Kraton Corporation Announces Fourth Quarter and Full Year 2018 Results
HOUSTON, Feb. 27, 2019 /PRNewswire/ -- Kraton Corporation (NYSE: 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.
-- Polymer segment operating income of $21.2 million, down 6.7% and
Adjusted EBITDA((1)) of $44.3 million, down 12.7%, compared to $50.8
million in the fourth quarter of 2017.
-- Chemical segment operating income of $12.2 million, down 31.6% and
Adjusted EBITDA((1)) of $40.8 million, up 17.7%, compared to $34.7
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 Cariflex(TM) 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 (NYSE: 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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SOURCE Kraton Corporation
