase to selling expenses.
    • Adjustment of $3.9 million of certain production expenses out of general and administrative expenses into cost of goods sold.
  • The prior period financial results were not adjusted due to the immaterial impact on the overall financial statements.

• Net sales of $95.6 million, including the adjustment of $6.4 million online sales platform fees, versus $92.7 million in the prior-year quarter, up 3.1 percent in amount and 7.3 percent in volume.
• Gross profit of $34.1 million, including the favorable impact totaling $0.2 million from the import duty reserve and the adjustments, up 14.9 percent from the prior-year quarter.
• Gross margin of 35.7 percent, including the negative impact totaling 240 basis points from the import duty reserve and adjustments, versus 32.0 percent in the prior-year quarter.
• Net income of $4.2 million, including the negative impact totaling $2.9 million from the import duty reserve, vendor prepayment write-off, and tax adjustment, versus $4.5 million in the prior-year quarter.
• Net income margin of 4.4 percent, including the negative impact totaling 350 basis points from the import duty reserve, vendor prepayment write-off, tax adjustment and the adjustments, versus 4.9 percent in the prior-year quarter.
• Adjusted EBITDA of $8.6 million, including the negative impact totaling $2.3 million from the import duty reserve, versus $9.9 million in the prior-year quarter.
• Adjusted EBITDA margin of 9.0 percent, including the negative impact totaling 330 basis points from the import duty reserve and the adjustments, versus 10.7 percent in the prior-year quarter.
  

Guidance

• Net sales for the 2024 first quarter expected to increase low to mid-single digit from the prior-year quarter.
• Gross margin goal for the 2024 first quarter: 37 to 39 percent versus 39.8 percent for 2023 first quarter.
• Net sales for full year 2024 expected to increase 8 to 15 percent from the prior year.
• Gross margin goal for full year 2024: 35 to 38 percent assuming no significant increases in ocean freight rates.

“Sales volume again grew 7.3 percent for the 2023 fourth quarter over the prior-year quarter. However, revenue was impacted principally by year-over-year pricing comparisons and start-up delays into 2024 by several new national and regional chain accounts,” said Alan Yu, Chief Executive Officer. “During the fourth quarter, we continued to scale back U.S. manufacturing, which further enhanced gross margin to a near record high of 35.7 percent.

“Sales of our eco-friendly products grew 11 percent for the quarter and comprised 33 percent of total net sales, which exceeded our expectations. We continue to develop new and innovative eco-friendly products to meet increasing demand and expand our customer base.

“As part of our growth plan, we recently signed a new lease for a distribution center in Arizona, which is expected to be fully operational early in the second quarter. Together with our salesforce expansion, we can further penetrate key U.S. markets in the South, Midwest, and Pacific Northwest regions. We also are implementing automation and AI technologies to enhance operation and distribution productivity.

“With Karat’s strong operating cash flow and balance sheet, our board of directors in February authorized another increase in the quarterly cash dividend payment to $0.30 per share, from the previous quarterly dividend of $0.20 per share,” Yu added.

Fourth Quarter 2023 Financial Results

Net sales for the 2023 fourth quarter increased 3.1 percent to $95.6 million, from $92.7 million in the prior-year quarter. The year-over-year increase included the impact of $6.4 million from the adjustment of online sales platform fees and volume growth of 7.3 percent, partially offset by unfavorable year-over-year pricing comparison, as the Company passed on savings from ocean freight and raw material costs to customers.

Cost of goods sold for the 2023 fourth quarter was $61.5 million, which included an additional import duty reserve of $2.3 million and the adjustment of $3.9 million of certain production expenses from general and administrative expenses, compared with $63.0 million in the prior-year quarter, which included an out-of-period inventory write-off of $1.7 million. Despite the larger unfavorable discrete items in the 2023 fourth quarter, gross profit increased 14.9 percent to $34.1 million, from $29.7 million in the prior-year quarter.

Gross margin expanded 370 basis points to 35.7 percent in the 2023 fourth quarter, from 32.0 percent in the same quarter last year primarily as a result of our continued scale back of manufacturing operations in favor of imports and improved operating efficiencies.

Operating expenses in the 2023 fourth quarter were $29.5 million, or 30.8 percent of net sales, compared with $24.9 million, or 26.8 percent of net sales, in the prior-year quarter. Operating expenses in the 2023 fourth quarter included a negative impact totaling $3.6 million from the vendor prepayment write-off and the adjustments noted above. Additionally, the year-over-year increase in operating expense was primarily driven by higher labor costs and rent and warehouse expense from workforce expansion and additional leased warehouses partially offset by a decrease in shipping and transportation costs and stock-compensation expense.

Net income for the 2023 fourth quarter was $4.2 million, compared with $4.5 million in the prior-year quarter. Net income margin was 4.4 percent in the 2023 fourth quarter, compared with 4.9 percent in the prior-year quarter.

Net income attributable to Karat for the 2023 fourth quarter was $3.9 million, or $0.19 per diluted share, compared with $4.5 million, or $0.23 per diluted share, in the prior-year quarter.

Adjusted EBITDA, a non-GAAP measure defined below, was $8.6 million in the 2023 fourth quarter, compared with $9.9 million in the prior-year quarter. Adjusted EBITDA margin, a non-GAAP measure defined below, was 9.0 percent of net sales, compared with 10.7 percent in the prior-year quarter.

Adjusted diluted earnings per common share, a non-GAAP measure defined below, was $0.24 per share in the 2023 fourth quarter, compared with $0.30 per share in the prior-year quarter.

2023 Full Year Results

Net sales for the year ended December 31, 2023, decreased 4.1 percent to $405.7 million, from $423.0 million in the prior year. The year-over-year decrease was primarily driven by unfavorable pricing comparison and lower logistics services and shipping revenue partially offset by the positive impact of $6.4 million from the adjustment of online sales platform fees and volume growth of 3.7 percent.

Cost of goods sold for the year ended December 31, 2023, was $252.6 million, which included an additional import duty charge of $3.9 million, an inventory write-off of $1.7 million in connection with scaling back production, and the adjustment of $3.9 million of certain production expenses from general and administrative expenses, compared with $290.9 million in the prior year, which included an out-of-period inventory write-off of $0.9 million. Despite the larger unfavorable discrete items in 2023, gross profit increased 15.9% to $153.0 million, from $132.1 million a year ago.

Gross margin for the year ended December 31, 2023, increased to 37.7 percent, from 31.2 percent for the prior year. Gross margin benefited from lower total ocean freight and import costs, the Company’s initiative to scale back manufacturing operations in favor of imports and the strong U.S. dollar.

Operating expenses for the year ended December 31, 2023, were $111.0 million, or 27.4 percent of net sales, compared with $102.1 million, or 24.1 percent of net sales, for the prior year. Operating expenses for the year ended December 31, 2023 included a negative impact totaling $2.5 million from the additional import duty charge and the adjustments. Additionally, the year-over-year increase was primarily due to increases in labor, rent, warehouse, and utility expenses from workforce expansion and additional leased warehouses, marketing expense as we grow our e-commerce channel, and impairment expense and loss, net, primarily related to disposal of machinery as we scaled back production. Such increases were partially offset by a decrease in shipping and transportation costs, stock-compensation expense and bad debt expense.

Net income for the year ended December 31, 2023, increased 28.4 percent to $33.2 million, from $25.8 million for the year ended December 31, 2022. Net income margin increased to 8.2 percent in 2023, compared with 6.1 percent in the prior year.

Net income attributable to Karat was $32.5 million, or $1.63 per diluted share, for the full 2023 year, compared with $23.6 million, or $1.19 per diluted share, in the prior year.

Adjusted EBITDA, a non-GAAP measure defined below, increased to $59.1 million for the full 2023 year, compared with $45.6 million in the prior year. Adjusted EBITDA margin, a non-GAAP measure defined below, increased to 14.6 percent in 2023, compared with 10.8 percent in 2022.

Adjusted diluted earnings per common share, a non-GAAP measure defined below, rose to $1.83 per share in 2023, from $1.30 per share in the prior year.

Investor Conference Call
The Company will host an investor conference call today, March 14, 2024, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) to discuss its 2023 fourth quarter and full year 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 our 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 and 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 Securities and Exchange Commission. 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 or Roger Pondel
310-279-5980
ir@karatpackaging.com

(1) The write-off of inventory and impairment expense and (gain) loss, net, on disposal of machinery represent costs incurred in connection with the scaling back of production in the U.S. As part of the execution of this strategy, certain machinery and equipment was disposed of or impaired, and raw materials associated with those machinery and equipment were written-off.

(2) Secondary offering transaction costs represent legal and professional fees incurred in connection with the completion of the secondary offering, which were directly related to the offering and were incremental to our normal operating expenses.

(3) The out-of-period adjustment for the three months ended December 31, 2023 represented a write-off of a vendor prepayment due to the resolution of a legal contingency, which management believes was not representative of our underlying operating performance. The adjustment was to correct an immaterial error in its previously issued quarterly financial statements for the quarter ended September 30, 2023. Although the full year financial statements for the year ended December 31, 2023 are not affected, the impact of the adjustment for the quarter ended December 31, 2023 was a decrease to other assets and an increase in general and administrative expenses of $1.1 million.

The out-of-period adjustment for the year ended December 31, 2022 represented an inventory write-off recorded during the year 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.

(1) The write-off of inventory and impairment expense and (gain) loss, net, on disposal of machinery represent costs incurred in connection with the scaling back of production in the U.S. As part of the execution of this strategy, certain machinery and equipment was disposed of or impaired, and raw materials associated with those machinery and equipment were written-off.

(2) Secondary offering transaction costs represent legal and professional fees incurred in connection with the completion of the secondary offering, which were directly related to the offering and were incremental to our normal operating expenses.

(3) The out-of-period adjustment represented a write-off of a vendor prepayment due to the resolution of a legal contingency, which management believes was not representative of our underlying operating performance. The adjustment was to correct an immaterial error in its previously issued quarterly financial statements for the quarter ended September 30, 2023. Although the full year financial statements for the year ended December 31, 2023 are not affected, the impact of the adjustment for the quarter ended December 31, 2023 was a decrease to other assets, and an increase in general and administrative expenses of $1.1 million.

(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 and interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, secondary offering transaction costs, write-off of certain inventory items outside the normal course of business, impairment expense and (gain) loss, net, on disposal of machinery outside the normal course of business, 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, secondary offering transaction costs, write-off of certain inventory items outside the normal course of business, impairment expense and (gain) loss, net, on disposal of machinery outside the normal course of business, 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.