Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34581
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12370947&doc=11
 
Kraton Corporation
(Exact Name of Registrant as Specified in its Charter)
 
 

Delaware
20-0411521
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
15710 John F. Kennedy Blvd.
Suite 300
Houston, TX 77032
281-504-4700
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act. (Check one):
Large accelerated filer:
ý
 
Accelerated filer:
¨
Non-accelerated filer:
¨
 
Smaller reporting company:
¨
 
 
 
Emerging growth company:
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Number of shares of Kraton Corporation Common Stock, $0.01 par value, outstanding as of July 23, 2018: 31,885,521.

 


Index to Quarterly Report
on Form 10-Q for
Quarter Ended June 30, 2018
 
 
PART I. FINANCIAL INFORMATION
Page
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Some of the statements and information in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make written or oral forward-looking statements in our reports on Forms 10-K, 10-Q and 8-K, in press releases and other written materials and in oral statements made by our officers, directors, or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as “outlook,” “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans,” “anticipates,” “forsees,” “future,” or by discussions of strategy, plans, or intentions; anticipated benefits of or performance of our products; beliefs regarding opportunities for new, differentiated applications, and other innovations; beliefs regarding strengthening relationships with customers; adequacy of cash flows to fund our working capital requirements; our investment in the joint venture with Formosa Petrochemical Corporation (“FPCC”); our expectations regarding indebtedness to be incurred by our joint venture with FPCC; debt payments, interest payments, benefit plan contributions, and income tax obligations; our anticipated capital expenditures, health, safety, environmental, and security and infrastructure and maintenance projects, projects to optimize the production capabilities of our manufacturing assets and to support our innovation platform; our ability to fully access our senior secured credit facilities; expectations regarding future dividend payments; expectations regarding our counterparties’ ability to perform, including with respect to trade receivables; estimates regarding tax expense of repatriating certain cash and short-term investments related to foreign operations; expectations regarding differentiated applications; our ability to realize certain deferred tax assets and our beliefs with respect to tax positions; expectations regarding our full year effective tax rate; estimates related to the useful lives of certain assets for tax purposes; expectations regarding our pension contributions; estimates or expectations related to raw material costs or availability, ending inventory levels and related estimated charges; the outcome and financial impact of legal proceedings; expectations regarding the spread between FIFO and ECRC (each as defined herein) in future periods; the estimates and matters described in our latest Annual Report on Form 10-K under the caption “Item 7. Management’s Discussion and Analysis—Results of Operations—Outlook;” and projections regarding environmental costs and capital expenditures and related operational savings.
Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements include, but are not limited to the factors set forth in this report, 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 (the “SEC”).
There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information.
Forward-looking statements are based on current plans, estimates, assumptions and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.
Presentation of Financial Statements
The terms “Kraton,” “our company,” “we,” “our,” “ours” and “us” as used in this report refer collectively to Kraton Corporation and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations, comprehensive income, and cash flows of Kraton. Kraton Corporation is a holding company whose only material asset is its investment in its wholly owned subsidiary, Kraton Polymers LLC. Kraton Polymers LLC and its subsidiaries own all of our consolidated operating assets.

3


Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Kraton Corporation:

Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Kraton Corporation and subsidiaries (the “Company”) as of June 30, 2018, the related condensed consolidated statements of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2018 and 2017, the related condensed consolidated statement of changes in equity for the six-month period ended June 30, 2018, and the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2018 and 2017, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of operations, and comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP
Houston, Texas
July 26, 2018

4



PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements.
KRATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 

 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
55,304

 
$
89,052

Receivables, net of allowances of $1,025 and $824
271,619

 
196,683

Inventories of products, net
394,033

 
367,796

Inventories of materials and supplies, net
27,675

 
25,643

Prepaid expenses
14,465

 
13,963

Other current assets
29,364

 
36,615

Total current assets
792,460

 
729,752

Property, plant, and equipment, less accumulated depreciation of $560,012 and $526,759
929,765

 
958,723

Goodwill
773,723

 
774,319

Intangible assets, less accumulated amortization of $222,126 and $197,318
383,296

 
406,863

Investment in unconsolidated joint venture
12,043

 
12,380

Debt issuance costs
1,755

 
2,340

Deferred income taxes
6,177

 
8,462

Other long-term assets
39,242

 
39,688

Total assets
$
2,938,461

 
$
2,932,527

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
39,373

 
$
42,647

Accounts payable-trade
180,713

 
169,265

Other payables and accruals
93,748

 
119,624

Due to related party
16,626

 
19,176

Total current liabilities
330,460

 
350,712

Long-term debt, net of current portion
1,607,484

 
1,574,881

Deferred income taxes
143,086

 
148,148

Other long-term liabilities
189,844

 
192,267

Total liabilities
2,270,874

 
2,266,008

Commitments and contingencies (note 10)

 

Equity:
 
 
 
Kraton stockholders' equity:
 
 
 
Preferred stock, $0.01 par value; 100,000 shares authorized; none issued

 

Common stock, $0.01 par value; 500,000 shares authorized; 31,886 shares issued and outstanding at June 30, 2018; 31,605 shares issued and outstanding at December 31, 2017
319

 
316

Additional paid in capital
381,569

 
377,957

Retained earnings
360,778

 
356,503

Accumulated other comprehensive loss
(105,042
)
 
(98,295
)
Total Kraton stockholders' equity
637,624

 
636,481

Noncontrolling interest
29,963

 
30,038

Total equity
667,587

 
666,519

Total liabilities and equity
$
2,938,461

 
$
2,932,527


See Notes to Condensed Consolidated Financial Statements
5



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
538,395

 
$
525,320

 
$
1,040,787

 
$
983,445

Cost of goods sold
368,019

 
377,483

 
723,360

 
691,683

Gross profit
170,376

 
147,837

 
317,427

 
291,762

Operating expenses:
 
 
 
 
 
 
 
Research and development
10,474

 
9,647

 
21,271

 
19,884

Selling, general, and administrative
41,975

 
41,132

 
80,698

 
81,546

Depreciation and amortization
35,140

 
34,590

 
70,516

 
67,733

Operating income
82,787

 
62,468

 
144,942

 
122,599

Other expense
(1,107
)
 
(863
)
 
(2,220
)
 
(1,671
)
Loss on extinguishment of debt
(72,330
)
 

 
(79,921
)
 
(19,738
)
Earnings of unconsolidated joint venture
120

 
118

 
257

 
245

Interest expense, net
(25,416
)
 
(34,444
)
 
(54,692
)
 
(68,749
)
Income (loss) before income taxes
(15,946
)
 
27,279

 
8,366

 
32,686

Income tax benefit (expense)
1,842

 
(3,854
)
 
(409
)
 
(5,072
)
Consolidated net income (loss)
(14,104
)
 
23,425

 
7,957

 
27,614

Net (income) loss attributable to noncontrolling interest
(826
)
 
2,136

 
(815
)
 
4,360

Net income (loss) attributable to Kraton
$
(14,930
)
 
$
25,561

 
$
7,142

 
$
31,974

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
(0.47
)
 
$
0.82

 
$
0.22

 
$
1.03

Diluted
$
(0.47
)
 
$
0.81

 
$
0.22

 
$
1.01

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
31,441

 
30,585

 
31,342

 
30,508

Diluted
31,441

 
31,066

 
31,797

 
30,952


See Notes to Condensed Consolidated Financial Statements
6



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) attributable to Kraton
$
(14,930
)
 
$
25,561

 
$
7,142

 
$
31,974

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $0
(14,575
)
 
29,646

 
(10,956
)
 
41,781

Unrealized gain (loss) on cash flow hedges, net of tax expense of $210, benefit of $421, expense of $490 and $30, respectively
674

 
(749
)
 
4,155

 
94

Reclassification of gain on cash flow hedge

 

 
(2,587
)
 
(41
)
Unrealized gain on net investment hedge, net of tax expense of $825 for both periods
2,641

 

 
2,641

 

Other comprehensive income (loss), net of tax
(11,260
)
 
28,897

 
(6,747
)
 
41,834

Comprehensive income (loss) attributable to Kraton
(26,190
)
 
54,458

 
395

 
73,808

Comprehensive loss attributable to noncontrolling interest
(597
)
 
(2,133
)
 
(75
)
 
(2,471
)
Consolidated comprehensive income (loss)
$
(26,787
)
 
$
52,325

 
$
320

 
$
71,337


See Notes to Condensed Consolidated Financial Statements
7



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In thousands)
 
 
Common Stock
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Kraton Stockholders' Equity
 
Noncontrolling Interest
 
Total Equity
Balance at December 31, 2017
$
316

 
$
377,957

 
$
356,503

 
$
(98,295
)
 
$
636,481

 
$
30,038

 
$
666,519

Net income

 

 
7,142

 

 
7,142

 
815

 
7,957

Other comprehensive loss

 

 

 
(6,747
)
 
(6,747
)
 
(890
)
 
(7,637
)
Retired treasury stock from employee tax withholdings
1

 
(3,143
)
 
(2,867
)
 

 
(6,009
)
 

 
(6,009
)
Exercise of stock options
1

 
1,631

 

 

 
1,632

 

 
1,632

Non-cash compensation related to equity awards
1

 
5,124

 

 

 
5,125

 

 
5,125

Balance at June 30, 2018
$
319

 
$
381,569

 
$
360,778

 
$
(105,042
)
 
$
637,624

 
$
29,963

 
$
667,587


See Notes to Condensed Consolidated Financial Statements
8



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Consolidated net income
$
7,957

 
$
27,614

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
70,516

 
67,733

Amortization of debt original issue discount
1,675

 
3,610

Amortization of debt issuance costs
3,325

 
4,371

(Gain) loss on disposal of property, plant, and equipment
360

 
(13
)
Loss on extinguishment of debt
79,921

 
19,738

Earnings from unconsolidated joint venture, net of dividends received
288

 
193

Deferred income tax benefit
(2,656
)
 
(317
)
Share-based compensation
5,125

 
5,147

Decrease (increase) in:
 
 
 
Accounts receivable
(80,178
)
 
(42,452
)
Inventories of products, materials, and supplies
(35,134
)
 
(55,562
)
Other assets
5,608

 
(7,683
)
Increase (decrease) in:
 
 
 
Accounts payable-trade
20,175

 
342

Other payables and accruals
(25,547
)
 
(3,187
)
Other long-term liabilities
(529
)
 
2,512

Due to related party
(2,812
)
 
4,123

Net cash provided by operating activities
48,094

 
26,169

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Kraton purchase of property, plant, and equipment
(42,223
)
 
(50,791
)
KFPC purchase of property, plant, and equipment
(653
)
 
(11,205
)
Purchase of software and other intangibles
(3,228
)
 
(3,470
)
Net cash used in investing activities
(46,104
)
 
(65,466
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt
713,540

 
432,797

Repayments of debt
(718,370
)
 
(424,797
)
KFPC proceeds from debt
10,197

 
39,898

KFPC repayments of debt
(28,661
)
 

Capital lease payments
(520
)
 
(454
)
Purchase of treasury stock
(6,009
)
 
(1,511
)
Proceeds from the exercise of stock options
1,632

 
1,601

Settlement of interest rate swap
2,587

 

Debt issuance costs
(10,345
)
 
(9,971
)
Net cash provided by (used in) financing activities
(35,949
)
 
37,563

Effect of exchange rate differences on cash
211

 
8,697

Net increase (decrease) in cash and cash equivalents
(33,748
)
 
6,963

Cash and cash equivalents, beginning of period
89,052

 
121,749

Cash and cash equivalents, end of period
$
55,304

 
$
128,712


See Notes to Condensed Consolidated Financial Statements
9



 
Six Months Ended June 30,
 
2018
 
2017
Supplemental disclosures:
 
 
 
Cash paid during the period for income taxes, net of refunds received
$
1,470

 
$
8,167

Cash paid during the period for interest, net of capitalized interest
$
57,063

 
$
53,484

Capitalized interest
$
1,577

 
$
2,313

Supplemental non-cash disclosures:
 
 
 
Property, plant, and equipment accruals
$
13,801

 
$
17,534



See Notes to Condensed Consolidated Financial Statements
10



KRATON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Description of our Business. We are a leading global specialty chemicals company that manufactures styrenic block copolymers (“SBCs”), specialty polymers, and high-value performance products primarily derived from pine wood pulping co-products.
SBCs are highly-engineered synthetic elastomers, which we originally invented and commercialized. Our SBCs enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability, and processability, and are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants, lubricants, medical, packaging, automotive, and paving and roofing products. We manufacture and sell isoprene rubber and isoprene rubber latex, which are non-SBC products primarily used in applications such as medical products, personal care, adhesives, tackifiers, paints, and coatings.
We refine and further upgrade crude tall oil and crude sulfate turpentine, into value-added specialty chemicals. These pine-based specialty products are sold into adhesive, road and construction, and tire markets, and we produce and sell a broad range of performance chemicals (which we formerly referred to as chemical intermediates) into markets that include fuel additives, oilfield chemicals, coatings, metalworking fluids and lubricants, inks, flavors and fragrances, and mining.
Basis of Presentation. The accompanying unaudited Condensed Consolidated Financial Statements presented in this report are for us and our consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in our joint venture, Kraton Formosa Polymers Corporation (“KFPC”), located in Mailiao, Taiwan. KFPC is a variable interest entity for which we have determined that we are the primary beneficiary and, therefore, have consolidated into our financial statements. Our 50% investment in our joint venture located in Kashima, Japan, is accounted for under the equity method of accounting. All significant intercompany transactions have been eliminated. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods or any other interim period, in particular due to the effect of seasonal changes and weather conditions that typically affect our sales into paving, roadmarking, roofing, and construction applications. In particular, sales volumes into these applications are generally higher in the second and third quarter of the calendar year as warm and dry weather is more conducive to paving and roofing activity.
Reclassifications. Certain amounts reported in the condensed consolidated financial statements and notes to the consolidated financial statements for the prior periods have been reclassified to conform to the current reporting presentation.
Significant Accounting Policies. Our significant accounting policies have been disclosed in Note 1 Description of Business, Basis of Presentation, and Significant Accounting Policies in our most recent Annual Report on Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies presented in the Condensed Consolidated Financial Statements.
Revenue Recognition. The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial adoption of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition and applied Topic 606 using the modified retrospective basis. Typically, this approach would result in recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at January 1, 2018. The Company did not have a material change in financial position, results of operations, or cash flows and therefore there is no cumulative impact recorded to opening equity.
There have been no other changes to the accounting policies, which are disclosed in our most recent Annual Report on Form 10-K. The accompanying unaudited Condensed Consolidated Financial Statements we present in this report have been prepared in accordance with our policies.
Use of Estimates. The preparation of these Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant items subject to such estimates and assumptions include:
the useful lives of long-lived assets;
estimates of fair value for assets acquired and liabilities assumed in business combinations;

11



allowances for doubtful accounts and sales returns;
the valuation of derivatives, deferred tax assets, property, plant and equipment, intangible assets, inventory, investments, and share-based compensation; and
liabilities for employee benefit obligations, environmental matters, asset retirement obligations, income tax uncertainties, and other contingencies.
Income Tax in Interim Periods. We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in these Condensed Consolidated Financial Statements for each of those jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period.
Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which there is uncertainty that they may be realized. The effects of unusual and infrequent items are recognized in the impacted interim period as discrete items.
The estimated annual effective tax rate may be significantly affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets to the amount that is deemed more likely than not to be recoverable. Our ability to realize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. If we fail to achieve our operating income targets, we may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. A change in our valuation allowance would impact our income tax benefit (expense) and our stockholders’ equity and could have a significant impact on our results of operations or financial condition in future periods.
2. New Accounting Pronouncements
Accounting Standards Adopted in the Current Period
We have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our financial statements.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, updated by ASU No. 2015-14 Deferral of the Effective Date, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. In August 2015, the effective date for the standard was deferred by one year and the standard is now effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted based on the original effective date. Our revenue is primarily generated from the sale of finished product to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time, when ownership and risk of loss transfers. These are largely un-impacted by the new standard. We completed our analysis during 2017 and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU No. 2014-09 and its amendment on a modified retrospective basis effective January 1, 2018. Although there is no material impact, we have expanded disclosures in our notes to our condensed consolidated financial statements related to revenue recognition under the new standard. We have implemented changes to our accounting policies and practices, business processes, systems, and controls to support the new revenue recognition and disclosure requirements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. Our analysis of ASU 2016-15 was completed during 2017 and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2016-15 effective January 1, 2018.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted as of the beginning of a year for which financial statements (interim and annual) have not been issued. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. Our service costs

12



were $3.4 million and $3.2 million for the six months ended June 30, 2018 and 2017, respectively. We adopted ASU 2017-07 effective January 1, 2018 and net periodic benefit costs other than the service cost component have been included in Other expense on our Condensed Consolidated Statements of Operations for all reported periods.
New Accounting Standards to be Adopted in Future Periods
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires that an entity must recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and early adoption is permitted. We are still analyzing the quantitative impact of adoption; therefore, the effects of this standard on our financial position, results of operations, and cash flows are not yet known. As we complete our overall assessment, we are identifying and preparing to implement changes to our accounting policies and practices, business processes, systems and controls to support the new standard and disclosure requirements. Our assessment will be completed during fiscal year 2018 and we expect to adopt the ASU 2016-02 effective January 1, 2019.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. Our evaluation of this standard is currently ongoing.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This standard is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted for any interim period after issuance of the ASU. Our evaluation of this standard is currently ongoing and we expect to adopt ASU 2017-12 effective on January 1, 2019.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for any interim period after issuance of the ASU. Our evaluation of this standard is currently ongoing and we expect to adopt ASU 2018-02 effective on January 1, 2019.
3. Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs at a point in time when the transfer of risk and title to the product transfers to the customer. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and invoices. As such, all revenue is considered revenue recognized from contracts with customers and we do not have other sources of revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of sales tax, value-added taxes, and other taxes. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale. Certain customers may receive cash-based incentives (including rebates, price supports, and sales commission), which are accounted for as variable consideration. We estimate rebates and price supports based on the expected amount to be provided to customers and reduce revenues recognized once the performance obligation has been met. Sales commissions are recorded as an increase in cost of goods sold once the performance obligation has been met. We do not expect to have significant changes in our estimates for variable considerations.
We have deferred revenue of $14.9 million related to contractual commitments with customers that the performance obligation will be satisfied over time, which will range from one to ten years. The revenue associated with these performance obligations is recognized as the obligation is satisfied, which occurs as a volume based metric over time when the transfer of risk and title of finished products transfer to the customer.
Occasionally, we enter into bill-and-hold contracts, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products will be shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it's ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer. Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer. During the three and six months ended June 30, 2018, we recognized $0.7 million and $4.5 million of revenue related to these arrangements, respectively. Custodial costs of $0.1 million have been accrued as of June 30, 2018 and will be recognized as revenue once the remaining performance obligation is met.


13



We disaggregate our revenue by segment product lines, which is how we market our products and review results of operations. The following tables disaggregate our segment revenue by major product lines:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Performance Products
$
180,738

 
$
191,134

 
$
326,468

 
$
332,852

Specialty Polymers
108,289

 
100,479

 
212,307

 
191,399

Cariflex
48,976

 
43,354

 
88,501

 
81,402

Other
147

 
151

 
(55
)
 
413

Polymer Product Line Revenue
$
338,150

 
$
335,118

 
$
627,221

 
$
606,066

Effective January 1, 2018, results for our Roads and Construction target market have been consolidated into our Adhesives and Performance Chemicals product lines to better align customer portfolio and end usage. We have adjusted the three and six months ended June 30, 2017 to conform with the respective 2018 presentations.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Adhesives
$
73,978

 
$
77,111

 
$
147,126

 
$
150,990

Performance Chemicals
114,813

 
100,304

 
237,754

 
201,883

Tires
11,454

 
12,787

 
28,686

 
24,506

Chemical Product Line Revenue
$
200,245

 
$
190,202

 
$
413,566

 
$
377,379

 
June 30, 2018
 
December 31, 2017
Contract receivables(1)
$
275,050

 
$
196,951

Contract liabilities(2)
$
14,859

 
$
16,257

____________________________________________________ 
(1)
Contract receivables are recorded within receivables, net of allowances on our Condensed Consolidated Balance Sheets.
(2)
Our contract liability decreased by $1.0 million, as a result of meeting the performance obligation, which was recognized in our Specialty Polymers product line revenue, and decreased approximately $0.4 million due to the change in currency exchange rates.
4. Share-Based Compensation
We account for share-based awards under the provisions of ASC 718, Compensation—Stock Compensation. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and we expense these costs using the straight-line method over the requisite service period. Share-based compensation expense was $2.2 million for both the three months ended June 30, 2018 and 2017, and $5.1 million for both the six months ended June 30, 2018 and 2017.

14



5. Detail of Certain Balance Sheet Accounts
 
June 30, 2018
 
December 31, 2017
 
(In thousands)
Inventories of products:
 
 
 
Finished products
$
286,236

 
$
270,562

Work in progress
6,602

 
6,925

Raw materials
108,987

 
100,594

Inventories of products, gross
401,825

 
378,081

Inventory reserves
(7,792
)
 
(10,285
)
Total inventories of products, net
$
394,033

 
$
367,796

Intangible assets:
 
 
 
Contractual agreements
$
263,429

 
$
264,581

Technology
146,007

 
146,449

Customer relationships
60,436

 
60,547

Tradenames/trademarks
80,363

 
80,138

Software
55,187

 
52,466

Intangible assets
605,422

 
604,181

Less accumulated amortization:
 
 
 
Contractual agreements
55,201

 
44,435

Technology
57,553

 
53,086

Customer relationships
35,639

 
33,871

Tradenames/trademarks
39,284

 
35,770

Software
34,449

 
30,156

Total accumulated amortization
222,126

 
197,318

Intangible assets, net of accumulated amortization
$
383,296

 
$
406,863

Other payables and accruals:
 
 
 
Employee related
$
28,649

 
$
41,250

Interest payable
15,922

 
23,615

Property, plant, and equipment accruals
10,391

 
10,404

Other
38,786

 
44,355

Total other payables and accruals
$
93,748

 
$
119,624

Other long-term liabilities:
 
 
 
Pension and other post-retirement benefits
$
143,397

 
$
147,209

Other
46,447

 
45,058

Total other long-term liabilities
$
189,844

 
$
192,267



15



Changes in accumulated other comprehensive income (loss) by component were as follows:
 
Cumulative Foreign Currency Translation
 
Net Unrealized Gain on Cash Flow Hedges
 
Net Unrealized Gain (Loss) on Net Investment Hedges
 
Benefit Plans Liability, Net of Tax
 
Total
 
(In thousands)
December 31, 2016
$
(72,731
)
 
$
515

 
$
(1,926
)
 
$
(84,388
)
 
$
(158,530
)
Other comprehensive income before reclassifications
41,781

 
94

 

 

 
41,875

Amounts reclassified from accumulated other comprehensive loss

 
(41
)
 

 

 
(41
)
Net other comprehensive income for the year
41,781

 
53

 

 

 
41,834

June 30, 2017
$
(30,950
)
 
$
568

 
$
(1,926
)
 
$
(84,388
)
 
$
(116,696
)
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
(9,654
)
 
$
4,550

 
$
(1,926
)
 
$
(91,265
)
 
$
(98,295
)
Other comprehensive income (loss) before reclassifications
(10,956
)
 
4,155

 
2,641

 

 
(4,160
)
Amounts reclassified from accumulated other comprehensive loss

 
(2,587
)
 

 

 
(2,587
)
Net other comprehensive income (loss) for the year
(10,956
)
 
1,568

 
2,641

 

 
(6,747
)
June 30, 2018
$
(20,610
)
 
$
6,118

 
$
715

 
$
(91,265
)
 
$
(105,042
)

16



6. Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income attributable to Kraton by the weighted-average number of shares outstanding during the period. Diluted EPS is computed by dividing net income attributable to Kraton by the diluted weighted-average number of shares outstanding during the period and, accordingly, reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised, settled or converted into common stock and were dilutive. The diluted weighted-average number of shares used in our diluted EPS calculation is determined using the treasury stock method.
The calculations of basic and diluted EPS are as follows:
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Net Loss Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Loss Per Share
 
Net Income Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Earnings Per Share
 
(In thousands, except per share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
As reported
$
(14,930
)
 
31,890

 
 
 
$
25,561

 
31,197

 
 
Amounts allocated to unvested restricted shares
210

 
(449
)
 
 
 
(501
)
 
(612
)
 
 
Amounts available to common stockholders
(14,720
)
 
31,441

 
$
(0.47
)
 
25,060

 
30,585

 
$
0.82

Diluted:
 
 
 
 
 
 
 
 
 
 
 
Amounts allocated to unvested restricted shares
(210
)
 
449

 
 
 
501

 
612

 
 
Non participating share units

 

 
 
 

 
181

 
 
Stock options added under the treasury stock method

 

 
 
 

 
300

 
 
Amounts reallocated to unvested restricted shares
210

 
(449
)
 
 
 
(494
)
 
(612
)
 
 
Amounts available to stockholders and assumed conversions
$
(14,720
)
 
31,441

 
$
(0.47
)
 
$
25,067

 
31,066

 
$
0.81

 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Net Income Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Earnings Per Share
 
Net Income Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Earnings Per Share
 
(In thousands, except per share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
As reported
$
7,142

 
31,831

 
 
 
$
31,974

 
31,115

 
 
Amounts allocated to unvested restricted shares
(110
)
 
(489
)
 
 
 
(624
)
 
(607
)
 
 
Amounts available to common stockholders
7,032

 
31,342

 
$
0.22

 
31,350

 
30,508

 
$
1.03

Diluted:
 
 
 
 
 
 
 
 
 
 
 
Amounts allocated to unvested restricted shares
110

 
489

 
 
 
624

 
607

 
 
Non participating share units

 
201

 
 
 

 
184

 
 
Stock options added under the treasury stock method

 
254

 
 
 

 
260

 
 
Amounts reallocated to unvested restricted shares
(108
)
 
(489
)
 
 
 
(615
)
 
(607
)
 
 
Amounts available to stockholders and assumed conversions
$
7,034

 
31,797

 
$
0.22

 
$
31,359

 
30,952

 
$
1.01


17



7. Long-Term Debt
Long-term debt consists of the following:
 
June 30, 2018
 
December 31, 2017
 
Principal
 
Discount
 
Debt Issuance Costs
 
Total
 
Principal
 
Discount
 
Debt Issuance Costs
 
Total
 
(In thousands)
USD Tranche
$
390,000

 
$
(7,922
)
 
$
(10,871
)
 
$
371,207

 
$
485,000

 
$
(13,373
)
 
$
(13,986
)
 
$
457,641

Euro Tranche
367,638

 

 
(5,163
)
 
362,475

 
198,265

 

 
(3,517
)
 
194,748

10.5% Senior Notes

 

 

 

 
440,000

 
(13,267
)
 
(14,409
)
 
412,324

7.0% Senior Notes
400,000

 

 
(7,023
)
 
392,977

 
400,000

 

 
(7,424
)
 
392,576

5.25% Senior Notes
338,461

 

 
(5,665
)
 
332,796

 

 

 

 

ABL Facility
50,000

 

 

 
50,000

 

 

 

 

KFPC Loan Agreement
129,428

 

 
(143
)
 
129,285

 
149,919

 

 
(196
)
 
149,723

KFPC Revolving Facilities
6,550

 

 

 
6,550

 
8,430

 

 

 
8,430

Capital lease obligation
1,567

 

 

 
1,567

 
2,086

 

 

 
2,086

Total debt
1,683,644

 
(7,922
)
 
(28,865
)
 
1,646,857

 
1,683,700

 
(26,640
)
 
(39,532
)
 
1,617,528

Less current portion of total debt
39,373

 

 

 
39,373

 
42,647

 

 

 
42,647

Long-term debt
$
1,644,271

 
$
(7,922
)
 
$
(28,865
)
 
$
1,607,484

 
$
1,641,053

 
$
(26,640
)
 
$
(39,532
)
 
$
1,574,881

 
Senior Secured Term Loan Facility. As of June 30, 2018, we had outstanding borrowings under the U.S. dollar denominated tranche (the “USD Tranche”) of our senior secured term loan facility (the “Term Loan Facility”) of $390.0 million and outstanding borrowings under the Euro denominated tranche (the “Euro Tranche”) of the Term Loan Facility of €315.0 million, or approximately $367.6 million.
On March 8, 2018, we entered into a fifth amendment to the credit agreement governing the Term Loan Facility (the “Credit Agreement”) pursuant to which borrowings under the Euro Tranche were increased by €150.0 million, we reduced our USD Tranche interest rate applicable margin to 2.5% and alternative base rate applicable margin to 1.5%, we reduced our Euro Tranche interest rate applicable margin to 2.0%, and extended the maturity date of the Term Loan Facility by three years to March 8, 2025. The proceeds from the additional borrowings under the Euro Tranche were used, together with available cash, to pay down $185.0 million of the then outstanding borrowings under the USD Tranche. On May 24, 2018, we entered into a sixth and seventh amendment to the Credit Agreement. The seventh amendment increased borrowings under the USD Tranche by $90.0 million, with the proceeds of such additional borrowing being used to fund a portion of the refinancing of the 10.5% Senior Notes discussed below. The sixth amendment provided for certain technical amendments to the Term Loan Facility to allow for greater flexibility in the repayment of unsecured indebtedness. For a summary of additional terms of the Term Loan Facility, see Note 8 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
As of the date of this filing, the effective interest rate for the USD Tranche is LIBOR plus 2.5% and the effective interest rate for the Euro Tranche is 2.75%. The Term Loan Facility contains a number of customary affirmative and negative covenants and we were in compliance with the covenants as of the date of this filing.
10.5% Senior Notes due 2023. During the three months ended June 30, 2018, approximately $157.6 million of the 10.5% Senior Notes due 2023 (the “10.5% Senior Notes”) were repurchased in a cash tender offer for any and all of the outstanding $440.0 million aggregate principal amount of 10.5% Senior Notes. The 10.5% Senior Notes that remained outstanding following the tender offer were redeemed on June 13, 2018. The consideration and redemption price plus, in each case, accrued and unpaid interest for the tender offer and redemption, respectively, and the fees and expenses of refinancing the 10.5% Senior Notes were paid with the net proceeds of the offering of the 5.25% Senior Notes (as defined below) and the additional $90.0 million borrowings under our USD Tranche, together with $60.0 million borrowings under the ABL Facility (as defined below), and cash on hand.
7.0% Senior Notes due 2025. Kraton Polymers LLC and its wholly-owned financing subsidiary Kraton Polymers Capital Corporation issued $400.0 million aggregate principal amount of 7.0% Senior Notes due 2025 (the 7.0% Senior Notes”) in March 2017, which mature on April 15, 2025. The 7.0% Senior Notes are general unsecured, senior obligations, and are unconditionally guaranteed on a senior unsecured basis by each of Kraton Corporation and certain of our wholly-owned

18



domestic subsidiaries. We pay interest on the Senior Notes at 7.0% per annum, semi-annually in arrears on January 15 and July 15 of each year.
5.25% Senior Notes due 2026. Kraton Polymers LLC and its wholly-owned financing subsidiary Kraton Polymers Capital Corporation issued €290.0 million, or approximately $338.5 million as of June 30, 2018, aggregate principal amount of 5.25% Senior Notes due 2026 (the 5.25% Senior Notes”) in May 2018, which mature on May 15, 2026. The 5.25% Senior Notes are general unsecured, senior obligations, and are unconditionally guaranteed on a senior unsecured basis by each of Kraton Corporation and certain of our wholly-owned domestic subsidiaries. We will pay interest on the Senior Notes at 5.25% per annum, semi-annually in arrears on May 15 and November 15 of each year, commencing November 15, 2018. The net proceeds of the offering of the 5.25% Senior Notes were used to fund a portion of the refinancing of the 10.5% Senior Notes discussed above.
ABL Facility. Our asset-based revolving credit facility provides financing of up to $250.0 million (the “ABL Facility”). The ABL Facility also provides that we have the right at any time to request up to $100.0 million of additional commitments, provided that we satisfy certain additional conditions. During the three months ended June 30, 2018, we borrowed $60.0 million to fund a portion of the refinancing of the 10.5% Senior Notes discussed above. Our outstanding borrowings under the ABL facility were $50.0 million as of June 30, 2018.
Borrowing availability under the ABL Facility is subject to borrowing base limitations based on the level of receivables and inventory available for security. Revolver commitments under the ABL Facility consist of U.S. and Dutch revolving credit facility commitments, and the terms of the ABL Facility require the U.S. revolver commitment comprises at least 60.0% of the commitments under the ABL Facility. The ABL Facility contains a number of customary affirmative and negative covenants and we were in compliance with the covenants as of the date of this filing. For a summary of additional terms of the ABL Facility, see Note 8 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
KFPC Loan Agreement. As of June 30, 2018, NTD 4.0 billion, or approximately $129.4 million, was drawn on KFPC's syndicated loan agreement (the “KFPC Loan Agreement”). For the three and six months ended June 30, 2018, our effective interest rate for borrowings on the KFPC Loan Agreement was 1.8%. The KFPC Loan Agreement contains certain financial covenants that change during the term of the KFPC Loan Agreement and KFPC was in compliance with the covenants as of the date of this filing. For a summary of additional terms of the KFPC Loan Agreement, see Note 8 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
KFPC Revolving Facilities. KFPC also has five revolving credit facilities (the “KFPC Revolving Facilities”) to provide funding for working capital requirements and/or general corporate purposes, which allow for total borrowings of up to NTD 2.2 billion, or approximately $70.4 million. All of the KFPC Revolving Facilities are subject to variable interest rates. As of June 30, 2018, NTD 200.0 million, or approximately $6.6 million, was drawn on the KFPC Revolving Facilities.
Debt Issuance Costs. We had net debt issuance cost of $31.8 million as of June 30, 2018, of which $2.9 million related to the ABL Facility is recorded as an asset (of which $1.2 million was included in other current assets) and $28.9 million is recorded as a reduction to long-term debt. We amortized $1.4 million and $2.0 million for the three months ended June 30, 2018 and 2017, respectively, and $3.3 million and $4.4 million during the six months ended June 30, 2018 and 2017, respectively. We deferred $11.0 million of debt issuance costs, of which $2.2 million, $3.1 million, and $5.7 million related to the Euro Tranche, USD Tranche, and 5.25% Senior Notes, respectively.
We recorded a $79.9 million loss on extinguishment of debt during the six months ended June 30, 2018, which includes a write off of $18.7 million related to previously capitalized deferred financing costs, a write off of $17.4 million related to original issue discount on our Term Loan Facility, and a $46.4 million related to the cash tender offer and subsequent redemption of the outstanding 10.5% Senior Notes, all of which was partially offset by a $2.6 million gain on the settlement of the ineffective portion of interest rate swaps.

19



Debt Maturities. The remaining principal payments on our outstanding total debt as of June 30, 2018, are as follows:
 
Principal Payments
 
(In thousands)
July 1, 2018 through June 30, 2019
$
39,373

July 1, 2019 through June 30, 2020
97,245

July 1, 2020 through June 30, 2021
185

July 1, 2021 through June 30, 2022
50,196

July 1, 2022 through June 30, 2023
208

Thereafter
1,496,437

Total debt
$
1,683,644

See Note 8 Fair Value Measurements, Financial Instruments, and Credit Risk for fair value information related to our long-term debt.
8. Fair Value Measurements, Financial Instruments, and Credit Risk
ASC 820, Fair Value Measurements and Disclosures defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
In accordance with ASC 820, these two types of inputs have created the following fair value hierarchy:
Level 1—Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in markets that are not active;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
Level 3—Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
Recurring Fair Value Measurements. The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2018 and December 31, 2017. These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which judgment may affect the valuation of their fair value and placement within the fair value hierarchy levels.
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance Sheet Location
 
June 30, 2018
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
(In thousands)
Derivative asset – current
Other current assets
 
$
2,246

 
$

 
$
2,246

 
$

Derivative asset – noncurrent
Other long-term assets
 
5,241

 

 
5,241

 

Retirement plan asset – noncurrent
Other long-term asset
 
2,504

 
2,504

 

 

Total
 
 
$
9,991

 
$
2,504

 
$
7,487

 
$


20



 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance Sheet Location
 
December 31, 2017
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
(In thousands)
Derivative asset – current
Other current assets
 
$
1,629

 
$

 
$
1,629

 
$

Derivative asset – noncurrent
Other long-term assets
 
3,801

 

 
3,801

 

Retirement plan asset – noncurrent
Other long-term assets
 
2,435

 
2,435

 

 

Derivative liability – current
Other payables and accruals
 
$
399

 
$

 
$
399

 
$

Total
 
 
$
8,264

 
$
2,435

 
$
5,829

 
$

The following table presents the carrying values and approximate fair values of our long-term debt.
 
June 30, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
USD Tranche (significant other observable inputs – level 2)
$
390,000

 
$
390,246

 
$
485,000

 
$
490,762

Euro Tranche (significant other observable inputs – level 2)
$
367,638

 
$
366,031

 
$
198,265

 
$
200,495

10.5% Senior Notes (quoted prices in active market for identical assets – level 1)
$

 
$

 
$
440,000

 
$
499,171

7.0% Senior Notes (quoted prices in active market for identical assets – level 1)
$
400,000

 
$
414,340

 
$
400,000

 
$
432,028

5.25% Senior Notes (quoted prices in active market for identical assets – level 1)
$
338,461

 
$
341,517

 
$

 
$

ABL Facility (significant other observable inputs – level 2)
$
50,000

 
$
50,000

 
$

 
$

Capital lease obligation (significant other observable inputs – level 2)
$
1,567

 
$
1,567

 
$
2,086

 
$
2,086

KFPC Loan Agreement (significant unobservable inputs – level 3)
$
129,428

 
$
129,428

 
$
149,919

 
$
149,919

KFPC Revolving Facilities (significant unobservable inputs – level 3)
$
6,550

 
$
6,550

 
$
8,430

 
$
8,430

The ABL Facility, Capital lease obligation, KFPC Loan Agreement, and KFPC Revolving Facilities are variable rate instruments, and as such, the fair value approximates the carrying value.
Financial Instruments    
Interest Rate Swap Agreements. Periodically, we enter into interest rate swap agreements to hedge or otherwise protect against interest rate fluctuation on a portion of our variable rate debt. These interest rate swap agreements are designated as cash flow hedges on our exposure to the variability of future cash flows.
In an effort to convert a substantial portion of our future interest payments pursuant to the USD Tranche to a fixed interest rate, in February and March 2016 we entered into several interest rate swap agreements with an aggregate notional value of $925.4 million, effective dates of January 3, 2017 and maturity dates of December 31, 2020. In May 2018 we entered into an interest rate swap agreement with a notional value of $90.0 million, effective date of June 4, 2018 and maturity date of December 31, 2018. We exited out of $625.4 million of our interest rate swaps as of June 30, 2018. As a result, at June 30, 2018 the total notional value of our interest rate swaps was $390.0 million, which effectively hedges the outstanding USD Tranche, fixing LIBOR at 1.749%. We recorded an unrealized gain of $0.9 million and an unrealized loss of $1.2 million for the three months ended June 30, 2018 and 2017, respectively, and an unrealized gain of $4.6 million and an unrealized gain of $0.1 million during the six months ended June 30, 2018 and 2017, respectively, in accumulated other comprehensive income (loss) related to the effective portion of these interest rate swap agreements. In addition, we reclassified out of other comprehensive income (loss) the settlement of a portion of our interest rate swap that amounted to $2.6 million gain for the six months ended June 30, 2018.

21



Foreign Currency Hedges. Periodically, we enter into foreign currency agreements to hedge or otherwise protect against fluctuations in foreign currency exchange rates. These agreements do not qualify for hedge accounting and gains/losses resulting from both the up-front premiums and/or settlement of the hedges at expiration of the agreements are recognized in the period in which they are incurred. We settled these hedges and recorded a gain of $0.2 million and $3.2 million for the three months ended June 30, 2018 and 2017, respectively, and a gain of $0.1 million and $3.1 million for the six months ended June 30, 2018 and 2017, respectively, which are recorded in cost of goods sold in the Condensed Consolidated Statements of Operations. These contracts are structured such that these gains/losses from the mark-to-market impact of the hedging instruments materially offset the underlying foreign currency exchange gains/losses to reduce the overall impact of foreign currency exchange movements throughout the period.
Net Investment Hedge. During the three months ended June 30, 2018, we designated €290 million of euro-denominated borrowing as a hedge against a portion of our net investment in the Company's European operations. The mark to market of this instrument at June 30, 2018 was a gain of $3.5 million, which is recorded within accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.
Credit Risk
The use of derivatives creates exposure to credit risk in the event that the counterparties to these instruments fail to perform their obligations under the contracts, which we seek to minimize by limiting our counterparties to major financial institutions with acceptable credit ratings and by monitoring the total value of positions with individual counterparties.
We analyze our counterparties’ financial condition prior to extending credit, and we establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit, or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.
9. Income Taxes
Income tax provision was a benefit of $1.8 million and an expense $3.9 million for the three months ended June 30, 2018 and 2017, respectively, and an expense of $0.4 million and $5.1 million for the six months ended June 30, 2018 and 2017, respectively. Our effective tax rate was 11.6% and 14.1% for the three months ended June 30, 2018 and 2017, respectively, and 4.9% and 15.5% for the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the mix of our pretax income or loss generated in various foreign jurisdictions and our uncertain tax positions. During the six months ended June 30, 2017, our pretax earnings in the Netherlands, Sweden, and Finland decreased our effective tax rate due to the statutory rates of 25.0%, 22.0%, and 20.0%, respectively.
The provision for income taxes differs from the amount computed by applying the U.S. corporate statutory income tax rate to income (loss) before income taxes for the reasons set forth below.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Income taxes at the statutory rate
$
3,349

 
$
(9,548
)
 
$
(1,757
)
 
$
(11,440
)
State taxes, net of federal benefit
207

 
231

 
(147
)
 
92

Foreign tax rate differential
1,361

 
3,876

 
4,200

 
5,666

Permanent differences
(1,879
)
 
2,056

 
141

 
1,726

Uncertain tax positions
(526
)
 
(580
)
 
(1,053
)
 
(1,155
)
Valuation allowance
(645
)
 
392

 
(443
)
 
317

Return to provision adjustments
(25
)
 

 
(1,350
)
 
3

Other

 
(281
)
 

 
(281
)
Income tax benefit (expense)
$
1,842

 
$
(3,854
)
 
$
(409
)
 
$
(5,072
)
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We consider all available material evidence, both positive and negative, in assessing the appropriateness of a valuation allowance for our deferred tax assets. In determining whether a valuation allowance is required during the period, we evaluate primarily (a) cumulative earnings and losses in recent years, (b) historical taxable income or losses as it relates to our ability to utilize operating loss and tax credit carryforwards within the expiration period, (c) trends indicating earnings or losses expected in future years along with our ability in prior years to reasonably project these future trends or operating results, (d)

22



length of the carryback and carryforward period, and (e) prudent and feasible tax-planning strategies, particularly related to operational changes and the impact on the timing or taxability of relative amounts.
As of June 30, 2018 and December 31, 2017, we recorded a valuation allowance of $51.7 million and $51.3 million, respectively, against our net operating loss carryforwards and other deferred tax assets. We increased our valuation allowances by $0.6 million and $0.4 million for the three and six months ended June 30, 2018, respectively, primarily related to current period net operating losses in the U.S. We decreased our valuation allowances by $0.4 million and $0.3 million for the three and six months ended June 30, 2017, respectively, which represents utilization of net operating losses.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“Tax Act”) introduced significant changes to U.S. income tax law, which included a reduction to the U.S. statutory tax rate from 35.0% to 21.0% and a limitation on net operating loss carryforwards generated in 2018 and beyond. Additionally, the Tax Act extends bonus depreciation provisions and limits the amount of interest expense deductible in future years. In 2017, we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
The Staff of the SEC issued Staff Accounting Bulletin No. 118, which provides registrants a measurement period to report the impact of the new U.S. tax law. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018. Certain items or estimates that result in impacts of the Tax Act being provisional include: the deemed repatriation tax on post-1986 accumulated earnings and profits, the deferred tax rate change effect of the new law, certain deferred taxes related to employee compensation, valuation allowances on certain deferred taxes, deferred taxes related to outside basis differences in certain foreign investments, detailed foreign earnings calculation for the most recent period, project foreign cash balances for certain foreign subsidiaries, and finalized computations of foreign tax credit availability. In addition, the companies 2017 U.S. income tax returns will not be finalized until later in 2018, and while historically this process has resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the U.S. tax rate will result in an adjustment to our income tax provision or benefit when recorded. Finally, we consider it likely that further technical guidance regarding the new Tax Act provisions, as well as clarity regarding state income tax conformity to current federal tax code, may be issued.
In accordance with the Tax Act, our previously untaxed accumulated foreign earnings are subjected to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8.0% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $46.3 million during the year ended December 31, 2017. We have recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed.
The impact of the Tax Act to our deferred taxes was a benefit of $95.0 million, of which $68.9 million relates to the reduction of the U.S. statutory tax rate from 35.0% to 21.0% for years after 2017 and the remaining relates to changes in our investments in foreign subsidiaries. We remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. Although the tax rate reduction is known, we have not collected the necessary data to complete our analysis of the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of December 31, 2017 are provisional. As we complete our analysis of the Tax Act and incorporate additional guidance that may be issued by the U.S. Treasury Department, the IRS or other standard-setting bodies, we may identify additional effects not reflected as of December 31, 2017.
For the period ending December 31, 2017, a portion of the unremitted foreign earnings are permanently reinvested in the corresponding country of origin. Accordingly, we have not provided deferred taxes for the differences between the book basis and underlying tax basis in those subsidiaries or on the foreign currency translation adjustment amounts related to such operations.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. For our U.S. federal income tax returns, the statute of limitations has expired through the tax year ended December 31, 2003. As a result of net operating loss carryforwards from 2004, the statute remains open for all years subsequent to 2003. In addition, open tax years for state and foreign jurisdictions remain subject to examination.
We recognize the tax impact of certain tax positions only when it is more likely than not those such positions are sustainable. The taxes are recorded in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes, which prescribes the minimum recognition threshold.

23



As of June 30, 2018 and December 31, 2017, we had total unrecognized tax benefits of $25.3 million and $24.4 million, respectively, related to uncertain tax positions, all of which, if recognized, would impact our effective tax rate. During the three and six months ended June 30, 2018, we had an increase of $0.1 million and $0.9 million, respectively, primarily related to our uncertain tax positions in the U.S. and Europe. During the three and six months ended June 30, 2017, we had an increase of $1.0 million and $1.3 million, respectively, primarily related to our uncertain tax positions in the U.S. and Europe. We recorded interest and penalties related to unrecognized tax benefits within the provision for income taxes. As a result of the expiration of statute of limitations in various jurisdictions, we expect to release a $0.9 million reserve for the year ending December 31, 2018.
10. Commitments and Contingencies
(a) Legal Proceedings
We received an initial notice from the tax authorities in Brazil during the fourth quarter of 2012 in connection with tax credits that were generated from the purchase of certain goods which were subsequently applied by us against taxes owed. We received an additional tax assessment of R$1.5 million, or approximately $0.4 million during the six months ended June 30, 2018. The tax authorities are currently assessing R$9.2 million, or approximately $2.4 million. We have appealed the assertion by the tax authorities in Brazil that the goods purchased were not eligible to earn the credits. While the outcome of this proceeding cannot be predicted with certainty, we do not expect this matter to have a material adverse effect upon our financial position, results of operations or cash flows.
We and certain of our subsidiaries, from time to time, are parties to various other legal proceedings, claims and disputes that have arisen in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance. A substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our financial position, results of operations or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not expect any of these existing matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations or cash flows.
(b) Asset Retirement Obligations.
The changes in the aggregate carrying amount of our asset retirement obligations are as follows:
 
Six Months Ended June 30,
 
2018
 
2017
 
(In thousands)
Beginning balance
$
5,712

 
$
8,863

Additional accruals

 
439

Accretion expense
168

 
156

Obligations settled
(40
)
 
(877
)
Foreign currency translation
(141
)
 
332

Ending balance
$
5,699

 
$
8,913

Pursuant to the indemnity included in the February 2001 separation agreement from Shell Chemical, we recorded a receivable of $0.2 million and $3.3 million as of June 30, 2018 and 2017, respectively.
There have been no material changes to our Commitments and Contingencies disclosed in our most recently filed Annual Report on Form 10-K.

24



11. Employee Benefits
The components of net periodic benefit costs related to pension benefits are as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
U.S Plans
 
Non-U.S. Plans
 
U.S Plans
 
Non-U.S. Plans
 
U.S Plans
 
Non-U.S. Plans
 
U.S Plans
 
Non-U.S. Plans
 
(In thousands)
Service cost
$
906

 
$
632

 
$
770

 
$
657

 
$
1,793

 
$
1,283

 
$
1,600

 
$
1,303

Interest cost
1,795

 
527

 
1,848

 
654

 
3,590

 
1,068

 
3,662

 
1,375

Expected return on plan assets
(2,453
)
 
(684
)
 
(2,348
)
 
(733
)
 
(4,905
)
 
(1,384
)
 
(4,701
)
 
(1,560
)
Amortization of prior service cost
(1,235
)
 
4

 
903

 
49

 

 
7

 
1,810

 
105

Amortization of net actuarial loss
2,452

 
163

 

 

 
2,452

 
331

 

 

Net periodic benefit cost
$
1,465

 
$
642

 
$
1,173

 
$
627

 
$
2,930

 
$
1,305

 
$
2,371

 
$
1,223

The components of net periodic benefit costs other than the service cost component are included in Other expense on our Condensed Consolidated Statements of Operations.
We made contributions of $6.6 million and $4.0 million to our pension plans in the six months ended June 30, 2018 and 2017, respectively.
The components of net periodic benefit cost related to other post-retirement benefits are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
2017
 
U.S Plans
 
U.S Plans
 
U.S Plans
 
U.S Plans
 
(In thousands)
Service cost
$
124

 
$
145

 
$
279

 
$
290

Interest cost
344

 
340

 
679

 
680

Amortization of prior service cost
194

 
150

 
382

 
300

Net periodic benefit cost
$
662

 
$
635

 
$
1,340

 
$
1,270

The components of net periodic benefit costs other than the service cost component are included in Other expense on our Condensed Consolidated Statements of Operations.
12. Industry Segments and Foreign Operations
Our operations are managed through two operating segments: (i) Polymer segment; and (ii) Chemical segment. In accordance with the provisions of ASC 280, Segment Reporting, our chief operating decision maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company.
Polymer Segment is comprised of our SBCs and other engineered polymers business.
Chemical Segment is comprised of our pine-based specialty products business.
Our chief operating decision maker uses operating income (loss) as the primary measure of each segment's operating results in order to allocate resources and in assessing the company's performance. In accordance with ASC 280, Segment Reporting, we have presented operating income (loss) for each segment. The following table summarizes our operating results by segment. We do not have sales between segments.

25



 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Revenue
$
338,150

 
$
200,245

 
$
538,395

 
$
335,118

 
$
190,202

 
$
525,320

Cost of goods sold
228,474

 
139,545

 
368,019

 
249,215

 
128,268

 
377,483

Gross profit
109,676

 
60,700

 
170,376

 
85,903

 
61,934

 
147,837

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
7,386

 
3,088

 
10,474

 
6,718

 
2,929

 
9,647

Selling, general, and administrative
24,461

 
17,514

 
41,975

 
25,334

 
15,798

 
41,132

Depreciation and amortization
17,598

 
17,542

 
35,140

 
16,773

 
17,817

 
34,590

Operating income
$
60,231

 
$
22,556

 
82,787

 
$
37,078

 
$
25,390

 
62,468

Other expense
 
 
 
 
(1,107
)
 
 
 
 
 
(863
)
Loss on extinguishment of debt
 
 
 
 
(72,330
)
 
 
 
 
 

Earnings of unconsolidated joint venture
 
 
 
 
120

 
 
 
 
 
118

Interest expense, net
 
 
 
 
(25,416
)
 
 
 
 
 
(34,444
)
Income (loss) before income taxes
 
 
 
 
$
(15,946
)
 
 
 
 
 
$
27,279

 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Revenue
$
627,221

 
$
413,566

 
$
1,040,787

 
$
606,066

 
$
377,379

 
$
983,445

Cost of goods sold
436,016

 
287,344

 
723,360

 
430,567

 
261,116

 
691,683

Gross profit
191,205

 
126,222

 
317,427

 
175,499

 
116,263

 
291,762

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
14,833

 
6,438

 
21,271

 
14,123

 
5,761

 
19,884

Selling, general, and administrative
47,981

 
32,717

 
80,698

 
48,671

 
32,875

 
81,546

Depreciation and amortization
35,360

 
35,156

 
70,516

 
33,097

 
34,636

 
67,733