SOURCE: Kraton Polymers LLC

March 27, 2006 18:43 ET

KRATON Announces Fourth Quarter and Full Year 2005 Earnings

Gross Profit Increased 41.3% Versus Fourth Quarter 2004 and 83.2% for the Full Year; Total Revenue and Net Income Improve

HOUSTON, TX -- (MARKET WIRE) -- March 27, 2006 -- Polymer Holdings LLC (Holdings), parent company of KRATON Polymers LLC (KRATON), announces its financial results for the fourth quarter and for the year ended December 31, 2005. Holdings' total revenues for the quarter were $223.0 million compared to $208.8 million in the comparable period of 2004, an increase of 6.8%. This improvement was primarily driven by an increase in average selling prices and an increase in sales volume.

Holdings' gross profit for the fourth quarter increased over $12.6 million or 41.3% to $43.1 million, as compared to $30.5 million in the comparable period of 2004. After adjusting for period-to-period differences in the amortization of the step-up in inventory value related to the acquisition of the company in December 2003, the improvement in gross profit over 2004 was $10.0 million. Holdings' net loss for the quarter was $4.5 million, compared with a net loss of $13.0 million in the comparable period of 2004. Holdings ended the quarter with $100.9 million in cash and cash equivalents, an increase of $54.6 million from December 31, 2004 and $29.4 million from September 30, 2005.

KRATON, the operating subsidiary of Holdings, had a net loss for the quarter of $1.9 million as compared with a net loss of $11.9 million in the comparable period of 2004. At the end of the fourth quarter 2005, Last Twelve Months (LTM) Adjusted Bank Covenant EBITDA, a measure used to determine compliance with KRATON's debt covenants, totaled $123.8 million, an increase of $25.8 million from the comparable period of 2004. A reconciliation of KRATON's EBITDA and Adjusted Bank Covenant EBITDA to net income or net loss, as applicable, is attached. Net income for the full year was $22.7 million versus a net loss of $35.8 million for the prior year.

Holdings' total revenue, which includes product sales and $22.7 million of other revenues, for the full year ended December 31, 2005 was $975.6 million, compared to $807.4 million for the year ended December 31, 2004, an increase of 20.8%. Product sales increased to $952.9 million as compared to $791.2 million last year, an increase of 20.4%. Sales volume increased by approximately 6.9 kT, or 2.0% during the year, which increased revenue by an estimated $9.6 million. Favorable pricing and product mix accounted for an estimated $145.8 million of the increase and favorable foreign currency exchange rates improved revenue by an estimated $6.3 million. Net income for the full year was $14.4 million versus a net loss of $36.9 million for the prior year.

"We are very pleased with our fourth quarter results and the improvements we achieved during the year. In 2005 despite continuing increases in raw material costs, KRATON was able to make progress in our pricing strategies and operational improvement programs," said George Gregory, Chief Executive Officer and President. "Our efforts to drive profitable growth, while carefully managing costs and inventory levels are paying off. In 2005, we posted record numbers in sales volume growth and inventory reduction. Our enhanced liquidity gives us the confidence to continue to invest in the innovation and growth required to meet the future needs of our customers."

Other Business Highlights:

--  Sales volumes reach 353 kT for the year, a record for KRATON.
--  Inventory volumes dropped by 20 KT for the year, a new record low of
    77 kT, increasing turns and improving liquidity.  This was another record
    for KRATON.
--  IR Latex growth is on track with the construction underway of KRATON's
    1,500 dry metric ton polyisoprene latex plant, located in Paulinia, Brazil.
    KRATON polyisoprene latex is a unique synthetic alternative to natural
    rubber latex for dipped goods and various specialty products.
--  Asia business strategy continues to show progress and promise.
--  Strong innovation pipeline with the recent announcements in KRATON's
    adhesives, sealants and coatings; and packaging and film business units.
    
KRATON has scheduled an investor and analyst conference call for Tuesday, March 28, 2006 to discuss the results of today's earnings announcement. The call will begin at 2:00 p.m. central time, 3:00 p.m. eastern time. You may listen to the analyst conference call by telephone by contacting the conference call operator 5-10 minutes prior to the scheduled start time and asking for the "Earnings Conference Call." US Dial-In #: (888) 324-6856. International Dial-In #: (517) 308-9001. For those unable to listen to the live call, a replay will be available 24 hours a day beginning at approximately 6:00 p.m. CT March 28th through 5:00 p.m. CT on April 11th. To hear a telephonic replay of the call, dial 800-677-4302 or 402-998-0977 for international callers.

About KRATON

KRATON Polymers LLC is a premier, global specialty chemicals company and is the world's largest producer of styrenic block copolymers ("SBCs"), a family of products whose chemistry was pioneered by KRATON over forty years ago. SBCs are highly engineered synthetic elastomers, which enhance the performance of products by delivering a variety of attributes, including greater flexibility, resilience, strength, durability and processability. KRATON polymers are used in a wide range of applications including road and roofing materials, numerous consumer products (diapers, tool handles, toothbrushes), tapes, labels, medical applications, packaging, automotive and footwear products. KRATON has the leading position in nearly all of its core markets and is the only producer of SBCs with global manufacturing capability. Its production facilities are located in the United States, The Netherlands, Germany, France, Brazil, and Japan.

Polymer Holdings LLC is the parent company of KRATON Polymers LLC and has no material assets other than its investment in KRATON Polymers LLC.

Forward-Looking Statements

This news release includes "forward-looking statements" as that term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements and are often characterized by the use of words such as "believes," "expects," "estimates," "projects," "may," "will," "intends," "plans," or "anticipates," or by discussions of strategy, plans or intentions. In this news release, forward-looking information relates to bookings trends, backlog levels, estimated turns levels, gross margins and average selling prices, and similar matters. All forward-looking statements in this news release are made based on management's current expectations and estimates, which involve risks, uncertainties and other factors that could cause results to differ materially from those expressed in forward-looking statements. Among these factors are changes in overall economic conditions, the cyclical nature of the chemical industry, changes in demand for our products, changes in inventories at our customers and distributors, technological and product development risks, availability and cost of raw materials, competitors' actions, pricing and gross margin pressures, loss of key customers, order cancellations or reduced bookings, the timing and cost of planned capital expenditures, changes in manufacturing yields, control of costs and expenses, significant litigation, risks associated with acquisitions and dispositions, risks associated with our substantial leverage and restrictive covenants in our debt agreements, risks associated with our international operations, the threat or occurrence of international armed conflict and terrorist activities both in the United States and internationally, risks and costs associated with increased and new regulation of corporate governance and disclosure standards (including pursuant to Section 404 of the Sarbanes-Oxley Act of 2002), and risks involving environmental or other governmental regulation. Additional factors that could affect the company's future operating results are described in our Form 10-K for the year ended December 31, 2005 under the caption "Trends, Risks and Uncertainties" in the MD&A section, and other factors are described from time to time in our subsequent filings. Readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update such information.

                       Polymer Holdings LLC

              Consolidated Statements of Operations
                  (In thousands of U.S. dollars)

                                           Quarter Ended    Quarter Ended
                                            December 31,     December 31,
                                               2005              2004
                                            ----------        ----------
Revenues:
  Sales                                     $  220,583        $  201,340
  Other                                          2,383             7,422
                                            ----------        ----------
     Total revenues                            222,966           208,762
Costs and expense:
  Costs of goods sold                          179,867           178,276
                                            ----------        ----------
     Gross profit                               43,099            30,486

Research and development expenses                6,652             5,932
Selling, general, and administrative expenses   18,039            18,400
Depreciation and amortization of identifiable
 intangibles                                    10,330            10,781
Earnings in joint venture                         (466)             (328)
Interest, net                                   11,155            13,028
                                            ----------        ----------
     Income (loss) before income taxes          (2,611)          (17,327)
Income tax (provision) benefit                  (1,840)            4,313
                                            ----------        ----------
     Net income (loss)                      $   (4,451)       $  (13,014)
                                            ==========        ==========



                                            Year Ended        Year Ended
                                            December 31,     December 31,
                                               2005              2004
                                            ----------        ----------
Revenues:
  Sales                                     $  952,921        $  791,226
  Other                                         22,670            16,160
                                            ----------        ----------

     Total revenues                            975,591           807,386
Costs and expense:
  Costs of goods sold                          766,012           692,968
                                            ----------        ----------

     Gross profit                              209,579           114,418

Research and development expenses               26,152            23,178
Selling, general, and administrative expenses   72,731            64,903
Depreciation and amortization of identifiable
 intangibles                                    44,090            42,630
Earnings in joint venture                       (1,516)             (462)
Interest, net                                   45,733            40,747
                                            ----------        ----------
     Income (loss) before income taxes          22,389           (56,578)
Income tax (provision) benefit                  (7,999)           19,645
                                            ----------        ----------
     Net income (loss)                      $   14,390        $  (36,933)
                                            ==========        ==========



                       Polymer Holdings LLC
                   Consolidated Balance Sheets
           As of December 31, 2005 and December 31, 2004
                  (In thousands of U.S. dollars)

                                            December 31,     December 31,
                                                2005            2004
                                            ----------        ----------
Assets
Current assets:
   Cash and cash equivalents                $  100,934        $   46,357
   Receivables, net of allowances of
    $1,013 and $750                            107,586           120,596
   Inventories of products                     192,595           211,076
   Inventories of materials and supplies         9,336             8,778
   Other current assets                         23,511            10,381
   Deferred income taxes                         1,953                 -
                                            ----------        ----------

      Total current assets                     435,915           397,188
Property, plant, and equipment,
 less accumulated depreciation                 394,192           424,333
Identifiable intangible assets                 101,848           109,694
Investment in joint venture                     10,542            10,753
Deferred financing costs                        14,399            16,799
Other long-term assets                           9,605             8,646
                                            ----------        ----------

      Total assets                          $  966,501        $  967,413
                                            ==========        ==========


Liabilities and Member's Equity
Current liabilities:
   Current portion of long-term debt        $   30,570        $    2,680
   Accounts payable-trade                       64,345            79,968
   Other payables and accruals                  48,758            40,059
   Due to related parties                       13,119            14,471
   Deferred income taxes                             -             1,240
                                            ----------        ----------
      Total current liabilities                156,792           138,418
Long-term debt, net of current portion         537,418           556,335
Deferred income taxes                           29,818            24,513
Long-term liabilities                           29,713            25,629
                                            ----------        ----------
      Total liabilities                        753,741           744,895
                                            ----------        ----------
Commitments and contingencies
Member's equity:
   Common equity                               215,452           200,528
   Accumulated other comprehensive income       (2,692)           21,990
                                            ----------        ----------
      Total member's equity                    212,760           222,518
                                            ----------        ----------

      Total liabilities and member's equity $  966,501        $  967,413
                                            ==========        ==========


                            KRATON Polymers LLC

                    Consolidated Statements of Operations
                       (In thousands of U.S. dollars)

                                           Quarter Ended    Quarter Ended
                                            December 31,     December 31,
                                               2005             2004
                                            ---------        ---------
Revenues
  Sales                                      $ 220,583       $ 201,340
  Other                                          2,383           7,422
                                             ---------       ---------
    Total revenues                             222,966         208,762
Costs and expense
  Costs of goods sold                          179,867         178,276
                                             ---------       ---------
    Gross profit                                43,099          30,486

Research and development expenses                6,652           5,932
Selling, general, and administrative
 expenses                                       18,039          18,400
Depreciation and amortization of
 identifiable intangibles                       10,330          10,781
Earnings in joint venture                         (466)           (328)
Interest, net                                    8,110          11,244
                                             ---------       ---------
  Income (loss) before income taxes                434         (15,543)
Income tax (provision) benefit                  (2,330)          3,641
                                             ---------       ---------
    Net income (loss)                        $  (1,896)      $ (11,902)
                                             =========       =========


                                             Year Ended       Year Ended
                                            December 31,     December 31,
                                                2005             2004
                                             ---------        ---------
Revenues
  Sales                                      $ 952,921       $ 791,226
  Other                                         22,670          16,160
                                             ---------       ---------
    Total revenues                             975,591         807,386
Costs and expense
  Costs of goods sold                          766,012         692,968
                                             ---------       ---------
    Gross profit                               209,579         114,418

Research and development expenses               26,152          23,178
Selling, general, and administrative expenses   72,731          64,903
Depreciation and amortization of identifiable
 intangibles                                    44,090          42,630
Earnings in joint venture                       (1,516)           (462)
Interest, net                                   33,943          38,963
                                             ---------       ---------
  Income (loss) before income taxes             34,179         (54,794)
Income tax (provision) benefit                 (11,519)         18,973
                                             ---------       ---------
        Net income (loss)                    $  22,660       $ (35,821)
                                             =========       =========




                            KRATON Polymers LLC

                       Consolidated Balance Sheets
              As of December 31, 2005 and December 31, 2004
                      (In thousands of U.S. dollars)

                                             December 31,   December 31,
                                                2005            2004
                                             ---------       ---------
Assets
Current assets:
  Cash and cash equivalents                  $ 100,934       $  46,357
  Receivables, net of allowances of
   $1,013 and $750                             107,586         120,596
  Inventories of products                      192,595         211,076
  Inventories of materials and supplies          9,336           8,778
  Other current assets                          23,511          10,381
  Deferred income taxes                          1,953               -
                                             ---------       ---------
    Total current assets                       435,915         397,188
Property, plant, and equipment, less
 accumulated depreciation of $57,654 and
 $38,086                                       394,192         424,333
Identifiable intangible assets, less
 accumulated amortization of $13,887 and
 $8,002                                        101,848         109,694
Investment in joint venture                     10,542          10,753
Deferred financing costs                        12,711          14,973
Other long-term assets                           9,605           8,646
                                             ---------       ---------

    Total assets                             $ 964,813       $ 965,587
                                             =========       =========

Liabilities and Member's Equity
Current liabilities:
  Current portion of long-term debt          $  30,570       $   2,680
  Accounts payable-trade                        64,345          79,968
  Other payables and accruals                   48,758          40,059
  Due to related parties                        13,119          14,471
  Deferred income taxes                              -           1,240
                                             ---------       ---------
    Total current liabilities                  156,792         138,418
Long-term debt, net of current portion         432,093         462,663
Deferred income taxes                           34,010          25,184
Long-term liabilities                           29,713          25,629
                                             ---------       ---------

    Total liabilities                          652,608         651,894
                                             ---------       ---------
Commitments and contingencies
Member's equity:
  Common equity                                314,897         291,703
  Accumulated other comprehensive income        (2,692)         21,990
                                             ---------       ---------
    Total member's equity                      312,205         313,693
                                             ---------       ---------

    Total liabilities and member's equity    $ 964,813       $ 965,587
                                             =========       =========




                           KRATON Polymers LLC
                        LTM Bank Adjusted EBITDA
                      (In thousands of U.S. dollars)

                                             Year Ended      Year Ended
                                             December 31,    December 31,
                                                2005            2004

Net income (loss)                            $  22,660       $ (35,821)
Income tax provision (benefit)                  11,519         (18,973)
Interest, net                                   33,943          38,963
Depreciation and amortization of identifiable
 intangibles                                    44,090          42,630
                                             ---------       ---------

Financial Statement EBITDA (1)                 112,212          26,799

Further Adjustments to EBITDA (2)
  Sponsor fees and expenses                      1,950           2,050
  Plant turnaround costs                           350           6,000
  Increase in cost of goods sold related to
   inventory step-up in the period from
   December 23                                   1,683          35,225
  Fire repairs                                    (100)          1,144
  Severance related restructuring charges            -           2,100
  Specific cost savings expenses                     -           4,582
  Other nonrecurring items                         530           1,856
  Specified other restructuring charges          2,674           3,755
  Other noncash items reducing Consolidated
   Net Income (non-cash charge related to
   inventory reduction)                          4,459          14,411
                                             ---------       ---------

Adjusted Bank Covenant EBITDA (3)            $ 123,758       $  97,922
                                             =========       =========

(1) The EBITDA measure is used by management to evaluate operating
    performance. Management believes that EBITDA is useful to investors
    because it is frequently used by securities analysts, institutional
    investors and other interested parties in the evaluation of companies
    in our industry. EBITDA is not a recognized term under GAAP and does
    not purport to be an alternative to net income (loss) as an indicator
    of operating performance or to cash flows from operating activities as
    a measure of liquidity. Because all companies do not use identical
    calculations, this presentation of EBITDA may not be comparable to
    other similarly titled measures of other companies.  Additionally,
    EBITDA is not intended to be a measure of free cash flow for
    management's discretionary use, as it does not consider certain cash
    requirements such as interest payments, tax payments and debt service
    requirements.

(2) These adjustments are made pursuant to the Credit and Guaranty
    Agreement, dated December 23, 2003, as amended as of March 4, 2004 and
    as of October 21, 2004, among KRATON Polymers LLC, as Borrower,
    Polymer Holdings LLC, certain subsidiaries of KRATON Polymers LLC, as
    Guarantors, various lenders, Goldman Sachs Credit Partners L.P. and
    UBS Securities LLC, as Lead Arrangers, Goldman Sachs Credit Partners
    L.P., as Syndication Agent, UBS AG, Stanford Branch, as Administrative
    Agent and Collateral Agent (the "senior secured credit facility").

(3) Adjusted Bank Covenant EBITDA is defined as EBITDA adjusted to exclude
    unusual items and other adjustments permitted in calculating covenant
    compliance under the senior secured credit facility. Management
    believes that the inclusion of supplementary adjustments to EBITDA
    applied in presenting Adjusted Bank Covenant EBITDA are appropriate to
    provide additional information to investors to demonstrate compliance
    with the financing covenants contained in the senior secured credit
    facility.

Contact Information

  • For Further Information:
    KRATON Polymers LLC
    Analyst and Media:
    Shari Mattern
    832-204-5998