Gross profit for the 2024 second quarter increased 3.7 percent to $43.4 million, from $41.9 million in the prior-year quarter. Gross margin for both the 2024 and 2023 second quarters was 38.5 percent. Gross margin for the 2024 second quarter included a net favorable impact of 90 basis points from the inclusion of online platform fees in net sales and production expenses in cost of goods sold. Gross margin also improved from lower vendor pricing and increased imports as a percentage of total product mix, partially offset by an increase in freight and duty costs and inventory reserve adjustment. Gross margin for the 2023 second quarter included a negative impact of 160 basis points from the write-off of certain raw materials, as the Company disposed of certain machinery and equipment in executing the plan to scale back production in certain locations.

Operating expenses in the 2024 second quarter were $32.3 million, compared with $28.5 million in the prior-year quarter. The increase was primarily due to the inclusion of online sales platform fees, higher rent and warehouse expense, including a higher rate on our Chino, California facility lease extension, an increase in online marketing expense and higher stock compensation expense, partially offset by the inclusion of production expense in cost of goods sold, and a decrease in impairment expense and loss on disposal of machinery.

Operating income in the 2024 second quarter decreased to $11.1 million, from $13.3 million in the prior-year quarter, primarily due to an increase in operating expenses of $3.8 million, partially offset by an increase in gross profit of $1.5 million.

Total other income, net, was $1.0 million for the 2024 second quarter, compared with $0.7 million in the prior-year quarter. The increase was primarily due to higher rental income from the sublease of the City of Industry warehouse.

Net income for the 2024 second quarter decreased to $9.2 million, from $10.7 million for the prior-year quarter. Net income margin was 8.2 percent in the 2024 second quarter, compared with 9.8 percent a year ago.

Net income attributable to Karat for the 2024 second quarter was $9.1 million, or $0.45 per diluted share, compared with $10.5 million, or $0.53 per diluted share in the prior-year quarter.

Adjusted EBITDA, a non-GAAP measure defined below, totaled $15.7 million for the 2024 second quarter, compared with $21.1 million for the prior-year quarter. Adjusted EBITDA margin, a non-GAAP measure defined below, was 13.9 percent of net sales, compared with 19.4 percent for the same quarter last year.

Adjusted diluted earnings per common share, a non-GAAP measure defined below, was $0.49 per share for the 2024 second quarter, compared with $0.69 per share in the prior-year quarter.

Six-Month 2024 Financial Results

Net sales for the first half of 2024 increased 1.8 percent to $208.2 million, from $204.5 million in the same period last year. Net sales for the first half of 2024 were understated by $0.7 million from products shipped and recognized as revenue in 2023 and not delivered until 2024. The increase in net sales in the first half of 2024 primarily resulted from volume growth and product mix change and the inclusion of online sales platform fees, partially offset by unfavorable year-over-year pricing comparison.

Gross profit for the first half of 2024 increased 1.3 percent to $81.0 million, from $80.0 million in the same period last year. Gross margin was 38.9 percent for the first half of 2024, compared with 39.1 percent in the same period last year. Gross profit for the first half of 2024 was understated by $0.3 million related to the timing of revenue recognition. Gross margin for the first half of 2024 included a net favorable impact from the inclusion of online platform fees in net sales and production expenses in cost of goods sold totaling 80 basis points. Gross margin for the first half of 2024 benefited from the strengthening of the United States Dollar against Taiwan New Dollar, more favorable vendor pricing, and increased import as a percentage of total product mix. These improvements were partially offset by an increase in freight and duty costs and inventory reserve adjustment. Gross margin for the first half of 2023 included the negative impact of 80 basis points from the write-off of certain raw materials, as the Company disposed of certain machinery and equipment in executing the plan to scale back production in certain locations.

Operating expenses were $61.8 million for the first half of 2024, compared with $53.9 million in the same period last year. Operating expenses for the six months ended June 30, 2024 included a $2.0 million non-cash impairment of a ROU asset and $0.5 million from loss of disposal of machinery in the normal course of business. In comparison, operating expenses for the six months ended June 30, 2023 included non-routine impairment expense and loss on disposal of machinery of $2.5 million as the Company executed its plan to scale back production in certain locations. The increase in operating expenses for the current year period was primarily due to the inclusion of online sales platform fees in operating expenses, higher rent and warehouse expense, including a higher rate on our Chino, California facility lease extension, an increase in online marketing expense, higher stock compensation expense and an increase in bad debt expense. These increases were partially offset by inclusion of production expense in cost of goods sold and a reduction in shipping and transportation costs.

Operating income decreased to $19.2 million for the first half of 2024, from $26.1 million in the same period last year. The decrease was primarily due to an increase in operating expenses of $7.9 million, partially offset by an increase in gross profit of $1.0 million.

Total other income, net, was $1.3 million in the first half of 2024, compared with total other expenses, net of $0.1 million in the same period last year. The year-over-year increase was primarily driven by the foreign currency transactions gain/loss and an increase in interest income and rental income.

Net income decreased to $15.7 million for the first half of 2024, from $19.9 million in the same period last year. Net income margin was 7.5 percent in the first half of 2024, compared with 9.7 percent in the same period last year.

Net income attributable to Karat was $15.3 million, or $0.76 per diluted share, for the first half of 2024, compared with $19.5 million, or $0.98 per diluted share, in the same period last year.

Adjusted EBITDA, a non-GAAP measure defined below, decreased to $29.2 million in the first six months of 2024, compared with $36.4 million in the same period last year. Adjusted EBITDA margin, a non-GAAP measure defined below, was 14.0 percent in the 2024 year-to-date period, compared with 17.8 percent in the same period last year.

Adjusted diluted earnings per common share, a non-GAAP measure defined below, was $0.88 per share, compared with $1.15 per share in the same period last year.

Dividends
On August 6, 2024, Karat’s board of directors approved a quarterly regular cash dividend of $0.35 per share and declared a special cash dividend of $0.15 per share, both payable on August 30, 2024, to stockholders of record as of August 21, 2024.

Investor Conference Call
The Company will host an investor conference call today, August 8, 2024, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time).

Phone: 646-307-1963 (domestic); (800) 715-9871 (international)
Conference ID: 4261013
Webcast: Accessible at https://irkarat.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 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 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 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 /Roger Pondel
310-279-5980; [email protected]

(1) The write-off of inventory and impairment expense and loss on disposal of machinery represent costs incurred in connection with the scaling back of production in certain locations. 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.

(1) The write-off of inventory and impairment expense and loss on disposal of machinery represent costs incurred in connection with the scaling back of production in certain locations. 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.

(1) The write-off of inventory and impairment expense and loss on disposal of machinery represent costs incurred in connection with the scaling back of production in certain locations. 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.

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 a financial measure calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation expense, (vi) write-off of certain inventory items outside the normal course of business, (vii) impairment expense and loss on disposal of machinery outside the normal course of business, and (viii) operating right-of-use asset impairment.

• 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, operating right-of-use asset impairment, write-off of certain inventory items outside the normal course of business, impairment expense and loss on disposal of machinery outside the normal course of business, 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.