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Kraton Corporation Announces Fourth Quarter and Full Year 2018 Results

HOUSTON, Feb. 27, 2019 /PRNewswire/ -- Kraton Corporation (KRA), a leading global producer of styrenic block copolymers, specialty polymers and high-value performance products derived from pine wood pulping co-products, announces financial results for the quarter and year ended December 31, 2018.

2018 FOURTH QUARTER AND FULL YEAR SUMMARY

  • Fourth quarter consolidated net income of $19.3 million compared to $69.9 million in the fourth quarter of 2017.
  • Fourth quarter Adjusted EBITDA(1) of $85.1 million, compared to $85.5 million in the fourth quarter of 2017.
  • Full year 2018 consolidated net income of $70.5 million compared to $92.6 million in 2017.
  • Full year 2018 Adjusted EBITDA(1) of $378.0 million, compared to $374.2 million 2017.
  • Full year 2018 reduction in debt of $116.6 million, and in consolidated net debt(1) of $113.4 million, or $75.8 million excluding foreign currency exchange impacts.

 


Three Months Ended December 31,


Years Ended December 31,


2018


2017


2018


2017


(In thousands, except per share amounts)

Revenue

$

447,783



$

465,970



$

2,011,675



$

1,960,362


Polymer segment operating income

$

21,232



$

22,750



$

159,162



$

121,089


Chemical segment operating income

$

12,166



$

17,781



$

91,572



$

84,395


Net income (loss) attributable to Kraton

$

17,524



$

69,608



$

67,015



$

97,549


Adjusted EBITDA (non-GAAP) (1)

$

85,143



$

85,461



$

378,043



$

374,199


Adjusted EBITDA margin (non-GAAP) (1)(2)

19.0

%


18.3

%


18.8

%


19.1

%

Diluted earnings (loss) per share

$

0.55



$

2.17



$

2.08



$

3.07


Adjusted diluted earnings per share (non-GAAP) (1)

$

0.67



$

0.67



$

3.16



$

2.85


_______________________________________

(1)

See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable U.S. GAAP measure. Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.

(2)

Accounting for lost sales associated with Hurricane Michael, Adjusted EBITDA margin would have been 18.3% and 18.6% for the three months and year ended December 31, 2018, respectively.

"Kraton's results for the fourth quarter 2018 were in line with our expectations, reflecting positive underlying demand fundamentals, improved profitability in our Chemical segment, and lower sales volume in our Polymer segment primarily reflecting the impact of the previously-disclosed production disruption at our Wesseling site," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer. "Specifically, despite the post-hurricane recovery underway at our Panama City, Florida, site, results for our Chemical segment were favorable, with margin improvement contributing to 18% growth in Adjusted EBITDA, compared to the fourth quarter of 2017. Fourth quarter 2018 Adjusted EBITDA for our Polymer segment was $44 million, down $6 million from the fourth quarter 2017. The multi-week production slowdown, resulting from the record low levels of the Rhine River, contributed to lower fourth quarter paving sales. Additionally, in the quarter, we also experienced lower sales in our Specialty Polymers business, specifically in China and into North American automotive applications, as these markets contracted as we approached year's end," said Fogarty.

"For the full year 2018, on a consolidated basis, Adjusted EBITDA for 2018 was $378 million, compared to $374 million in 2017. Chemical segment Adjusted EBITDA increased 8% to $163 million, representing the first full year of Adjusted EBITDA improvement since we acquired the Chemical segment in 2016. The results achieved in 2018 reflect modestly higher sales volume, despite the negative effect of Hurricane Michael in the fourth quarter, and the year-long trend of improved pricing for TOFA, TOFA derivatives, and other high-value product streams, including sales into our Tires markets. We expect these favorable market trends to continue into 2019," said Fogarty. "Our Polymer segment Adjusted EBITDA was $215 million, down $8 million compared to 2017, primarily due to the impact of production challenges in the second half of 2018, lower sales volume into non-core paving markets, lower overall demand in China, and weakness in North American automotive applications, as well as higher costs, including transportation and logistics costs. Despite these very real headwinds, overall profitability for the Polymer segment in 2018 was consistent with our longer-term objective of delivering adjusted gross profit in excess of $1,000 per ton. Moreover, we believe underlying business fundamentals, across both our Performance Products and Specialty Polymers businesses, in both the Americas and Europe, remain vibrant as we transition from 2018 in to 2019. Only in China, and by extension greater Asia, do we see more immediate-term indications of markets continuing to pull back. In 2018, our CariflexTM volume was up 8% following minimal growth in 2017, which we believe was negatively impacted by a pull-forward of volume into 2016, associated with the Food and Drug Administration ban on powdered natural rubber latex. In fact, based on our current outlook for Cariflex, we believe we have an opportunity for further expansion," commented Fogarty. "With regard to the previously discussed production challenges, we have taken steps to address those which were under our direct control, and for those more outside our control, we believe we have built contingencies into our supply planning for 2019," added Fogarty.

"In 2018, consistent with our stated strategies, we reduced consolidated net debt by $113 million, or by $76 million when excluding the benefit of foreign currency favorability, thus exceeding the high end of our recent guidance range of $50-$60 million. At December 31, 2018, our consolidated net debt leverage ratio was below 4.0 turns. Our capital structure is solid, with no scheduled maturities until 2025, and debt reduction will remain a priority in 2019," said Fogarty.

Polymer Segment


Three Months Ended December 31,


Years Ended December 31,


2018


2017


2018


2017

Revenue

(In thousands)

Performance Products

$

125,578



$

131,489



$

631,728



$

640,313


Specialty Polymers

97,052



104,161



408,628



389,873


CariflexTM

50,496



43,835



180,814



168,267


Other

274



(34)



416



1,223



$

273,400



$

279,451



$

1,221,586



$

1,199,676










Operating income

$

21,232



$

22,750



$

159,162



$

121,089


Adjusted EBITDA (non-GAAP)(1)

$

44,333



$

50,782



$

214,802



$

223,015


Adjusted EBITDA margin (non-GAAP)(2)

16.2

%


18.2

%


17.6

%


18.6

%

_______________________________________

(1)

See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable U.S. GAAP measure.

(2)

Defined as Adjusted EBITDA as a percentage of revenue.

Q4 2018 VERSUS Q4 2017 RESULTS

Revenue for the Polymer segment was $273.4 million for the three months ended December 31, 2018 compared to $279.5 million for the three months ended December 31, 2017. Sales volume of 69.5 kilotons for the three months ended December 31, 2018 decreased 8.1% compared to the three months ended December 31, 2017. Performance Products volumes decreased 10.0%, Specialty Polymers volumes decreased 10.5%, partially offset by increased Cariflex volumes of 17.5%. The positive effect from changes in currency exchange rate between the periods was $4.0 million.

For the three months ended December 31, 2018, the Polymer segment generated $44.3 million of Adjusted EBITDA (non-GAAP) compared to $50.8 million for the three months ended December 31, 2017, a decrease of $6.4 million or 12.7%. The decrease is driven by the lower sales volumes discussed above and higher costs, including freight and logistics costs. The negative effect from changes in currency exchange rates between the periods was $4.0 million. See a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA below.

FY 2018 VERSUS FY 2017 RESULTS

Revenue for the Polymer segment was $1,221.6 million for the year ended December 31, 2018 compared to $1,199.7 million for the year ended December 31, 2017. The increase was driven by higher average sales prices, partially offset by lower sales volumes. Sales volumes were 319.6 kilotons for the year ended December 31, 2018, a decrease of 14.1 kilotons, or 4.2%. Performance Products volumes decreased 6.9%, Specialty Polymers volumes increased 0.5%, and Cariflex volumes increased 8.0%. The decrease in Performance Products revenues were primarily impacted by lower paving sales outside of our core North American and European markets, as well as decreases in SIS volumes. The increase in Specialty Polymers revenue was primarily driven by higher average selling prices, resulting from higher average raw materials costs, and to a lesser extent, higher sales into lubricant additive applications. The increase in Cariflex revenue was driven by higher demand in our latex and solid rubber offerings. The positive effect from changes in currency exchange rates between the periods was $15.5 million.

For the year ended December 31, 2018, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $214.8 million compared to $223.0 million for the year ended December 31, 2017. The decrease in Adjusted EBITDA was primarily due to higher operating expenses from the impact of unplanned, short-term facility outages and higher costs, including freight and logistics costs. We also experienced lower sales volumes, primarily in our Performance Products business, driven by lower SIS and paving demand, in our non-core markets. These negative impacts were partially offset by higher average unit margins. The positive effect from changes in currency exchange rates between the periods was $4.7 million. See a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA below.

Chemical Segment


Three Months Ended December 31,


Years Ended December 31,


2018


2017


2018


2017

Revenue

(In thousands)

Adhesives

$

59,960



$

68,459



$

280,867



$

294,467


Tires

9,270



12,041



48,122



49,955


Performance chemicals

105,153



106,019



461,100



416,264



$

174,383



$

186,519



$

790,089



$

760,686










Operating income

$

12,166



$

17,781



$

91,572



$

84,395


Adjusted EBITDA (non-GAAP) (1)

$

40,810



$

34,679



$

163,241



$

151,184


Adjusted EBITDA margin (non-GAAP) (2)(3)

23.4

%


18.6

%


20.7

%


19.9

%

_______________________________________

(1)

See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable U.S. GAAP measure.

(2)

Defined as Adjusted EBITDA as a percentage of revenue.

(3)

Accounting for lost sales associated with Hurricane Michael, Adjusted EBITDA margin would have been 21.3% and 20.2% for the three months and year ended December 31, 2018, respectively.

Q4 2018 VERSUS Q4 2017 RESULTS

Revenue for the Chemical segment was $174.4 million for the three months ended December 31, 2018 compared to $186.5 million for the three months ended December 31, 2017. Sales volume was 95.8 kilotons for the three months ended December 31, 2018 compared to 100.9 kilotons for the three months ended December 31, 2017. Tires volumes decreased 13.6%, Performance Chemicals volumes decreased 5.5%, and Adhesives volumes decreased 2.8%. These volumes were negatively impacted due to lost sales from Hurricane Michael. The negative effect from changes in currency exchange rate between the periods was $2.9 million.

In October 2018, our Panama City, Florida, facility was damaged by Hurricane Michael. During the three months ended December 31, 2018, we incurred $12.3 million of direct costs, which are included in our costs of good sold, and that had not been reimbursed from our insurance carrier. With respect to lost sales, we estimate the associated margin to be $8.9 million. During the fourth quarter we recognized $8.9 million of cash proceeds as reimbursement under our business interruption policy, which is included in operating income. We currently estimate the replacement cost associated with damaged equipment to be in a range of $5.0 million to $7.0 million. During the fourth quarter, we impaired damaged equipment with a net book value of $1.3 million, which as of December 31, 2018, had not been reimbursed under our property and casualty insurance policy.

For the three months ended December 31, 2018, the Chemical segment generated Adjusted EBITDA (non-GAAP) of $40.8 million compared to $34.7 million for the three months ended December 31, 2017. See a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA below.

FY 2018 VERSUS FY 2017 RESULTS

Revenue for the Chemical segment was $790.1 million for the year ended December 31, 2018 compared to $760.7 million for the year ended December 31, 2017. The increase was driven by higher average sales prices resulting from price actions, and to a lesser extent, an increase in sales volumes. Sales volumes were 428.5 kilotons for the year ended December 31, 2018, an increase of 2.1 kilotons, or 0.5%, despite sales volumes being negatively impacted due to lost sales from Hurricane Michael as discussed above. Performance Chemicals volumes increased 3.2%, partially offset by a decrease of 4.5% and 5.6% in Adhesives and Tires volumes, respectively. The positive effect from changes in currency exchange rates between the periods was $13.7 million.

For the year ended December 31, 2018, the Chemical segment generated $163.2 million of Adjusted EBITDA (non-GAAP) compared to $151.2 million for the year ended December 31, 2017. The increase in Adjusted EBITDA was primarily driven by improved unit margin in our Performance Chemicals and Tires product lines. The improved unit margins were partially offset by higher operating costs, including planned maintenance activities and higher average raw material costs. The negative effect from changes in currency exchange rates between the periods was $2.8 million. See a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA below.

Impact of the Tax Act

On December 22, 2017, the U.S. Tax Cuts and Jobs Act ("Tax Act") introduced significant changes to U.S. income tax law, including a reduction to the U.S. statutory tax rate from 35.0% to 21.0% as well as other reform initiatives, effective in 2018. There was a benefit to Diluted Earnings per Share of $0.28 for the year ended December 31, 2018. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, and other standard -setting bodies, we made adjustments to the provisional amounts over the course of the year. The accounting for the tax effects of the Tax Act has been completed as of December 31, 2018.

Status of Synergies, Operational Improvement, and Cost Reduction Initiatives

We previously announced synergies and operational improvement initiatives associated with the acquisition of Arizona Chemical and a cost reduction initiative targeted at lowering costs in our Polymer segment.

The Polymer segment cost reduction initiative began in 2015 with a total target savings of $70.0 million to be realized by the end of 2018. The cost reduction initiative was fully realized as of December 31, 2018.

In conjunction with the acquisition of Arizona Chemical, we identified $65.0 million of cost-based synergies, approximately $25.0 million of which relate to general and administrative costs, and approximately $40.0 million of which are associated with operational improvements, all of which have been realized as of December 31, 2017.

CASH FLOW AND CAPITAL STRUCTURE

During the year ended December 31, 2018 we reduced Kraton indebtedness by approximately $116.6 million, and consolidated net debt (non-GAAP) by $113.4 million.

Summary of principal amounts for indebtedness and a reconciliation of Kraton debt to Kraton net debt and consolidated net debt (non-GAAP):


December 31, 2018


December 31, 2017


(In thousands)

USD Tranche

$

362,000



$

485,000


Euro Tranche

342,900



198,265


10.5% Senior Notes



440,000


7.0% Senior Notes

399,060



400,000


5.25% Senior Notes

331,470




ABL

5,000




Capital lease

1,184



2,086


Kraton debt

1,441,614



1,525,351


Kraton cash

79,251



75,204


Kraton net debt

1,362,363



1,450,147






KFPC(1)(2) loans

125,501



158,349


KFPC(1) cash

6,640



13,848


KFPC(1) net debt

118,861



144,501






Consolidated net debt

$

1,481,224



$

1,594,648






Effect of foreign currency on consolidated net debt

37,580




Consolidated net debt excluding effect of foreign currency

$

1,518,804




_______________________________________

(1)

This amount includes all of the indebtedness of our Kraton Formosa Polymers Corporation (KFPC) joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and we consolidate within our financial statements.

(2)

KFPC executed revolving credit facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the 5.5 billion NTD KFPC Loan Agreement.

OUTLOOK

During 2019, we expect strong underlying business fundamentals, including significant volume growth and margin expansion in both our Polymer and Chemical segments. However, 2019 will include certain structural headwinds off-setting underlying business momentum:

  • We have been notified by a significant customer that it intends to implement an inventory management program in 2019 that will likely negatively impact our Adjusted EBITDA by up to $17 million.
  • We expect a continuation of the inflationary headwinds associated with transportation and logistics costs which impacted both segments in 2018. While we strive to off-set this cost pressure through a combination of logistics optimization and pricing initiatives, we currently expect a net increase in transportation and logistics costs of approximately $10 million.
  • 2019 is a significant turnaround year, with planned maintenance costs expected to increase by $7 million in 2019, as compared to 2018.
  • Lastly, during the fourth quarter 2018, we began to experience volume declines in our Specialty Polymers business associated with slowing consumer demand in Asia, and in particular China, as well as tariff impacts from the ongoing trade negotiations between the U.S. and China. Based on our current view, we do expect this trend to continue into 2019.

We therefore currently anticipate 2019 Adjusted EBITDA will be in a range of $370 - $390 million. This range does assume recovery under our business interruption policies in 2019 that will offset any lost margin occurring in the first quarter of 2019 associated with Hurricane Michael at our Panama City, Florida, site.

Consistent with the aforementioned 2019 Adjusted EBITDA range, and excluding any activity under the recently announced share buyback program, we currently anticipate reducing consolidated net debt (excluding the effects of foreign currency) by $170-$190 million in 2019.

We have not reconciled Adjusted EBITDA guidance to net income (loss) because we do not provide guidance for net income (loss) or for items that we do not consider indicative of our on-going performance, including, but not limited to, transaction costs and production downtime, as certain of these items are out of our control and/or cannot be reasonably predicted. We have not reconciled consolidated net debt guidance to debt due to high variability and difficulty in making accurate forecasts and projections that are impacted by future decisions and actions. The actual amount of such reconciling items will have a significant impact if they were included in our Adjusted EBITDA and net debt. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding U.S. GAAP measures is not available without unreasonable effort.

USE OF NON-GAAP FINANCIAL MEASURES

This press release includes the use of both U.S. GAAP and non-GAAP financial measures. The non-GAAP financial measures are EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Diluted Earnings per Share, Consolidated Net Debt Leverage Ratio, Consolidated Net Debt, and Net Debt. Tables included in this earnings release reconcile each of these non-GAAP financial measures with the most directly comparable U.S. GAAP financial measure. For additional information on the impact of the spread between the FIFO basis of accounting and ECRC, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

We consider these non-GAAP financial measures to be important supplemental measures of our performance and believe they are frequently used by investors, securities analysts and other interested parties in the evaluation of our performance including period-to-period comparisons and/or that of other companies in our industry. Further, management uses these measures to evaluate operating performance, and our incentive compensation plan bases incentive compensation payments on our Adjusted EBITDA performance and attainment of net debt, along with other factors. These non-GAAP financial measures have limitations as analytical tools and in some cases can vary substantially from other measures of our performance. You should not consider them in isolation, or as a substitute for analysis of our results under U.S. GAAP in the United States.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin: For our consolidated results, EBITDA represents net income (loss) before interest, taxes, depreciation and amortization. For each reporting segment, EBITDA represents operating income before depreciations and amortization, disposition and exit of business activities and earnings of unconsolidated joint ventures. Among other limitations EBITDA does not: reflect the significant interest expense on our debt or reflect the significant depreciation and amortization expense associated with our long-lived assets; and EBITDA included herein should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements. The calculation of EBITDA in our debt agreements includes adjustments, such as extraordinary, non-recurring or one-time charges, proforma cost savings, certain non-cash items, turnaround costs, and other items included in the definition of EBITDA in the debt agreements. Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure. As an analytical tool, Adjusted EBITDA is subject to all the limitations applicable to EBITDA. We prepare Adjusted EBITDA by eliminating from EBITDA the impact of a number of items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC, but you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, due to volatility in raw material prices, Adjusted EBITDA may, and often does, vary substantially from EBITDA and other performance measures, including net income calculated in accordance with U.S. GAAP. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenue (for each reporting segment or on a consolidated basis, as applicable). Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business.

Adjusted Diluted Earnings Per Share: We prepare Adjusted Diluted Earnings per Share by eliminating from Diluted Earnings (loss) per Share the impact of a number of non-recurring items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC.

Consolidated Net Debt and Net Debt: We define net debt for Kraton as total debt (excluding debt of KFPC) less cash and cash equivalents. We define consolidated net debt as Kraton net debt plus debt of KFPC less KFPC's cash and cash equivalents. Management uses net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using net debt is useful to investors in determining our leverage since we could choose to use cash and cash equivalents to retire debt. In addition, management believes that presenting Kraton's net debt excluding KFPC is useful because KFPC has its own capital structure.

Consolidated Net Debt Leverage Ratio: The consolidated net debt leverage ratio is defined as consolidated net debt as of the balance sheet date divided by Adjusted EBITDA for the twelve months then ended. Our use of this term may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.

CONFERENCE CALL AND WEBCAST INFORMATION

Kraton has scheduled a conference call on Thursday, February 28, 2019 at 9:00 a.m. (Eastern Time) to discuss fourth quarter and full year 2018 financial results. Kraton invites you to listen to the conference call, which will be broadcast live over the internet at www.kraton.com, by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page.

You may also listen to the conference call by telephone by contacting the conference call operator 5 to 10 minutes prior to the scheduled start time and asking for the "Kraton Conference Call – Passcode: Earnings Call." U.S./Canada dial-in 800-857-6511. International dial-in: 210-839-8886.

For those unable to listen to the live call, a replay will be available beginning at approximately 11:00 a.m. (Eastern Time) on February 28, 2019 through 1:59 a.m. (Eastern Time) on March 7, 2019. To hear a replay of the call over the Internet, access Kraton's Website at www.kraton.com by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page. To hear a telephonic replay of the call, dial 866-395-9164 and International callers dial 203-369-0500.

ABOUT KRATON

Kraton Corporation (KRA) is a leading global producer of styrenic block copolymers, specialty polymers and high-value performance products derived from pine wood pulping co-products. Kraton's polymers are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants and lubricants, and medical, packaging, automotive, paving and roofing applications. As the largest global provider in the pine chemicals industry, the company's pine-based specialty products are sold into adhesives, roads and construction and tire markets, and it produces and sells a broad range of performance chemicals into markets that include fuel additives, oilfield chemicals, coatings, metalworking fluids and lubricants, inks, flavors and fragrances and mining. Kraton offers its products to a diverse customer base in numerous countries worldwide.

Kraton, the Kraton logo and design, and Cariflex are all trademarks of Kraton Polymers LLC.

FORWARD LOOKING STATEMENTS

Some of the statements in this press release contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This press release includes forward-looking statements that reflect our plans, beliefs, expectations, and current views with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by the use of words such as "outlook," "believes," "target," "estimates," "expects," "projects," "may," "intends," "plans", "on track", or "anticipates," or by discussions of strategy, plans or intentions, including all matters described on the section titled "Outlook" including, but not limited to, our guidance for Adjusted EBITDA and consolidated net debt reduction, expectations regarding the impact of the Tax Act, and our expectations for market trends.

All forward-looking statements in this press release are made based on management's current expectations and estimates, which involve known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed in forward-looking statements. These risks and uncertainties are more fully described in our latest Annual Report on Form 10-K, including but not limited to "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" therein, and in our other filings with the Securities and Exchange Commission, and include, but are not limited to, risks related to: Kraton's ability to repay its indebtedness and risk associated with incurring additional indebtedness; Kraton's reliance on third parties for the provision of significant operating and other services; conditions in, and risk associated with operating in, the global economy and capital markets; fluctuations in raw material costs; limitations in the availability of raw materials; competition in Kraton's end-use markets; and other factors of which we are currently unaware or deem immaterial. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information. Readers are cautioned not to place undue reliance on our forward-looking statements. Forward-looking statements speak only as of the date they are made, and we assume no obligation to update such information in light of new information or future events.

Contact:
Gene Shiels
281-504-4886

 

KRATON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



Three Months Ended December 31,


Years Ended December 31,


2018


2017


2018


2017


(Unaudited)





Revenue

$

447,783



$

465,970



$

2,011,675



$

1,960,362


Cost of goods sold

339,225



342,384



1,431,069



1,415,659


Gross profit

108,558



123,586



580,606



544,703


Operating expenses:








Research and development

9,428



10,187



41,296



40,283


Selling, general, and administrative

37,049



37,293



153,897



161,260


Depreciation and amortization

35,777



35,122



141,410



137,162


Gain on insurance proceeds

(8,900)





(8,900)




Loss on disposal of fixed assets

1,806



453



2,169



514


Operating income

33,398



40,531



250,734



205,484


Other expense

(512)



(843)



(3,472)



(3,360)


Loss on extinguishment of debt

55



(19)



(79,866)



(35,389)


Earnings of unconsolidated joint venture

114



116



471



486


Interest expense, net

(18,937)



(30,693)



(93,772)



(132,459)


Income before income taxes

14,118



9,092



74,095



34,762


Income tax benefit

5,169



60,791



(3,574)



57,884


Consolidated net income

19,287



69,883



70,521



92,646


Net (income) loss attributable to noncontrolling interest

(1,763)



(275)



(3,506)



4,903


Net income attributable to Kraton

$

17,524



$

69,608



$

67,015



$

97,549


Earnings per common share:








Basic

$

0.55



$

2.21



$

2.10



$

3.12


Diluted

$

0.55



$

2.17



$

2.08



$

3.07


Weighted average common shares outstanding:








Basic

31,520



30,944



31,416



30,654


Diluted

31,714



31,454



31,789



31,140


 

KRATON CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



December 31, 2018


December 31, 2017

ASSETS




Current assets:




Cash and cash equivalents

$

85,891



$

89,052


Receivables, net of allowances of $784 and $824

198,046



196,683


Inventories of products

410,640



367,796


Inventories of materials and supplies

30,843



25,643


Prepaid expense

10,156



13,963


Other current assets

29,980



36,615


Total current assets

765,556



729,752


Property, plant, and equipment, less accumulated depreciation of $597,785 and $526,759

941,476



958,723


Goodwill

772,886



774,319


Intangible assets, less accumulated amortization of $246,648 and $197,318

362,038



406,863


Investment in unconsolidated joint venture

12,070



12,380


Debt issuance costs

1,170



2,340


Deferred income taxes

10,434



8,462


Other long-term assets

29,074



39,688


Total assets

$

2,894,704



$

2,932,527


LIABILITIES AND EQUITY




Current liabilities:




Current portion of long-term debt

$

45,321



$

42,647


Accounts payable-trade

182,153



169,265


Other payables and accruals

100,695



119,624


Due to related party

20,918



19,176


Total current liabilities

349,087



350,712


Long-term debt, net of current portion

1,487,298



1,574,881


Deferred income taxes

127,827



148,148


Other long-term liabilities

182,893



192,267


Total liabilities

2,147,105



2,266,008


Equity:




Kraton stockholders' equity:




Preferred stock, $0.01 par value; 100,000 shares authorized; none issued




Common stock, $0.01 par value; 500,000 shares authorized; 31,917 shares issued and outstanding at December 31, 2018; 31,605 shares issued and outstanding at December 31, 2017

319



316


Additional paid in capital

385,921



377,957


Retained earnings

420,597



356,503


Accumulated other comprehensive loss

(91,699)



(98,295)


Total Kraton stockholders' equity

715,138



636,481


Noncontrolling interest

32,461



30,038


Total equity

747,599



666,519


Total liabilities and equity

$

2,894,704



$

2,932,527


 

KRATON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



Years Ended December 31,


2018


2017

CASH FLOWS FROM OPERATING ACTIVITIES




Consolidated net income

$

70,521



$

92,646


Adjustments to reconcile consolidated net income to net cash provided by operating activities:




Depreciation and amortization

141,410



137,162


Amortization of debt premium and original issue discount

2,202



6,169


Amortization of debt issuance costs

5,771



8,420


Loss on disposal of property, plant, and equipment

2,169



514


Loss on extinguishment of debt

79,866



35,389


(Earnings) loss from unconsolidated joint venture, net of dividends received

74



(49)


Deferred income tax benefit

(26,487)



(66,004)


Share-based compensation

8,102



7,627


Decrease (increase) in:




Accounts receivable

(7,841)



19,237


Inventories of products, materials, and supplies

(58,077)



(22,269)


Other assets

12,304



12,941


Increase (decrease) in:




Accounts payable-trade

20,271



8,275


Other payables and accruals

(18,693)



13,463


Other long-term liabilities

13,742



(1,802)


Due to related party

1,245



3,721


Net cash provided by operating activities

246,579



255,440


CASH FLOWS FROM INVESTING ACTIVITIES




Kraton purchase of property, plant, and equipment

(100,122)



(99,223)


KFPC purchase of property, plant, and equipment

(2,746)



(17,103)


Purchase of software and other intangibles

(8,299)



(6,265)


Net cash used in investing activities

(111,097)



(122,591)


CASH FLOWS FROM FINANCING ACTIVITIES




Proceeds from debt

732,540



739,167


Repayments of debt

(828,747)



(938,006)


KFPC proceeds from debt

24,918



48,207


KFPC repayments of debt

(52,947)



(16,244)


Capital lease payments

(902)



(964)


Purchase of treasury stock

(6,189)



(2,298)


Proceeds from the exercise of stock options

3,133



10,952


Settlement of interest rate swap

2,584



(879)


Settlement of foreign currency hedges



(716)


Debt issuance costs

(11,113)



(14,330)


Net cash provided by (used in) financing activities

(136,723)



(175,111)


Effect of exchange rate differences on cash

(1,920)



9,565


Net increase in cash and cash equivalents

(3,161)



(32,697)


Cash and cash equivalents, beginning of period

89,052



121,749


Cash and cash equivalents, end of period

$

85,891



$

89,052


Supplemental disclosures:




Cash paid (received) during the period for income taxes, net of refunds received

$

4,715



$

(5,395)


Cash paid during the period for interest, net of capitalized interest

$

106,838



$

103,995


Capitalized interest

$

3,882



$

4,042


Supplemental non-cash disclosures:




Property, plant, and equipment accruals

$

17,829



$

19,720


Asset acquired through capital lease

$



$


 

KRATON CORPORATION

RECONCILIATION OF POLYMER GROSS PROFIT TO ADJUSTED GROSS PROFIT

(Unaudited)

(In thousands)



Three Months Ended December 31,


2018


2017

Gross profit

$

67,598



$

69,712


Add (deduct):




Restructuring and other charges (a)

1,581




Hurricane related costs (b)



3,385


KFPC startup costs (c)



3,970


Non-cash compensation expense

29



16


Spread between FIFO and ECRC

1,669



1,170


Adjusted gross profit (non-GAAP)

$

70,877



$

78,253


_______________________________________

(a) 

Severance expenses and other restructuring related charges.

(b) 

2017 costs are related to Hurricane Harvey, which are all recorded in cost of goods sold.

(c) 

Startup costs related to the joint venture company, KFPC, which are recorded in costs of goods sold for 2017.

 


Years Ended December 31,


2018


2017

Gross profit

$

349,080



$

312,580


Add (deduct):




Restructuring and other charges (a)

1,581



5,354


Hurricane related costs (b)



4,145


KFPC startup costs (c)



13,633


Non-cash compensation expense

486



458


Spread between FIFO and ECRC

(26,042)



(2,261)


Adjusted gross profit (non-GAAP)

$

325,105



$

333,909


_______________________________________

(a) 

Severance expenses and other restructuring related charges.

(b) 

2017 costs are related to Hurricane Harvey, which are all recorded in cost of goods sold.

(c) 

Startup costs related to the joint venture company, KFPC, which are recorded in costs of goods sold for 2017.

 

KRATON CORPORATION

RECONCILIATION OF NET INCOME (LOSS) ATTRIBUTABLE TO KRATON AND OPERATING INCOME TO ADJUSTED EBITDA (NON-GAAP)

(Unaudited)

(In thousands)



Three Months Ended December 31, 2018


Three Months Ended December 31, 2017


Polymer


Chemical


Total


Polymer


Chemical


Total

Net income attributable to Kraton (a)





$

17,524







$

69,608


Net income attributable to noncontrolling interest





1,763







275


Consolidated net income (loss)





19,287







69,883


Add (deduct):












Income tax expense





(5,169)







(60,791)


Interest expense, net





18,937







30,693


Earnings of unconsolidated joint venture





(114)







(116)


(Gain) loss on extinguishment of debt





(55)







19


Other expense





512







843


Operating income

21,232



12,166



33,398



22,750



17,781



40,531


Add:












Depreciation and amortization

18,092



17,685



35,777



17,559



17,563



35,122


Other income (expense)

(711)



199



(512)



(920)



77



(843)


Gain (loss) on extinguishment of debt

55





55



(19)





(19)


Earnings of unconsolidated joint venture

114





114



116





116


EBITDA (a)

38,782



30,050



68,832



39,486



35,421



74,907


Add (deduct):












Transaction, acquisition related costs, restructuring, and other costs (b)

3,455



356



3,811



1,507



344



1,851


(Gain) loss on extinguishment of debt

(55)





(55)



19





19


Weather related costs (c)



13,651



13,651



3,385





3,385


KFPC startup costs (d)







4,954





4,954


Non-cash compensation expense

482





482



261





261


Spread between FIFO and ECRC

1,669



(3,247)



(1,578)



1,170



(1,086)



84


Adjusted EBITDA (non-GAAP) (a)

$

44,333



$

40,810



$

85,143



$

50,782



$

34,679



$

85,461


























_______________________________________

(a) 

Included in net income attributable to Kraton, EBITDA and Adjusted EBITDA in 2018 is $8.9 million of insurance proceeds associated with our estimate of lost margin resulting from the impact of Hurricane Michael.

(b) 

Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses.

(c) 

2018 costs are related to Hurricane Michael, which are mostly recorded in cost of goods sold and $1.3 million recorded in loss on disposal of fixed assets. 2017 costs are related to Hurricane Harvey and Hurricane Irma, which are all recorded in cost of goods sold.

(d) 

Startup costs related to the joint venture company, KFPC, which are recorded in selling, general, and administrative expenses for 2018 and costs of goods sold for 2017.

 

KRATON CORPORATION

RECONCILIATION OF NET INCOME ATTRIBUTABLE TO KRATON AND OPERATING INCOME TO ADJUSTED EBITDA (NON-GAAP)

(Unaudited)

(In thousands)



Year Ended December 31, 2018


Year Ended December 31, 2017


Polymer


Chemical


Total


Polymer


Chemical


Total

Net income attributable to Kraton (a)





$

67,015







$

97,549


Net income (loss) attributable to noncontrolling interest





3,506







(4,903)


Consolidated net income





70,521







92,646


Add (deduct):












Income tax benefit (expense)





3,574







(57,884)


Interest expense, net





93,772







132,459


Earnings of unconsolidated joint venture





(471)







(486)


Loss on extinguishment of debt





79,866







35,389


Other expense





3,472







3,360


Operating income

159,162



91,572



250,734



121,089



84,395



205,484


Add:












Depreciation and amortization

71,006



70,404



141,410



67,998



69,164



137,162


Other income (expense)

(4,311)



839



(3,472)



(3,687)



327



(3,360)


Loss on extinguishment of debt

(79,866)





(79,866)



(35,389)





(35,389)


Earnings of unconsolidated joint venture

471





471



486





486


EBITDA (a)

146,462



162,815



309,277



150,497



153,886



304,383


Add (deduct):












Transaction, acquisition related costs, restructuring, and other costs (b)

5,517



(607)



4,910



13,000



(165)



12,835


Loss on extinguishment of debt

79,866





79,866



35,389





35,389


Weather related costs (c)



13,651



13,651



4,145



1,320



5,465


KFPC startup costs (d)

897





897



14,618





14,618


Non-cash compensation expense

8,102





8,102



7,627





7,627


Spread between FIFO and ECRC

(26,042)



(12,618)



(38,660)



(2,261)



(3,857)



(6,118)


Adjusted EBITDA (non-GAAP) (a)

$

214,802



$

163,241



$

378,043



$

223,015



$

151,184



$

374,199


























_______________________________________

(a) 

Included in net income attributable to Kraton, EBITDA and Adjusted EBITDA in 2018 is $8.9 million of insurance proceeds associated with our estimate of lost margin resulting from the impact of Hurricane Michael.

(b) 

Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses.

(c) 

2018 costs are related to Hurricane Michael, which are mostly recorded in cost of goods sold and $1.3 million recorded in loss on disposal of fixed assets. 2017 costs are related to Hurricane Harvey and Hurricane Irma, which are all recorded in cost of goods sold.

(d) 

Startup costs related to the joint venture company, KFPC, which are recorded in selling, general, and administrative expenses for 2018 and costs of goods sold for 2017.

 

We reconcile Diluted Earnings (Loss) Per Share to Adjusted Diluted Earnings Per Share (non-GAAP) as follows:


Three Months Ended December 31,


Years Ended December 31,


2018


2017


2018


2017


(Unaudited)

Diluted Earnings Per Share

$

0.55



$

2.17



$

2.08



$

3.07


Transaction, acquisition related costs, restructuring, and other costs (a)

0.10



0.05



0.13



0.31


Loss on extinguishment of debt

0.02



0.14



1.91



0.87


Weather related costs (b)

0.32



0.09



0.32



0.13


KFPC startup costs (c)



0.09



0.01



0.26


Tax reform repatriation (d)

(0.28)



1.46



(0.28)



1.46


Tax reform deferred tax rate change (d)



(3.06)





(3.06)


Spread between FIFO and ECRC

(0.04)



(0.27)



(1.01)



(0.19)


Adjusted Diluted Earnings Per Share (non-GAAP)

$

0.67



$

0.67



$

3.16



$

2.85


_______________________________________

(a) 

Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses.

(b) 

2018 costs are related to Hurricane Michael, which are mostly recorded in cost of goods sold and $1.3 million recorded in loss on disposal of fixed assets. 2017 costs are related to Hurricane Harvey and Hurricane Irma, which are all recorded in cost of goods sold.

(c) 

Startup costs related to the joint venture company, KFPC, which are recorded in selling, general, and administrative expenses for 2018, costs of goods sold for 2017, and selling, general, and administrative expenses for 2016.

(d) 

Tax repatriation and deferred tax rate change relating to the 2017 U.S. Tax Cuts and Jobs Act, see Note 12 Income Taxes to the consolidated financial statements.

 

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