Kraton Corporation Announces Third Quarter 2016 Results

HOUSTON, Oct. 26, 2016 /PRNewswire/ -- Kraton Corporation KRA, a leading global producer of styrenic block copolymers, specialty polymers, and value-added specialty products primarily derived from renewable sources, announces financial results for the quarter ended September 30, 2016.

2016 THIRD QUARTER HIGHLIGHTS

  • Strong volume growth for the Polymer segment, with sales volume up 6.1% compared to the third quarter 2015. Sales volume in our Chemical segment was in line with third quarter 2015.
  • Net income was $15.6 million, or $0.49 per diluted share, in the third quarter 2016 compared to a net income of $8.4 million, or $0.27 per diluted share, in the third quarter 2015. Adjusted earnings per diluted share (non-GAAP) was $0.63 in the third quarter 2016 compared to $0.48 in the third quarter 2015.
  • Adjusted EBITDA (non-GAAP) was $91.1 million in the third quarter 2016 compared to $42.4 million in the third quarter 2015.
  • Realized $10.9 million of year-over-year benefit associated with integration synergies and cost reduction initiatives in the third quarter 2016.

Three Months Ended September 30,


Nine Months Ended September 30,


2016


2015


2016


2015


(In thousands, except per share amounts)

Revenue

$

454,143



$

269,012



$

1,328,715



$

786,349


Net income (loss) attributable to Kraton

$

15,560



$

8,446



$

111,048



$

(6,574)


Adjusted EBITDA (non-GAAP)(1)

$

91,074



$

42,393



$

276,911



$

116,773


Adjusted EBITDA as % of revenue (non-GAAP)

20.1

%


15.8

%


20.8

%


14.9

%

Earnings (loss) per diluted share

$

0.49



$

0.27



$

3.56



$

(0.21)


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

$

0.63



$

0.48



$

2.07



$

1.26



_______________________

(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.

 

"During the third quarter 2016 we continued to execute under our cost reduction initiatives and we delivered solid progress toward achieving our targeted transaction synergies for the year. With regard to our HSBC project in Mailiao, Taiwan, having previously achieved mechanical completion, during the quarter the plant was undergoing steps in the commissioning phase as we move toward anticipated commercial production before year end. With respect to our CariflexTM 'direct-couple' project in Paulinia, Brazil, during the third quarter we conducted an extremely successful preliminary production run on the commercial asset that further validates our expectations for the benefits of our new process technology," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer. "We still expect to deliver $70 million of cost reductions and $65 million of transaction synergies by year-end 2018."

"Overall, our results for the third quarter 2016 were below our expectations principally due to incremental margin pressure in our adhesives businesses, lower than planned sales of SBS into paving applications and the impact of lower pricing for TOFA in our Chemical Intermediates business," said Fogarty. "During the quarter our Polymer segment remained on its trend of volume growth, and sales mix improvement. Our Cariflex business continued to demonstrate its attractive market value, as evidenced by 29% volume growth, and we realized 10% volume growth for our Specialty Polymer HSBC product grades, compared to the third quarter 2015. Despite lower than expected sales of SBS grades into paving applications related to a supply constraint for butadiene and production shortfalls in the quarter, sales volume for Performance Products was up over 3% compared to Q3 2015. Differentiated sales as a percentage of the Polymer segment sales mix, increased to 60% in the TTM period ending September 30, 2016, up from 59% for the period ending June 30, 2016," added Fogarty.

"During the quarter, continued availability of low-cost, C5-hydrocarbon-based resins maintained pressure on margins for certain adhesive products in our Chemical segment. In addition, our Chemical Intermediates business experienced continued margin pressure, resulting from the on-going over-supply of TOFA, the impact of increased energy prices on our feedstock costs, and to a lesser extent, changes in product mix. Nevertheless, despite these pressures, in the third quarter 2016 our Chemical segment generated $22.1 million in operating income and $41.5 million in Adjusted EBITDA, resulting in  Adjusted EBITDA as a percentage of revenue for the segment of 23%, reflecting its resiliency and attractive customer value" said Fogarty.

Status of Synergies, Operational Improvement, and Cost Reduction Initiatives

We previously announced synergies and operational improvement initiatives associated with our January 6, 2016 acquisition of Arizona Chemical (the "Arizona Chemical Acquisition") and a cost reduction initiative targeted at lowering costs in our Polymer segment. Following is a summary of the status of these initiatives:


Three Months Ended September 30,


Nine Months Ended September 30,




2016


2015


Incremental


2016


2015


Incremental


Cumulative(1)


(In thousands)

G&A synergies

$

5,099



$



$

5,099



$

10,722



$



$

10,722



$

10,722


Operational improvements

4,224





4,224



9,631





9,631



9,631


Polymer cost reduction

6,888



5,279



1,609



20,242



11,859



8,383



27,771



$

16,211



$

5,279



$

10,932



$

40,595



$

11,859



$

28,736



$

48,124



___________________________________

(1)

The cumulative Polymer cost reduction initiatives include $19.4 million realized in the full year 2015.

 

Consolidated Results

Q3 2016 VERSUS Q3 2015 RESULTS

Revenue was $454.1 million for the three months ended September 30, 2016 compared to $269.0 million for the three months ended September 30, 2015, an increase of $185.1 million or 68.8%, of which $181.2 million relates to our Chemical segment.

Gross profit was $135.3 million for the three months ended September 30, 2016 compared to $67.8 million for the three months ended September 30, 2015, an increase of $67.4 million or 99.5%, of which $58.2 million relates to our Chemical segment.

Research and development expenses were $9.7 million for the three months ended September 30, 2016 compared to $7.6 million for the three months ended September 30, 2015, an increase of $2.1 million or 27.6%, of which $2.8 million related to our Chemical segment. 

Selling, general, and administrative expenses were $42.8 million for the three months ended September 30, 2016 compared to $26.9 million for the three months ended September 30, 2015, an increase of $15.9 million or 58.9%, of which $16.4 million relates to our Chemical segment.

Interest expense, net was $33.9 million for the three months ended September 30, 2016 compared to $6.2 million for the three months ended September 30, 2015, an increase of $27.7 million. The increase is primarily due to additional indebtedness related to the Arizona Chemical Acquisition.

Income tax expense was $2.2 million and $3.1 million for the three months ended September 30, 2016 and 2015, respectively.

Net income attributable to Kraton was $15.6 million or $0.49 per diluted share for the three months ended September 30, 2016, an increase of $7.1 million compared to net income of $8.4 million or $0.27 per diluted share for the three months ended September 30, 2015. Adjusted earnings per diluted share (non-GAAP) was $0.63 for the three months ended September 30, 2016 compared to $0.48 for the three months ended September 30, 2015. See a reconciliation of U.S. generally accepted accounting principles ("GAAP") earnings (loss) per diluted share to non-GAAP adjusted earnings per diluted share below.

YTD 2016 VERSUS YTD 2015 RESULTS

Revenue was $1,328.7 million for the nine months ended September 30, 2016 compared to $786.3 million for the nine months ended September 30, 2015, an increase of $542.4 million or 69.0%, of which $542.6 million relates to our Chemical segment.

Gross profit was $361.0 million for the nine months ended September 30, 2016 compared to $161.8 million for the nine months ended September 30, 2015. The increase includes gross profit of $151.2 million from our Chemical segment, which includes $24.7 million of higher costs of goods sold related to the full amortization of the fair value adjustment in purchase accounting for inventory.

Research and development expenses were $30.4 million for the nine months ended September 30, 2016 compared to $23.3 million for the nine months ended September 30, 2015, an increase of $7.0 million or 30.1%, of which $8.4 million relates to our Chemical segment. 

Selling, general, and administrative expenses were $135.8 million for the nine months ended September 30, 2016 compared to $77.5 million for the nine months ended September 30, 2015, an increase of $58.4 million or 75.3%, of which $53.2 million relates to our Chemical segment.

Interest expense, net was $101.5 million for the nine months ended September 30, 2016 compared to $18.0 million for the nine months ended September 30, 2015, an increase of $83.5 million. The increase is primarily due to additional indebtedness related to the Arizona Chemical Acquisition.

Income tax benefit was $83.0 million and income tax expense was $4.1 million for the nine months ended September 30, 2016 and 2015, respectively. Following the completion of the Arizona Chemical Acquisition, we reassessed the need for a valuation allowance against our U.S. net operating loss deferred tax assets and released $86.6 million of the previously recorded valuation allowance.

Net income attributable to Kraton was $111.0 million or $3.56 per diluted share for the nine months ended September 30, 2016, an increase of $117.6 million compared to net loss of $6.6 million or $0.21 per diluted share for the nine months ended September 30, 2015. Adjusted earnings per diluted share (non-GAAP) was $2.07 for the nine months ended September 30, 2016 compared to $1.26 for the nine months ended September 30, 2015. See a reconciliation of GAAP earnings (loss) per diluted share to non-GAAP adjusted earnings per diluted share below.

Polymer Segment


Three Months Ended September 30,


Nine Months Ended September 30,


2016


2015


2016


2015

Revenue

(In thousands)


(In thousands)

Cariflex

$

45,303



$

34,044



$

126,513



$

102,069


Specialty Polymers

89,107



86,828



256,197



263,082


Performance Products

138,479



147,987



403,214



420,889


Other

81



153



208



309



$

272,970



$

269,012



$

786,132



$

786,349










Operating income

$

28,728



$

17,151



$

59,936



$

14,122


Adjusted EBITDA (non-GAAP) (1)

$

49,576



$

42,393



$

141,023



$

116,773



__________________________________

(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.

 

Q3 2016 VERSUS Q3 2015 RESULTS

Revenue for the Polymer segment was $273.0 million for the three months ended September 30, 2016 compared to $269.0 million for the three months ended September 30, 2015, an increase of $4.0 million or 1.5%. The increase was due to higher sales volumes of $23.2 million and changes in foreign currency exchange rates of $3.8 million, partially offset by lower average selling prices amounting to $23.0 million, which were primarily driven by lower average raw material costs, lower prices for certain SIS product grades and mix. Sales volumes were 85.9 kilotons for the three months ended September 30, 2016, an increase of 5.0 kilotons or 6.1%. 

With respect to revenue for the Polymer segment product groups:

  • Cariflex revenue was $45.3 million for the three months ended September 30, 2016 compared to $34.0 million for the three months ended September 30, 2015. The increase of $11.3 million was attributable to a 29.4% increase in sales volumes, primarily into surgical glove applications, and changes in foreign currency exchange rates amounting to $2.4 million.
  • Specialty Polymers revenue was $89.1 million for the three months ended September 30, 2016 compared to $86.8 million for the three months ended September 30, 2015, a $2.3 million increase, which includes a decrease of $1.7 million related to the sale of the Belpre Compounding Unit ("BCU"). The revenue increase was attributable to a 10.2% increase in sales volumes, primarily within automotive and lubricant additive applications, partially offset by lower average selling prices resulting from lower raw material costs.
  • Performance Products revenue was $138.5 million for the three months ended September 30, 2016 compared to $148.0 million for the three months ended September 30, 2015. The $9.5 million decline was primarily driven by lower average selling prices due to lower raw material costs, lower prices for certain SIS product grades reflective of global over capacity for SIS, and product mix, partially offset by a 3.2% increase in sales volumes and changes in foreign currency exchange rates of $1.1 million. The increase in sales volumes was primarily driven by higher sales into roofing and personal care applications, which more than offset lower volume into paving applications and lower sales of SIS product grades into packaging and industrial adhesive applications. A factor in the decline in paving volume was constrained availability of butadiene arising from a cracker outage from one of our suppliers.

For the three months ended September 30, 2016, the Polymer segment operating income was $28.7 million compared to $17.2 million for the three months ended September 30, 2015.

For the three months ended September 30, 2016, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $49.6 million compared to $42.4 million for the three months ended September 30, 2015, an increase of $7.2 million, or 16.9%.  The increase was due to higher sales volumes and lower costs, partially offset by modestly lower unit margins, including the effect of product mix. The effect of currency fluctuations negatively impacted Adjusted EBITDA (non-GAAP) by $2.2 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

YTD 2016 VERSUS YTD 2015 RESULTS

Revenue for the Polymer segment was $786.1 million for the nine months ended September 30, 2016 compared to $786.3 million for the nine months ended September 30, 2015. Lower average selling prices amounting to $76.5 million, primarily driven by lower average raw material costs, lower prices for certain SIS product grades and mix, was offset by an increase of $74.4 million due to higher sales volumes and changes in foreign currency exchange rates of $2.0 million. Sales volumes were 250.9 kilotons for the nine months ended September 30, 2016, an increase of 19.3 kilotons or 8.3%.

With respect to revenue for the Polymer segment product groups:

  • Cariflex revenue was $126.5 million for the nine months ended September 30, 2016 compared to $102.1 million for the nine months ended September 30, 2015. The increase of $24.4 million was attributable to a 23.7% increase in sales volumes, primarily due to higher sales into surgical glove applications, and changes in foreign currency of $4.1 million, partially offset by a $4.2 million decrease attributable to lower average selling prices resulting from lower raw material costs.
  • Specialty Polymers revenue was $256.2 million for the nine months ended September 30, 2016 compared to $263.1 million for the nine months ended September 30, 2015, a decrease of $6.9 million. Excluding the $7.8 million effect of the sale of the BCU, which occurred in the first quarter of 2016, revenue was essentially unchanged with a 7.2% increase in sales volumes, largely in automotive and industrial applications, offset by lower average selling prices due to lower raw material costs and a $1.0 million negative effect from changes in currency exchange rates.
  • Performance Products revenue was $403.2 million for the nine months ended September 30, 2016 compared to $420.9 million for the nine months ended September 30, 2015. The $17.7 million decrease was primarily driven by lower average selling prices resulting from lower raw material costs, lower prices for certain SIS product grades and mix, and changes in foreign currency exchange rates of $1.2 million, partially offset by 7.5% increase in sales volumes. The increase in sales volumes was primarily driven by paving, roofing, and personal care applications, partially offset by lower sales of SIS product grades into packaging and industrial adhesive applications.

For the nine months ended September 30, 2016, the Polymer segment operating income was $59.9 million compared to $14.1 million for the nine months ended September 30, 2015.

For the nine months ended September 30, 2016, the Polymer segment generated $141.0 million of Adjusted EBITDA (non-GAAP) compared to $116.8 million for the nine months ended September 30, 2015, an increase $24.3 million or 20.8%.  The increase was a result of higher sales volumes and lower costs, partially offset by lower unit margins, including the effect of product mix. The effect of currency fluctuations negatively impacted Adjusted EBITDA (non-GAAP) by $4.9 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

Chemical Segment

The results for the Chemical segment are included in the consolidated financial statements for the period January 6, 2016 to September 30, 2016. The 2015 amounts have been derived from the Arizona Chemical historical operating results and are being included for comparative purposes only. 


Three Months Ended
September 30, 2016


Three Months Ended
September 30, 2015


For the period January
6, 2016 through
September 30, 2016


Nine Months Ended
September 30, 2015

Revenue

(In thousands)

Adhesives

$

60,771



$

65,754



$

186,903



$

205,250


Roads and construction

13,778



16,138



40,845



41,864


Tires

10,380



11,058



30,238



32,058


Chemical intermediates

96,244



114,531



284,597



341,791



$

181,173



$

207,481



$

542,583



$

620,963


 

Q3 2016 VERSUS Q3 2015 RESULTS

Revenue for the Chemical segment was $181.2 million for the three months ended September 30, 2016 compared to $207.5 million for the three months ended September 30, 2015, a decrease of $26.3 million or 12.7%. Sales volumes were 104.3 kilotons for the three months ended September 30, 2016 compared to 104.8 kilotons for the three months ended September 30, 2015, a decrease of 0.5 kilotons or 0.4%.

With respect to revenue for the Chemical segment product groups:

  • Adhesives revenue was $60.8 million for the three months ended September 30, 2016 compared to $65.8 million for the three months ended September 30, 2015, a decrease of $5.0 million or 7.6%, largely due to lower average selling prices due to the availability of low cost hydrocarbon C5 based alternatives, which has resulted in price pressures. This was partially offset by higher sales volume of 2.4%. 
  • Roads and Construction revenue was $13.8 million for the three months ended September 30, 2016 compared to $16.1 million for the three months ended September 30, 2015, an decrease of $2.4 million or 14.6%, primarily attributable to lower average selling prices.
  • Tires revenue was $10.4 million for the three months ended September 30, 2016, effectively unchanged compared to $11.1 million for the three months ended September 30, 2015.
  • Chemical Intermediates revenue was $96.2 million for the three months ended September 30, 2016 compared to $114.5 million for the three months ended September 30, 2015, a decrease of $18.3 million, or 16.0%. The revenue decline reflects lower average selling prices, driven by excess supply of tall oil fatty acids ("TOFA") and tall oil rosin ("TOR"), and to a lesser extent, a 1.3% decrease in sales volume.

For the three months ended September 30, 2016, the Chemical segment operating income was $22.1 million.  

For the three months ended September 30, 2016, the Chemical segment generated Adjusted EBITDA (non-GAAP) of $41.5 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

YTD 2016 VERSUS YTD 2015 RESULTS

Revenue for the Chemical segment was $542.6 million from the date of the Arizona Chemical Acquisition to September 30, 2016 compared to $621.0 million for the nine months ended September 30, 2015, a decrease of $78.4 million, or 12.6%. Sales volumes were 308.0 kilotons for the period from January 6, 2016 through September 30, 2016 compared to 315.4 kilotons for the nine months ended September 30, 2015, a decrease of 7.4 kilotons or 2.3%.

With respect to revenue for the Chemical segment product groups:

  • Adhesives revenue was $186.9 million from the date of the Arizona Chemical Acquisition to September 30, 2016 compared to $205.3 million for the nine months ended September 30, 2015, a decrease of $18.3 million or 8.9%, largely due to lower average selling prices and to a lesser degree lower sales volume of 3.0%. The availability of low cost hydrocarbon C5 based alternatives has resulted in price pressures in adhesive markets.
  • Roads and Construction revenue was $40.8 million from the date of the Arizona Chemical Acquisition to September 30, 2016 compared to $41.9 million for the nine months ended September 30, 2015, an decrease of $1.0 million or 2.4%, primarily attributable to lower average selling prices, which were partially offset by a 4.7% increase in sales volume.
  • Tires revenue was $30.2 million, compared to $32.1 million for the nine months ended September 30, 2015, a decrease of $1.8 million or 5.7%, primarily attributable to a to lower average selling prices.
  • Chemical Intermediates revenue was $284.6 million from the date of the Arizona Chemical Acquisition to September 30, 2016 compared to $341.8 million for the nine months ended September 30, 2015, a decrease of $57.2 million or 16.7%. The revenue decline reflects lower average selling prices, driven by excess supply of TOFA and TOR and lower substitute material pricing, and to a lesser extent, a 2.8% decrease in sales volume.

From the date of the Arizona Chemical Acquisition to September 30, 2016, the Chemical segment operating income was $40.9 million.  

From the date of the Arizona Chemical Acquisition to September 30, 2016, the Chemical segment generated Adjusted EBITDA (non-GAAP) of $135.9 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

CASH FLOW AND CAPITAL STRUCTURE

In connection with the Arizona Chemical Acquisition, we entered into a $1,350.0 million six-year senior secured first lien term loan facility and issued $440.0 million in aggregate principal amount of 10.5% senior notes due 2023. In addition, we entered into a $250.0 million five-year asset-based revolving credit facility, we did not have any borrowings drawn under this facility as of September 30, 2016. We applied a portion of the acquisition-related proceeds to prepay our previously issued 6.75% Senior Notes ($350.0 million principal amount plus fees and expenses of $8.0 million) and fund $57.6 million of debt issuance costs. 

Since the date of the Arizona Chemical Acquisition (excluding borrowings under the KFPC Loan Agreement) we repaid approximately $109 million of Kraton Corporation indebtedness, while increasing cash on hand (excluding KFPC cash) by approximately $37 million.

Summary of principal amounts for indebtedness and net debt:


As of September 30, 2016


As of January 6, 2016


(In thousands)

Term Loan

$

1,278,000



$

1,350,000


10.5% Senior Notes

440,000



440,000


ABL



37,075


Capital lease

1,529



1,634


Kraton debt

1,719,529



1,828,709


Kraton cash

134,755



97,400


Kraton net debt

1,584,774



1,731,309






KFPC(1) loan

106,128



76,912


KFPC(1) cash

8,793



9,315


KFPC(1) net debt

97,335



67,597






Consolidated net debt

$

1,682,109



$

1,798,906



______________________________________

(1)

Represents the debt of Kraton Formosa Polymers Corporation (KFPC) located in Mailiao, Taiwan, a 50% investment in a joint venture,which we consolidate.

 

OUTLOOK

Our third quarter 2016 results were below our expectations primarily due to weaker than anticipated margins and volumes for sales into adhesive applications in both our Polymer and Chemical segments, lower prices for TOFA and TOR products, and lower sales of SBS products.  In light of the year-to-date results and the expectation that market conditions will not reverse in the fourth quarter, we now expect fourth quarter 2016 Adjusted EBITDA to be in the low $80 million range, resulting in full-year 2016 Adjusted EBITDA of approximately $360 million.

We expect Kraton net debt to be approximately $1.6 billion at December 31, 2016, and we remain committed to our goal of delivering a $500 million reduction in Kraton net debt by December 31, 2018.  

We currently estimate that our results in the fourth quarter 2016 will reflect a positive spread between FIFO and ECRC of approximately $5.0 million.

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 and acquisition costs and costs associated with dispositions, business exits, and production downtime, as certain of these items are out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding 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, and Adjusted Net Income attributable to Kraton (or earnings per share). Tables included in this earnings release reconcile each of these non-GAAP financial measures with the most directly comparable GAAP financial measure.  For additional information on the impact of the spread between the 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, 2015.

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, 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 GAAP in the United States. For EBITDA, which represents net income before interest, taxes, depreciation and amortization, these limitations include: EBITDA does not reflect the significant interest expense on our debt; EBITDA does not 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; and Adjusted EBITDA may, and often will, vary significantly from EBITDA calculations under the terms of our debt agreements and should not be used for assessing compliance or non-compliance with financial covenants under our debt agreements. 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. Finally, we prepare Adjusted Net Income attributable to Kraton by eliminating from net income (loss) the impact of a number of items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC. Our presentation of non-GAAP financial measures and the adjustments made therein should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, and in the future we may incur expenses or charges similar to the adjustments made in the presentation of our non-GAAP financial measures.

CONFERENCE CALL AND WEBCAST INFORMATION

Kraton has scheduled a conference call on Thursday, October 27, 2016 at 9:00 a.m. (Eastern Time) to discuss third quarter 2016 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 27, 2016 through 1:59 a.m. (Eastern Time) on November 11, 2016. 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 866-516-0665.

ABOUT KRATON

Kraton Corporation (NYSE "KRA") is a leading global producer of styrenic block copolymers, specialty polymers and high-value performance products derived from renewable sources.  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 adhesive, road and construction and tire markets, and it produces and sells a broad range of chemical intermediates 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," "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 outlook for full year 2016 guidance for Adjusted EBITDA, expectations of Kraton net debt at December 31, 2016 and December 31, 2018 and fourth quarter 2016 guidance on the positive spread between FIFO and ECRC.

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: the integration of Arizona Chemical (now, AZ Chem Holdings LP); Kraton's ability to repay its indebtedness; Kraton's reliance on third parties for the provision of significant operating and other services; conditions 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.  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.

For Further Information:
H. Gene Shiels
Director of Investor Relations
(281) 504-4886

 

KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)



Three Months Ended September 30,


Nine Months Ended September 30,


2016


2015


2016


2015

Revenue

$

454,143



$

269,012



$

1,328,715



$

786,349


Cost of goods sold

318,887



201,202



967,744



624,542


Gross profit

135,256



67,810



360,971



161,807


Operating expenses:








Research and development

9,693



7,597



30,383



23,345


Selling, general, and administrative

42,769



26,917



135,845



77,488


Depreciation and amortization

31,977



16,145



93,913



46,852


Operating income

50,817



17,151



100,830



14,122


Disposition and exit of business activities





40,001




Loss on extinguishment of debt





(13,423)




Earnings of unconsolidated joint venture

94



95



274



273


Interest expense, net

(33,870)



(6,151)



(101,450)



(17,975)


Income (loss) before income taxes

17,041



11,095



26,232



(3,580)


Income tax benefit (expense)

(2,198)



(3,076)



83,024



(4,135)


Consolidated net income (loss)

14,843



8,019



109,256



(7,715)


Net loss attributable to noncontrolling interest

717



427



1,792



1,141


Net income (loss) attributable to Kraton

$

15,560



$

8,446



$

111,048



$

(6,574)


Earnings (loss) per common share:








Basic

$

0.50



$

0.27



$

3.60



$

(0.21)


Diluted

$

0.49



$

0.27



$

3.56



$

(0.21)


Weighted average common shares outstanding:








Basic

30,221



30,503



30,137



30,779


Diluted

30,783



30,849



30,557



30,779


 

KRATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)



September 30, 2016


December 31, 2015


(unaudited)



ASSETS




Current assets:




Cash and cash equivalents

$

143,548



$

70,049


Receivables, net of allowances of $847 and $244

209,867



105,089


Inventories of products

321,845



264,107


Inventories of materials and supplies

20,717



12,138


Other current assets

68,134



29,956


Total current assets

764,111



481,339


Property, plant, and equipment, less accumulated depreciation of $420,907 and $382,157

905,117



517,673


Goodwill

753,928




Intangible assets, less accumulated amortization of $135,361 and $100,093

451,576



41,602


Investment in unconsolidated joint venture

11,608



11,628


Debt issuance costs

3,803



1,337


Deferred income taxes

5,218



3,867


Other long-term assets

23,332



21,789


Total assets

$

2,918,693



$

1,079,235


LIABILITIES AND EQUITY




Current liabilities:




Current portion of long-term debt

$

23,135



$

141


Accounts payable-trade

134,560



59,337


Other payables and accruals

157,330



91,011


Due to related party

14,907



14,101


Total current liabilities

329,932



164,590


Long-term debt, net of current portion

1,698,952



415,591


Deferred income taxes

213,776



9,070


Other long-term liabilities

141,305



96,992


Total liabilities

2,383,965



686,243






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; 30,916 shares issued and outstanding at September 30, 2016; 30,569 shares issued and outstanding at December 31, 2015

309



306


Additional paid in capital

358,798



349,871


Retained earnings

258,179



147,131


Accumulated other comprehensive loss

(116,611)



(138,568)


Total Kraton stockholders' equity

500,675



358,740


Noncontrolling interest

34,053



34,252


Total equity

534,728



392,992


Total liabilities and equity

$

2,918,693



$

1,079,235


 


KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)



Nine Months Ended September 30,


2016


2015

CASH FLOWS FROM OPERATING ACTIVITIES




Consolidated net income (loss)

$

109,256



$

(7,715)


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




Depreciation and amortization

93,913



46,852


Amortization of debt premium and original issue discount

4,893



(130)


Amortization of debt issuance costs

5,343



1,668


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

452



(60)


Disposition and exit of business activities

(40,001)




Loss on extinguishment of debt

13,423




Earnings from unconsolidated joint venture, net of dividends received

136



90


Deferred income tax benefit

(4,343)



(2,270)


Release of valuation allowance

(86,631)




Share-based compensation

7,272



6,601


Decrease (increase) in:




Accounts receivable

(18,114)



(9,693)


Inventories of products, materials, and supplies

44,035



50,462


Other assets

(3,044)



(2,022)


Increase (decrease) in:




Accounts payable-trade

(2,981)



(2,988)


Other payables and accruals

(401)



1,548


Other long-term liabilities

4,631



1,536


Due to related party

(1,710)



(2,306)


Net cash provided by operating activities

126,129



81,573


CASH FLOWS FROM INVESTING ACTIVITIES




Kraton purchase of property, plant, and equipment

(62,885)



(42,384)


KFPC purchase of property, plant, and equipment

(16,995)



(46,097)


Purchase of software and other intangibles

(4,691)



(1,763)


Acquisition, net of cash acquired

(1,312,105)




Sale of assets

72,803




Net cash used in investing activities

(1,323,873)



(90,244)


CASH FLOWS FROM FINANCING ACTIVITIES




Proceeds from debt

1,782,965



30,000


Repayments of debt

(480,133)



(30,000)


KFPC proceeds from debt

24,368



55,622


Capital lease payments

(105)



(99)


Purchase of treasury stock

(967)



(31,891)


Proceeds from the exercise of stock options

2,625



1,022


Settlement of interest rate swap

(5,155)




Debt issuance costs

(57,646)




Net cash provided by financing activities

1,265,952



24,654


Effect of exchange rate differences on cash

5,291



(6,002)


Net increase in cash and cash equivalents

73,499



9,981


Cash and cash equivalents, beginning of period

70,049



53,818


Cash and cash equivalents, end of period

$

143,548



$

63,799


Supplemental disclosures:




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

$

7,788



$

5,435


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

$

56,972



$

21,690


Capitalized interest

$

4,022



$

3,342


Supplemental non-cash disclosures:




Property, plant, and equipment accruals

$

30,494



$

16,023


Asset acquired through capital lease

$



$

681


 

RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT

(Unaudited)

(In thousands)






Three Months Ended September 30, 2016


Three Months Ended September 30, 2015


Polymer


Chemical


Total


Polymer


Chemical


Total


(In thousands)

Gross profit

$

77,008



$

58,248



$

135,256



$

67,810





$

67,810














Add (deduct):












Restructuring and other charges (a)

743



8



751



61





61


Production downtime (b)







(146)





(146)


Non-cash compensation expense

128





128



122





122


Spread between FIFO and ECRC

(5,001)



1,879



(3,122)



926





926


Adjusted gross profit (non-GAAP)

$

72,878



$

60,135



$

133,013



$

68,773



$



$

68,773



























___________________________________________

(a)   

Severance expenses and other restructuring related charges.



(b)   

In 2015, the reduction in costs is due to additional insurance recovery related to the Belpre, Ohio, production downtime.

 


Nine Months Ended September 30, 2016


Nine Months Ended September 30, 2015


Polymer


Chemical


Total


Polymer


Chemical


Total


(In thousands)

Gross profit

$

209,774



$

151,197



$

360,971



$

161,807





$

161,807














Add (deduct):












Restructuring and other charges (a)

785



8



793



142





142


Effect of purchase price accounting on inventory valuation (b)



24,719



24,719








Production downtime (c)







(474)





(474)


Non-cash compensation expense

436





436



396





396


Spread between FIFO and ECRC

5,807



13,788



19,595



40,144





40,144


Adjusted gross profit (non-GAAP)

$

216,802



$

189,712



$

406,514



$

202,015



$



$

202,015



























______________________________________

(a)  

Severance expenses and other restructuring related charges.



(b)   

Higher costs of goods sold for our Chemical segment related to the fair value adjustment in purchase accounting for their inventory.



(c)   

In 2015, the reduction in costs is due to additional insurance recovery related to the Belpre, Ohio, production downtime.

 


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






Three Months Ended September 30, 2016


Three Months Ended September 30, 2015


Polymer


Chemical


Total


Polymer


Chemical


Total


(In thousands)

Net income attributable to Kraton





$

15,560







$

8,446


Net loss attributable to noncontrolling interest





(717)







(427)


Consolidated net income





14,843







8,019


Add (deduct):












Income tax expense





2,198







3,076


Interest expense, net





33,870







6,151


Earnings of unconsolidated joint venture





(94)







(95)


Operating income

$

28,728



$

22,089



$

50,817



$

17,151



$



$

17,151


Add:












Depreciation and amortization

14,977



17,000



31,977



16,145





16,145


Earnings of unconsolidated joint venture

94





94



95





95


EBITDA

43,799



39,089



82,888



33,391





33,391


Add (deduct):












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

7,216



530



7,746



5,501





5,501


Production downtime (b)







(134)





(134)


KFPC startup costs (c)

1,421





1,421



677





677


Non-cash compensation expense (d)

2,141





2,141



2,032





2,032


Spread between FIFO and ECRC

(5,001)



1,879



(3,122)



926





926


Adjusted EBITDA

$

49,576



$

41,498



$

91,074



$

42,393



$



$

42,393




__________________________________

(a)   

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



(b)   

In 2015, the reduction in costs is due to additional insurance recovery related to the Belpre, Ohio, production downtime, which is primarily 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.



(d)   

For the three months ended September 30, 2016 and 2015, respectively, $1.9 million and $1.7 million is recorded in selling, general and administrative expenses, $0.1 million and $0.2 million is recorded in research and development expenses, and $0.1 million and $0.1 million is recorded in cost of goods sold.

 

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, 2016


Nine Months Ended September 30, 2015


Polymer


Chemical


Total


Polymer


Chemical


Total


(In thousands)

Net income (loss) attributable to Kraton





$

111,048







$

(6,574)


Net loss attributable to noncontrolling interest





(1,792)







(1,141)


Consolidated net income (loss)





109,256







(7,715)


Add (deduct):












Income tax (benefit) expense





(83,024)







4,135


Interest expense, net





101,450







17,975


Earnings of unconsolidated joint venture





(274)







(273)


Loss on extinguishment of debt





13,423








Disposition and exit of business activities





(40,001)








Operating income

$

59,936



$

40,894



$

100,830



$

14,122



$



$

14,122


Add (deduct):












Depreciation and amortization

45,199



48,714



93,913



46,852





46,852


Disposition and exit of business activities

40,001





40,001








Loss on extinguishment of debt

(13,423)





(13,423)








Earnings of unconsolidated joint venture

274





274



273





273


EBITDA

131,987



89,608



221,595



61,247





61,247


Add (deduct):












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

19,255



7,773



27,028



7,297





7,297


Disposition and exit of business activities

(40,001)





(40,001)








Loss on extinguishment of debt

13,423





13,423








Effect of purchase price accounting on inventory valuation



24,719



24,719








Production downtime (b)







(343)





(343)


KFPC startup costs (c)

3,280





3,280



1,827





1,827


Non-cash compensation expense (d)

7,272





7,272



6,601





6,601


Spread between FIFO and ECRC

5,807



13,788



19,595



40,144





40,144


Adjusted EBITDA

$

141,023



$

135,888



$

276,911



$

116,773



$



$

116,773




__________________________________

(a)   

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



(b)   

In 2015, the reduction in costs is due to additional insurance recovery related to the Belpre, Ohio, production downtime, which is primarily 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.



(d)    

For the nine months ended September 30, 2016 and 2015, respectively, $6.3 million and $5.7 million is recorded in selling, general and administrative expenses, $0.6 million and $0.5 million is recorded in research and development expenses, and $0.4 million and $0.4 million is recorded in cost of goods sold.

 


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


Three Months Ended
September 30,


Nine Months Ended
September 30,


2016


2015


2016


2015

Earnings (Loss) Per Diluted Share

$

0.49



$

0.27



$

3.56



$

(0.21)


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

0.20



0.18



0.72



0.23


Disposition and exit of business activities





(0.82)




Loss on extinguishment of debt





0.28




Production downtime (b)



(0.01)





(0.01)


Effect of purchase price accounting on inventory valuation (c)





0.63




KFPC startup costs (d)

0.02



0.01



0.04



0.02


Valuation Allowance (e)





(2.77)




Spread between FIFO and ECRC

(0.08)



0.03



0.43



1.23


Adjusted Earnings Per Diluted Share (non-GAAP)

$

0.63



$

0.48



$

2.07



$

1.26




__________________________________

(a)  

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



(b)  

In 2015, the reduction in costs is due to additional insurance recovery related to the Belpre, Ohio, production downtime, which is primarily recorded in cost of goods sold.



(c)   

 Higher costs of goods sold for our Chemical segment related to the fair value adjustment in purchase accounting for their inventory.



(d)   

Startup costs related to the joint venture company, KFPC, which are recorded in selling, general and administrative expenses.



(e)   

Reduction of income tax valuation allowance related to the assessment of our ability to utilize net operating losses in future periods.

 

Kraton Corporation Logo

Logo - http://photos.prnewswire.com/prnh/20100728/DA42514LOGO

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/kraton-corporation-announces-third-quarter-2016-results-300352084.html

SOURCE Kraton Corporation

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