Total operating revenues amounted to $232 million for the three months ended December 31, 2008, a decline of $26 million, or 10%, compared to total operating revenues of $258 million in the three months ended December 31, 2007.
Gross profit amounted to $49 million for the three months ended December 31, 2008, an increase of $28 million, or 133%, compared to gross profit of $21 million in the three months ended December 31, 2007. For the twelve months ended December 31, 2008, gross profit amounted to $255 million, representing an increase of $104 million, or 69%, from $151 million for the twelve months ended December 31, 2007. In the fourth quarter of 2008, the company recorded a non-cash lower-of-cost-or-market adjustment to our inventory of $8 million which is included in the 2008 gross profit amounts noted above.
Net (loss) of $(7) million for the three months ended December 31, 2008 is an improvement of $29 million compared to the net (loss) of $(36) million in the three months ended December 31, 2007.
We are generally pleased with our improved financial performance in 2008, especially in light of the headwinds associated with rising feedstock and energy costs that we faced for most of the year, said Kevin M. Fogarty, Kraton’s president and chief executive officer. Although our fourth quarter results exceeded the comparable 2007 period, Kraton is not insulated from global economic market conditions. In fact, each of Kraton’s end-use markets recorded a decline in sales volume in the fourth quarter as customers aggressively reduced inventories, resulting in an aggregate 36% decline in sales volume compared to the fourth quarter of 2007.
The demand softness in the fourth quarter of 2008 has continued into 2009. Kraton currently estimates first quarter 2009 sales volume could be about 40% below first quarter 2008 sales volume. In addition, the first quarter 2009 results will reflect lower FIFO margins commensurate with selling higher-cost inventory produced when feedstock prices were above our current replacement cost, the negative effect of which could be in the range of $35 to $40 million. Conversely, first quarter 2008 margins were positively affected by more than $5 million uplift commensurate with selling lower cost inventory produced when feedstock prices were below the then current replacement cost.
At December 31, 2008, Kraton had more than $101 million of cash-on-hand and net debt of $474 million, compared to net debt of $490 million at December 31, 2007. In addition to scheduled maturities, Kraton voluntarily reduced term debt by $10 million in the second quarter of 2008.
Last Twelve Months (LTM) Bank EBITDA, a measure used to determine compliance with our debt covenants, of $149 million for the twelve months ended December 31, 2008, represents an increase of $50 million, or 51%, from $99 million at December 31, 2007. With respect to financial covenants, leverage and interest coverage ratios of 3.87x and 4.15x, respectively, were both well within the requirements of 4.95x and 2.50x, respectively.
Fogarty also noted, It remains difficult to predict the full impact the current economic downturn will have on global demand for our products. That said, however, after excluding the large negative effect on margins in the first quarter of 2009 and the positive effect on margins in 2008 resulting from the aforementioned FIFO measurements, we currently anticipate that earnings in the first quarter of 2009 will be in-line with the first quarter of 2008 earnings, and we expect to be in full compliance with our debt covenants at the close of the first quarter. In addition, in 2009 we do expect to exceed our $10 million fixed cost reduction target, announced in November, as we continue to aggressively pursue new options to reduce cost, improve productivity and manage cash. We believe these steps will allow us to endure this down trend and become even more competitive in responding to our innovative customers’ demanding needs when an economic recovery takes hold.
Recent Developments:
In December 2008, the company announced its new breakthrough technology. MD9150 and MD9200 are Sulfonated block copolymers, which are selectively Sulfonated in the mid block. Sulfonated block copolymers are designed for applications in desalination, electro-deionization, electro-dialysis, humidification and dehumidification, breathable protective clothing, battery separators, fuel cell membranes, sensors and actuators, reverse osmosis, medical devices, filtration, gas separation, performance outerwear and apparel, energy recovery and antifouling.
Kraton was awarded the 2009 Frost & Sullivan North American Technology Leadership of the Year Award in the field of elastic non-wovens. The award cited Kraton’s intense R&D efforts driving innovation in pioneering the development of styrenic block copolymers, particularly noting MD6705, G1643, and MD6717 grades, which are suitable for a wide variety of applications that demand superior qualities of softness, breath ability and elasticity.
In March 2009, the company purchased and retired $30 million face value of our 8.125% Notes for cash consideration of about $11 million, which included accrued interest.
