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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34581
KRA-20200930_G1.JPG
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)
  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 KRA New York Stock Exchange
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer: ☐
Non-accelerated filer: ☐ Smaller reporting company: ☐
Emerging growth company: ☐
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  ☒
Number of shares of Kraton Corporation Common Stock, $0.01 par value, outstanding as of October 26, 2020: 31,871,895.

Index to Quarterly Report
on Form 10-Q for
Quarter Ended September 30, 2020
 
 
PART I. FINANCIAL INFORMATION Page
    
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PART II. OTHER INFORMATION  
  
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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. Forward-looking statements are often characterized by the use of words such as “outlook,” “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans,” “anticipates,” “foresees,” “future,” or by discussions of strategy, plans, or intentions. The statements in this report that are not historical statements, including, but not limited to, statements regarding our expectations as to the continued impact of the coronavirus (“COVID-19”) pandemic (including governmental and regulatory actions relating thereto) on demand for our products, on the national and global economy and on our customers, suppliers, employees, business and results of operations; the potential impact of actions by our competitors in response to the COVID-19 pandemic on the price and demand for our products; expectations regarding the possibility for future impairment of goodwill or other assets, including as a result of the impact of the COVID-19 pandemic; the anticipated benefits or performance of our products; beliefs regarding opportunities for new, differentiated applications, and other innovations; our ability to obtain necessary regulatory approvals for BIAXAM on our anticipated timeline, or at all, and whether the expected benefits of the product will be realized; our expectations with respect to debt reduction; our expected use of remaining proceeds from the Cariflex transaction; 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”) and our expectations regarding indebtedness to be incurred by our joint venture with FPCC; debt payments, interest payments, benefit plan contributions, and income tax obligations; expected benefits from our acquisitions, business dispositions, or other business combinations and expectations regarding our ability to timely execute and close such transactions; 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 their obligations, 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 and 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; expectations regarding the impact of other extraordinary events such as natural disasters, other weather events, or terrorist attacks; estimated impacts of changing tariff rates; the estimates and matters described in our latest Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and projections regarding environmental costs and capital expenditures and related operational savings, are forward-looking statements.
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”). Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic.
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 (loss), changes in equity, and cash flows of
3

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.
4

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 September 30, 2020, the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2020 and 2019, the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2020 and 2019, the related condensed consolidated statements of changes in equity for the three-month periods ended September 30, June 30, and March 31, 2020 and 2019, 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, 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2020, 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, 2019, 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
October 29, 2020
5

PART I. FINANCIAL INFORMATION
Item 1.     Condensed Consolidated Financial Statements.
KRATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 
September 30, 2020 December 31, 2019
(unaudited)
ASSETS    
Current assets:    
Cash and cash equivalents $ 62,821  $ 35,033 
Receivables, net of allowances of $636 and $434
169,519  169,603 
Inventories of products, net 322,292  332,457 
Inventories of materials and supplies, net 33,143  32,211 
Prepaid expenses 13,961  6,991 
Other current assets 16,054  22,385 
Current assets held for sale —  51,356 
Total current assets 617,790  650,036 
Property, plant, and equipment, less accumulated depreciation of $705,084 and $639,197
921,528  925,940 
Goodwill 373,845  772,418 
Intangible assets, less accumulated amortization of $319,076 and $285,819
301,541  325,877 
Investment in unconsolidated joint venture 12,160  11,971 
Deferred income taxes 75,799  8,863 
Long-term operating lease assets, net 86,839  85,003 
Other long-term assets 20,535  25,219 
Long-term assets held for sale —  27,058 
Total assets $ 2,410,037  $ 2,832,385 
LIABILITIES AND EQUITY    
Current liabilities:    
Current portion of long-term debt $ 75,717  $ 53,139 
Accounts payable-trade 131,747  168,541 
Other payables and accruals 153,534  112,645 
Due to related party 16,805  17,470 
Current liabilities held for sale —  14,849 
Total current liabilities 377,803  366,644 
Long-term debt, net of current portion 859,030  1,311,486 
Deferred income taxes 120,797  125,240 
Long-term operating lease liabilities 70,786  66,624 
Deferred income 161,351  11,049 
Other long-term liabilities 157,480  161,911 
Long-term liabilities held for sale —  3 
Total liabilities 1,747,247  2,042,957 
Commitments and contingencies (note 11)
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; 31,863 shares issued and outstanding at September 30, 2020; 31,751 shares issued and outstanding at December 31, 2019
319  318 
Additional paid in capital 397,121  392,208 
Retained earnings 262,385  464,712 
Accumulated other comprehensive loss (39,439) (105,795)
Total Kraton stockholders' equity 620,386  751,443 
Noncontrolling interest 42,404  37,985 
Total equity 662,790  789,428 
Total liabilities and equity $ 2,410,037  $ 2,832,385 
See Notes to Condensed Consolidated Financial Statements
6

KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Revenue $ 373,438  $ 444,221  $ 1,156,386  $ 1,395,912 
Cost of goods sold 304,684  342,942  875,388  1,058,429 
Gross profit 68,754  101,279  280,998  337,483 
Operating expenses:        
Research and development 9,454  10,367  30,158  31,091 
Selling, general, and administrative 35,285  32,272  122,745  111,623 
Depreciation and amortization 31,313  34,804  93,828  98,230 
Gain on insurance proceeds —  (14,250) —  (32,850)
Gain on disposal of fixed assets (527) (17) (34) (17)
Impairment of goodwill 400,000  —  400,000  — 
Operating income (loss) (406,771) 38,103  (365,699) 129,406 
Other income 259  4,235  837  3,559 
Disposition and exit of business activities —  —  175,189  — 
Gain (loss) on extinguishment of debt (848) —  (14,943) 210 
Earnings of unconsolidated joint venture 81  102  310  363 
Interest expense, net (13,527) (19,214) (44,454) (57,494)
Income (loss) before income taxes (420,806) 23,226  (248,760) 76,044 
Income tax benefit (expense) 18,189  (2,311) 48,082  1,881 
Consolidated net income (loss) (402,617) 20,915  (200,678) 77,925 
Net income attributable to noncontrolling interest (1,177) (2,222) (2,998) (5,356)
Net income (loss) attributable to Kraton $ (403,794) $ 18,693  $ (203,676) $ 72,569 
Earnings (loss) per common share:        
Basic $ (12.67) $ 0.59  $ (6.40) $ 2.28 
Diluted $ (12.67) $ 0.58  $ (6.40) $ 2.26 
Weighted average common shares outstanding:        
Basic 31,787  31,486  31,728  31,603 
Diluted 31,787  31,823  31,728  31,914 
See Notes to Condensed Consolidated Financial Statements
7

KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Net income (loss) attributable to Kraton $ (403,794) $ 18,693  $ (203,676) $ 72,569 
Other comprehensive income (loss):        
Foreign currency translation adjustments, net of tax of $0
11,656  (8,746) 14,136  (10,645)
Reclassification of foreign currency translation adjustments from disposition and exit of business activities, net of tax of $0
—  —  66,533  — 
Unrealized gain (loss) on cash flow hedges, net of tax benefit of $151, expense of $458, and benefit of $1,135, respectively
—  (511) 1,387  (3,858)
Reclassification of loss on cash flow hedge, net of tax benefit of $293
—  —  1,002  — 
Unrealized gain (loss) on net investment hedge, net of tax benefit of $3,334, expense of $3,192, benefit of $3,315, and expense of $3,482, respectively
(11,434) 10,844  (14,089) 11,830 
Reclassification of gain on net investment hedge, net of tax expense of $0
—  —  (899) — 
(Increase) decrease in benefit plans liability, net of tax benefit of $571, $0, $571, and $0, respectively
(1,714) 163  (1,714) 163 
Other comprehensive income (loss), net of tax (1,492) 1,750  66,356  (2,510)
Comprehensive income (loss) attributable to Kraton (405,286) 20,443  (137,320) 70,059 
Comprehensive income attributable to noncontrolling interest 1,856  2,233  4,419  5,035 
Consolidated comprehensive income (loss) $ (403,430) $ 22,676  $ (132,901) $ 75,094 
See Notes to Condensed Consolidated Financial Statements
8

KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In thousands)
 
  Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Kraton Stockholders' Equity Noncontrolling Interest Total Equity
Balance at December 31, 2018 $ 319  $ 385,921  $ 420,597  $ (91,699) $ 715,138  $ 32,461  $ 747,599 
Consolidated net income —  —  12,668  —  12,668  944  13,612 
Other comprehensive loss —  —  —  (1,218) (1,218) (109) (1,327)
Retired treasury stock from employee tax withholdings —  (1,274) (1,410) —  (2,684) —  (2,684)
Exercise of stock options 1  1,544  —  —  1,545  —  1,545 
Non-cash compensation related to equity awards —  3,309  —  —  3,309  —  3,309 
Balance at March 31, 2019 $ 320  $ 389,500  $ 431,855  $ (92,917) $ 728,758  $ 33,296  $ 762,054 
Consolidated net income $ —  $ —  $ 41,208  $ —  $ 41,208  $ 2,190  $ 43,398 
Other comprehensive loss —  —  —  (3,042) (3,042) (223) (3,265)
Retired treasury stock from employee tax withholdings —  (40) (1) —  (41) —  (41)
Cancelled stock from share repurchases (1) (2,064) (2,935) —  (5,000) —  (5,000)
Exercise of stock options —  94  —  —  94  —  94 
Non-cash compensation related to equity awards —  2,190  —  —  2,190  —  2,190 
Balance at June 30, 2019 $ 319  $ 389,680  $ 470,127  $ (95,959) $ 764,167  $ 35,263  $ 799,430 
Consolidated net income —  —  18,693  —  18,693  2,222  20,915 
Other comprehensive income —  —  —  1,750  1,750  11  1,761 
Retired treasury stock from employee tax withholdings —  (2) —  —  (2) —  (2)
Cancelled stock from share repurchases (2) (2,133) (2,865) —  (5,000) —  (5,000)
Exercise of stock options —  3  —  —  3  —  3 
Non-cash compensation related to equity awards —  2,659  —  —  2,659  —  2,659 
Balance at September 30, 2019 $ 317  $ 390,207  $ 485,955  $ (94,209) $ 782,270  $ 37,496  $ 819,766 
See Notes to Condensed Consolidated Financial Statements
9

  Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Kraton Stockholders' Equity Noncontrolling Interest Total Equity
Balance at December 31, 2019 $ 318  $ 392,208  $ 464,712  $ (105,795) $ 751,443  $ 37,985  $ 789,428 
Consolidated net income —  —  208,086  —  208,086  934  209,020 
Other comprehensive income (loss) —  —  —  64,788  64,788  (407) 64,381 
Retired treasury stock from employee tax withholdings —  (1,927) 1,249  —  (678) —  (678)
Non-cash compensation related to equity awards 1  2,847  —  —  2,848  —  2,848 
Balance at March 31, 2020 $ 319  $ 393,128  $ 674,047  $ (41,007) $ 1,026,487  $ 38,512  $ 1,064,999 
Consolidated net income (loss) $ —  $ —  $ (7,968) $ —  $ (7,968) $ 887  $ (7,081)
Other comprehensive income —  —  —  3,060  3,060  1,149  4,209 
Retired treasury stock from employee tax withholdings —  (160) 94  —  (66) —  (66)
Non-cash compensation related to equity awards —  1,897  —  —  1,897  —  1,897 
Balance at June 30, 2020 $ 319  $ 394,865  $ 666,173  $ (37,947) $ 1,023,410  $ 40,548  $ 1,063,958 
Consolidated net income (loss) —  —  (403,794) —  (403,794) 1,177  (402,617)
Other comprehensive income (loss) —  —  —  (1,492) (1,492) 679  (813)
Retired treasury stock from employee tax withholdings —  (10) 6  —  (4) —  (4)
Non-cash compensation related to equity awards —  2,266  —  —  2,266  —  2,266 
Balance at September 30, 2020 $ 319  $ 397,121  $ 262,385  $ (39,439) $ 620,386  $ 42,404  $ 662,790 

See Notes to Condensed Consolidated Financial Statements
10

KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
  2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES    
Consolidated net income (loss) $ (200,678) $ 77,925 
Adjustments to reconcile consolidated net income to net cash provided by operating activities:    
Depreciation and amortization 93,828  98,230 
Lease amortization 18,463  17,164 
Amortization of debt original issue discount 148  808 
Amortization of debt issuance costs 2,426  3,501 
Amortization of deferred income (8,460) — 
Gain on disposal of property, plant, and equipment (34) (17)
(Gain) loss on extinguishment of debt 14,943  (210)
Impairment of goodwill 400,000  — 
Earnings from unconsolidated joint venture, net of dividends received 197  80 
Deferred income tax (benefit) provision (64,576) 8,604 
Release of uncertain tax positions (3,316) (17,739)
Gain on disposition and exit of business activities (175,189) — 
Gain on insurance proceeds for capital expenditures —  (3,948)
Share-based compensation 7,011  8,158 
Decrease (increase) in:    
Accounts receivable 5,033  (19,682)
Inventories of products, materials, and supplies 10,083  (5,550)
Other assets 769  4,295 
Increase (decrease) in:    
Accounts payable-trade (37,073) (16,187)
Other payables and accruals 3,377  (20,715)
Other long-term liabilities (3,567) (12,317)
Due to related party (1,032) (3,634)
Net cash provided by operating activities 62,353  118,766 
CASH FLOWS FROM INVESTING ACTIVITIES    
Kraton purchase of property, plant, and equipment (54,138) (76,298)
KFPC purchase of property, plant, and equipment (3,727) (319)
Purchase of software and other intangibles (6,118) (7,274)
Insurance proceeds for capital expenditures —  3,948 
Cash proceeds from disposition and exit of business activities 510,500  — 
Net cash provided by (used in) investing activities 446,517  (79,943)
CASH FLOWS FROM FINANCING ACTIVITIES    
Proceeds from debt 77,000  57,941 
Repayments of debt (534,733) (67,251)
KFPC proceeds from debt 63,559  33,262 
KFPC repayments of debt (76,555) (53,147)
Capital lease payments (134) (126)
Purchase of treasury stock (748) (12,727)
Proceeds from the exercise of stock options —  1,642 
Settlement of interest rate swap (1,295) — 
Debt issuance costs (1,575) — 
Net cash used in financing activities (474,481) (40,406)
Effect of exchange rate differences on cash (6,601) (1,048)
Net increase (decrease) in cash and cash equivalents 27,788  (2,631)
Cash and cash equivalents, beginning of period 35,033  85,891 
Cash and cash equivalents, end of period $ 62,821  $ 83,260 
See Notes to Condensed Consolidated Financial Statements
11

Nine Months Ended September 30,
  2020 2019
Supplemental disclosures during the period:    
Cash paid for income taxes, net of refunds received $ 6,649  $ 9,351 
Cash paid for interest, net of capitalized interest $ 43,966  $ 41,689 
Capitalized interest $ 2,226  $ 3,112 
Supplemental non-cash disclosures: increase (decrease) during the period  
Property, plant, and equipment accruals $ (13,054) $ (1,564)
Operating leases $ 18,012  $ 89,397 
See Notes to Condensed Consolidated Financial Statements
12

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. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment.
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 through a multi-year Isoprene Rubber Supply Agreement (“IRSA”) with Daelim Industrial Co, Ltd. (“Daelim”).
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 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 condensed 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;
•valuation of goodwill;
•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.
13

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. Overall effective tax rate may therefore vary considerably from quarter to quarter and from year to year based on the actual or projected location of operations, levels of income, intercompany gains or losses, and other factors.
In accordance with U.S. GAAP for interim reporting, we have historically estimated our full-year effective tax rate and applied this rate to ordinary income or loss for the reporting period. We have determined that since small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rate this historical method would not provide reliable results for the quarter ended September 30, 2020. Therefore, a discrete year-to-date method of reporting was used for the quarter ended September 30, 2020. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.
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 Financial Accounting Standards Board (“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.
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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 $185.2 million related to contractual commitments with customers for which the performance obligation will be satisfied over time, which ranges from one to ten years. During the nine months ended September 30, 2020, we added $180.6 million related to the IRSA with 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 with the transfer of risk and title of finished products 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 September 30, 2020 and 2019, we did not recognize any revenue related to these bill-and-hold arrangements. During the nine months ended September 30, 2020 and 2019, we recognized $4.2 million and $5.6 million of revenue related to these bill-and-hold 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:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Polymer Segment (In thousands)
Performance Products $ 117,353  $ 141,267  $ 354,452  $ 422,539 
Specialty Polymers 78,629  70,986  232,851  256,483 
Cariflex(1)
—  49,241  36,930  141,117 
Isoprene Rubber 1,833  —  17,436  — 
Other 725  99  1,103  370 
Polymer Product Line Revenue $ 198,540  $ 261,593  $ 642,772  $ 820,509 
____________________________________________________ 
(1)     Cariflex is included in the results of operations through March 6, 2020.
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Chemical Segment (In thousands)
Adhesives $ 63,901  $ 64,391  $ 189,789  $ 198,785 
Performance Chemicals 99,919  105,367  295,509  337,766 
Tires 11,078  12,870  28,316  38,852 
Chemical Product Line Revenue $ 174,898  $ 182,628  $ 513,614  $ 575,403 
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September 30, 2020 December 31, 2019
(In thousands)
Contract receivables(1)
$ 169,720  $ 190,093 
Contract liabilities(2)
$ 185,227  $ 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 $173.1 million of non-cash deferred income related to the IRSA and $11.4 million of non-cash deferred income related to a supply agreement with a significant lubricant additive customer. The impact from currency exchange rates is $0.8 million.
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 were 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 $1.8 million and $17.4 million of Isoprene Rubber sales revenue for the three and nine months ended September 30, 2020, respectively. Included within Isoprene Rubber sales revenue is $0.3 million and $7.5 million of amortization of deferred income, which represents non-cash revenue realized as the products are sold under the IRSA for the three and nine months ended September 30, 2020, respectively. See Note 3 Revenue Recognition for further discussion of the impact to the nine months ended September 30, 2020 related to Cariflex and Isoprene Rubber sales.
We used the $510.5 million net proceeds from the sale of our Cariflex business 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 €145.0 million, or approximately $166.8 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 and/or invest in strategic assets of the Company.
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 $2.3 million and $2.7 million for the three months ended September 30, 2020 and 2019, respectively, and $7.0 million and $8.2 million for the nine months ended September 30, 2020 and 2019, respectively.
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6. Detail of Certain Balance Sheet Accounts
September 30, 2020 December 31, 2019
  (In thousands)
Inventories of products:    
Finished products $ 251,420  $ 255,406 
Work in progress 2,322  4,589 
Raw materials 75,423  80,647 
Inventories of products, gross 329,165  340,642 
Inventory reserves (6,873) (8,185)
Total inventories of products, net $ 322,292  $ 332,457 
Intangible assets:    
Contractual agreements $ 263,609  $ 261,923 
Technology 146,322  145,663 
Customer relationships 60,453  60,291 
Tradenames/trademarks 82,763  80,638 
Software 67,470  63,181 
Intangible assets 620,617  611,696 
Less accumulated amortization:    
Contractual agreements 104,590  87,576 
Technology 72,948  68,132 
Customer relationships 39,827  38,760 
Tradenames/trademarks 52,418  48,162 
Software 49,293  43,189 
Total accumulated amortization 319,076  285,819 
Intangible assets, net of accumulated amortization $ 301,541  $ 325,877 
Other payables and accruals:    
Employee related $ 44,339  $ 27,078 
Short-term operating lease liabilities 18,215  20,908 
Interest payable 13,448  16,289 
Capital project accruals 1,833  13,259 
Customer related 9,243  10,329 
Short-term deferred income 23,876  1,407 
Income tax payable 16,732  3,372 
Utilities payable 2,365  2,397 
Property and other taxes 2,339  1,548 
Other 21,144  16,058 
Total other payables and accruals $ 153,534  $ 112,645 
Other long-term liabilities:    
Pension and other post-retirement benefits $ 123,219  $ 126,386 
Long-term tax liability 19,458  21,022 
Other 14,803  14,503 
Total other long-term liabilities $ 157,480  $ 161,911 

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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 (10,645) (3,858) 11,830  163  (2,510)
Net other comprehensive income (loss) for the year (10,645) (3,858) 11,830  163  (2,510)
September 30, 2019 $ (34,738) $ 64  $ 17,983  $ (77,518) $ (94,209)
December 31, 2019 $ (29,389) $ (2,389) $ 13,624  $ (87,641) $ (105,795)
Other comprehensive income (loss) before reclassifications 14,136  1,387  (14,089) (1,714) (280)
Amounts reclassified to (income) expense from accumulated other comprehensive loss (1)
66,533  1,002  (899) —  66,636 
Net other comprehensive income (loss) for the year 80,669  2,389  (14,988) (1,714) 66,356 
September 30, 2020 $ 51,280  $ —  $ (1,364) $ (89,355) $ (39,439)
____________________________________________________ 
(1)     Amounts reclassified to (income) expense from accumulated other comprehensive income (loss) are related to cumulative foreign currency translation and settlement of a net investment hedge, which are recorded in disposition and exit of business activities in the Condensed Consolidated Statement of Operations. Additionally, the settlement of interest rate swaps are recorded in loss on extinguishment of debt in the Condensed Consolidated Statement of Operations. All these costs are in connection with the divestiture of our Cariflex business and subsequent repayments of debt.

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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 computation of diluted EPS excludes weighted average restricted share units of 493,187 and 454,366 for the three and nine months ended September 30, 2020, respectively, as they are anti-dilutive due to a net loss attributable to Kraton.
The calculations of basic and diluted EPS are as follows:
  Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
  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 $ (403,794) 31,863    $ 18,693  31,710   
Amounts allocated to unvested restricted shares 963  (76)   (132) (224)  
Amounts available to common stockholders (402,831) 31,787  $ (12.67) 18,561  31,486  $ 0.59 
Diluted:            
Amounts allocated to unvested restricted shares (963) 76    132  224   
Non participating share units —  —    —  282   
Stock options added under the treasury stock method —  —    —  55   
Amounts reallocated to unvested restricted shares 963  (76)   (131) (224)  
Amounts available to stockholders and assumed conversions $ (402,831) 31,787  $ (12.67) $ 18,562  31,823  $ 0.58 
  Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
  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 $ (203,676) 31,836    $ 72,569  31,861   
Amounts allocated to unvested restricted shares 691  (108)   (588) (258)  
Amounts available to common stockholders (202,985) 31,728  $ (6.40) 71,981  31,603  $ 2.28 
Diluted:            
Amounts allocated to unvested restricted shares (691) 108    588  258   
Non participating share units —  —    —  252   
Stock options added under the treasury stock method —  —    —  59   
Amounts reallocated to unvested restricted shares 691  (108)   (582) (258)  
Amounts available to stockholders and assumed conversions $ (202,985) 31,728  $ (6.40) $ 71,987  31,914  $ 2.26 
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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 September 30, 2020, we did not repurchase any shares of our common stock under this program. From the inception of the program through September 30, 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:
September 30, 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 117,250  —  (1,183) 116,067  277,134  —  (3,237) 273,897 
7.0% Senior Notes 394,750  —  (5,150) 389,600  394,750  —  (5,846) 388,904 
5.25% Senior Notes 340,024  —  (4,386) 335,638  325,378  —  (4,879) 320,499 
ABL Facility —  —  —  —  —  —  —  — 
KFPC Loan Agreement 51,159  —  (22) 51,137  82,375  —  (33) 82,342 
KFPC Revolving Facilities 41,424  —  —  41,424  20,010  —  —  20,010 
Capital lease obligation 881  —  —  881  1,015  —  —  1,015 
Total debt 945,488  —  (10,741) 934,747  1,390,662  (5,057) (20,980) 1,364,625 
Less current portion of total debt 75,717  —  —  75,717  53,139  —  —  53,139 
Long-term debt $ 869,771  $ —  $ (10,741) $ 859,030  $ 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. During the three months ended September 30, 2020, we repaid an additional €70.0 million (or approximately $82.1 million) of outstanding borrowings under the Euro Tranche. We recorded a $14.9 million loss on extinguishment of debt during the nine months ended September 30, 2020, which includes a write off of $8.7 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 $340.0 million as of September 30, 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
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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. We had no outstanding borrowings under the ABL Facility as of September 30, 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. As part of the April 2020 amendment and restatement, there was no significant change in terms and a price increase of fifty basis points in the borrowing margin for amounts outstanding under the ABL Facility, while improving certain borrowing base advance rates and borrowing base eligibility criteria from the existing agreement.
KFPC Loan Agreement. As of September 30, 2020, approximately NTD 1.5 billion (or approximately $51.2 million) was outstanding on KFPC's syndicated loan agreement (the “KFPC Loan Agreement”). For the nine months ended September 30, 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 $74.2 million). All of the KFPC Revolving Facilities are subject to variable interest rates. As of September 30, 2020, NTD 1.2 billion (or approximately $41.4 million) was drawn on the KFPC Revolving Facilities.
Debt Issuance Costs. We had debt issuance cost of $12.6 million as of September 30, 2020, of which $1.9 million related to the ABL Facility, which is recorded as an asset (of which $0.8 million was included in other current assets) and $10.7 million is recorded as a reduction to long-term debt. We amortized $2.4 million and $3.5 million during the nine months ended September 30, 2020 and 2019, respectively.
Debt Maturities. The remaining principal payments on our outstanding total debt as of September 30, 2020, are as follows:
  Principal Payments
  (In thousands)
October 1, 2020 through September 30, 2021 $ 75,717 
October 1, 2021 through September 30, 2022 17,252 
October 1, 2022 through September 30, 2023 211 
October 1, 2023 through September 30, 2024 224 
October 1, 2024 through September 30, 2025 512,060 
Thereafter 340,024 
Total debt $ 945,488 
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.
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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 September 30, 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 September 30, 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 September 30, 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 $ 2,896  $ 2,896  $ — 
Derivative liability – current Other payables and accruals (904) —  (904)
Total   $ 1,992  $ 2,896  $ (904)
      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)
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The following table presents the carrying values and approximate fair values of our long-term debt.
  September 30, 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) $ 117,250  $ 115,125  $ 277,134  $ 277,827 
7.0% Senior Notes (quoted prices in active market for identical assets – level 1) $ 394,750  $ 402,811  $ 394,750  $ 406,214 
5.25% Senior Notes (quoted prices in active market for identical assets – level 1) $ 340,024  $ 344,509  $ 325,378  $ 338,364 
ABL Facility $ —  $ —  $ —  $ — 
Capital lease obligation $ 881  $ 881  $ 1,015  $ 1,015 
KFPC Loan Agreement $ 51,159  $ 51,159  $ 82,375  $ 82,375 
KFPC Revolving Facilities $ 41,424  $ 41,424  $ 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 nine months ended September 30, 2020. We recorded an unrealized loss of $0.7 million and $5.0 million during the three and nine months ended September 30, 2019, respectively, 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 loss of $0.1 million and $1.2 million for the three months ended September 30, 2020 and 2019, respectively, and a gain of $0.5 million and a loss of $3.0 million for the nine months ended September 30, 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 loss of $14.8 million and a gain of $14.0 million for the three months ended September 30, 2020 and 2019, respectively, and a loss of $14.6 million and a gain of $15.3 million for the nine months ended September 30, 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.
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10. Income Taxes
Our income tax provision was a benefit of $18.2 million and an expense of $2.3 million for the three months ended September 30, 2020 and 2019, respectively, and a benefit of $48.1 million and $1.9 million for the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the non-deductible goodwill impairment loss and the mix of our pretax income or loss generated in various foreign jurisdictions, offset by the intercompany transfer of certain intellectual property rights to our Dutch subsidiary and the tax impact of the sale of our Cariflex business. During the nine months ended September 30, 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, particularly the release from the closing of the U.S. tax audit.
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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands)
Income taxes at the statutory rate $ 88,370  $ (4,877) $ 52,240  $ (15,969)
State taxes, net of federal benefit 266  (440) 530  (1,142)
Foreign tax rate differential (240) 2,590  (7,539) 5,896 
Permanent differences (928) (3,681) (4,846) (4,813)
Cariflex disposition 18,912  —  22,652  — 
Dutch transfer of assets —  —  65,527  — 
Tax credits 157  —  800  — 
Uncertain tax positions (209) 3,936  2,698  17,364 
Valuation allowance (139) 162  282  572 
Goodwill impairment (84,000) —  (84,000) — 
Return to provision adjustments (4,000) (1) (262) (27)
Income tax benefit (expense) $ 18,189  $ (2,311) $ 48,082  $ 1,881 
As of September 30, 2020, we have recorded a deferred tax asset of $65.5 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 to simplify our organizational structure.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the U.S. on March 27, 2020. The CARES Act among other things, includes provisions relating to modifications of the net interest deduction limitations and revisions to alternative minimum tax credit, (“AMT”), refunds. We have recognized a provisional current tax benefit of $15.0 million related to the modification to the interest deduction limitation. As a result of the CARES Act, we reclassified $1.6 million of expected AMT refunds from long-term to current. We are continuing to analyze the CARES Act, but we do not anticipate the other income tax provisions of the CARES Act to have a material impact on our financial statements.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a deferred 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. As of September 30, 2020 and December 31, 2019, we recorded a valuation allowance of $38.2 million and $38.4 million, respectively, against our net operating loss carryforwards and other deferred tax assets.
We currently believe that certain unremitted foreign earnings of our subsidiaries will permanently reinvest for an infinite period of time. Accordingly, we have not provided deferred taxes for the differences between these subsidiaries' book basis and underlying tax basis or on related foreign currency translation adjustment amounts.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Our U.S. federal income tax returns, for 2004 remain open to examination, as a result of the utilization of net operating loss carryforwards from 2004. In addition, open tax years for state and foreign jurisdictions remain subject to examination. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying condensed consolidated financial statements for any adjustments that might be incurred due to federal, state, or foreign audits.
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We recognize the effect of income tax positions only when it is more likely than not of being sustainable. The taxes are recorded in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.
As of September 30, 2020 and December 31, 2019, we had total unrecognized tax benefits of $8.8 million and $11.3 million, respectively, if recognized, would impact our effective tax rate. The net decrease was primarily due to the lapse in a statute of limitations for unrecognized tax benefits in the U.S. and China of $3.3 million. During the nine months ended September 30, 2019, we had a decrease of $17.7 million, primarily related to the closing of the U.S. tax audit for the pre-acquisition tax return filing and foreign tax audits. We recorded interest and penalties related to unrecognized tax benefits within the provision for income taxes.
It is reasonable that the existing liabilities for the unrecognized tax benefits may increase or decrease over the next 12 months as a result of audit closures and statute expirations; however, the ultimate timing of the resolution and/or closure of audits is highly uncertain.
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 weighted-average rate of 3.55%, 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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Lease cost $ 6,035  $ 5,849  $ 18,463  $ 17,164 
Variable lease cost 759  187  813  302 
Operating lease expense $ 6,794  $ 6,036  $ 19,276  $ 17,466 
The operating lease liabilities on a discounted basis arising from obtaining ROU assets as of September 30, 2020 were comprised as follows:
Leased Asset Class Polymer Chemical Percentage Average Months Remaining on the Lease Weighted Average in Months
(in thousands)
Railcars $ 2,950  $ 28,143  34.9  % 68 23.9
Buildings 25,853  10,307  40.6  % 26 11.3
Equipment 1,298  7,630  10.0  % 36 3.7
Land 6,835  42  7.7  % 363 28.0
Other 686  5,257  6.7  % 23 1.6
Total $ 37,622  $ 51,379  68.5






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The following tables show the undiscounted cash flows for the operating lease liabilities.
  September 30, 2020
  (In thousands)
October 1, 2020 through December 31, 2020 $ 5,892 
2021 19,415 
2022 15,676 
2023 14,068 
2024 10,501 
Thereafter 35,376 
Total undiscounted operating lease liabilities 100,928 
Present value discount (11,934)
Foreign currency and other 7 
Total discounted operating lease liabilities $ 89,001 
  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$10.2 million, or approximately $1.8 million, including penalties and interest. 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.
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(c) Asset Retirement Obligations.
The changes in the aggregate carrying amount of our asset retirement obligations are as follows:
  Nine Months Ended September 30,
  2020 2019
  (In thousands)
Beginning balance $ 6,523  $ 5,703 
Additional accruals 119  780 
Accretion expense 257  262 
Obligations settled (344) (206)
Foreign currency translation 246  (233)
Ending balance $ 6,801  $ 6,306 
12. Employee Benefits
The components of net periodic benefit cost related to pension benefits are as follows: 
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
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 $ 48  $ 443  $ 655  $ 345  $ 143  $ 1,327  $ 1,965  $ 1,123 
Interest cost 1,665  419  2,041  508  4,965  1,259  5,925  1,557 
Expected return on plan assets (2,303) (675) (2,515) (581) (6,908) (2,057) (7,545) (1,825)
Amortization of prior service cost —  4  —  8  —  13  —  25 
Amortization of net actuarial loss 408  253  918  100  1,223  758  2,753  310 
Curtailment income —  —  —  (352) —  —  —  (352)
Settlement cost —  —  —  24  —  —  —  24 
Net periodic benefit (income) cost $ (182) $ 444  $ 1,099  $ 52  $ (577) $ 1,300  $ 3,098  $ 862 
During the fourth quarter of 2019 (the effective date), we amended our Polymer segment U.S. Pension Plan, eliminating future participant benefit accruals after January 31, 2020, which resulted in a pension curtailment and remeasurement as of the effective date.
The components of net periodic benefit cost other than the service cost component are included in other income on our Condensed Consolidated Statements of Operations.
We made contributions of $5.9 million and $9.6 million to our pension plans in the nine months ended September 30, 2020 and 2019, respectively.
The components of net periodic benefit cost related to other post-retirement benefits are as follows:
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
  U.S. Plans U.S. Plans U.S. Plans U.S. Plans
(In thousands)
Service cost $ 85  $ 38  $ 255  $ 218 
Interest cost 195  225  585  705 
Amortization of prior service cost (438) (438) (1,313) (1,313)
Amortization of net actuarial loss 213  115  638  465 
Net periodic benefit (income) cost $ 55  $ (60) $ 165  $ 75 
The components of net periodic benefit cost other than the service cost component are included in other income on our Condensed Consolidated Statements of Operations.
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We made contributions of $1.0 million and $1.1 million to our other post-retirement plans in the nine months ended September 30, 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 September 30, 2020 Three Months Ended September 30, 2019
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Revenue $ 198,540  $ 174,898  $ 373,438  $ 261,593  $ 182,628  $ 444,221 
Cost of goods sold 163,544  141,140  304,684  203,115  139,827  342,942 
Gross profit 34,996  33,758  68,754  58,478  42,801  101,279 
Operating expenses:
Research and development 7,234  2,220  9,454  7,322  3,045  10,367 
Selling, general, and administrative 19,112  16,173  35,285  17,922  14,350  32,272 
Depreciation and amortization 13,042  18,271  31,313  14,982  19,822  34,804 
Gain on insurance proceeds —  —  —  —  (14,250) (14,250)
(Gain) loss on disposal of fixed assets 698  (1,225) (527) (17) —  (17)
Impairment of goodwill —  400,000  400,000  —  —  — 
Operating income (loss) $ (5,090) $ (401,681) (406,771) $ 18,269  $ 19,834  38,103 
Other income 259  4,235 
Disposition and exit of business activities —  — 
Loss on extinguishment of debt (848) — 
Earnings of unconsolidated joint venture 81  102 
Interest expense, net (13,527) (19,214)
Income (loss) before income taxes $ (420,806) $ 23,226 
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Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Revenue $ 642,772  $ 513,614  $ 1,156,386  $ 820,509  $ 575,403  $ 1,395,912 
Cost of goods sold 481,200  394,188  875,388  629,279  429,150  1,058,429 
Gross profit 161,572  119,426  280,998  191,230  146,253  337,483 
Operating expenses:
Research and development 22,056  8,102  30,158  22,227  8,864  31,091 
Selling, general, and administrative 70,074  52,671  122,745  63,226  48,397  111,623 
Depreciation and amortization 39,337  54,491  93,828  43,296  54,934  98,230 
Gain on insurance proceeds —  —  —  —  (32,850) (32,850)
(Gain) loss on disposal of fixed assets 508  (542) (34) (17) —  (17)
Impairment of goodwill —  400,000  400,000  —  —  — 
Operating income (loss) $ 29,597  $ (395,296) (365,699) $ 62,498  $ 66,908  129,406 
Other income 837  3,559 
Disposition and exit of business activities 175,189  — 
Gain (loss) on extinguishment of debt (14,943) 210 
Earnings of unconsolidated joint venture 310  363 
Interest expense, net (44,454) (57,494)
Income before income taxes $ (248,760) $ 76,044 
The following table presents long-lived assets including goodwill and total assets.
  September 30, 2020 December 31, 2019
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Property, plant, and equipment, net $ 515,460  $ 406,068  $ 921,528  $ 526,692  $ 399,248  $ 925,940 
Investment in unconsolidated joint venture $ 12,160  $ —  $ 12,160  $ 11,971  $ —  $ 11,971 
Goodwill $ —  $ 373,845  $ 373,845  $ —  $ 772,418  $ 772,418 
Total assets $ 1,070,354  $ 1,339,683  $ 2,410,037  $ 1,097,691  $ 1,734,694  $ 2,832,385 
(a) Goodwill
The Company conducts an annual impairment review of goodwill on October 1st of each year, unless events occur which trigger the need for an interim impairment review.
During the third quarter of 2020, the Company updated its annual long-range plan, taking into consideration the following:
•a continued decline in rosin margins, resulting from excess hydrocarbon supply, negatively affecting our adhesives applications
•a significant decline in gum turpentine pricing, which began in the second half of 2019, resulting in lower CST margins
•the impacts of COVID-19, which weakened demand fundamentals, including applications such as oilfield, tires, and automotive
These and other factors were considered indicators of impairment of our Chemical segment’s goodwill. We performed an interim impairment test of goodwill as of September 30, 2020. As a result, we recorded a non-cash impairment charge of $400.0 million within the Chemical segment. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.
The Company estimated the fair value using both an income and market approach. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to forecasts of future revenues, profit margins, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to earnings before interest, taxes, depreciation, and amortization
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(“EBITDA”) multiples. The Company estimates future cash flows based upon EBITDA projections within our long-range plan, discounted at an appropriate risk-adjusted rate.
Under the income approach, the fair value for Chemical segment was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecast, including our annual long-range plan, updated for recent events, to estimate future cash flows, including a terminal value. Our internal forecast includes assumptions about future commodity pricing and expected demand for goods and services. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in our forecast.
Valuations using the market approach were derived from metrics of selected publicly traded peer companies. The selection of peer companies was based on the markets in which the Chemical segment operates, considering risk profiles, size, geography, and diversity of products and services.
We derived our risk-adjusted rate using a capital asset pricing model and analyzing published rates for industries and comparable businesses similar to our Chemical segment taking into account the cost of equity and debt. We used a risk-adjusted rate that is commensurate with the risks and uncertainties inherent in the respective businesses and in our internally developed forecast.
Changes in goodwill from January 1, 2020 through September 30, 2020 were as follows:
  Chemical
  (In thousands)
Balance at January 1, 2020 $ 772,418 
Goodwill impairment charge (400,000)
Foreign currency translation 1,427 
 Balance at September 30, 2020 $ 373,845 
(b) Revenue by Geography
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 September 30, 2020 Three Months Ended September 30, 2019
  Polymer Chemical Total Polymer Chemical Total
  (In thousands) (In thousands)
Revenue:        
United States $ 77,586  $ 69,559  $ 147,145  $ 78,640  $ 78,516  $ 157,156 
Germany 21,388  11,390  32,778  29,970  13,282  43,252 
All other countries 99,566  93,949  193,515  152,983  90,830  243,813 
  $ 198,540  $ 174,898  $ 373,438  $ 261,593  $ 182,628  $ 444,221 
  Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
  Polymer Chemical Total Polymer Chemical Total
  (In thousands) (In thousands)
Revenue:        
United States $ 235,289  $ 214,684  $ 449,973  $ 270,786  $ 244,139  $ 514,925 
Germany 69,256  32,610  101,866  84,967  40,560  125,527 
All other countries 338,227  266,320  604,547  464,756  290,704  755,460 
  $ 642,772  $ 513,614  $ 1,156,386  $ 820,509  $ 575,403  $ 1,395,912 
(c) Capital Expenditures
Our capital expenditures for the Polymer segment, excluding capital expenditures by the KFPC joint venture, were $27.3 million and $44.5 million during the nine months ended September 30, 2020 and 2019, respectively, and capital expenditures for our Chemical segment were $26.9 million and $31.8 million during the nine months ended September 30, 2020 and 2019, respectively.

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14. Related Party Transactions
We own a 50% equity investment in an SBC manufacturing joint venture in Kashima, Japan. Our outstanding payables were $12.7 million and $16.4 million as of September 30, 2020 and December 31, 2019, respectively, which were recorded in due to related party on the Condensed Consolidated Balance Sheets. Our total purchases from the joint venture were $6.1 million and $7.0 million for the three months ended September 30, 2020 and 2019, respectively, and $20.9 million and $23.4 million for the nine months ended September 30, 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 $4.1 million and $1.1 million as of September 30, 2020 and December 31, 2019, respectively, which were recorded in due to related party on the Condensed Consolidated Balance Sheets. Our total purchases from this joint venture were $10.7 million and $15.8 million for the three months ended September 30, 2020 and 2019, respectively, and $36.4 million and $41.2 million for the nine months ended September 30, 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 September 30, 2020 and December 31, 2019 for KFPC before intercompany eliminations.
September 30, 2020 December 31, 2019
  (In thousands)
Cash and cash equivalents $ 2,914  $ 10,402 
Other current assets 17,365  14,847 
Property, plant, and equipment, net 148,509  155,153 
Intangible assets 7,896  8,133 
Long-term operating lease assets, net 7,046  7,044 
Other long-term assets 4,386  2,147 
Total assets $ 188,116  $ 197,726 
Current portion of long-term debt $ 75,530  $ 52,961 
Current liabilities 4,247  12,801 
Long-term debt 17,031  49,391 
Long-term operating lease liabilities 6,501  6,603 
Total liabilities $ 103,309  $ 121,756 
16. Subsequent Events
We have evaluated events and transactions that occurred after the balance sheet date and determined that there were no other significant events or transactions that would require recognition or disclosure in our condensed consolidated financial statements for the period ended September 30, 2020.
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. This discussion contains forward-looking statements and involves numerous risks, uncertainties, assumptions and other important factors that could cause the actual results, performance, or industry results, to differ materially from historical results, any future results, or performance, or industry results expressed or implied by such forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Information.”
OVERVIEW
We are a leading global sustainable producer of specialty polymers and high-value biobased products derived from pine wood pulping co-products. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment.
Polymer Segment
SBCs are highly-engineered synthetic elastomers, which we invented and commercialized over 50 years ago. We developed the first unhydrogenated styrenic block copolymers (“USBC”) in 1964 and the first hydrogenated styrenic block copolymers (“HSBC”) in the late 1960s. 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, paving, roofing, and footwear products.
Our polymers are typically formulated or compounded with other products to achieve improved, customer-specific performance characteristics in a variety of applications. We seek to maximize the value of our product portfolio by emphasizing complex or specialized polymers and innovations that yield higher margins than more commoditized products. We sometimes refer to these complex or specialized polymers or innovations as being more “differentiated.” We believe our SBC products offer many characteristics that help our customers drive towards their sustainability goals. Among others, our SBCs may offer features such as greater recyclability, increased durability that reduces the costly need for maintenance and replacement, alternatives to less environmentally friendly materials, such as PVCs.
Our USBC paving and roofing applications provide a sustainable alternative by increasing durability, extending road and roof life. Our products are also found in medical applications, personal care products such as disposable diapers, oil additives, gels, and various other consumer goods. Our products are also used to impart tack and shear properties in a wide variety of adhesive products and to impart characteristics such as flexibility and durability in sealants and corrosion resistance in coatings.
Our HSBC offerings are often the more sustainable choice when compared to alternatives. Among other features, our HSBCs can offer improved recyclability of polyethylene-terephthalate and polypropylene streams, and function as replacements for less sustainable alternatives such as PVC, mainly in medical applications.
Prior to the sale of our CariflexTM business, we produced Cariflex isoprene rubber and isoprene rubber latex. Our Cariflex products are based on synthetic polyisoprene polymer and do not contain natural rubber latex or other natural rubber products, making them an ideal substitute for natural rubber latex, particularly in applications with high purity requirements such as medical, healthcare, personal care, and food contact. Cariflex is included in the results of operations through March 6, 2020.
On March 6, 2020, we completed the sale of our Cariflex business to Daelim Industrial Co, Ltd. (“Daelim”). As part of the sale, we entered into a multi-year Isoprene Rubber Supply Agreement (“IRSA”) with Daelim. 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. See Note 4 Disposition and Exit of Business Activities for further discussion of the IRSA.
Chemical Segment
We manufacture and sell high value sustainable products primarily derived from pine wood pulping co-products. We refine and further upgrade two primary feedstocks, crude tall oil (“CTO”) and crude sulfate turpentine (“CST”), both of which are co-products of the wood pulping process, into value-added specialty chemicals. We refine CTO through a distillation process into four primary constituent fractions: tall oil fatty acids (“TOFA”); tall oil rosin (“TOR”); distilled tall oil (“DTO”); and tall oil pitch. We further upgrade TOFA, TOR, and DTO into derivatives such as dimer acids, polyamide resins, rosin resins, dispersions, and disproportionated resins. We refine CST into terpene fractions, which can be further upgraded into terpene resins. The various fractions and derivatives resulting from our CTO and CST refining process provide for distinct
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functionalities and properties, determining their respective applications and end markets. Our products derived from CTO and CST offer sustainable, non-GMO bio-based alternatives to hydrocarbons.
We focus our resources on three product groups: Adhesives, Performance Chemicals, and Tires. Within our product groups, our products are sold into a diverse range of submarkets, including packaging, tapes and labels, pavement marking, high performance tires, fuel additives, oilfield and mining, coatings, metalworking fluids and lubricants, inks, and flavor and fragrances, among others.
While this business is based predominantly on the refining and upgrading of CTO and CST, we have the capacity to use both hydrocarbon-based raw materials, such as alpha-methyl-styrene, rosins, and gum rosins where appropriate and, accordingly, are able to offer tailored solutions for our customers.
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Factors Affecting Our Results of Operations
International Operations and Currency Fluctuations. We operate a geographically diverse business, serving customers in numerous countries from fourteen manufacturing facilities on four continents. Our sales and production costs are mainly denominated in U.S. dollars, Euro, Japanese Yen, and Swedish Krona. From time to time, we use hedging strategies to reduce our exposure to currency fluctuations.
We generated our revenue from customers located in the following regions:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenue by Geography: (In thousands)
Americas $ 171,177  $ 179,616  $ 517,892  $ 581,345 
Europe, Middle East, and Africa 140,728  156,613  407,672  476,388 
Asia Pacific 61,533  107,992  230,822  338,179 
Total revenue $ 373,438  $ 444,221  $ 1,156,386  $ 1,395,912 
Raw Materials. We use butadiene, styrene, and isoprene (collectively referred to as “monomers”) as our primary raw materials in our Polymer segment and CTO and CST in our Chemical segment. The cost of these raw materials has generally correlated with changes in energy prices and is generally influenced by supply and demand factors, and for our isoprene monomers, the prices of natural and synthetic rubber. Average purchase prices of our raw materials decreased for the Polymer and Chemical segments during the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019.
Seasonality. Seasonal changes and weather conditions typically affect our sales of products in our paving, pavement marking, roofing, and construction applications, which generally results in higher sales volumes in the second and third quarters of the calendar year compared to the first and fourth quarters of the calendar year. Sales for our other product applications tend to show relatively little seasonality.
Recent Developments and Certain Known Trends
Our business is subject to a number of known risks and uncertainties, some of which are a result of recent developments.
COVID-19 Pandemic. The continued global impact of COVID-19 has resulted in various emergency measures to combat the spread of the virus. We continue to monitor the progression of the COVID-19 pandemic on a daily basis, and we have a dedicated COVID-19 management team that meets regularly. The safety and well-being of our employees, stakeholders, and the communities in which we operate remain our primary concern. While our essential manufacturing plant and research and development laboratory personnel remain on-site, many of our other employees around the world are working remotely. We are continuing to follow the orders and guidance of federal, regional, and local governmental agencies, as we maintain our own stringent protocols in an effort to mitigate the spread of the virus and protect the health of our employees, customers, and suppliers as well as the communities in which we operate.
To date, our plants have continued to operate at normal capacities, and our supply chain has remained largely intact, with adequate availability of key raw materials. Importantly, under the U.S. Department of Homeland Security guidance issued on April 17, 2020, and supplemented on August 18, 2020, as well as many related regional and local governmental orders, chemical manufacturing sites are considered essential critical infrastructure, and as such, are not currently subject to closure in the locations where we operate. While the members of the European Union issue critical infrastructure orders on a country-by-country basis, thus far they have taken a similar approach to the U.S. Department of Homeland Security guidance. Although there has been some disruption in global logistics channels, we have not experienced significant delays in fulfillment of customer orders. We believe our geographic and end market diversification partially mitigate our exposure, as we serve many customers whose products remain vital in the current environment.
During the third quarter 2020, we saw improvement in demand trends in our Chemical segment, compared to the second quarter of 2020, however, COVID-19 continues to modestly affect sales volumes in our Chemical segment’s market sectors such as tires, automotive, lubricants/fuel additives, and oilfield. As future impact of COVID-19 remains uncertain, we expect to see continued pressure on sales volumes in the Chemical segment during the remainder of 2020, primarily in the oilfield sector.
During the third quarter of 2020, we also saw improved demand trends in our Polymer segment, compared to the second quarter of 2020. Within the Polymer segment, the recovery of global demand for medical and hygiene applications was partially offset by continued weakness in demand in oilfield and automotive applications.
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We are unable to accurately predict the impact that the pandemic will have on our business and results of operations for the remainder of 2020 and beyond (including how the impact of the pandemic on our business and results of operations may change from quarter to quarter) due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, additional actions that may be taken by governmental authorities, and other unintended consequences. Furthermore, the pandemic has adversely impacted, and may further adversely impact, the national and global economy, particularly in less essential end markets. There can also be no assurance that demand for our products generally (regardless of end market) won’t be adversely affected by the continued impact of the COVID-19 pandemic on the national and global economy. Moreover, we are unable to predict actions that may be taken by our competitors, some of which may be less diversified, that could negatively impact pricing or demand for our products.
While the future remains uncertain, our geographic and end market diversification, such as medical, adhesives, and food packaging, may partially mitigate this financial exposure, as we serve many customers whose products remain vital in the current environment. We will continue to monitor the impacts of COVID-19 and implement operational cost reductions and logistics initiatives as needed. While the impacts of COVID-19 contributed to the goodwill impairment in our Chemical segment, as discussed further in Note 13 Industry Segments and Foreign Operations, we do not currently anticipate any material impairments, with respect to intangible assets, long-lived assets, or right of use assets, increases in allowances for credit losses from our customers, restructuring charges, other expenses, or changes in accounting judgments to have a material impact on our financial statements, however at this point we are continuing to assess the impact, if any.
Market Conditions. Certain fundamental market conditions that affected our business and financial results prior to the COVID-19 pandemic continue to have an impact on market demand.
Our Chemical segment has been impacted by the decline in oilfield demand and continues to see pressure on pricing from 2019 levels in the rosin market, driven by adverse market fundamentals and excess availability of low-cost C5 hydrocarbon tackifiers. While rosin prices remain under pressure compared to historical levels, they have stabilized and we do not expect pricing to improve through the remainder of 2020. Prices for upgraded products within our CST chain have remained relatively stable since the second half of 2019.
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RESULTS OF OPERATIONS
KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Revenue $ 373,438  $ 444,221  $ 1,156,386  $ 1,395,912 
Cost of goods sold 304,684  342,942  875,388  1,058,429 
Gross profit 68,754  101,279  280,998  337,483 
Operating expenses:        
Research and development 9,454  10,367  30,158  31,091 
Selling, general, and administrative 35,285  32,272  122,745  111,623 
Depreciation and amortization 31,313  34,804  93,828  98,230 
Gain on insurance proceeds —  (14,250) —  (32,850)
Gain on disposal of fixed assets (527) (17) (34) (17)
Impairment of goodwill 400,000  —  400,000  — 
Operating income (loss) (406,771) 38,103  (365,699) 129,406 
Other income 259  4,235  837  3,559 
Disposition and exit of business activities —  —  175,189  — 
Gain (loss) on extinguishment of debt (848) —  (14,943) 210 
Earnings of unconsolidated joint venture 81  102  310  363 
Interest expense, net (13,527) (19,214) (44,454) (57,494)
Income (loss) before income taxes (420,806) 23,226  (248,760) 76,044 
Income tax benefit (expense) 18,189  (2,311) 48,082  1,881 
Consolidated net income (loss) (402,617) 20,915  (200,678) 77,925 
Net income attributable to noncontrolling interest (1,177) (2,222) (2,998) (5,356)
Net income (loss) attributable to Kraton $ (403,794) $ 18,693  $ (203,676) $ 72,569 
Earnings (loss) per common share:        
Basic $ (12.67) $ 0.59  $ (6.40) $ 2.28 
Diluted $ (12.67) $ 0.58  $ (6.40) $ 2.26 
Weighted average common shares outstanding:        
Basic 31,787  31,486  31,728  31,603 
Diluted 31,787  31,823  31,728  31,914 
Consolidated Results
Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019
Revenue was $373.4 million for the three months ended September 30, 2020 compared to $444.2 million for the three months ended September 30, 2019, a decrease of $70.8 million, or 15.9%. Revenue declined $63.1 million and $7.7 million for the Polymer and Chemical segments, respectively. For additional information regarding the changes in revenue, see our segment disclosures below.
Cost of goods sold was $304.7 million for the three months ended September 30, 2020 compared to $342.9 million for the three months ended September 30, 2019, a decrease of $38.3 million, or 11.2%. Cost of goods sold decreased $39.6 million for the Polymer segment and increased $1.3 million for the Chemical segment. For additional information regarding the changes in cost of goods sold, see our segment disclosures below.
Selling, general, and administrative expenses were $35.3 million for the three months ended September 30, 2020 compared to $32.3 million for the three months ended September 30, 2019. The $3.0 million increase is primarily attributable to higher employee related costs, partially offset by reduced fixed costs initiatives.
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Depreciation and amortization was $31.3 million for the three months ended September 30, 2020 compared to $34.8 million for the three months ended September 30, 2019. The decrease of $3.5 million was primarily attributable to the divestiture of our Cariflex business.
During the third quarter of 2020, we recorded a non-cash impairment charge of $400.0 million within the Chemical segment. For more information regarding the goodwill impairment charge, see Note 13 Industry Segments and Foreign Operations.
Other income was $0.3 million for the three months ended September 30, 2020 compared to other income of $4.2 million for the three months ended September 30, 2019. During the three months ended September 30, 2019, we recorded a gain of $4.6 million related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.
Interest expense, net, was $13.5 million for the three months ended September 30, 2020 compared to $19.2 million for the three months ended September 30, 2019, a decrease of $5.7 million. The decrease is due to lower overall indebtedness.
Income tax provision was a benefit of $18.2 million and an expense of $2.3 million for the three months ended September 30, 2020 and 2019, respectively. During the three months ended September 30, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the non-deductible goodwill impairment loss, return to provision adjustments, and certain permanent items, offset by the tax impact of the sale of our Cariflex business. During the three months ended September 30, 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, particularly the release from the closing of the foreign tax audit.
Net loss attributable to Kraton was $403.8 million, or $12.67 per diluted share, for the three months ended September 30, 2020, a decrease of $422.5 million compared to net income attributable to Kraton of $18.7 million, or $0.58 per diluted share, for the three months ended September 30, 2019. Adjusted Diluted Earnings Per Share (non-GAAP) was $0.49 for the three months ended September 30, 2020 compared to Adjusted Diluted Earnings Per Share (non-GAAP) of $0.52 for the three months ended September 30, 2019. See a reconciliation of generally accepted accounting principles (“GAAP”) Diluted Earnings Per Share to non-GAAP Adjusted Diluted Earnings Per Share below.
Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019
Revenue was $1,156.4 million for the nine months ended September 30, 2020 compared to $1,395.9 million for the nine months ended September 30, 2019, a decrease of $239.5 million, or 17.2%. Revenue decreased $177.7 million and $61.8 million for the Polymer and Chemical segments, respectively. For additional information regarding the changes in revenue, see our segment disclosures below.
Cost of goods sold was $875.4 million for the nine months ended September 30, 2020 compared to $1,058.4 million for the nine months ended September 30, 2019, a decrease of $183.0 million, or 17.3%. Cost of goods sold decreased $148.1 million for the Polymer segment and increased $35.0 million for the Chemical segment. For additional information regarding the changes in cost of goods sold, see our segment disclosures below.
Selling, general, and administrative expenses were $122.7 million for the nine months ended September 30, 2020 compared to $111.6 million for the nine months ended September 30, 2019. The $11.1 million increase is primarily attributable to higher transaction, acquisition, and restructuring costs related to the divestiture of our Cariflex business and higher employee related costs, partially offset by reduced fixed costs initiatives.
Depreciation and amortization was $93.8 million for the nine months ended September 30, 2020 compared to $98.2 million for the nine months ended September 30, 2019. The decrease of $4.4 million was primarily attributable to the divestiture of our Cariflex business.
During the third quarter of 2020, we recorded a non-cash impairment charge of $400.0 million within the Chemical segment. For more information regarding the goodwill impairment charge, see Note 13 Industry Segments and Foreign Operations.
Other income was $0.8 million for the nine months ended September 30, 2020 compared to other income of $3.6 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, we recorded a gain of $4.6 million related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.
Disposition and exit of business activities was $175.2 million for the nine months ended September 30, 2020 related to the gain on sale of our Cariflex business. See Note 4 Disposition and Exit of Business Activities for further discussion on the sale of our Cariflex business.
We recorded a $14.9 million loss on extinguishment of debt during the nine months ended September 30, 2020, which includes the write off of previously capitalized deferred financing costs, the write off of original issue discount, and a loss on the settlement of the ineffective portion of interest rate swaps due to the repayment in full of our USD Tranche and a partial
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repayment of our Euro Tranche with the net cash proceeds from the sale of our Cariflex business. See Note 8 Long-Term Debt for further discussion.
Interest expense, net, was $44.5 million for the nine months ended September 30, 2020 compared to $57.5 million for the nine months ended September 30, 2019, a decrease of $13.0 million. The decrease is due to lower overall indebtedness.
Our income tax provision was a benefit of $48.1 million and $1.9 million for the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the non-deductible goodwill impairment loss, the tax impact of certain permanent items, and the mix of our pretax income or loss generated in various foreign jurisdictions, partially offset by the intercompany transfer of certain intellectual property rights to our Dutch subsidiary and the tax impact of the sale of our Cariflex business. During the nine months ended September 30, 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, particularly the release from the closing of the U.S. and foreign tax audit. See Note 10 Income Taxes for further discussion on the reconciliation from the U.S. corporate statutory tax rate to the effective tax rate.
Net loss attributable to Kraton was $203.7 million, or $6.40 per diluted share, for the nine months ended September 30, 2020, a decrease of $276.2 million compared to net income attributable to Kraton of $72.6 million, or $2.26 per diluted share, for the nine months ended September 30, 2019. Adjusted Diluted Earnings Per Share (non-GAAP) was $1.05 for the nine months ended September 30, 2020 compared to Adjusted Diluted Earnings Per Share (non-GAAP) of $2.99 for the nine months ended September 30, 2019. See a reconciliation of GAAP Diluted Earnings Per Share to non-GAAP Adjusted Diluted Earnings Per Share below.
Polymer Segment
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands)
Performance Products $ 117,353  $ 141,267  $ 354,452  $ 422,539 
Specialty Polymers 78,629  70,986  232,851  256,483 
Cariflex(1)
—  49,241  36,930  141,117 
Isoprene Rubber(1)
1,833  —  17,436  — 
Other 725  99  1,103  370 
Polymer Segment Revenue $ 198,540  $ 261,593  $ 642,772  $ 820,509 
Operating income (loss) $ (5,090) $ 18,269  $ 29,597  $ 62,498 
Operating income (loss) margin (2.6) % 7.0  % 4.6  % 7.6  %
Adjusted EBITDA (non-GAAP)(1)(2)
$ 31,912  $ 50,304  $ 136,926  $ 158,635 
Adjusted EBITDA margin (non-GAAP)(3)
16.1  % 19.2  % 21.3  % 19.3  %
 ____________________________________________________
(1)Our Cariflex revenue includes sales through March 6, 2020. We continue to sell Isoprene Rubber to Daelim under an IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $0.3 million and $7.5 million for the three and nine months ended September 30, 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.
(2)See non-GAAP reconciliations included below for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(3)Defined as Adjusted EBITDA as a percentage of revenue.
Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019
Revenue for the Polymer segment was $198.5 million for the three months ended September 30, 2020 compared to $261.6 million for the three months ended September 30, 2019. The decrease was driven by the divestiture of our Cariflex business in March 2020 and lower average sales prices resulting from lower raw material costs, partially offset by higher sales volumes in our Specialty Polymers and Performance Products business lines.
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Polymer Segment Sales Volume % Change Three Months Ended September 30, 2020
Performance Products 3.3  %
Specialty Polymers 23.0  %
Isoprene Rubber —  %
Subtotal 8.4  %
Cariflex (100.0) %
Total (0.6) %
Sales volumes of 75.3 kilotons for the three months ended September 30, 2020 declined 0.6% compared to the three months ended September 30, 2019, largely due to the aforementioned divestiture of our Cariflex business. Specialty Polymers sales volumes increased 23.0% primarily from higher purchases by a significant lubricant additives customer and demand recovery primarily in Asia and North America. Performance Products sales volumes increased 3.3% due to stronger paving and roofing demand associated with improved weather conditions. The IRSA provided $1.8 million of sales revenue for the three months ended September 30, 2020. The positive effect from changes in currency exchange rates between the periods was $3.4 million.
Cost of goods sold was $163.5 million for the three months ended September 30, 2020 compared to $203.1 million for the three months ended September 30, 2019, a decrease of $39.6 million, or 19.5%. The decrease in cost of goods sold reflects the divestiture of our Cariflex business and lower raw material costs. These impacts are partially offset by the cost of consumed raw materials, which has higher average costs on a first-in, first-out (“FIFO”) measurement basis of accounting and higher sales volumes, excluding Cariflex, and timing of higher plant maintenance costs deferred from first half of 2020. Additionally, changes in currency exchange rates between the periods resulted in a positive impact of $2.5 million.
For the three months ended September 30, 2020, the Polymer segment operating loss was $5.1 million compared to operating income of $18.3 million for the three months ended September 30, 2019, a decrease of $23.4 million, or 127.9%. This decrease is largely attributable to the divestiture of our Cariflex business, combined with higher raw material costs on a FIFO basis.
For the three months ended September 30, 2020, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $31.9 million compared to $50.3 million for the three months ended September 30, 2019. The decline in Adjusted EBITDA (non-GAAP) was largely due to the divestiture of our Cariflex business. However, on a comparative basis, excluding the operating results of our Cariflex business, Adjusted EBITDA (non-GAAP) would have been approximately $4.6 million lower. The lower comparative Adjusted EBITDA (non-GAAP) is driven by the factors described above. The positive effect from changes in currency exchange rates between the periods was $5.1 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019
Revenue for the Polymer segment was $642.8 million for the nine months ended September 30, 2020 compared to $820.5 million for the nine months ended September 30, 2019. The decrease was due to lower sales volumes driven by the divestiture of our Cariflex business in March 2020 and lower average sales prices resulting from lower raw material costs across all product lines.
Polymer Segment Sales Volume % Change Nine Months Ended September 30, 2020
Performance Products 0.8  %
Specialty Polymers 1.9  %
Isoprene Rubber —  %
Subtotal 2.5  %
Cariflex (74.1) %
Total (3.6) %
Sales volumes of 221.6 kilotons for the nine months ended September 30, 2020 decreased 3.6% compared to the nine months ended September 30, 2019. Specialty Products sales volumes increased 1.9% primarily driven by recovery in Asia, partially offset by the impacts of COVID-19 within North America. The 0.8% increase in Performance Products sales volumes was driven by higher sales into adhesives applications, as well as stronger paving and roofing demand with improved weather conditions. With the completion of the Cariflex sale, the IRSA provided $17.4 million of sales revenue for the nine months ended September 30, 2020. The negative impact from changes in currency exchange rates between the periods was $4.1 million.
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Cost of goods sold was $481.2 million for the nine months ended September 30, 2020 compared to $629.3 million for the nine months ended September 30, 2019, a decrease of $148.1 million, or 23.5%. The decrease in cost of goods sold reflects the divestiture of our Cariflex business, lower raw material costs, and lower fixed costs partially due to timing. These impacts were partially offset by the cost of consumed raw materials, which has higher average costs on a FIFO measurement basis of accounting and higher sales volumes, excluding Cariflex. The positive effect from changes in currency exchange rates between the periods was $8.6 million.
For the nine months ended September 30, 2020, the Polymer segment operating income was $29.6 million compared to $62.5 million for the nine months ended September 30, 2019, a decrease of $32.9 million, or 52.6%. This decrease is largely attributable to the divestiture of our Cariflex business, and higher raw material costs on a FIFO basis.
For the nine months ended September 30, 2020, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $136.9 million compared to $158.6 million for the nine months ended September 30, 2019. The 13.7% decrease in Adjusted EBITDA (non-GAAP) is mainly attributed to the divestiture of our Cariflex business in March 2020 and the factors described above. However, on a comparative basis, excluding the operating results of our Cariflex business, Adjusted EBITDA (non-GAAP) would have been approximately $6.6 million higher. The positive effect from changes in currency exchange rates between the periods was $4.0 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
Chemical Segment
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands)
Adhesives $ 63,901  $ 64,391  $ 189,789  $ 198,785 
Performance Chemicals 99,919  105,367  295,509  337,766 
Tires 11,078  12,870  28,316  38,852 
Chemical Segment Revenue $ 174,898  $ 182,628  $ 513,614  $ 575,403 
Operating income (loss) $ (401,681) $ 19,834  $ (395,296) $ 66,908 
Operating income (loss) margin (229.7) % 10.9  % (77.0) % 11.6  %
Adjusted EBITDA (non-GAAP)(1)
$ 28,345  $ 29,752  $ 70,746  $ 112,913 
Adjusted EBITDA margin (non-GAAP)(2)
16.2  % 16.3  % 13.8  % 19.6  %
 ____________________________________________________
(1)See non-GAAP reconciliations included below for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(2)Defined as Adjusted EBITDA as a percentage of revenue.
Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019
Revenue for the Chemical segment was $174.9 million for the three months ended September 30, 2020 compared to $182.6 million for the three months ended September 30, 2019. The decrease in revenue was attributable to lower average sales prices in terpene refinery upgrades driven by a decrease in gum turpentine prices and lower average sales prices for rosin esters associated with excess hydrocarbon tackifier supply compared to 2019 levels, partially offset by higher sales volumes across all product lines, particularly in TOFA refined products, and opportunistic raw material sales. Third quarter 2020 continued to see adverse demand impacts of market fundamentals including COVID-19 within Performance Chemicals and Tires.
Chemical Segment Sales Volume % Change Three Months Ended September 30, 2020
Adhesives 5.8  %
Performance Chemical 25.7  %
Tires(1)
14.2  %
Total 18.7  %
 ____________________________________________________
(1)Tires volumes are less than 5% of total Chemical segment volumes.
Sales volumes were 110.5 kilotons for the three months ended September 30, 2020, an increase of 17.4 kilotons, or 18.7%, due to opportunistic raw material sales, timing of purchases by significant customers, and rosin ester volumes, largely offset by the impact from weakness in oilfield applications and related COVID-19 demand pressures. The positive effect from changes in currency exchange rates between the periods was $4.9 million.
Cost of goods sold was $141.1 million for the three months ended September 30, 2020 compared to $139.8 million for the three months ended September 30, 2019, an increase of $1.3 million, or 0.9%. The increase was largely driven by higher
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sales volumes, partially offset by the decline in average raw material costs. The negative impact from changes in currency exchange rates between the periods was $4.8 million.
For the three months ended September 30, 2020, the Chemical segment operating loss was $401.7 million compared to an income of $19.8 million for the three months ended September 30, 2019, a decrease of $421.5 million, or 2,125.2%, largely due to a non-cash impairment charge of $400.0 million and finalizing insurance claims related to Hurricane Michael in the third quarter 2019, resulting in a $14.3 million recorded as a gain on insurance proceeds in the Condensed Consolidated Statement of Operations.
For the three months ended September 30, 2020, the Chemical segment generated $28.3 million of Adjusted EBITDA (non-GAAP) compared to $29.8 million for the three months ended September 30, 2019. The decrease in Adjusted EBITDA (non-GAAP) was primarily driven by a decline in average sales prices in CST refinery products and rosin esters, partially offset by higher sales volumes and lower raw material cost. The positive effect from changes in currency exchange rates between the periods was $0.3 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019
Revenue for the Chemical segment was $513.6 million for the nine months ended September 30, 2020 compared to $575.4 million for the nine months ended September 30, 2019. The decrease in Chemical segment revenue was primarily attributable to lower average sales prices in CST refinery products driven by a decrease in gum turpentine price and lower average sales prices for rosin esters associated with excess hydrocarbon tackifier supply. The decline was also due to lower sales volumes in TOFA and derivatives, including weakness in oilfield applications, associated with market fundamentals, including the impacts of COVID-19, partially offset by higher sales volumes of rosin ester adhesives and opportunistic raw material sales.
Chemical Segment Sales Volume % Change Nine Months Ended September 30, 2020
Adhesives 0.5  %
Performance Chemical 3.9  %
Tires(1)
(8.5) %
Total 2.4  %
 ____________________________________________________
(1)Tires volumes are less than 5% of total Chemical segment volumes.
Sales volumes were 307.8 kilotons for the nine months ended September 30, 2020, an increase of 7.2 kilotons, or 2.4%, due to opportunistic raw material sales and rosin ester adhesives volumes, partially offset by the timing of purchases by significant customers, weakness in oilfield applications, and impacts related to COVID-19 demand pressures. The positive effect from changes in currency exchange rates between the periods was $0.7 million.
Cost of goods sold was $394.2 million for the nine months ended September 30, 2020 compared to $429.2 million for the nine months ended September 30, 2019, a decrease of $35.0 million, or 8.1%. The decrease was driven by a decline in average raw material costs and energy costs, combined with lower refinery product upgrades, partially offset by higher sales volumes. The negative impact from changes in currency exchange rates between the periods was $0.6 million.
For the nine months ended September 30, 2020, the Chemical segment operating loss was $395.3 million compared to an income of $66.9 million for the nine months ended September 30, 2019, a decrease of $462.2 million, or 690.8%, largely due to a non-cash impairment charge of $400.0 million and finalizing insurance claims related to Hurricane Michael in the nine months ended September 30, 2019, resulting in a $32.9 million recorded as a gain on insurance proceeds in the Condensed Consolidated Statement of Operations.
For the nine months ended September 30, 2020, the Chemical segment generated $70.7 million of Adjusted EBITDA (non-GAAP) compared to $112.9 million for the nine months ended September 30, 2019. The 37.3% decrease in Adjusted EBITDA (non-GAAP) was primarily driven by lower margins as a result of a decline in average sales prices impacting the CST and TOR chains. The decrease was also driven by the decline in TOFA and derivative sales volumes impacted by market fundamentals, including COVID-19, partially offset by improved rosin ester sales volumes and higher opportunistic raw material. The positive effect from changes in currency exchange rates between the periods was $0.7 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
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NON-GAAP FINANCIAL MEASURES
EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share
We consider EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share to be important supplemental measures of our performance and believe they are frequently used by investors, securities analysts, and other interested parties in the evaluation of our performance and/or that of other companies in our industry, including period-to-period comparisons. Further, management uses these measures to evaluate operating performance, and our incentive compensation plan bases incentive compensation payments on our Adjusted EBITDA performance and attainment of net debt reduction, along with other factors. EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share have limitations as analytical tools and in some cases can vary substantially from other measures of our performance. You should not consider any of them in isolation, or as substitutes for analysis of our results under GAAP.
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
  (In thousands, except per share amounts)
EBITDA(2)(4)
$ (375,966) $ 77,244  $ (110,478) $ 231,768 
Adjusted EBITDA(1)(3)(4)
$ 60,257  $ 80,056  $ 207,672  $ 271,548 
Adjusted Diluted Earnings Per Share(1)(4)
$ 0.49  $ 0.52  $ 1.05  $ 2.99 
____________________________________________________ 
(1)The majority of our consolidated inventory is measured using the FIFO basis of accounting. As part of our pricing strategy, we measure our business performance using the estimated current replacement cost (“ECRC”) of our inventory and cost of goods sold. Our ECRC is based on our current expectation of the current cost of our significant raw material inputs. ECRC is developed monthly based on actual market-based contracted rates and spot market purchase rates that are expected to occur in the period. We then adjust the value of the significant raw material inputs and their associated impact to finished goods to the current replacement cost to arrive at an ECRC value for inventory and cost of goods sold. The result of this revaluation from the GAAP carrying value creates the spread between GAAP and ECRC. We maintain our perpetual inventory in our global enterprise resource planning system, where the carrying value of our inventory is determined. With inventory valued under GAAP and ECRC, we then have the ability to report cost of goods sold and therefore Adjusted EBITDA and Adjusted Diluted Earnings Per Share under both our GAAP convention and ECRC.
(2)On a consolidated basis, EBITDA represents net income before interest, taxes, depreciation, and amortization. On a reporting segment basis, EBITDA represents segment operating income before depreciation and amortization, disposition and exit of business activities, other income (expense), gain (loss) on extinguishment of debt, and earnings of unconsolidated joint venture. Limitations for EBITDA as an analytical tool include the following:
•EBITDA does not reflect the significant interest expense on our debt;
•EBITDA does not reflect the significant depreciation and amortization expense associated with our long-lived assets;
•EBITDA included herein should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements. The calculation of EBITDA in the debt agreements includes adjustments, such as extraordinary, non-recurring or one-time charges, proforma cost savings, certain non-cash items, turnaround costs, and other items included in the definition of EBITDA in the debt agreements; and
•other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
(3)Adjusted EBITDA is EBITDA net of the impact of the spread between the FIFO basis of accounting and ECRC and net of the impact of items we do not consider indicative of our ongoing operating performance. We explain how each adjustment is derived and why we believe it is helpful and appropriate in the reconciliation below. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to the limitations applicable to EBITDA described above, as well as the following limitations:
•due to volatility in raw material prices, Adjusted EBITDA may, and often does, vary substantially from EBITDA, net income, and other performance measures, including net income calculated in accordance with GAAP; and
•Adjusted EBITDA may, and often will, vary significantly from EBITDA calculations under the terms of our debt agreements and should not be used for assessing compliance or non-compliance with financial covenants under our debt agreements.
(4)Included in EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share is $14.3 million and $32.9 million, which was recognized as a gain on insurance proceeds in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019, respectively, associated with Hurricane Michael. Also included are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. The IRSA sales include amortization of non-cash deferred income of $0.3 million and $7.5 million for the three and nine months ended September 30, 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.
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Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business.  
Our presentation of non-GAAP financial measures and the adjustments made therein should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, and in the future we may incur expenses or charges similar to the adjustments made in the presentation of our non-GAAP financial measures.
We compensate for the above limitations by relying primarily on our GAAP results and using EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share only as supplemental measures. See our condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
We reconcile consolidated net income and operating income to EBITDA and Adjusted EBITDA as follows:
Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income (loss) attributable to Kraton $ (403,794) $ 18,693 
Net income attributable to noncontrolling interest 1,177  2,222 
Consolidated net income (loss) (402,617) 20,915 
Add (deduct):
Income tax (benefit) expense (18,189) 2,311 
Interest expense, net 13,527  19,214 
Earnings of unconsolidated joint venture (81) (102)
Loss on extinguishment of debt 848  — 
Other income (259) (4,235)
Operating income (loss) $ (5,090) $ (401,681) (406,771) $ 18,269  $ 19,834  38,103 
Add (deduct):
Depreciation and amortization 13,042  18,271  31,313  14,982  19,822  34,804 
Other income (expense) (7) 266  259  (502) 4,737  4,235 
Loss on extinguishment of debt (848) —  (848) —  —  — 
Earnings of unconsolidated joint venture 81  —  81  102  —  102 
EBITDA (a) 7,178  (383,144) (375,966) 32,851  44,393  77,244 
Add (deduct):
Transaction, acquisition related costs, restructuring, and other costs (b) 1,531  150  1,681  1,672  244  1,916 
Loss on extinguishment of debt 848  —  848  —  —  — 
Gain on disposal of fixed assets —  (1,316) (1,316) —  —  — 
Impairment of goodwill —  400,000  400,000  —  —  — 
Hurricane related costs (c) —  —  —  —  2,220  2,220 
Hurricane reimbursements (d) —  —  —  —  (13,841) (13,841)
KFPC startup costs (e) —  —  —  3,019  —  3,019 
Sale of emissions credits (f) —  —  —  —  (4,601) (4,601)
Non-cash compensation expense 2,266  —  2,266  2,659  —  2,659 
Spread between FIFO and ECRC 20,089  12,655  32,744  10,103  1,337  11,440 
Adjusted EBITDA $ 31,912  $ 28,345  $ 60,257  $ 50,304  $ 29,752  $ 80,056 
_____________________________________________________
(a)Included in EBITDA is a $14.3 million gain on insurance for the three months ended September 30, 2019, a reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.
Also included in EBITDA are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $0.3 million for the three months ended September 30, 2020, which represents revenue deferred until the products are sold under the IRSA.
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(b)Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.
(c)Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold.
(d)Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.
(e)Startup costs related to the joint venture company, KFPC.
(f)We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.

Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income (loss) attributable to Kraton $ (203,676) $ 72,569 
Net income attributable to noncontrolling interest 2,998  5,356 
Consolidated net income (loss) (200,678) 77,925 
Add (deduct):
Income tax benefit (48,082) (1,881)
Interest expense, net 44,454  57,494 
Earnings of unconsolidated joint venture (310) (363)
(Gain) loss on extinguishment of debt 14,943  (210)
Other income (837) (3,559)
Disposition and exit of business activities (175,189) — 
Operating income (loss) $ 29,597  $ (395,296) (365,699) $ 62,498  $ 66,908  129,406 
Add (deduct):
Depreciation and amortization 39,337  54,491  93,828  43,296  54,934  98,230 
Disposition and exit of business activities 175,189  —  175,189  —  —  — 
Other income (expense) 32  805  837  (1,547) 5,106  3,559 
Gain (loss) on extinguishment of debt (14,943) —  (14,943) 210  —  210 
Earnings of unconsolidated joint venture 310  —  310  363  —  363 
EBITDA (a) 229,522  (340,000) (110,478) 104,820  126,948  231,768 
Add (deduct):
Transaction, acquisition related costs, restructuring, and other costs (b) 13,230  1,380  14,610  4,781  808  5,589 
Disposition and exit of business activities (175,189) —  (175,189) —  —  — 
(Gain) loss on extinguishment of debt 14,943  —  14,943  (210) —  (210)
Gain on disposal of fixed assets —  (1,316) (1,316) —  —  — 
Impairment of goodwill —  400,000  400,000  —  —  — 
Hurricane related costs (c) —  —  —  —  15,025  15,025 
Hurricane reimbursements (d) —  —  —  —  (26,561) (26,561)
KFPC startup costs (e) —  —  —  3,019  —  3,019 
Sale of emissions credits (f) —  —  —  —  (4,601) (4,601)
Non-cash compensation expense 7,011  —  7,011  8,158  —  8,158 
Spread between FIFO and ECRC 47,409  10,682  58,091  38,067  1,294  39,361 
Adjusted EBITDA $ 136,926  $ 70,746  $ 207,672  $ 158,635  $ 112,913  $ 271,548 
_____________________________________________________
(a)Included in EBITDA is an $32.9 million gain on insurance for the nine months ended September 30, 2019, fully offsetting the lost margin in the first quarter of 2019, and reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.
Also included in EBITDA are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $7.5 million for the nine months ended September 30, 2020, which represents revenue deferred until the products are sold under the IRSA.
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(b)Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.
(c)Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold.
(d)Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.
(e)Startup costs related to the joint venture company, KFPC.
(f)We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.
We reconcile GAAP Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share (non-GAAP) as follows:
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Diluted Earnings (Loss) Per Share $ (12.67) $ 0.58  $ (6.40) $ 2.26 
Transaction, acquisition related costs, restructuring, and other costs (a) 0.03  0.04  0.34  0.13 
Disposition and exit of business activities —  —  (4.94) — 
(Gain) loss on extinguishment of debt 0.02  —  0.36  (0.01)
Gain on disposal of fixed assets (0.03) —  (0.03) — 
Impairment of goodwill 12.39  —  12.39  — 
Tax restructuring —  —  (2.03) — 
Hurricane related costs (b) —  0.15  —  0.55 
Hurricane reimbursements (c) —  (0.44) —  (0.83)
KFPC startup costs (d) —  0.04  —  0.04 
Sale of emissions credits (e) —  (0.14) —  (0.14)
Spread between FIFO and ECRC 0.75  0.29  1.36  0.99 
Adjusted Diluted Earnings Per Share (non-GAAP) $ 0.49  $ 0.52  $ 1.05  $ 2.99 
_____________________________________________________
(a)Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.
(b)Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an additional $14.2 million of costs incurred during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and did not continue into the fourth quarter of 2019.
(c)Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.
(d)Startup costs related to the joint venture company, KFPC.
(e)We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.

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Critical Accounting Policies
For a discussion of our critical accounting policies and estimates that require the use of significant estimates and judgments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. See Note 13 Industry Segments and Foreign Operations for a discussion of our methodologies, assumptions, and policies in relation to the goodwill impairment charges recognized during the third quarter of 2020 within the Chemical segment.
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LIQUIDITY AND CAPITAL RESOURCES
Kraton Corporation is a holding company without any operations or assets other than the operations of its subsidiaries. Cash flows from operations of our subsidiaries, cash on hand, and available borrowings under the ABL Facility are our principal sources of liquidity.
We also continue to monitor government economic stabilization efforts in response to the COVID-19 pandemic and are participating, and may in the future participate, in certain legislative provisions to enhance our liquidity, including certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and similar federal or foreign governmental programs. For example, we are evaluating certain cash deferral options under the CARES Act and similar federal or foreign governmental programs.
We do not expect any elections made under the CARES Act and similar federal or foreign governmental programs to have a material impact on our cash flows and results of operations. We will continue to evaluate our options under the CARES Act and similar federal or foreign programs as legislative provisions occur.
We reduced our consolidated debt by $445.2 million and our consolidated net debt by $499.9 million, excluding the effect of foreign currency, by the end of the third quarter of 2020. Further, we had approximately $267.7 million of available liquidity, comprised of $62.8 million of cash on hand and a borrowing base of $204.9 million on our ABL Facility as of September 30, 2020. As of the date of this filing, our available borrowing capacity under the ABL Facility was $194.0 million, with no outstanding borrowings and $10.9 million of letters of credit outstanding under the facility.
Management uses consolidated net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using consolidated net debt is useful to investors in determining our leverage since we could choose to use cash and cash equivalents to retire debt. We also present consolidated net debt, as adjusted for foreign exchange impact accounts for the foreign exchange effect on our foreign currency denominated debt agreements.
Summary of principal amounts for indebtedness and a reconciliation of Kraton debt to consolidated net debt (non-GAAP) and consolidated net debt excluding the effect of foreign currency (non-GAAP):
September 30, 2020 December 31, 2019
(In thousands)
Kraton debt $ 852,905  $ 1,288,277 
KFPC(1)(2) loans
92,583  102,385 
Consolidated debt 945,488  1,390,662 
Kraton cash 59,907  24,631 
KFPC(1) cash
2,914  10,402 
Consolidated cash 62,821  35,033 
Consolidated net debt $ 882,667  $ 1,355,629 
Effect of foreign currency on consolidated net debt (26,947)
Consolidated net debt excluding effect of foreign currency $ 855,720 
__________________________________________________
(1)KFPC joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and consolidate within our financial statements.
(2)KFPC executed the KFPC Revolving Facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the 5.5 billion NTD KFPC Loan Agreement.
As of September 30, 2020, our outstanding borrowings included (i) €100.0 million (or approximately $117.3 million) under the Euro Tranche of the Term Loan Facility, and (ii) $394.8 million and €290.0 million (or approximately $340.0 million as of September 30, 2020) under the 7.0% Senior Notes and 5.25% Senior Notes, respectively. As of September 30, 2020, we had no outstanding borrowings under our ABL Facility.
In addition, as of September 30, 2020, KFPC had NTD 1.5 billion (or approximately $51.2 million) and NTD 1.2 billion (or approximately $41.4 million) of borrowings under the KFPC Loan Agreement and KFPC Revolving Facilities, respectively. The KFPC Loan Agreement matures on January 17, 2022.
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See Note 8 Long-Term Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 8 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
Based upon current and anticipated levels of operations, we believe that cash flows from operations of our subsidiaries, cash on hand, and borrowings available to us will be sufficient to fund our expected financial obligations, planned capital expenditures, and anticipated liquidity requirements, including working capital requirements, our investment in the KFPC joint venture, debt payments, interest payments, benefit plan contributions, and income tax obligations.
Going forward there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under the Term Loan Facility and the ABL Facility or any new credit facilities or financing arrangements to fund liquidity needs and enable us to service our indebtedness. Subject to compliance with certain covenants and other conditions, we have the option to borrow up to $350.0 million of incremental term loans plus an additional amount subject to a senior secured net leverage ratio. Our available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of cash invested in interest bearing funds and operating accounts. To date, we have not experienced any losses or lack of access to our invested cash or cash equivalents; however, we cannot provide any assurance that adverse conditions in the financial markets will not impact access to our invested cash and cash equivalents.
We made contributions of $6.9 million and $10.7 million to our pension and other post-retirement plans during the nine months ended September 30, 2020 and 2019, respectively. We expect our total pension and other post-retirement plans contributions for the year ended December 31, 2020 to be approximately $9.2 million. Our pension plan obligations are predicated on a number of factors, the primary ones being the return on our pension plan assets and the discount rate used in deriving our pension obligations. If the investment return on our pension plan assets does not meet or exceed expectations during 2020, and the discount rate decreases from the prior year, higher levels of contributions could be required in 2021 and beyond.
As of September 30, 2020, we had $46.1 million of cash and short-term investments related to foreign operations that management asserts are permanently reinvested. As a result of net operating loss carryforwards and the impact of recent tax reform, management estimates that no incremental cash tax expense would be incurred if this cash were repatriated.
In December 2017, the Tax Act was enacted and resulted in a one-time transition tax on accumulated foreign subsidiary earnings. As of September 30, 2020, the remaining long-term tax payable related to the Tax Act of $10.7 million is presented within income tax payable, on our Condensed Consolidated Balance Sheets. We will pay the transition tax in annual interest-free installments through 2025, as permitted by the Tax Act.
Operating Cash Flows
Net cash provided by operating activities totaled $62.4 million during the nine months ended September 30, 2020 compared to $118.8 million during the nine months ended September 30, 2019. This represents a net decrease in operating cash flows of $56.4 million, which was primarily driven by a decrease in operating income, partially offset by a decrease in working capital. The period-over-period changes in working capital are as follows:
•$24.1 million increase in other payables and accruals due to timing of income tax and deferred income; and
•$24.7 million increase in cash flows associated with lower accounts receivables largely due to lower sales volumes, partially as a result of the divestiture of our Cariflex business and lower selling prices; and
•$15.6 million increase in cash flows associated with inventories of products, materials, and supplies due to lower raw material costs; and
•$7.8 million increase in cash flows associated with other items, including due to related parties, other assets and liabilities, primarily due to timing of transactions and payments; partially offset by
•$20.9 million decrease in cash flows associated with lower accounts payable due to lower raw material costs and timing of payments.
Investing Cash Flows
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, for net proceeds of $510.5 million. The closing is subject to a customary post-closing working capital adjustment and a contractual capital contribution post-closing adjustment.
Net cash provided by investing activities totaled $446.5 million for the nine months ended September 30, 2020 and net cash used in investing activities totaled $79.9 million for the nine months ended September 30, 2019.
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Expected Capital Expenditures
We currently expect 2020 capital expenditures, excluding expenditures by the KFPC joint venture, will be approximately $80.0 million, which includes approximately $4.0 million of capitalized interest. Included in projected capital expenditures is approximately $55.0 million for infrastructure and maintenance, and health, safety, environmental, and security projects. The remaining anticipated 2020 capital expenditures are primarily associated with projects to optimize the production capabilities of our manufacturing assets, to support our innovation platform, and to upgrade our information technology systems.
Financing Cash Flows
Our consolidated capital structure as of September 30, 2020 was approximately 38.6% equity, 58.8% debt, and 2.6% noncontrolling interest compared to approximately 34.5% equity, 63.8% debt, and 1.7% noncontrolling interest as of December 31, 2019.
On December 6, 2018, we commenced a repurchase program for up to $20.0 million of our 7.0% Senior Notes. We repurchased $5.3 million of our 7.0% Senior Notes from inception of the plan, which ended on March 4, 2019.
During the nine months ended September 30, 2020, we decreased indebtedness by $445.2 million (or $472.1 million excluding impacts on foreign currency), while increasing cash on hand by approximately $27.8 million.
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 nine months ended September 30, 2020, we did not repurchase any shares of our common stock. We are not obligated to acquire any specific number of shares of our common stock.
Contractual Obligations
Our contractual obligations are summarized in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. See Note 8 Long-Term Debt for changes to our debt maturity schedule. There have been no other material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
We are not involved in any material off-balance sheet arrangements as of September 30, 2020.
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Item 3.     Quantitative and Qualitative Disclosures about Market Risk.
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no material changes to the quantitative and qualitative disclosures about market risk disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. See Note 9 Fair Value Measurements, Financial Instruments, and Credit Risk for further discussion.
Item 4.     Controls and Procedures.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As of September 30, 2020, based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.     Legal Proceedings.
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.
For more information regarding legal proceedings, including environmental matters, see Note 11 Commitments and Contingencies to the condensed consolidated financial statements.
Item 1A.     Risk Factors.
Readers of this Quarterly Report on Form 10-Q should carefully consider the risks described in our other reports and filings filed with or furnished to the SEC, including our prior and subsequent reports on Forms 10-K, 10-Q and 8-K, in connection with any evaluation of our financial position, results of operations and cash flows.
The risks and uncertainties in our most recent Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not presently known or those that are currently deemed immaterial may also affect our operations. Any of the risks, uncertainties, events or circumstances described therein could cause our future financial condition, results of operations or cash flows to be adversely affected. There have been no material changes from the risk factors disclosed in our most recent Annual Report on Form 10-K.
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.
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 September 30, 2020, we did not repurchase any shares of our common stock under this program. We are not obligated to acquire any specific number of shares of our common stock.
The Company repurchases treasury stock that is withheld to satisfy the tax obligation of holders of restricted stock awards when they vest. Our equity incentive plans provide that the value of shares delivered to us to pay the withholding tax obligations is calculated based on the average of the high and low sales price per share of our common stock on the day of vest. During the three months ended September 30, 2020, we did not withhold any shares of our common stock in satisfaction of the tax withholding obligation of holders of restricted stock awards which vested.
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Item 3.     Default Upon Senior Securities.
None.
Item 4.     Mine Safety Disclosures.
Not applicable.
Item 5.     Other Information.
None.
52

Item 6.     Exhibits.
Exhibit
Number 		   
Kraton Corporation Executive Severance Program (as amended and restated September 11, 2020)
Letter re: Unaudited Interim Financial Information
  Certification of Chief Executive Officer under Section 302 of Sarbanes—Oxley Act of 2002
  Certification of Chief Financial Officer under Section 302 of Sarbanes—Oxley Act of 2002
  Certification Pursuant to Section 906 of Sarbanes—Oxley Act of 2002
101*   The following materials from Kraton Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (Unaudited), (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (Unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 (Unaudited), (iv) Condensed Consolidated Statement of Changes in Equity for the nine months ended September 30, 2020 and 2019 (Unaudited), (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited)
104* The cover page from Kraton Corporation Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language)
_________________________________________________
*    Filed herewith.
+    Denotes management contract or compensatory plan or arrangement.
53

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
    KRATON CORPORATION
Date: October 29, 2020
/s/ Kevin M. Fogarty
    Kevin M. Fogarty
    President and Chief Executive Officer
     
Date: October 29, 2020
/s/ Atanas H. Atanasov
    Atanas H. Atanasov
    Executive Vice President, Chief Financial Officer, and Treasurer
54
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