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Kraton Corporation Announces Third Quarter 2019 Results

HOUSTON, Oct. 23, 2019 /PRNewswire/ -- Kraton Corporation (KRA), a leading global specialty chemicals company that manufactures styrenic block copolymers, specialty polymers, and high-value performance products primarily derived from pine wood pulping co-products, announces financial results for the quarter ended September 30, 2019.

THIRD QUARTER 2019 SUMMARY

  • Third quarter consolidated net income of $20.9 million, compared to $43.3 million in the third quarter of 2018.
  • Third quarter consolidated Adjusted EBITDA(1) of $80.1 million, down 18.8% compared to the third quarter of 2018.
  • Polymer segment operating income of $18.3 million, down 59.3% compared to Q3 2018, and Adjusted EBITDA(1) of $50.3 million, down 11.8% compared to $57.0 million in the third quarter of 2018.
  • Chemical segment operating income of $19.8 million, down 27.9% compared to Q3 2018, and Adjusted EBITDA(1) of $29.8 million, down 28.6% compared to $41.6 million in the third quarter of 2018.
  • During the third quarter, consolidated debt was reduced by $61.2 million and consolidated net debt(1) was reduced by $80.6 million ($52.1 million excluding the effect of foreign currency).

 


Three Months Ended September 30,


Nine Months Ended September 30,


2019


2018


2019


2018


(In thousands, except percentages and per share amounts)

Revenue

$

444,221



$

523,105



$

1,395,912



$

1,563,892


Polymer segment operating income

$

18,269



$

44,899



$

62,498



$

137,930


Chemical segment operating income

$

19,834



$

27,495



$

66,908



$

79,406


Consolidated net income

$

20,915



$

43,277



$

77,925



$

51,234


Adjusted EBITDA (non-GAAP)(1)

$

80,056



$

98,651



$

271,548



$

292,900


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

18.0

%


18.9

%


19.5

%


18.7

%

Diluted earnings per share

$

0.58



$

1.31



$

2.26



$

1.53


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

$

0.52



$

1.02



$

2.99



$

2.49


__________________________________________________

(1)

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

(2)

Defined as Adjusted EBITDA as a percentage of revenue.

(3)

For the nine months ended September 30, 2019, Adjusted EBITDA margin adjusted for lost revenues from Hurricane Michael would be 19.3%.

"As previously disclosed, deterioration in macroeconomic fundamentals driving softer demand in China, broader Asia, and Europe had a direct impact on weaker than expected results for the third quarter of 2019. As a result, Kraton's consolidated Adjusted EBITDA for the third quarter was $80.1 million, down 18.8% compared to the third quarter of 2018," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer.

The further weakening of demand in China, broader Asia and Europe in the third quarter of 2019 impacted sales volume for the Polymer segment, while unit margins were resilient. Polymer segment Adjusted EBITDA was $50.3 million for the third quarter, down 11.8% compared to the third quarter of 2018. The decrease was primarily driven by lower sales into paving and roofing applications in our Performance Polymers business associated with market conditions that included high customer inventory levels resulting from a delayed start to the paving & roofing season, as well as lower sales into lubricant additive applications in the Specialty Polymers business attributable to an ongoing inventory management program by a significant customer. These factors were partially offset by an 18.9% increase in Cariflex sales volume, associated with increased sales into surgical glove applications. Although Polymer segment sales volume fell below third quarter 2018 levels, unit margins were strong, and the Adjusted EBITDA margin for the Polymer segment was 19.2%, an improvement of 140 basis points compared to the third quarter of 2018.

Weaker global demand fundamentals and the compounding effect of significant declines in Asian market pricing for gum rosin and gum turpentine led to a more difficult operating environment for the Chemical segment during the third quarter. Third quarter 2019 Adjusted EBITDA for the Chemical segment was $29.8 million, down 28.6% compared to the third quarter of 2018. Performance Chemicals sales volume was down 15.0% compared to the third quarter of 2018 reflecting weakness in demand for Tall Oil Rosin and lower sales of Tall Oil Fatty Acid upgrades, principally into mining, oilfield demand, and automotive applications. Sales volume for Adhesives was down 7.5% compared to the third quarter of 2018 on weaker demand for Rosin Esters in global adhesive markets and weaker market conditions and demand in road marking applications. During the third quarter, demand was lower in aroma markets, which impacted sales for certain upgraded products in the Crude Sulfate Turpentine chain. Specifically to address competition with hydrocarbon based C5 tackifiers, during the third quarter Kraton realized its first commercial sales of a newly developed, low-color Rosin Ester formulation.

"Despite weaker than anticipated operating results in the third quarter of 2019, cash generation remained positive, and we reduced consolidated net debt by $81 million in the quarter, or by $52 million excluding the effect of foreign currency. Our focus remains on debt reduction and we expect to continue to further reduce outstanding indebtedness during the fourth quarter. On a full-year basis we are now targeting a reduction in consolidated net debt of $120 - $140 million, excluding the effect of foreign currency and activity under our share repurchase authorization. In this difficult environment we are actively managing costs and optimizing cash generation, while continuing our innovation efforts to drive market growth, particularly with respect to new bio-based products being introduced within our Chemical segment and we are realizing success in driving new innovation-based HSBC product offerings for our customers, notably in North America," remarked Fogarty.

"Sustainability is at the core of our values, strategy and products. Kraton's pine chemical product offering is a real and cost competitive alternative to hydrocarbons while delivering a sustainable solution to our customers. Likewise, our polymer portfolio provides compelling alternatives to non-recyclable materials in various industrial applications.  Our goal and focus is to continue to deliver innovation led growth and demonstrate to our customers the value of our sustainable product offerings. Despite significant societal demand for our industry to advance renewable solutions, we continue to see our industry defaulting to hydrocarbon-based and non-recyclable solutions. It is therefore incumbent on us, as a leading supplier of sustainable solutions, to continue advancing our renewable offerings in terms of both cost and quality. In doing so, we believe the ultimate consumer will value Kraton's sustainable offerings," said Fogarty.

Polymer Segment


Three Months Ended September 30,


Nine Months Ended September 30,


2019


2018


2019


2018


(In thousands, except percentages)

Performance Products

$

141,267



$

179,684



$

422,539



$

506,151


Specialty Polymers

$

70,986



$

99,349



256,483



311,657


Cariflex

$

49,241



$

41,818



141,117



130,319


Other

99



114



370



59


Polymer Segment Revenue

$

261,593



$

320,965



$

820,509



$

948,186










Operating income

$

18,269



$

44,899



$

62,498



$

137,930


Adjusted EBITDA (non-GAAP)(1)

$

50,304



$

57,008



$

158,635



$

170,469


Adjusted EBITDA margin (non-GAAP)(2)

19.2

%


17.8

%


19.3

%


18.0

%

__________________________________________________

(1)

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

(2)

Defined as Adjusted EBITDA as a percentage of revenue.

Q3 2019 VERSUS Q3 2018 RESULTS

Revenue for the Polymer segment was $261.6 million for the three months ended September 30, 2019 compared to $321.0 million for the three months ended September 30, 2018. The decrease was driven by lower sales volumes and lower average sales prices resulting from lower raw material costs. Sales volumes of 75.8 kilotons for the three months ended September 30, 2019 declined 10.0% compared to the three months ended September 30, 2018 sales volumes of 84.2 kilotons. Performance Products sales volumes decreased 9.8% due to weaker paving and roofing demand. Specialty Polymers sales volumes decreased 18.9% primarily from a previously announced inventory management program by a significant lubricant additives customer and lower demand in Asia and Europe, partially offset by higher innovation-led volume in North America. Cariflex sales volumes increased 18.9% primarily from higher latex sales into surgical glove applications. The negative effect from changes in currency exchange rates between the periods was $3.3 million.

For the three months ended September 30, 2019, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $50.3 million compared to $57.0 million for the three months ended September 30, 2018. The decline in Adjusted EBITDA was due to lower sales volumes as noted in the aforementioned weaker paving and roofing season, a previously announced inventory management program by a significant lubricant additives customer, coupled with lower demand in Asia and Europe, partially offset by higher innovation-led volume in North America. This was partially offset by higher sales volumes in the Cariflex product group. The effect from changes in currency exchange rates between the periods was immaterial. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

Chemical Segment


Three Months Ended September 30,


Nine Months Ended September 30,


2019


2018


2019


2018


(In thousands, except percentages)

Adhesives

$

64,391



$

73,781



$

198,785



$

220,907


Performance Chemicals

105,367



118,193



337,766



355,947


Tires

12,870



10,166



38,852



38,852


Chemical Segment Revenue

$

182,628



$

202,140



$

575,403



$

615,706










Operating income

$

19,834



$

27,495



$

66,908



$

79,406


Adjusted EBITDA (non-GAAP)(1)

$

29,752



$

41,643



$

112,913



$

122,431


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

16.3

%


20.6

%


19.6

%


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 GAAP measure.

(2)

Defined as Adjusted EBITDA as a percentage of revenue.

(3)

For the nine months ended September 30, 2019, Adjusted EBITDA margin adjusted for lost revenues from Hurricane Michael would be 19.3%.

Q3 2019 VERSUS Q3 2018 RESULTS

Revenue for the Chemical segment was $182.6 million for the three months ended September 30, 2019 compared to $202.1 million for the three months ended September 30, 2018. The decrease in revenue was attributable to lower sales volumes and pricing in rosin end markets such as adhesives and road marking. These results were related to softness in gum rosin Asian pricing, which declined by 20.0% in the third quarter of 2019. Sales volumes were 93.1 kilotons for the three months ended September 30, 2019, a decrease of 12.8 kilotons or 12.1%, due to a decline in the rosin and upgrade derivatives is attributable to weak demand globally for adhesives and road markings applications. Price remained under pressure from competitive alternative pricing in gum rosin and hydrocarbons. In addition, sales in the TOFA and derivatives were negatively impacted by weakness in mining, oilfield demand, and automotive applications. The revenue decline resulted in a 15.0% and 7.5% decrease in Performance Chemicals and Adhesives sales volumes, respectively, partially offset by a 2.4% increase in Tires sales volumes. The negative effect from changes in currency exchange rates between the periods was $3.8 million.

For the three months ended September 30, 2019, the Chemical segment generated $29.8 million of Adjusted EBITDA (non-GAAP) compared to $41.6 million for the three months ended September 30, 2018. The decrease in Adjusted EBITDA was primarily driven by lower sales volumes and rosin ester pricing, and to a lesser degree higher average raw material costs. The negative effect from changes in currency exchange rates between the periods was $0.1 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

CASH FLOW AND CAPITAL STRUCTURE

During the nine months ended September 30, 2019, consolidated net debt (total debt less cash) decreased by $59.1 million compared to December 31, 2018.

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


September 30, 2019


June 30, 2019


December 31, 2018


(In thousands)

Kraton debt

$

1,401,027



$

1,456,625



$

1,441,614


KFPC(1)(2) loans

104,328



109,931



125,501


Consolidated debt

1,505,355



1,566,556



1,567,115








Kraton cash

77,047



58,650



79,251


KFPC(1) cash

6,213



5,204



6,640


Consolidated cash

83,260



63,854



85,891








Consolidated net debt

$

1,422,095



$

1,502,702



$

1,481,224








Effect of foreign currency on consolidated net debt

32,331



3,800




Consolidated net debt excluding effect of foreign currency

$

1,454,426



$

1,506,502




Effect of share buyback program

(10,000)



(5,000)




Consolidated net debt excluding effect of foreign currency and share buyback program

$

1,444,426



$

1,501,502




__________________________________________________

(1)

Kraton Formosa Polymers Corporation (KFPC) joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and 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

Market fundamentals including demand in China and broader Asia, as well as in Europe and North America, weakened notably as the third quarter of 2019 progressed. Based upon our expectation that market conditions will not improve for the balance of the year, we now expect full year 2019 Adjusted EBITDA to be 10-15% below the lower end of our previous guidance range of $370 to $390 million.

On a full-year basis we now expect to reduce consolidated net debt by $120 to $140 million, excluding the effect of foreign currency and activity under our share repurchase authorization.

With regard to the strategic review of our Cariflex business, the process is still ongoing, and we are targeting completion of the review process within the next few weeks.

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 GAAP and non-GAAP financial measures. The non-GAAP financial measures are EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Diluted Earnings per Share and, Consolidated 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 first-in, first-out ("FIFO") basis of accounting and estimated current replacement cost ("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 reduction, 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 depreciation and amortization, 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, if 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 (Loss) 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: We define consolidated net debt as total consolidated debt (including debt of KFPC) less consolidated cash and cash equivalents. Management uses consolidated 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 consolidated net debt is useful to investors in determining our leverage since we could choose to use cash and cash equivalents to retire debt. Consolidated Net Debt, as adjusted for foreign exchange impact accounts for the FX effect on the Euro Tranche of our Term Loan.

CONFERENCE CALL AND WEBCAST INFORMATION

Kraton has scheduled a conference call on Thursday, October 24, 2019 at 9:00 a.m. (Eastern Time) to discuss third quarter 2019 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 October 24, 2019 through 1:59 a.m. (Eastern Time) on November 25, 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 800-480-3547 (toll free) or 203-369-1551 (toll).

ABOUT KRATON CORPORATION

Kraton Corporation (KRA) is a leading global specialty chemicals company that manufactures styrenic block copolymers, specialty polymers, and high-value performance products primarily 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 and tire markets, and it produces and sells a broad range of performance chemicals into markets that include fuel additives, oilfield chemicals, coatings, roads, construction, metalworking fluids and lubricants, inks, 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 or its affiliates.

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, but not limited to, our expectations with respect to full-year 2019 Adjusted EBITDA results, 2019 consolidated net debt reduction, the impact to us of global market conditions, and the timeline of our strategic review of our Cariflex business.

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, assumptions, 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; natural disasters and weather conditions; limitations in the availability of raw materials; competition in Kraton's end-use markets; fluctuations in global tariffs and logistics costs, 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 supersede 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.

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



Three Months Ended September 30,


Nine Months Ended September 30,


2019


2018


2019


2018

Revenue

$

444,221



$

523,105



$

1,395,912



$

1,563,892


Cost of goods sold

342,942



368,844



1,058,429



1,091,844


Gross profit

101,279



154,261



337,483



472,048


Operating expenses:








Research and development

10,367



10,597



31,091



31,868


Selling, general, and administrative

32,272



36,150



111,623



116,848


Depreciation and amortization

34,804



35,117



98,230



105,633


Gain on insurance proceeds

(14,250)





(32,850)




(Gain) loss on disposal of fixed assets

(17)



3



(17)



363


Operating income

38,103



72,394



129,406



217,336


Other income (expense)

4,235



(740)



3,559



(2,960)


Gain (loss) on extinguishment of debt





210



(79,921)


Earnings of unconsolidated joint venture

102



100



363



357


Interest expense, net

(19,214)



(20,143)



(57,494)



(74,835)


Income before income taxes

23,226



51,611



76,044



59,977


Income tax benefit (expense)

(2,311)



(8,334)



1,881



(8,743)


Consolidated net income

20,915



43,277



77,925



51,234


Net income attributable to noncontrolling interest

(2,222)



(928)



(5,356)



(1,743)


Net income attributable to Kraton

$

18,693



$

42,349



$

72,569



$

49,491


Earnings per common share:








Basic

$

0.59



$

1.33



$

2.28



$

1.55


Diluted

$

0.58



$

1.31



$

2.26



$

1.53


Weighted average common shares outstanding:








Basic

31,486



31,459



31,603



31,381


Diluted

31,823



31,834



31,914



31,810


 

KRATON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



September 30, 2019


December 31, 2018


(unaudited)



ASSETS




Current assets:




Cash and cash equivalents

$

83,260



$

85,891


Receivables, net of allowances of $614 and $784

212,387



198,046


Inventories of products, net

407,317



410,640


Inventories of materials and supplies, net

32,119



30,843


Prepaid expenses

12,253



10,156


Other current assets

23,651



29,980


Total current assets

770,987



765,556


Property, plant, and equipment, less accumulated depreciation of $646,242 and $597,785

932,649



941,476


Goodwill

771,739



772,886


Intangible assets, less accumulated amortization of $279,639 and $246,648

335,238



362,038


Investment in unconsolidated joint venture

11,577



12,070


Debt issuance costs

293



1,170


Deferred income taxes

5,955



10,434


Long-term operating lease assets, net

69,925




Other long-term assets

26,143



29,074


Total assets

$

2,924,506



$

2,894,704


LIABILITIES AND EQUITY




Current liabilities:




Current portion of long-term debt

$

56,784



$

45,321


Accounts payable-trade

161,848



182,153


Other payables and accruals

104,597



100,695


Due to related party

17,564



20,918


Total current liabilities

340,793



349,087


Long-term debt, net of current portion

1,417,794



1,487,298


Deferred income taxes

132,496



127,827


Long-term operating lease liabilities

52,594




Other long-term liabilities

161,063



182,893


Total liabilities

2,104,740



2,147,105






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; 31,707 shares issued and outstanding at September 30, 2019; 31,917 shares issued and outstanding at December 31, 2018

317



319


Additional paid in capital

390,207



385,921


Retained earnings

485,955



420,597


Accumulated other comprehensive loss

(94,209)



(91,699)


Total Kraton stockholders' equity

782,270



715,138


Noncontrolling interest

37,496



32,461


Total equity

819,766



747,599


Total liabilities and equity

$

2,924,506



$

2,894,704


 

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



Nine Months Ended September 30,


2019


2018

CASH FLOWS FROM OPERATING ACTIVITIES




Consolidated net income

$

77,925



$

51,234


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




Depreciation and amortization

98,230



105,633


Lease amortization

17,164




Amortization of debt original issue discount

808



1,938


Amortization of debt issuance costs

3,501



4,571


(Gain) loss on disposal of property, plant, and equipment

(17)



363


(Gain) loss on extinguishment of debt

(210)



79,921


Earnings from unconsolidated joint venture, net of dividends received

80



188


Deferred income tax provision

8,604



3,581


Release of uncertain tax positions

(17,739)




Gain on insurance proceeds of capital expenditures

(3,948)




Share-based compensation

8,158



7,620


Decrease (increase) in:




Accounts receivable

(19,682)



(63,068)


Inventories of products, materials, and supplies

(5,550)



(47,393)


Other assets

4,295



8,065


Increase (decrease) in:




Accounts payable-trade

(16,187)



5,869


Other payables and accruals

(20,715)



(19,057)


Other long-term liabilities

(12,317)



(2,584)


Due to related party

(3,634)



(292)


Net cash provided by operating activities

118,766



136,589


CASH FLOWS FROM INVESTING ACTIVITIES




Kraton purchase of property, plant, and equipment

(76,298)



(66,047)


KFPC purchase of property, plant, and equipment

(319)



(1,592)


Purchase of software and other intangibles

(7,274)



(4,630)


Gain on insurance proceeds

3,948




Net cash used in investing activities

(79,943)



(72,269)


CASH FLOWS FROM FINANCING ACTIVITIES




Proceeds from debt

57,941



731,540


Repayments of debt

(67,251)



(796,863)


KFPC proceeds from debt

33,262



24,918


KFPC repayments of debt

(53,147)



(48,084)


Capital lease payments

(126)



(785)


Purchase of treasury stock

(12,727)



(6,051)


Proceeds from the exercise of stock options

1,642



3,133


Settlement of interest rate swap



2,584


Debt issuance costs



(11,113)


Net cash used in financing activities

(40,406)



(100,721)


Effect of exchange rate differences on cash

(1,048)



(1,143)


Net decrease in cash and cash equivalents

(2,631)



(37,544)


Cash and cash equivalents, beginning of period

85,891



89,052


Cash and cash equivalents, end of period

$

83,260



$

51,508


 

KRATON CORPORATION

RECONCILIATION OF NET INCOME (LOSS) ATTRIBUTABLE TO KRATON AND OPERATING INCOME TO NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In thousands)



Three Months Ended September 30, 2019


Three Months Ended September 30, 2018


Polymer


Chemical


Total


Polymer


Chemical


Total

Net income attributable to Kraton





18,693







42,349


Net income attributable to noncontrolling interest





2,222







928


Consolidated net income





20,915







43,277


Add (deduct):












Income tax benefit





2,311







8,334


Interest expense, net





19,214







20,143


Earnings of unconsolidated joint venture





(102)







(100)


Other income (expense)





(4,235)







740


Operating income

18,269



19,834



38,103



44,899



27,495



72,394


Add (deduct):












Depreciation and amortization

14,982



19,822



34,804



17,554



17,563



35,117


Other income (expense)

(502)



4,737



4,235



(958)



218



(740)


Earnings of unconsolidated joint venture

102





102



100





100


EBITDA (a)

32,851



44,393



77,244



61,595



45,276



106,871


Add (deduct):












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

1,672



244



1,916



689



(177)



512


Hurricane related costs (c)



2,220



2,220








Hurricane reimbursements (d)



(13,841)



(13,841)








KFPC startup costs (e)

3,019





3,019








Sale of emissions credits (f)



(4,601)



(4,601)








Non-cash compensation expense

2,659





2,659



2,495





2,495


Spread between FIFO and ECRC

10,103



1,337



11,440



(7,771)



(3,456)



(11,227)


Adjusted EBITDA

50,304



29,752



80,056



57,008



41,643



98,651


__________________________________________________

(a)

We finalized our claim associated with Hurricane Michael during the third quarter of 2019. We received proceeds of $14.3 million, which is included in EBITDA as a gain on insurance.

(b)

Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.

(c)

Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an additional $1.4 million of costs incurred during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and will not continue into the fourth quarter of 2019.

(d)

Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.

(e)

Startup costs related to the joint venture company, KFPC.

(f)

We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.

 

KRATON CORPORATION
RECONCILIATION OF NET INCOME (LOSS) ATTRIBUTABLE TO KRATON AND OPERATING INCOME TO NON-GAAP FINANCIAL MEASURES
(Unaudited)
(In thousands)



Nine Months Ended September 30, 2019


Nine Months Ended September 30, 2018


Polymer


Chemical


Total


Polymer


Chemical


Total

Net income attributable to Kraton





$

72,569







$

49,491


Net income attributable to noncontrolling interest





5,356







1,743


Consolidated net income





77,925







51,234


Add (deduct):












Income tax (benefit) expense





(1,881)







8,743


Interest expense, net





57,494







74,835


Earnings of unconsolidated joint venture





(363)







(357)


(Gain) loss on extinguishment of debt





(210)







79,921


Other income (expense)





(3,559)







2,960


Operating income

$

62,498



$

66,908



$

129,406



$

137,930



$

79,406



$

217,336


Add (deduct):












Depreciation and amortization

43,296



54,934



98,230



52,914



52,719



105,633


Other income (expense)

(1,547)



5,106



3,559



(3,600)



640



(2,960)


Gain (loss) on extinguishment of debt

210





210



(79,921)





(79,921)


Earnings of unconsolidated joint venture

363





363



357





357


EBITDA (a)

104,820



126,948



231,768



107,680



132,765



240,445


Add (deduct):












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

4,781



808



5,589



2,062



(963)



1,099


(Gain) loss on extinguishment of debt

(210)





(210)



79,921





79,921


Hurricane related costs (c)



15,025



15,025








Hurricane reimbursements (d)



(26,561)



(26,561)








KFPC startup costs (e)

3,019





3,019



897





897


Sale of emissions credits (f)



(4,601)



(4,601)








Non-cash compensation expense

8,158





8,158



7,620





7,620


Spread between FIFO and ECRC

38,067



1,294



39,361



(27,711)



(9,371)



(37,082)


Adjusted EBITDA

$

158,635



$

112,913



$

271,548



$

170,469



$

122,431



$

292,900


__________________________________________________

(a)

Included in EBITDA is a $32.9 million gain on insurance, fully offsetting the lost margin in the first quarter of 2019, and reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.

(b)

Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.

(c)

Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an additional $14.2 million of costs incurred during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and will not continue into the fourth quarter of 2019.

(d)

Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.

(e)

Startup costs related to the joint venture company, KFPC.

(f)

We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.

 

KRATON CORPORATION

RECONCILIATION OF DILUTED EARNINGS (LOSS) PER SHARE TO ADJUSTED DILUTED EARNINGS PER SHARE

(Unaudited)



Three Months Ended September 30,


Nine Months Ended September 30,


2019


2018


2019


2018

Diluted Earnings Per Share

$

0.58



$

1.31



$

2.26



$

1.53


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

0.04



0.02



0.13



0.03


(Gain) loss on extinguishment of debt





(0.01)



1.89


Hurricane related costs (b)

0.15





0.55




Hurricane reimbursements (c)

(0.44)





(0.83)




KFPC startup costs (d)

0.04





0.04



0.01


Sale of emissions credits (e)

(0.14)





(0.14)




Spread between FIFO and ECRC

0.29



(0.31)



0.99



(0.97)


Adjusted Diluted Earnings Per Share (non-GAAP)

$

0.52



$

1.02



$

2.99



$

2.49


__________________________________________________

(a)

Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.

(b)

Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an additional $14.2 million of costs incurred during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and will not continue into the fourth quarter of 2019.

(c)

Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.

(d)

Startup costs related to the joint venture company, KFPC.

(e)

We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.

 

POLYMER SEGMENT RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT

(Unaudited)

(In thousands)



Three Months Ended September 30,


Nine Months Ended September 30,


2019


2018


2019


2018

Gross profit

$

58,478



$

90,205



$

191,230



$

281,482










Add (deduct):








KFPC startup costs (a)

3,019





3,019




Non-cash compensation expense

159



149



489



457


Spread between FIFO and ECRC

10,103



(7,771)



38,067



(27,711)


Adjusted gross profit (non-GAAP)

$

71,759



$

82,583



$

232,805



$

254,228










Sales volume (kilotons)

75.8



84.2



229.8



249.5


Adjusted gross profit per ton

$

947



$

981



$

1,013



$

1,019


__________________________________________________

(a)

Startup costs related to the joint venture company, KFPC.

For further information:

H. Gene Shiels
Director of Investor Relations
(218) 504-4886

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