EX-99.1 2 kra8-kexhibit991q32019.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1
Kraton Corporation Announces Third Quarter 2019 Results
HOUSTON, October 23, 2019 /PRNewswire/ -- Kraton Corporation (NYSE: 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.
▪
Average segment unit margins improved compared to Q3 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 of 2019 the Chemical segment closed its first commercial sale of its next generation low-color Rosin Ester formulation.
•
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 CariflexTM 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 CariflexTM 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 (NYSE: 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.










 
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.