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. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment. Operating results for Arizona Chemical are included in the accompanying consolidated financial statements since the date of acquisition.
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 (through March 6, 2020 in connection with the sale of our CariflexTM business), 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 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, 2019 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.
There have been no 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 (“GAAP”) 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;
|
|
|
•
|
allowances for doubtful accounts and sales returns;
|
|
|
•
|
the valuation of derivatives, deferred taxes, property, plant and equipment, inventory, share-based compensation, and deferred income; 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard is effective for fiscal years beginning after December 15, 2019. Our analysis of ASU 2016-13 was completed during 2019, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2016-13 effective January 1, 2020.
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. Our analysis of ASU 2017-04 was completed during 2019, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2017-04 effective January 1, 2020.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard is effective for fiscal years beginning after December 15, 2019. Our analysis of ASU 2018-18 was completed during 2019, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2018-18 effective January 1, 2020.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides practical expedients and exception for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard is applicable to our contracts and hedging relationships that reference LIBOR. The amendments may be applied through December 31, 2022. We will apply this guidance to transactions and modifications of these arrangements as appropriate.
New Accounting Standards to be Adopted in Future Periods
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is effective for fiscal years beginning after December 15, 2020. 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 2019-12 effective on January 1, 2021.
3. Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs at a point in time when the risk of loss 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 $184.0 million related to contractual commitments with customers for which the performance obligation will be satisfied over time, which will range from one to ten years. During the three months ended March 31, 2020, we added $180.6 million related to the Isoprene Rubber Supply Agreement (“IRSA”) with Daelim Industrial Co, Ltd. (“Daelim”) associated with the sale of our Cariflex business. 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. See Note 4 Disposition and Exit of Business Activities for further discussion of the IRSA.
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 are 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 is 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 months ended March 31, 2020 and 2019, we recognized $4.1 million and $5.8 million of revenue related to these arrangements, respectively.
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:
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Polymer Segment
|
(In thousands)
|
Performance Products
|
$
|
118,760
|
|
|
$
|
138,092
|
|
Specialty Polymers
|
77,917
|
|
|
82,010
|
|
Cariflex(1)
|
36,930
|
|
|
40,867
|
|
Isoprene Rubber
|
6,859
|
|
|
—
|
|
Other
|
(86
|
)
|
|
86
|
|
Polymer Product Line Revenue
|
$
|
240,380
|
|
|
$
|
261,055
|
|
____________________________________________________
(1) Cariflex is included in the results of operations through March 6, 2020.
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Chemical Segment
|
(In thousands)
|
Adhesives
|
$
|
64,895
|
|
|
$
|
65,576
|
|
Performance Chemicals
|
110,742
|
|
|
116,753
|
|
Tires
|
11,252
|
|
|
13,027
|
|
Chemical Product Line Revenue
|
$
|
186,889
|
|
|
$
|
195,356
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Contract receivables(1)
|
$
|
200,853
|
|
|
$
|
190,093
|
|
Contract liabilities(2)
|
$
|
183,950
|
|
|
$
|
12,456
|
|
____________________________________________________
|
|
(1)
|
Contract receivables are recorded within receivables, net of allowances on our Condensed Consolidated Balance Sheets. This includes $20.4 million of contract receivables related to the Cariflex business recorded as current assets held for sale for the year ended December 31, 2019.
|
|
|
(2)
|
Our contract liability consists of $172.8 million of non-cash deferred income related to the IRSA and $12.4 million of non-cash deferred income related to a supply agreement with a significant lubricant additive customer, partially offset by a negative impact of $1.2 million related to the impact of currency exchange rates.
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4. Disposition and Exit of Business Activities
On March 6, 2020, we completed the sale of our Cariflex business to Daelim for gross proceeds of $530.0 million, adjusted for incremental working capital of $5.8 million, less contractual capital contributions of $25.3 million. The closing is subject to a customary post-closing working capital adjustment and a contractual capital contribution post-closing adjustment. Upon closing, we recognized a gain of $175.2 million, and as part of the consideration received, entered into a multi-year IRSA with Daelim. As the IRSA product sales are at cost, we deferred approximately $180.6 million, of which $158.2 million and $22.4 million are recorded within deferred income and other payables and accruals, respectively, on the condensed consolidated balance sheet. The deferred income will be amortized into revenue as a non-cash transaction when the products are sold. In accordance with the IRSA, we will supply Isoprene Rubber to Daelim for a period of five years, with an optional extension for an additional five years.
The IRSA provided $6.9 million of Isoprene Rubber sales revenue for the three months ended March 31, 2020. Included within Isoprene Rubber sales revenue is $3.4 million of amortization of deferred income, which represents non-cash revenue realized as the products are sold under the IRSA. See Note 3 Revenue Recognition for further discussion of the impact to the three months ended March 31, 2020 related to Cariflex and Isoprene Rubber sales.
We used the $510.5 million net proceeds from the transaction principally for repayment of the full outstanding balance of $290.0 million under the U.S. dollar denominated tranche (the “USD Tranche”) of the Company's senior secured term loan facility (the “Term Loan Facility”) and repayment in the amount of €75.0 million, or approximately $84.7 million, of borrowings under the Euro dollar denominated tranche (the “Euro Tranche”) of the Term Loan Facility. We intend to use the remaining proceeds in accordance with the terms of the Term Loan Facility to make additional repayments of debt, invest in strategic assets of the Company, and/or pay transaction costs.
For further discussion on assets held for sale, see Note 4 Assets Held for Sale to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
5. 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, generally three years. Share-based compensation expense was $2.8 million and $3.3 million for the three months ended March 31, 2020 and 2019, respectively.
6. Detail of Certain Balance Sheet Accounts
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Inventories of products:
|
|
|
|
Finished products
|
$
|
265,357
|
|
|
$
|
255,406
|
|
Work in progress
|
4,499
|
|
|
4,589
|
|
Raw materials
|
79,907
|
|
|
80,647
|
|
Inventories of products, gross
|
349,763
|
|
|
340,642
|
|
Inventory reserves
|
(7,782
|
)
|
|
(8,185
|
)
|
Total inventories of products, net
|
$
|
341,981
|
|
|
$
|
332,457
|
|
Intangible assets:
|
|
|
|
Contractual agreements
|
$
|
261,178
|
|
|
$
|
261,923
|
|
Technology
|
145,373
|
|
|
145,663
|
|
Customer relationships
|
60,220
|
|
|
60,291
|
|
Tradenames/trademarks
|
81,756
|
|
|
80,638
|
|
Software
|
63,449
|
|
|
63,181
|
|
Intangible assets
|
611,976
|
|
|
611,696
|
|
Less accumulated amortization:
|
|
|
|
Contractual agreements
|
92,760
|
|
|
87,576
|
|
Technology
|
69,613
|
|
|
68,132
|
|
Customer relationships
|
39,096
|
|
|
38,760
|
|
Tradenames/trademarks
|
49,480
|
|
|
48,162
|
|
Software
|
45,061
|
|
|
43,189
|
|
Total accumulated amortization
|
296,010
|
|
|
285,819
|
|
Intangible assets, net of accumulated amortization
|
$
|
315,966
|
|
|
$
|
325,877
|
|
Other payables and accruals:
|
|
|
|
Employee related
|
$
|
26,555
|
|
|
$
|
25,233
|
|
Short-term operating lease liabilities
|
21,627
|
|
|
20,908
|
|
Interest payable
|
12,916
|
|
|
16,289
|
|
Capital project accruals
|
10,332
|
|
|
13,259
|
|
Customer related
|
5,596
|
|
|
10,329
|
|
Short-term deferred income
|
23,171
|
|
|
1,407
|
|
Income tax payable
|
31,741
|
|
|
3,372
|
|
Other
|
41,103
|
|
|
21,848
|
|
Total other payables and accruals
|
$
|
173,041
|
|
|
$
|
112,645
|
|
Other long-term liabilities:
|
|
|
|
Pension and other post-retirement benefits
|
$
|
121,599
|
|
|
$
|
126,386
|
|
Long-term tax liability
|
$
|
18,174
|
|
|
$
|
21,022
|
|
Other
|
13,796
|
|
|
14,503
|
|
Total other long-term liabilities
|
$
|
153,569
|
|
|
$
|
161,911
|
|
Changes in accumulated other comprehensive income (loss) by component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Foreign Currency Translation
|
|
Cash Flow Hedges, Net of Tax
|
|
Net Investment Hedges, Net of Tax
|
|
Benefit Plans Liability, Net of Tax
|
|
Total
|
|
(In thousands)
|
December 31, 2018
|
$
|
(24,093
|
)
|
|
$
|
3,922
|
|
|
$
|
6,153
|
|
|
$
|
(77,681
|
)
|
|
$
|
(91,699
|
)
|
Other comprehensive income (loss) before reclassifications
|
(4,496
|
)
|
|
(1,316
|
)
|
|
4,594
|
|
|
—
|
|
|
(1,218
|
)
|
Net other comprehensive income (loss) for the year
|
(4,496
|
)
|
|
(1,316
|
)
|
|
4,594
|
|
|
—
|
|
|
(1,218
|
)
|
March 31, 2019
|
$
|
(28,589
|
)
|
|
$
|
2,606
|
|
|
$
|
10,747
|
|
|
$
|
(77,681
|
)
|
|
$
|
(92,917
|
)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
(29,389
|
)
|
|
$
|
(2,389
|
)
|
|
$
|
13,624
|
|
|
$
|
(87,641
|
)
|
|
$
|
(105,795
|
)
|
Other comprehensive income (loss) before reclassifications
|
(15,557
|
)
|
|
1,387
|
|
|
12,322
|
|
|
—
|
|
|
(1,848
|
)
|
Amounts reclassified to (income) expense from accumulated other comprehensive loss (1)
|
66,533
|
|
|
1,002
|
|
|
(899
|
)
|
|
—
|
|
|
66,636
|
|
Net other comprehensive income for the year
|
50,976
|
|
|
2,389
|
|
|
11,423
|
|
|
—
|
|
|
64,788
|
|
March 31, 2020
|
$
|
21,587
|
|
|
$
|
—
|
|
|
$
|
25,047
|
|
|
$
|
(87,641
|
)
|
|
$
|
(41,007
|
)
|
____________________________________________________
|
|
(1)
|
Amounts reclassified to (income) expense from accumulated other comprehensive loss are related to cumulative foreign currency translation, the settlement of interest rate swaps, and settlement of a net investment hedge in connection with the sale of our Cariflex business and subsequent repayments of debt. These costs are recorded in disposition and exit of business activities and loss on extinguishment of debt in the Consolidated Statement of Operations.
|
7. Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income attributable to Kraton by the weighted-average number of shares outstanding, excluding non-vested restricted stock awards 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 March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
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
|
$
|
208,086
|
|
|
31,783
|
|
|
|
|
$
|
12,668
|
|
|
31,956
|
|
|
|
Amounts allocated to unvested restricted shares
|
(1,283
|
)
|
|
(196
|
)
|
|
|
|
(128
|
)
|
|
(323
|
)
|
|
|
Amounts available to common stockholders
|
206,803
|
|
|
31,587
|
|
|
$
|
6.55
|
|
|
12,540
|
|
|
31,633
|
|
|
$
|
0.40
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
1,283
|
|
|
196
|
|
|
|
|
128
|
|
|
323
|
|
|
|
Non participating share units
|
—
|
|
|
362
|
|
|
|
|
—
|
|
|
205
|
|
|
|
Stock options added under the treasury stock method
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
63
|
|
|
|
Amounts reallocated to unvested restricted shares
|
(1,269
|
)
|
|
(196
|
)
|
|
|
|
(127
|
)
|
|
(323
|
)
|
|
|
Amounts available to stockholders and assumed conversions
|
$
|
206,817
|
|
|
31,949
|
|
|
$
|
6.47
|
|
|
$
|
12,541
|
|
|
31,901
|
|
|
$
|
0.39
|
|
Share Repurchase Program. In February 2019, we announced a repurchase program for up to $50.0 million of the Company's common stock by March 2021. Repurchases may be made at management's discretion from time to time through privately-negotiated transactions, in the open market, or through broker-negotiated purchases in compliance with applicable securities law, including through a 10b5-1 Plan. The repurchase program may be suspended for periods or discontinued at any time, and the amount and timing of the repurchases are subject to a number of factors, including Kraton's stock price. During the three months ended March 31, 2020, we did not repurchase any shares of our common stock under this program. From the inception of the program through March 31, 2020, we repurchased 311,152 shares of our common stock at an average price of $32.14 per share and a total cost of $10.0 million. We are not obligated to acquire any specific number of shares of our common stock.
8. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Principal
|
|
Discount
|
|
Debt Issuance Costs
|
|
Total
|
|
Principal
|
|
Discount
|
|
Debt Issuance Costs
|
|
Total
|
|
(In thousands)
|
USD Tranche
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290,000
|
|
|
$
|
(5,057
|
)
|
|
$
|
(6,985
|
)
|
|
$
|
277,958
|
|
Euro Tranche
|
186,949
|
|
|
—
|
|
|
(2,075
|
)
|
|
184,874
|
|
|
277,134
|
|
|
—
|
|
|
(3,237
|
)
|
|
273,897
|
|
7.0% Senior Notes
|
394,750
|
|
|
—
|
|
|
(5,614
|
)
|
|
389,136
|
|
|
394,750
|
|
|
—
|
|
|
(5,846
|
)
|
|
388,904
|
|
5.25% Senior Notes
|
318,913
|
|
|
—
|
|
|
(4,715
|
)
|
|
314,198
|
|
|
325,378
|
|
|
—
|
|
|
(4,879
|
)
|
|
320,499
|
|
ABL Facility
|
15,000
|
|
|
—
|
|
|
—
|
|
|
15,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
KFPC Loan Agreement
|
65,208
|
|
|
—
|
|
|
(29
|
)
|
|
65,179
|
|
|
82,375
|
|
|
—
|
|
|
(33
|
)
|
|
82,342
|
|
KFPC Revolving Facilities
|
30,030
|
|
|
—
|
|
|
—
|
|
|
30,030
|
|
|
20,010
|
|
|
—
|
|
|
—
|
|
|
20,010
|
|
Capital lease obligation
|
971
|
|
|
—
|
|
|
—
|
|
|
971
|
|
|
1,015
|
|
|
—
|
|
|
—
|
|
|
1,015
|
|
Total debt
|
1,011,821
|
|
|
—
|
|
|
(12,433
|
)
|
|
999,388
|
|
|
1,390,662
|
|
|
(5,057
|
)
|
|
(20,980
|
)
|
|
1,364,625
|
|
Less current portion of total debt
|
62,816
|
|
|
—
|
|
|
—
|
|
|
62,816
|
|
|
53,139
|
|
|
—
|
|
|
—
|
|
|
53,139
|
|
Long-term debt
|
$
|
949,005
|
|
|
$
|
—
|
|
|
$
|
(12,433
|
)
|
|
$
|
936,572
|
|
|
$
|
1,337,523
|
|
|
$
|
(5,057
|
)
|
|
$
|
(20,980
|
)
|
|
$
|
1,311,486
|
|
Senior Secured Term Loan Facility. On March 6, 2020, we sold our Cariflex business and the net proceeds from the transaction were used to fully repay $290.0 million of outstanding borrowings under the USD Tranche and repay €75.0 million (or approximately $84.7 million) of outstanding borrowings under the Euro Tranche. We recorded a $14.0 million loss on extinguishment of debt during the three months ended March 31, 2020, which includes a write off of $7.7 million related to previously capitalized deferred financing costs, a write off of $4.9 million related to original issue discount on our USD Tranche, and a $1.3 million loss on the settlement of the ineffective portion of interest rate swaps. The Euro Tranche interest rate applicable margin is 2.0%. Our Term Loan Facility will mature on March 8, 2025. 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 Euro Tranche is 2.78%. The Term Loan Facility contains a number of customary affirmative and negative covenants, and we were in compliance with those covenants as of the date of this filing.
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 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. We repurchased $5.3 million of our 7.0% Senior Notes during the term of the 10b5-1 Plan, which ended on March 4, 2019.
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 $318.9 million as of March 31, 2020) 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 pay interest on the senior notes at 5.25% per annum, semi-annually in arrears on May 15 and November 15 of each year.
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. Our outstanding borrowings under the ABL Facility were $15.0 million as of March 31, 2020. The ABL Facility originally matured on January 6, 2021. In April 2020, we amended and restated the credit agreement governing the ABL Facility to extend the term through January 6, 2023.
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 those covenants as of the date of this filing. In April 2020, we amended the terms of our ABL Facility. See Note 16 Subsequent Events for additional discussion on the ABL Facility extension.
KFPC Loan Agreement. As of March 31, 2020, NTD 2.0 billion (or approximately $65.2 million) was drawn on KFPC's syndicated loan agreement (the “KFPC Loan Agreement”). For the three months ended March 31, 2020, the 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. KFPC was in compliance with those covenants as of the date of this filing. In each case, these covenants are calculated and tested on an annual basis at December 31st each year.
The KFPC Loan Agreement will mature on January 17, 2022. 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 four 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 $71.0 million). All of the KFPC Revolving Facilities are subject to variable interest rates. As of March 31, 2020, NTD 910.0 million (or approximately $30.0 million) was drawn on the KFPC Revolving Facilities.
Debt Issuance Costs. We had net debt issuance cost of $13.4 million as of March 31, 2020, of which $1.0 million related to the ABL Facility is recorded in other current assets and $12.4 million is recorded as a reduction to long-term debt. We amortized $1.0 million and $1.1 million during the three months ended March 31, 2020 and 2019, respectively.
Debt Maturities. The remaining principal payments on our outstanding total debt as of March 31, 2020, are as follows:
|
|
|
|
|
|
Principal Payments
|
|
(In thousands)
|
April 1, 2020 through March 31, 2021
|
$
|
62,816
|
|
April 1, 2021 through March 31, 2022
|
47,797
|
|
April 1, 2022 through March 31, 2023
|
205
|
|
April 1, 2023 through March 31, 2024
|
218
|
|
April 1, 2024 through March 31, 2025
|
173
|
|
Thereafter
|
900,612
|
|
Total debt
|
$
|
1,011,821
|
|
See Note 9 Fair Value Measurements, Financial Instruments, and Credit Risk for fair value information related to our long-term debt.
9. 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 March 31, 2020 and December 31, 2019. 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. As of March 31, 2020 and December 31, 2019, the Company has no assets or liabilities utilizing significant unobservable inputs (or Level 3) to derive its estimated fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance Sheet Location
|
|
March 31, 2020
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
|
(In thousands)
|
Retirement plan asset – noncurrent
|
Other long-term asset
|
|
$
|
2,503
|
|
|
$
|
2,503
|
|
|
$
|
—
|
|
Derivative liability – current
|
Other payables and accruals
|
|
(1,295
|
)
|
|
—
|
|
|
(1,295
|
)
|
Total
|
|
|
$
|
1,208
|
|
|
$
|
2,503
|
|
|
$
|
(1,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance Sheet Location
|
|
December 31, 2019
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
|
(In thousands)
|
Derivative asset – current
|
Other current assets
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
14
|
|
Derivative asset – noncurrent
|
Other long-term assets
|
|
32
|
|
|
—
|
|
|
32
|
|
Retirement plan asset – noncurrent
|
Other long-term assets
|
|
2,547
|
|
|
2,547
|
|
|
—
|
|
Derivative liability – current
|
Other payables and accruals
|
|
(170
|
)
|
|
—
|
|
|
(170
|
)
|
Total
|
|
|
$
|
2,423
|
|
|
$
|
2,547
|
|
|
$
|
(124
|
)
|
The following table presents the carrying values and approximate fair values of our long-term debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(In thousands)
|
USD Tranche (significant other observable inputs – level 2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290,000
|
|
|
$
|
290,183
|
|
Euro Tranche (significant other observable inputs – level 2)
|
$
|
186,949
|
|
|
$
|
159,841
|
|
|
$
|
277,134
|
|
|
$
|
277,827
|
|
7.0% Senior Notes (quoted prices in active market for identical assets – level 1)
|
$
|
394,750
|
|
|
$
|
338,881
|
|
|
$
|
394,750
|
|
|
$
|
406,214
|
|
5.25% Senior Notes (quoted prices in active market for identical assets – level 1)
|
$
|
318,913
|
|
|
$
|
250,905
|
|
|
$
|
325,378
|
|
|
$
|
338,364
|
|
ABL Facility
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Capital lease obligation
|
$
|
971
|
|
|
$
|
971
|
|
|
$
|
1,015
|
|
|
$
|
1,015
|
|
KFPC Loan Agreement
|
$
|
65,208
|
|
|
$
|
65,208
|
|
|
$
|
82,375
|
|
|
$
|
82,375
|
|
KFPC Revolving Facilities
|
$
|
30,030
|
|
|
$
|
30,030
|
|
|
$
|
20,010
|
|
|
$
|
20,010
|
|
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 a series of 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. Based on debt repayments, we have exited all of the interest rate swap agreements originally entered into in 2017. We reclassified out of other comprehensive income (loss) the settlement of our interest rate swaps that amounted to a $1.3 million loss on extinguishment of debt for the three months ended March 31, 2020. We recorded an unrealized loss of $1.7 million during the three months ended March 31, 2019 in other comprehensive income (loss) related to the effective portion of these interest rate swap agreements.
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 a loss of $2.2 million for the three months ended March 31, 2020 and 2019, 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 year ended December 31, 2018, we designated €290.0 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 was a gain of $6.5 million and $5.9 million for the three months ended March 31, 2020 and 2019, respectively, which is recorded within accumulated other comprehensive income (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.
10. Income Taxes
Our income tax provision was a benefit of $36.6 million and an expense of $2.7 million for the three months ended March 31, 2020 and 2019, respectively. Our effective tax rate was 21.2% and 16.3% for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the intercompany transfer of certain intellectual property rights to our Dutch subsidiary, the tax impact of the sale of our Cariflex business, and the mix of our pretax income or loss generated in various foreign jurisdictions. During the three months ended March 31, 2019, 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, the tax impact of certain permanent items, and our uncertain tax positions.
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 March 31,
|
|
2020
|
|
2019
|
Income taxes at the statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
State taxes, net of federal benefit
|
0.1
|
|
|
1.4
|
|
Foreign tax rate differential
|
4.4
|
|
|
0.4
|
|
Permanent differences
|
0.7
|
|
|
(9.4
|
)
|
Cariflex disposition
|
(7.9
|
)
|
|
—
|
|
Dutch transfer of assets
|
(36.4
|
)
|
|
—
|
|
Uncertain tax positions
|
(1.6
|
)
|
|
3.8
|
|
Valuation allowance
|
(0.1
|
)
|
|
(0.8
|
)
|
Return to provision adjustments
|
(1.4
|
)
|
|
(0.1
|
)
|
Effective tax rate
|
(21.2
|
)%
|
|
16.3
|
%
|
For the period ending March 31, 2020, we recorded a deferred tax asset of $62.8 million related to the intercompany transfers of certain intellectual property rights to our Dutch subsidiary. This transfer was concluded as part of a broader internal restructuring in conjunction with the Cariflex disposition.
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) 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 March 31, 2020 and December 31, 2019, we recorded a valuation allowance of $38.3 million and $38.4 million, respectively, against our net operating loss carryforwards and other deferred tax assets. We decreased our valuation allowances by $0.1 million for each of the three months ended March 31, 2020 and 2019, respectively, primarily related to current period utilization of net operating loss carryforwards in certain jurisdictions.
For the period ending March 31, 2020, 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 the utilization 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.
As of March 31, 2020 and December 31, 2019, we had total unrecognized tax benefits of $8.4 million and $11.3 million, respectively, related to uncertain tax positions, all of which, if recognized, would impact our effective tax rate. During the three months ended March 31, 2020 and 2019, we had a decrease of $2.9 million and an increase of $0.5 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. For the year ending December 31, 2020, we expect to release $3.8 million in reserves.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the United States on March 27, 2020. The changes in this act are expected to reduce our 2020 cash tax position by approximately $4.6 million. We are continuing to analyze the CARES Act, but the CARES Act did not have a material impact on our provision for income taxes for the three months ended March 31, 2020.
11. Commitments and Contingencies
(a) Lease Commitments - accounted for under ASC 842, Leases
All of our lease right-of-use (“ROU”) assets and lease liabilities are related to operating leases, where the lease term exceeds one year. Our operating leases are generally for railcars, office space, and equipment used to conduct our operations. We currently have no finance leases as that term is defined under ASC 842. These leases were discounted using a rate of 3.125%, which is based on a weighted average borrowing rate of specific debt. Non-variable lease costs include the amortization of the asset recorded on a straight-line basis. Variable lease components are non-index based payments based on performance or usage of the underlying asset. We have no material lessor or sublease income.
The components of lease cost for operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Lease cost
|
$
|
6,164
|
|
|
$
|
4,576
|
|
Variable lease cost
|
88
|
|
|
191
|
|
Operating lease expense
|
$
|
6,252
|
|
|
$
|
4,767
|
|
The operating lease liabilities on a discounted basis arising from obtaining ROU assets as of March 31, 2020 were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased Asset Class
|
|
Polymer
|
|
Chemical
|
|
Percentage
|
|
Average Months Remaining on the Lease
|
|
Weighted Average in Months
|
|
|
(in thousands)
|
|
|
|
|
|
|
Railcars
|
|
$
|
3,039
|
|
|
$
|
25,330
|
|
|
32.0
|
%
|
|
43
|
|
13.7
|
Buildings
|
|
28,039
|
|
|
7,858
|
|
|
40.4
|
%
|
|
32
|
|
12.9
|
Equipment
|
|
2,597
|
|
|
9,007
|
|
|
13.1
|
%
|
|
35
|
|
4.6
|
Land
|
|
6,843
|
|
|
40
|
|
|
7.8
|
%
|
|
373
|
|
28.9
|
Other
|
|
628
|
|
|
5,408
|
|
|
6.8
|
%
|
|
17
|
|
1.2
|
Total
|
|
$
|
41,146
|
|
|
$
|
47,643
|
|
|
|
|
|
|
61.3
|
The following tables show the undiscounted cash flows for the operating lease liabilities.
|
|
|
|
|
|
March 31, 2020
|
|
(In thousands)
|
April 1, 2020 through December 31, 2020
|
$
|
18,717
|
|
2021
|
19,203
|
|
2022
|
14,598
|
|
2023
|
11,075
|
|
2024
|
7,612
|
|
Thereafter
|
27,950
|
|
Total undiscounted operating lease liabilities
|
99,155
|
|
|
|
Present value discount
|
(10,346
|
)
|
Foreign currency and other
|
(20
|
)
|
Total discounted operating lease liabilities
|
$
|
88,789
|
|
|
|
|
|
|
|
December 31, 2019
|
|
(In thousands)
|
2020
|
$
|
23,310
|
|
2021
|
17,629
|
|
2022
|
13,087
|
|
2023
|
9,665
|
|
2024
|
6,264
|
|
Thereafter
|
27,860
|
|
Total undiscounted operating lease liabilities
|
$
|
97,815
|
|
|
|
Present value discount
|
(10,400
|
)
|
Foreign currency and other
|
117
|
|
Total discounted operating lease liabilities
|
$
|
87,532
|
|
(b) 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 that were subsequently applied by us against taxes owed. The tax authorities are currently assessing R$9.6 million, or approximately $1.8 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.
(c) Asset Retirement Obligations.
The changes in the aggregate carrying amount of our asset retirement obligations are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In thousands)
|
Beginning balance
|
$
|
6,523
|
|
|
$
|
5,703
|
|
Accretion expense
|
78
|
|
|
91
|
|
Obligations settled
|
(302
|
)
|
|
(206
|
)
|
Foreign currency translation
|
(102
|
)
|
|
(82
|
)
|
Ending balance
|
$
|
6,197
|
|
|
$
|
5,506
|
|
12. Employee Benefits
The components of net periodic benefit costs related to pension benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
(In thousands)
|
Service cost
|
$
|
65
|
|
|
$
|
442
|
|
|
$
|
753
|
|
|
$
|
389
|
|
Interest cost
|
1,648
|
|
|
420
|
|
|
1,938
|
|
|
533
|
|
Expected return on plan assets
|
(2,328
|
)
|
|
(682
|
)
|
|
(2,517
|
)
|
|
(633
|
)
|
Amortization of prior service cost
|
—
|
|
|
4
|
|
|
—
|
|
|
9
|
|
Amortization of net actuarial loss
|
388
|
|
|
253
|
|
|
845
|
|
|
106
|
|
Net periodic benefit cost
|
$
|
(227
|
)
|
|
$
|
437
|
|
|
$
|
1,019
|
|
|
$
|
404
|
|
The components of net periodic benefit costs other than the service cost component are included in Other income (expense) on our Condensed Consolidated Statements of Operations.
We made contributions of $3.3 million to our pension plans in each of the three months ended March 31, 2020 and 2019, respectively.
The components of net periodic benefit cost related to other post-retirement benefits are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
U.S. Plans
|
|
U.S. Plans
|
|
(In thousands)
|
Service cost
|
$
|
85
|
|
|
$
|
90
|
|
Interest cost
|
195
|
|
|
240
|
|
Amortization of prior service cost
|
(438
|
)
|
|
(437
|
)
|
Amortization of net actuarial loss
|
213
|
|
|
175
|
|
Net periodic benefit cost
|
$
|
55
|
|
|
$
|
68
|
|
The components of net periodic benefit costs other than the service cost component are included in Other income (expense) on our Condensed Consolidated Statements of Operations.
We made contributions of $0.7 million and $0.1 million to our other post-retirement plans in the three months ended March 31, 2020 and 2019, respectively.
13. 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 our 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 for each segment. The following table summarizes our operating results by segment. We do not have sales between segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Polymer
|
|
Chemical
|
|
Total
|
|
Polymer
|
|
Chemical
|
|
Total
|
|
(In thousands)
|
Revenue
|
$
|
240,380
|
|
|
$
|
186,889
|
|
|
$
|
427,269
|
|
|
$
|
261,055
|
|
|
$
|
195,356
|
|
|
$
|
456,411
|
|
Cost of goods sold
|
171,649
|
|
|
136,420
|
|
|
308,069
|
|
|
207,169
|
|
|
142,240
|
|
|
349,409
|
|
Gross profit
|
68,731
|
|
|
50,469
|
|
|
119,200
|
|
|
53,886
|
|
|
53,116
|
|
|
107,002
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
7,725
|
|
|
3,067
|
|
|
10,792
|
|
|
7,567
|
|
|
2,984
|
|
|
10,551
|
|
Selling, general, and administrative
|
29,933
|
|
|
19,125
|
|
|
49,058
|
|
|
23,098
|
|
|
17,796
|
|
|
40,894
|
|
Depreciation and amortization
|
13,347
|
|
|
17,826
|
|
|
31,173
|
|
|
13,971
|
|
|
17,551
|
|
|
31,522
|
|
Gain on insurance proceeds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,100
|
)
|
|
(11,100
|
)
|
(Gain) loss on disposal of fixed assets
|
(199
|
)
|
|
135
|
|
|
(64
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating income
|
$
|
17,925
|
|
|
$
|
10,316
|
|
|
28,241
|
|
|
$
|
9,250
|
|
|
$
|
25,885
|
|
|
35,135
|
|
Other income (expense)
|
|
|
|
|
327
|
|
|
|
|
|
|
(259
|
)
|
Disposition and exit of business activities
|
|
|
|
|
175,214
|
|
|
|
|
|
|
—
|
|
Gain (loss) on extinguishment of debt
|
|
|
|
|
(13,954
|
)
|
|
|
|
|
|
210
|
|
Earnings of unconsolidated joint venture
|
|
|
|
|
101
|
|
|
|
|
|
|
121
|
|
Interest expense, net
|
|
|
|
|
(17,461
|
)
|
|
|
|
|
|
(18,941
|
)
|
Income before income taxes
|
|
|
|
|
$
|
172,468
|
|
|
|
|
|
|
$
|
16,266
|
|
The following table presents long-lived assets including goodwill and total assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Polymer
|
|
Chemical
|
|
Total
|
|
Polymer
|
|
Chemical
|
|
Total
|
|
(In thousands)
|
Property, plant, and equipment, net
|
$
|
515,481
|
|
|
$
|
391,669
|
|
|
$
|
907,150
|
|
|
$
|
526,692
|
|
|
$
|
399,248
|
|
|
$
|
925,940
|
|
Investment in unconsolidated joint venture
|
$
|
11,390
|
|
|
$
|
—
|
|
|
$
|
11,390
|
|
|
$
|
11,971
|
|
|
$
|
—
|
|
|
$
|
11,971
|
|
Goodwill
|
$
|
—
|
|
|
$
|
772,045
|
|
|
$
|
772,045
|
|
|
$
|
—
|
|
|
$
|
772,418
|
|
|
$
|
772,418
|
|
Total assets
|
$
|
1,190,558
|
|
|
$
|
1,746,175
|
|
|
$
|
2,936,733
|
|
|
$
|
1,097,691
|
|
|
$
|
1,734,694
|
|
|
$
|
2,832,385
|
|
For geographic reporting, revenue is attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant, and equipment, which are attributed to the geographic location in which they are located and are presented at historical cost.
Following is a summary of revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Polymer
|
|
Chemical
|
|
Total
|
|
Polymer
|
|
Chemical
|
|
Total
|
|
(In thousands)
|
|
(In thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
85,394
|
|
|
$
|
80,581
|
|
|
$
|
165,975
|
|
|
$
|
87,968
|
|
|
$
|
80,357
|
|
|
$
|
168,325
|
|
Germany
|
24,433
|
|
|
12,668
|
|
|
37,101
|
|
|
25,911
|
|
|
14,981
|
|
|
40,892
|
|
All other countries
|
130,553
|
|
|
93,640
|
|
|
224,193
|
|
|
147,176
|
|
|
100,018
|
|
|
247,194
|
|
|
$
|
240,380
|
|
|
$
|
186,889
|
|
|
$
|
427,269
|
|
|
$
|
261,055
|
|
|
$
|
195,356
|
|
|
$
|
456,411
|
|
Our capital expenditures for the Polymer segment, excluding capital expenditures by the KFPC joint venture, were $10.3 million and $11.5 million during the three months ended March 31, 2020 and 2019, respectively, and capital expenditures for our Chemical segment were $7.2 million and $10.9 million during the three months ended March 31, 2020 and 2019, respectively.
14. Related Party Transactions
We own a 50% equity investment in an SBC manufacturing joint venture in Kashima, Japan. Our outstanding payables were $18.2 million and $16.4 million as of March 31, 2020 and December 31, 2019, respectively, which were recorded in “Due to related party” liability on the Condensed Consolidated Balance Sheets. Our total purchases from the joint venture were $9.1 million and $8.2 million for the three months ended March 31, 2020 and 2019, respectively.
We own a 50% variable interest in KFPC, an HSBC manufacturing joint venture in Mailiao, Taiwan. The KFPC joint venture is fully consolidated in our financial statements, and our joint venture partner, Formosa Petrochemical Corporation (“FPCC”), is a related party affiliate. Under the terms of the joint venture agreement, FPCC is to provide certain site services and raw materials to KFPC. Additionally, we purchase certain raw materials from FPCC for our other manufacturing locations. Our outstanding payables were $2.0 million and $1.1 million as of March 31, 2020 and December 31, 2019, respectively, which were recorded in “Due to related party” liability on the Condensed Consolidated Balance Sheets. Our total purchases from this joint venture were $14.0 million and $11.8 million for the three months ended March 31, 2020 and 2019, respectively. See Note 15 Variable Interest Entity, for further discussion related to the KFPC joint venture.
15. Variable Interest Entity
We hold a variable interest in a joint venture with FPCC to own and operate a 30 kiloton HSBC plant at FPCC’s petrochemical site in Mailiao, Taiwan. Included in the below assets and liabilities is a land lease with FPCC to support our operations at the HSBC plant. Kraton and FPCC are each 50% owners of the joint venture company, KFPC. Under the provisions of an offtake agreement with KFPC, we have exclusive rights to purchase all production from KFPC. Additionally, following a ramp-up period, the agreement requires us to purchase a minimum of 80% of the plant production capacity each year at a defined fixed margin. This offtake agreement represents a variable interest that provides us the power to direct the most significant activities of KFPC and exposes us to the economic variability of the joint venture. As such, we have determined that we are the primary beneficiary of this variable interest entity. As a result, we have consolidated KFPC in our financial statements and reflected FPCC’s 50% ownership as a noncontrolling interest.
The following table summarizes the carrying amounts of assets and liabilities as of March 31, 2020 and December 31, 2019 for KFPC before intercompany eliminations.
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
3,151
|
|
|
$
|
10,402
|
|
Other current assets
|
17,412
|
|
|
14,847
|
|
Property, plant, and equipment, net
|
151,163
|
|
|
155,153
|
|
Intangible assets
|
7,881
|
|
|
8,133
|
|
Long-term operating lease assets, net
|
6,894
|
|
|
7,044
|
|
Other long-term assets
|
6,632
|
|
|
2,147
|
|
Total assets
|
$
|
193,133
|
|
|
$
|
197,726
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
62,634
|
|
|
$
|
52,961
|
|
Current liabilities
|
14,366
|
|
|
12,801
|
|
Long-term debt
|
32,575
|
|
|
49,391
|
|
Long-term operating lease liabilities
|
6,534
|
|
|
6,603
|
|
Total liabilities
|
$
|
116,109
|
|
|
$
|
121,756
|
|
16. Subsequent Events
On April 15, 2020, we announced a two year extension of our ABL Facility, with an aggregate commitment of up to $250 million. Availability under the ABL Facility is subject to a borrowing base, supported by inventory and receivables. The ABL Facility has a $100 million uncommitted accordion feature which, subject to satisfaction of specific terms and conditions, would provide for increased availability under the credit facility.
We extended the ABL Facility's maturity date to January of 2023 with no significant change in terms and a price increase of fifty basis points in the borrowing margin for amounts outstanding under the facility, while improving certain borrowing base advance rates and borrowing base eligibility criteria from the original agreement.
We have evaluated events and transactions that occurred after the balance sheet date and determined that there were no other significant events or transactions, other than described above, that would require recognition or disclosure in our condensed consolidated financial statements for the period ended March 31, 2020.