10-K: Karat Packaging Reports Record Sales, Navigates Margin Pressures

Karat Packaging Inc. reported record net sales of $467.7 million for the fiscal year ended December 31, 2025, an increase of 10.7%, driven by volume and product mix, despite a decrease in gross margin due to higher tariffs and freight costs.

Summary

• Achieved record net sales of $467.7 million for the year ended December 31, 2025, an increase of 10.7% compared to $422.6 million in the prior year.
• Net income increased by 6.0% to $32.7 million for the year ended December 31, 2025, up from $30.8 million in 2024.
• Gross margin decreased by 210 basis points to 36.8% in 2025 from 38.9% in 2024, primarily due to a significant increase in ocean freight and duty costs, which nearly doubled from $14.7 million in 2024 to $29.3 million in 2025.
• Adjusted EBITDA was $55.2 million in 2025, a slight decrease of 0.2% from $55.3 million in 2024, with Adjusted EBITDA margin declining to 11.8% from 13.1%.
• Net cash provided by operating activities decreased by $14.2 million to $33.8 million in 2025 from $48.0 million in 2024.
• The company continued its strategic pivot to a more asset-light model, with manufacturing accounting for approximately 9% of net sales in 2025, down from 11% in 2024.
• Global supply chain was realigned, reducing purchases from China from 22% of global sourcing in 2024 to 15% in 2025, while diversifying to Malaysia and Vietnam, which collectively increased from 9% to 17%.
• Sales from eco-friendly products increased to 34.1% of total sales in 2025, up from 33.6% in 2024, with the product line expanding to over 580 SKUs.
• Secured a paper bag contract with a national chain account, forecasting annualized revenue of approximately $17.0 million, contributing to paper bag sales growth from $7.9 million in 2024 to $13.7 million in 2025.
• Returned $36.1 million to shareholders in regular quarterly cash dividends during 2025 and repurchased approximately $3.0 million of common stock under a new $15.0 million share repurchase program.
• Remediated a previously identified material weakness in internal control over financial reporting related to journal entry creation and approval processes as of March 31, 2025.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a moderately positive report, reflecting strong top-line growth and strategic adaptation to market challenges, particularly in supply chain diversification and eco-friendly products. However, the notable decline in gross margin and operating cash flow due to tariffs and freight costs, though partially anticipated, indicates ongoing profitability pressures.

Positives

• Record net sales of $467.7 million in 2025, a 10.7% increase year-over-year, driven by strong volume growth ($39.7 million) and positive product mix ($11.9 million).
• Net income increased by 6.0% to $32.7 million in 2025.
• Eco-friendly product sales continue to grow, reaching 34.1% of total sales in 2025 (up from 33.6% in 2024), with the product line expanding to over 580 SKUs.
• Secured a significant paper bag contract with a national chain, projected to generate $17.0 million in annualized revenue, with paper bag sales increasing from $7.9 million in 2024 to $13.7 million in 2025.
• Successful diversification of the global supply chain, reducing purchases from China from 22% to 15% of sourcing and increasing sourcing from Malaysia and Vietnam from 9% to 17%.
• Improved operating cost leverage partially offset the gross margin decline.
• Maintained a strong customer retention rate of 99% for top 100 customers from 2024 to 2025, with revenue from major customers increasing 11% year-over-year.
• Expanded distribution network with two new warehouses in Chino, California (2025) and Mesa, Arizona (2024), adding over 230,000 square feet of distribution space.
• Remediation of a previously identified material weakness in internal control over financial reporting as of March 31, 2025.
• Returned $36.1 million to shareholders in dividends and initiated a $15.0 million share repurchase program, repurchasing $3.0 million in 2025.

Negatives

• Gross margin decreased by 210 basis points to 36.8% in 2025 from 38.9% in 2024.
• Cost of goods sold increased by 14.4% to $295.6 million, primarily due to a $20.6 million increase in ocean freight and duty costs, with duties and tariffs nearly doubling from $14.7 million in 2024 to $29.3 million in 2025.
• Experienced a $6.5 million unfavorable year-over-year pricing comparison due to a competitive pricing environment.
• Net cash provided by operating activities decreased by $14.2 million to $33.8 million in 2025 from $48.0 million in 2024.
• Other income, net, decreased by $1.3 million (45.2%) due to a $1.5 million loss on foreign currency transactions in 2025, compared to a $0.5 million gain in 2024, attributed to the weakening U.S. Dollar against the New Taiwan Dollar.
• Adjusted EBITDA decreased slightly by 0.2% to $55.2 million, and Adjusted EBITDA margin decreased by 130 basis points to 11.8%.
• Working capital decreased by $23.6 million (20.6%) to $91.0 million, driven by an increase in current liabilities (long-term debt current portion, accounts payable) and increased inventories.
• Increased shipping and transportation costs by $7.0 million and rent expense by $3.3 million in 2025.
• Outstanding indebtedness of $35.9 million as of December 31, 2025, with the entire $12.3 million balance of the 2026 Term Loan classified as a current portion.
• Faces potential significant liability from a U.S. Customs and Border Protection investigation regarding anti-dumping and countervailing duties on thermal paper products, with $1.9 million paid in 2025 and a $1.7 million liability reserve, which could vary significantly.

Risks

• Demand for products could be affected by changes in laws and regulations applicable to food and beverages and changes in consumer preferences, such as bans on plastic straws or requirements for eco-friendly utensils.
• Supply chain disruptions, reliance on third-party manufacturers outside the U.S., international conflicts, and increased lead times or freight costs could negatively impact the business.
• Raw material inflation or shortages, especially for plastic and paper, or the inability to timely pass through increased costs to customers, could harm financial condition and results of operations.
• Operating in a highly competitive and fragmented industry with larger competitors who have greater resources, brand recognition, and product offerings.
• Inability to accurately forecast demand for products or results of operations, potentially leading to excess inventory, inventory write-downs, or product shortages and lost revenue.
• Significant capital expenditures for expanding warehouse space, truck fleet, and upgrading IT systems could affect the ability to service debt obligations or limit growth.
• Risk of conflicts of interest due to significant related party transactions, including purchases from entities owned by a stockholder's family member and leases with a variable interest entity controlled by a stockholder.
• Inadequate insurance coverage could have an adverse effect on the business if large claims exceed available coverage or result in increased premiums.
• Inability to successfully design and develop new products in anticipation of consumer preferences or to differentiate products from competitors.
• Potential liability if the company infringes upon the intellectual property rights of third parties, leading to substantial costs, damages, or product modifications.
• Quality problems with current and future products could result in product returns, recalls, credit claims, negative publicity, and litigation, harming sales and operating profit margin.
• Labor cost inflation (e.g., increased minimum wage laws) and the unavailability of skilled workers could disrupt the business and negatively impact labor costs and results of operations.
• Future growth depends on expanding into additional foodservice and geographic markets, and there is no assurance of success in attracting new customers or penetrating new sectors.
• Reliance on third-party contract manufacturers poses risks of untimely delivery, inability to meet demand, errors in specifications, and business interruptions.
• Reputation and business could suffer due to non-compliance with ethical and legal standards by suppliers and manufacturers.
• Significant expenses are incurred to maintain manufacturing equipment and facilities, and any interruption in operations could negatively impact the business.
• Many operating costs and expenses are fixed and may not decline if revenues decline, potentially harming profitability.
• The successful running of operations is highly dependent upon information technology systems, and security incidents or cyberattacks could lead to significant costs and business disruptions.
• Adopting artificial intelligence (AI) technologies poses risks such as regulatory scrutiny, cybersecurity vulnerabilities, ethical concerns, and system inaccuracies.
• Future success depends on the continuing efforts of management and key employees, and the ability to attract and retain highly skilled personnel.
• Difficulties in effectively managing rapid growth could strain resources, harm corporate culture, and affect product quality or timely delivery.
• Involvement in legal or regulatory proceedings and audits could result in substantial costs, damage awards, fines, and diversion of management's attention.
• Payment-related risks, including evolving regulations, increased interchange fees, and reliance on independent service providers for payment processing.
• Credit risk on accounts receivable, particularly if a material number of customers are unable to meet payment obligations during an economic downturn.
• Failure to maintain an effective system of internal controls could lead to inaccurate or untimely financial reporting and a decline in stock price.
• Potential future impairments of goodwill, other intangible assets, or property and equipment could result in non-cash charges to earnings.
• If estimates or judgments relating to critical accounting policies prove incorrect or change significantly, results of operations could be harmed.
• Business is subject to the risk of earthquakes, fires, floods, pandemics, and other catastrophic events, including criminal acts and terrorism, particularly given facility locations in California, Texas, and Hawaii, and supplier locations in Asia.
• Climate change and sustainability initiatives may result in significant operational changes, increased expenditures, additional regulations, or disruptions.
• Subject to environmental laws and regulations that could result in significant liabilities and costs, and increased legislation related to plastics could increase compliance or input costs.
• Recent trade policy shifts and regulatory developments, including increased import tariffs and renegotiation of trade agreements, could materially adversely impact business by increasing product costs or reducing demand.
• International political instability and armed conflicts could result in market instability, economic sanctions, increased energy costs, and general inflation.
• Failure to obtain shipments of products from overseas manufacturers with standard shipping by sea could harm gross margin and profitability if more expensive air freight is required.
• Legal, regulatory, economic, and political risks associated with international trade and foreign markets, including compliance with U.S. and foreign anti-corruption laws and currency exchange fluctuations.
• Directors, executive officers, and significant stockholders have substantial control (57% aggregate ownership) over the company, which could delay or prevent a change in corporate control.
• Stock price may be volatile or decline due to numerous factors beyond the company's control.
• Acquisitions could result in operating difficulties, integration challenges, loss of customers or employees, dilutive equity issuances, debt incurrence, or unanticipated liabilities.
• Substantial future sales, or the perception of future sales, of common stock by stockholders could cause the stock price to decline.
• Bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain actions, which could limit stockholders' ability to bring claims in other judicial forums.
• Ability to issue preferred stock could adversely affect the voting power or value of common stock.
• As a holding company, the company depends on its subsidiaries for cash to fund operations and expenses, including future dividend payments.
• Reduced disclosure requirements as an emerging growth company could make common stock less attractive to investors.

Future Outlook

The company expects its paper bag business to significantly scale and become a major growth driver in the next two to three years. It aims to broaden its reach to national and regional airlines, entertainment venues, and other non-restaurant customers, anticipating continued growth in eco-friendly product sales. The company plans to enhance its distribution capabilities by opening additional centers and expanding its fleet, and will continue investing in R&D for its Karat Earth line. Management intends to evaluate potential strategic acquisitions and expects to meet long-term liquidity needs through cash flows from operations and financing arrangements, while continuing to pay regular quarterly dividends for the foreseeable future. The company will cease to be an emerging growth company on December 31, 2026.

Management Comments

• "We believe we have established ourselves as a differentiated provider of high-quality products relative to our competitors."
• "Amidst the evolving tariff environment, we have placed our strategic emphasis on expanding and diversifying our global vendor network to enhance the resilience of our supply chain, minimize tariff impact on our operations and financial results, and maintain a strong margin profile and operating cash flows."
• "While we expect manufacturing to remain a relatively small portion of our sales mix going forward, we plan to keep manufacturing capabilities domestically to retain our nimble business model and resilient supply chain."
• "We expect our paper bag business to significantly scale, and become one of the most significant growth drivers for our business in the next two to three years."
• "Our increasingly strong brand recognition in the foodservice industry, nimble operations and scaled distribution position us strongly for new customer acquisition and continued wallet share expansion with existing customers."
• "We believe that the current industry environment and regulatory landscape has accelerated the shift in consumer preferences towards take-out orders, food delivery, and eco-friendly sustainable products, which we expect to continue in the foreseeable future."
• "Our commitment to pursuing environmental sustainability is exhibited in many aspects of our business. We believe we are amongst the leading companies in the supply of eco-friendly disposable foodservice products in the United States."
• "Our goal is to become a leading provider to a broad set of customers for all of their disposable foodservice products and related needs."
• "We believe there is an opportunity to continue to significantly grow our higher margin e-commerce business and we intend to do so by continuing to make investments in people, distribution capabilities, marketing, and technology."
• "We are committed to continuously evaluating and expanding our product and service offerings to meet evolving customer needs and enter new markets."
• "Management is constantly assessing and identifying businesses that align with our strategic goals, seeking opportunities to acquire companies that bring complementary technologies, innovative capabilities, or niche market expertise."
• "We believe that effectively prioritizing and managing our ESG factors helps create long-term value for our investors."
• "We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, make lease payments, and fund capital expenditures for at least the next 12 months."

Industry Context

StockSavvy.ai notes that Karat Packaging's strong revenue growth and strategic focus on eco-friendly products and paper bags align with broader industry trends driven by increasing consumer preference for sustainable options and evolving governmental regulations (e.g., EPR laws, plastic bans in California, Rhode Island, Delaware). The company's strategic pivot to an asset-light model and diversified global sourcing is a proactive response to escalating global trade tensions and tariff impacts, a common challenge across manufacturing and distribution sectors. The continued expansion of food delivery and take-out services, as highlighted by the National Restaurant Association and International Market Analysis Research and Consulting Group's projection of the U.S. online food delivery market reaching $68.6 billion by 2032, provides a strong tailwind for Karat Packaging's disposable foodservice products. The highly fragmented nature of the disposable foodservice products industry, coupled with ongoing consolidation, presents both competitive pressures and opportunities for Karat Packaging to gain market share through its differentiated offerings and expanded distribution network.

Comparison to Industry Standards

• The filing does not provide specific comparable company data or industry benchmarks for direct comparison of financial metrics or project results. It mentions the industry is highly fragmented with larger competitors but does not name specific comparable companies for a detailed assessment.

Management Changes

Corporate Governance

Legal Proceedings

• U.S. Customs and Border Protection (CBP) initiated a formal investigation in May 2023 to determine if the company evaded anti-dumping and countervailing duty orders on lightweight thermal paper from China by transshipping through Taiwan.
• CBP issued a Notice of Determination on February 5, 2024, concluding that manufacturing procedures in Taiwan did not constitute substantial transformation, and upheld this conclusion after an administrative review on June 11, 2024.
• The company initiated an appeal process on March 19, 2024, and started receiving bills in February 2025, submitting protests and making total payments of $1.9 million related to certain shipments in 2025.
• A liability reserve of $1.7 million as of December 31, 2025, is maintained for the estimated probable loss from the investigation, but the final payments could vary significantly.
• The company is involved in various routine legal proceedings and audits, but management does not believe any currently pending proceedings will have a material adverse effect on financial condition or results of operations.
• The company received a notice from the IRS in October 2025 that its 2023 federal income tax return was selected for examination.

Related Party Transactions

• Keary Global and its affiliate, Keary International, owned by a stockholder's family member, serve as inventory suppliers and purchasing agents for the company overseas.
• The company has an ongoing Procurement Agreement with Keary Global, which was amended and restated on June 26, 2025.
• Accounts payable due to Keary Global and Keary International were $4.7 million as of December 31, 2025, up from $3.1 million in 2024.
• Purchases from Keary Global and Keary International totaled $33.2 million in 2025, compared to $35.1 million in 2024.
• The company leases its Rockwall, Texas facility and Branchburg, New Jersey facility from Global Wells Investment Group LLC, a consolidated variable interest entity controlled by one of the company's stockholders.
• The New Jersey Lease with Global Wells was renewed on June 26, 2025, extending the term for an additional five years to August 31, 2030, with monthly base lease payments ranging from $122,000 to $140,000.
• The 2026 Term Loan and 2027 Term Loan are collateralized by substantially all of Global Wells' assets and guaranteed by one of the company's stockholders (and Global Wells for the 2026 Term Loan).
• Payments for Global Wells noncontrolling membership interest redemption gain tax withholding amounted to $0.9 million in 2025.

Stakeholder Impact

• Shareholders: Positive impact from increased net sales and net income, regular quarterly dividends ($1.80 per share declared in 2025), and a share repurchase program. Potential negative impact from decreased gross margin and Adjusted EBITDA margin, and the uncertainty surrounding the CBP investigation and new tariffs. Concentration of ownership (57% by directors, executive officers, and significant stockholders) could influence corporate control.
• Employees: Benefit from competitive compensation and comprehensive benefits, including 401(k) matching, healthcare, wellness, and paid leave. Emphasis on learning and development, with 77 promotions in 2025. Strong safety culture and DE&I initiatives. Potential negative impact from labor cost inflation if not managed effectively.
• Customers: Benefit from an extensive product portfolio, a growing focus on eco-friendly products, customized solutions, and an expanded distribution network for faster delivery. Potential negative impact from competitive pricing environment and any inability to meet demand due to supply chain issues or raw material shortages.
• Suppliers: Diversification of the global supplier network (reducing reliance on China, increasing sourcing from Malaysia/Vietnam) could shift business among suppliers. Strong partnerships are prioritized.
• Creditors: The company is in compliance with financial covenants under all loan agreements. Outstanding indebtedness of $35.9 million, with a significant portion ($12.3 million) becoming current in 2026, which the company intends to repay using available liquidity.

Next Steps

• Replicate the success of the paper bag business with other customers.
• Continue to focus on the growth of the paper bag business and eco-friendly products.
• Broaden reach to national and regional airlines, entertainment venues, and other non-restaurant customers.
• Continue to add new experienced sales team members to broaden reach and expand into new geographic areas.
• Continuously evaluate and expand product and service offerings to meet evolving customer needs and enter new markets.
• Continue the expansion of the distribution footprint and capabilities across the United States.
• Continue to invest in research and development to broaden and enhance the Karat Earth product line.
• Collaborate with customers to progress towards achieving sustainability goals.
• Evaluate and consider potential business acquisitions to expand infrastructure, product offerings, expertise, supply chain network, and operating efficiencies.
• Actively explore sourcing from other geographies to further enhance the resilience of the global supply chain.
• Continue to enhance distribution capabilities via opening of additional distribution centers in strategic locations across the U.S. and expanding the distribution fleet and workforce.
• Continue to enhance Sarbanes-Oxley ("SOX") compliance and cybersecurity awareness training programs.
• Explore options to improve the energy efficiency of warehouses, such as through the installation of solar panels.
• Transition the company fleet from gas powered to electric.
• Continue to look into and implement further sustainable practices.
• Monitor and evaluate developments regarding the U.S. Supreme Court ruling on IEEPA tariffs and new tariffs, and assess their potential impact.
• Repay the 2026 Term Loan at maturity (September 30, 2026) using available liquidity.
• Evaluate other appeal options for the CBP thermal paper investigation.
• Adopt ASU 2023-09 in the annual reporting period beginning after December 15, 2025.
• Adopt ASU 2024-03 in the annual reporting period beginning after December 15, 2026.
• Adopt ASU 2025-11 in its interim reporting period beginning after December 15, 2027.

Key Dates

Recommendation

Karat Packaging demonstrates strong revenue growth and strategic agility in diversifying its supply chain and expanding eco-friendly product lines, which are positive long-term indicators. The new paper bag contract and continued e-commerce investment also support future growth. However, the significant decline in gross margin and operating cash flow, primarily due to rising tariffs and freight costs, presents a notable headwind to profitability. While net income increased, the margin compression is a concern. The ongoing CBP investigation adds a layer of regulatory uncertainty. Given the mixed financial performance—strong top-line growth offset by profitability pressures—a "Hold" recommendation is appropriate for investors to observe if the company can effectively mitigate cost pressures and translate revenue growth into improved margins and cash flow in future periods.

Keywords

Disposable foodservice products, Food packaging, Eco-friendly products, Sustainability, Supply chain management, Distribution network, E-commerce, Restaurant supplies, Karat Packaging, KRT, SEC 10-K, Financial results, Tariffs, Global sourcing, Paper bags, Dividend, Share repurchase, Internal controls, Risk factors