Kraton Performance Polymers Comments on Fourth Quarter and Full Year 2015 Results

($ in millions)

Three months ended December 31,

Years ended December 31,

2015

2014

2015

2014

Sales volume (kT)

74.9

72.2

306.5

305.6

Revenue

 Approx. $248.0

$276.0

 Approx. $1,035.0

$1,230.4

Adjusted EBITDA ⁽¹⁾

$48.2 to $50.2

$31.7

$165.0 to $167.0

$147.2

Net cash provided by operating activities

 Approx. $22.0

$48.6

Approx. $104.0

$29.9

(1)

Adjusted EBITDA includes the spread between FIFO and Estimated Current Replacement Cost ("ECRC").  See Non-GAAP reconciliations in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.

($ in millions)

Three months ended December 31,

Years ended December 31,

2015

2014

2015

2014

Sales volume (kT) ⁽¹⁾

90.1

99.5

390.8

424.1

Revenue

 Approx. $186.0

$209.7

 Approx. $807.0

$938.1

Adjusted EBITDA⁽²⁾

$41.0 to $44.0

$46.2

$177.0 to $180.0

$191.7

Net cash provided by operating activities

Approx. $32.0

$41.8

 Approx. $107.0

$91.3

(1)

Excludes sales of Pitch

(2)

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

RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In thousands)

Year Ended December 31, 2014

Year Ended December 31, 2015

Kraton

Arizona

Kraton

Arizona

Actual

Actual

Low

High

Low

High

Consolidated net income (loss)

$

1,210

$

98,351

$

(14,346)

$

(12,346)

$

55,667

$

58,667

Add (deduct):

Interest expense, net

24,594

42,825

24,223

24,223

47,565

47,565

Income tax expense

5,118

49,966

6,943

6,943

24,690

24,690

Depreciation and amortization

66,242

33,656

62,093

62,093

30,124

30,124

EBITDA

97,164

224,798

78,913

80,913

158,046

161,046

Add (deduct):

Loss (gain) on interest rate caps/swaps, net (a)

—

3,579

—

—

5,034

5,034

Loss on extinguishment of debt (b)

—

7,860

—

—

—

—

Retirement plan charges (c)

399

1,027

792

792

515

515

Restructuring and other charges (d)

2,953

4,074

1,729

1,729

1,165

1,165

Transaction and acquisition related costs (e)

9,585

817

20,846

20,846

2,971

2,971

Impairment of long-lived assets and facility closure costs (f)

4,731

—

—

—

5,931

5,931

Impairment of spare parts inventory (g)

430

—

—

—

—

—

Production downtime (h)

10,291

—

(593)

(593)

—

—

KFPC startup costs (i)

1,911

—

3,640

3,640

—

—

Non-cash compensation expense (j)

10,475

1,999

9,015

9,015

(102)

(102)

Other share based compensation expense (k)

—

10,593

—

—

—

—

Gain on sale of assets (l)

—

(365)

—

—

—

—

Financing costs in connection with debt (m)

—

4,152

—

—

205

205

Management fees (n)

—

2,149

—

—

2,074

2,074

Litigation expense (o)

—

(70,100)

—

—

—

—

Indirect CTO spill related costs (p)

—

1,164

—

—

—

—

Unrealized foreign currency losses (q)

—

(53)

—

—

1,161

1,161

Spread between FIFO and ECRC (r)

9,255

—

50,658

50,658

—

—

Adjusted EBITDA

$

147,194

$

191,694

$

165,000

$

167,000

$

177,000

$

180,000

(a)   

Represents loss (gain) on interest rate caps and swaps.

(b)    

Represents loss incurred on the extinguishment of Arizona Chemical's historical indebtedness.

(c)     

Charges associated with the termination of certain employee defined benefit pension plans including curtailment costs and cash costs related to the termination of the plans.

(d)     

Severance expenses, professional fees and other restructuring related charges. For Arizona, includes costs associated with ceasing operations at the UK manufacturing facility including severance costs, pension entitlements and other exit costs.

(e)    

  Professional fees and other costs associated with the evaluation of acquisition transactions. For the year ended December 31, 2015, costs are primarily associated with Kraton's acquisition of Arizona Chemical. For the year ended December 31, 2014, costs primarily associated with the terminated combination agreement with LCY.

(f) 

In 2015, impairment and other costs related to the announced closure of Arizona Chemical's Chester-le-Street plant in the U.K. In 2014, $2.4 million was related to engineering and design assets for projects we determined were no longer economically viable; $1.4 million was related to information technology and office assets associated with restructuring activities; and $0.9 million was related to other long-lived assets.

(g) 

Impairment of spare parts inventory associated with the coal-burning boilers which were decommissioned in 2015.

(h)  

In 2014, costs for weather-related production downtime at our Belpre, Ohio facility and an operating disruption from a small fire at our Berre, France facility, which occurred in the first quarter of 2014. In 2015, the reduction in costs is due to incremental insurance recoveries related to the production downtime at our Belpre, Ohio, facility.

(i)    

Startup costs related to the joint venture company, KFPC.

(j)    

Represents expense recognized for non-cash share-based compensation.

(k)    

Represents other share-based compensation expense in the form of common profit interests granted to certain Arizona Chemical employees. These interests are recognized as compensation expense at fair market value when probable of monetization.

(l)    

In 2014, the net gain relates to the 2013 sale of Arizona Chemical's personal care business consisting of intellectual property, customer relationships and inventories, of which $0.6 million was received in June 2014. The $0.4 million gain in 2014 is net of an expense for a claim from a distributor.

(m) 

Professional fees and other costs incurred related to the refinancing of Arizona Chemical's historical indebtedness.

(n)  

Management fees and out of pocket expenses paid to Arizona Chemical's former owners in accordance with the former management agreement.

(o)   

This credit represents an accrued insurance recovery for litigation expenses and damages associated with a claim filed by a former customer for an alleged breach of warranty and breach of contract regarding delivery of resin products during the period 2005 through 2009.

(p)   

In December 2011, a leak was discovered in CTO tanks owned by Arizona Chemical in Söderhamn, Sweden. The costs in 2014 represents additional storage costs incurred as a result of the loss of the CTO tanks.

(q)    

Represents unrealized foreign currency losses.

(r)  

Although we report our financial results using the FIFO basis of accounting, as part of our pricing strategy, we measure our business performance using the ECRC of our inventory and cost of goods sold. We maintain our perpetual inventory in our global enterprise resource planning system, where the carrying value of our inventory is determined using FIFO. At the beginning of each month, we determine the estimated current cost of our raw materials for that particular month, and using the same perpetual inventory system that we use to manage inventory and therefore costs of goods sold under FIFO, we revalue our ending inventory to reflect the total cost of such inventory as if it was valued using the ECRC. The result of this revaluation from FIFO creates the spread between FIFO and ECRC. With inventory valued under FIFO and ECRC, we then have the ability to report cost of goods sold and therefore Adjusted EBITDA under both our FIFO convention and ECRC.

RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In thousands)

Three Months Ended

December 31, 2014

Three Months Ended December 31, 2015

Kraton

Arizona

Kraton

Arizona

Actual

Actual

Low

High

Low

High

Consolidated net income (loss)

$

(17,781)

$

58,397

$

(6,631)

$

(4,631)

$

15,733

$

18,733

Add (deduct):

Interest expense, net

5,927

12,427

6,248

6,248

11,637

11,637

Income tax expense

1,713

32,882

2,808

2,808

6,587

6,587

Depreciation and amortization

16,612

7,927

15,241

15,241

7,329

7,329

EBITDA

6,471

111,633

17,666

19,666

41,286

44,286

Add (deduct):

Loss (gain) on interest rate caps/swaps, net (a)

—

3,284

—

—

(1,969)

(1,969)

Retirement plan charges (b)

399

695

792

792

—

—

Restructuring and other charges (c)

2,300

645

230

230

—

—

Transaction and acquisition related costs (d)

763

710

15,048

15,048

834

834

Impairment of long-lived assets and facility closure costs (e)

4,731

—

—

—

(22)

(22)

Impairment of spare parts inventory (f)

430

—

—

—

—

—

Production downtime (g)

(1,732)

—

(250)

(250)

—

—

KFPC startup costs (h)

571

—

1,813

1,813

—

—

Non-cash compensation expense (i)

2,007

(51)

2,414

2,414

71

71

Financing costs in connection with debt (j)

—

577

—

—

84

84

Management fees (k)

—

578

—

—

512

512

Litigation expense (l)

—

(73,200)

—

—

—

—

Indirect CTO spill related costs (m)

—

1,164

—

—

—

—

Unrealized foreign currency losses (n)

—

117

—

—

228

228

Spread between FIFO and ECRC (o)

15,763

—

10,514

10,514

—

—

Adjusted EBITDA

$

31,703

$

46,152

$

48,227

$

50,227

$

41,024

$

44,024

(a)   

 Represents loss (gain) on interest rate caps and swaps.

(b)    

Charges associated with the termination of certain employee defined benefit pension plans including curtailment costs and cash costs related to the termination of the plans.

(c)     

Severance expenses, professional fees and other restructuring related charges. For Arizona, includes costs associated with ceasing operations at the UK manufacturing facility including severance costs, pension entitlements and other exit costs.

(d)   

Professional fees and other costs associated with the evaluation of acquisition transactions, primarily associated with Kraton's acquisition of Arizona Chemical.

(e)   

In 2015, impairment and other costs related to the announced closure of Arizona Chemical's Chester-le-Street plant in the U.K. In 2014, $2.4 million was related to engineering and design assets for projects we determined were no longer economically viable; $1.4 million was related to information technology and office assets associated with restructuring activities; and $0.9 million was related to other long-lived assets.

(f)    

Impairment of spare parts inventory associated with the coal-burning boilers which were decommissioned in 2015.

(g)    

Reduction in costs associated with the weather-related production downtime at our Belpre, Ohio, facility.

(h)    

Startup costs related to the joint venture company, KFPC.

(i)     

Represents expense recognized for non-cash share-based compensation.

(j)     

Professional fees and other costs incurred related to the refinancing of Arizona Chemical's historical indebtedness.

(k)    

Management fees and out of pocket expenses paid to Arizona Chemical's former owners in accordance with the former management agreement.

(l)     

This credit represents an accrued insurance recovery for litigation expenses and damages associated with a claim filed by a former customer for an alleged breach of warranty and breach of contract regarding delivery of resin products during the period 2005 through 2009.

(m)   

In December 2011, a leak was discovered in CTO tanks owned by Arizona Chemical in Söderhamn, Sweden. The costs in 2014 represents additional storage costs incurred as a result of the loss of the CTO tanks.

(n)    

Represents unrealized foreign currency losses.

(o)    

Although we report our financial results using the FIFO basis of accounting, as part of our pricing strategy, we measure our business performance using the ECRC of our inventory and cost of goods sold. We maintain our perpetual inventory in our global enterprise resource planning system, where the carrying value of our inventory is determined using FIFO. At the beginning of each month, we determine the estimated current cost of our raw materials for that particular month, and using the same perpetual inventory system that we use to manage inventory and therefore costs of goods sold under FIFO, we revalue our ending inventory to reflect the total cost of such inventory as if it was valued using the ECRC. The result of this revaluation from FIFO creates the spread between FIFO and ECRC. With inventory valued under FIFO and ECRC, we then have the ability to report cost of goods sold and therefore Adjusted EBITDA under both our FIFO convention and ECRC.