false--12-31Q22019000132164659778500063405200022000007840009760000.010.015000000005000000003191700031868000319170003186800070900000P78M24DP17M6DP11M12DP4M12DP44M6DP1M18D0000825000825000106200029000005880000021000010770005980009850000.010.0110000000010000000000P1Y 0001321646 2019-01-01 2019-06-30 0001321646 2019-07-23 0001321646 2018-12-31 0001321646 2019-06-30 0001321646 2018-04-01 2018-06-30 0001321646 2019-04-01 2019-06-30 0001321646 2018-01-01 2018-06-30 0001321646 us-gaap:RetainedEarningsMember 2018-06-30 0001321646 us-gaap:ParentMember 2018-01-01 2018-03-31 0001321646 2019-01-01 2019-03-31 0001321646 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0001321646 us-gaap:ParentMember 2019-03-31 0001321646 us-gaap:NoncontrollingInterestMember 2019-04-01 2019-06-30 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001321646 us-gaap:NoncontrollingInterestMember 2019-01-01 2019-03-31 0001321646 us-gaap:ParentMember 2019-01-01 2019-03-31 0001321646 us-gaap:NoncontrollingInterestMember 2018-12-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-04-01 2018-06-30 0001321646 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0001321646 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-03-31 0001321646 us-gaap:NoncontrollingInterestMember 2018-06-30 0001321646 2018-01-01 2018-03-31 0001321646 us-gaap:RetainedEarningsMember 2019-06-30 0001321646 us-gaap:ParentMember 2018-04-01 2018-06-30 0001321646 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001321646 us-gaap:NoncontrollingInterestMember 2018-01-01 2018-03-31 0001321646 us-gaap:AdditionalPaidInCapitalMember 2018-04-01 2018-06-30 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0001321646 us-gaap:ParentMember 2019-04-01 2019-06-30 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0001321646 us-gaap:ParentMember 2017-12-31 0001321646 us-gaap:RetainedEarningsMember 2018-04-01 2018-06-30 0001321646 us-gaap:NoncontrollingInterestMember 2018-03-31 0001321646 us-gaap:CommonStockMember 2018-12-31 0001321646 us-gaap:NoncontrollingInterestMember 2017-12-31 0001321646 us-gaap:AdditionalPaidInCapitalMember 2019-06-30 0001321646 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0001321646 2018-06-30 0001321646 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001321646 us-gaap:RetainedEarningsMember 2018-03-31 0001321646 us-gaap:CommonStockMember 2017-12-31 0001321646 us-gaap:AdditionalPaidInCapitalMember 2019-04-01 2019-06-30 0001321646 us-gaap:NoncontrollingInterestMember 2019-03-31 0001321646 2017-12-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-06-30 0001321646 us-gaap:AdditionalPaidInCapitalMember 2018-06-30 0001321646 us-gaap:AdditionalPaidInCapitalMember 2018-03-31 0001321646 us-gaap:NoncontrollingInterestMember 2018-04-01 2018-06-30 0001321646 us-gaap:NoncontrollingInterestMember 2019-06-30 0001321646 us-gaap:CommonStockMember 2018-01-01 2018-03-31 0001321646 us-gaap:CommonStockMember 2019-03-31 0001321646 us-gaap:RetainedEarningsMember 2019-03-31 0001321646 us-gaap:RetainedEarningsMember 2018-12-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-03-31 0001321646 us-gaap:CommonStockMember 2018-03-31 0001321646 us-gaap:CommonStockMember 2019-04-01 2019-06-30 0001321646 us-gaap:CommonStockMember 2018-04-01 2018-06-30 0001321646 2018-03-31 0001321646 us-gaap:RetainedEarningsMember 2018-01-01 2018-03-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0001321646 us-gaap:ParentMember 2018-06-30 0001321646 us-gaap:ParentMember 2018-03-31 0001321646 2019-03-31 0001321646 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001321646 us-gaap:CommonStockMember 2019-01-01 2019-03-31 0001321646 us-gaap:RetainedEarningsMember 2017-12-31 0001321646 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-03-31 0001321646 us-gaap:CommonStockMember 2018-06-30 0001321646 us-gaap:ParentMember 2019-06-30 0001321646 us-gaap:ParentMember 2018-12-31 0001321646 us-gaap:CommonStockMember 2019-06-30 0001321646 kra:KratonFormosaPolymersCorporationMember 2019-06-30 0001321646 kra:StyrenicBlockCopolymerJointVentureMember 2019-06-30 0001321646 2019-01-01 0001321646 kra:AdhesivesMember kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 kra:TiresMember kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 kra:PerformanceChemicalsMember kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 kra:PerformanceChemicalsMember kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 kra:PerformanceChemicalsMember kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 kra:AdhesivesMember kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 kra:TiresMember kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 kra:PerformanceChemicalsMember kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 kra:AdhesivesMember kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 kra:AdhesivesMember kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 kra:TiresMember kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 kra:TiresMember kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 srt:MaximumMember 2019-07-01 2019-06-30 0001321646 kra:SpecialtyPolymersMember kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:CariflexMember kra:PolymerMember 2018-01-01 2018-06-30 0001321646 kra:CariflexMember kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:OtherProductandServicesMember kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:PerformanceProductsMember kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:PerformanceProductsMember kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:PolymerMember 2018-04-01 2018-06-30 0001321646 kra:CariflexMember kra:PolymerMember 2018-04-01 2018-06-30 0001321646 kra:OtherProductandServicesMember kra:PolymerMember 2018-01-01 2018-06-30 0001321646 kra:SpecialtyPolymersMember kra:PolymerMember 2018-04-01 2018-06-30 0001321646 kra:PolymerMember 2018-01-01 2018-06-30 0001321646 kra:OtherProductandServicesMember kra:PolymerMember 2018-04-01 2018-06-30 0001321646 kra:PerformanceProductsMember kra:PolymerMember 2018-04-01 2018-06-30 0001321646 kra:PerformanceProductsMember kra:PolymerMember 2018-01-01 2018-06-30 0001321646 kra:CariflexMember kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:OtherProductandServicesMember kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:SpecialtyPolymersMember kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:SpecialtyPolymersMember kra:PolymerMember 2018-01-01 2018-06-30 0001321646 srt:MinimumMember 2019-07-01 2019-06-30 0001321646 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-01-01 2018-06-30 0001321646 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-12-31 0001321646 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-06-30 0001321646 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-12-31 0001321646 us-gaap:AccumulatedTranslationAdjustmentMember 2018-01-01 2018-06-30 0001321646 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-01-01 2019-06-30 0001321646 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-06-30 0001321646 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-12-31 0001321646 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-06-30 0001321646 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-01-01 2019-06-30 0001321646 us-gaap:AccumulatedTranslationAdjustmentMember 2018-06-30 0001321646 us-gaap:AccumulatedTranslationAdjustmentMember 2019-01-01 2019-06-30 0001321646 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-06-30 0001321646 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-01-01 2018-06-30 0001321646 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-01-01 2018-06-30 0001321646 us-gaap:AccumulatedTranslationAdjustmentMember 2017-12-31 0001321646 us-gaap:AccumulatedTranslationAdjustmentMember 2018-12-31 0001321646 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-06-30 0001321646 us-gaap:AccumulatedTranslationAdjustmentMember 2019-06-30 0001321646 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-01-01 2019-06-30 0001321646 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-12-31 0001321646 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-12-31 0001321646 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-12-31 0001321646 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-06-30 0001321646 us-gaap:SoftwareServiceSupportAndMaintenanceArrangementMember 2019-06-30 0001321646 us-gaap:TechnologyEquipmentMember 2018-12-31 0001321646 us-gaap:TradeNamesMember 2018-12-31 0001321646 us-gaap:TechnologyEquipmentMember 2019-06-30 0001321646 us-gaap:TradeNamesMember 2019-06-30 0001321646 us-gaap:ContractualRightsMember 2018-12-31 0001321646 us-gaap:CustomerRelationshipsMember 2019-06-30 0001321646 us-gaap:CustomerRelationshipsMember 2018-12-31 0001321646 us-gaap:SoftwareServiceSupportAndMaintenanceArrangementMember 2018-12-31 0001321646 us-gaap:ContractualRightsMember 2019-06-30 0001321646 2019-02-28 0001321646 us-gaap:RevolvingCreditFacilityMember kra:ABLFacilityMember 2016-01-31 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:SeniorNotesMember 2018-12-31 0001321646 us-gaap:SecuredDebtMember kra:SeniorSecuredTermLoanFacilityMember us-gaap:MediumTermNotesMember us-gaap:LondonInterbankOfferedRateLIBORMember 2018-03-08 2018-03-08 0001321646 us-gaap:RevolvingCreditFacilityMember kra:KratonFormosaPolymersCorporationLoanAgreementMember 2019-06-30 0001321646 us-gaap:SecuredDebtMember kra:SeniorSecuredTermLoanFacilityMember us-gaap:MediumTermNotesMember us-gaap:BaseRateMember 2018-03-08 2018-03-08 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:SeniorNotesMember 2018-12-06 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member 2019-06-30 0001321646 us-gaap:SecuredDebtMember kra:EuroSeniorSecuredTermLoanMember us-gaap:MediumTermNotesMember 2018-03-08 0001321646 us-gaap:SecuredDebtMember kra:EuroSeniorSecuredTermLoanMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember 2019-01-01 2019-06-30 0001321646 us-gaap:SecuredDebtMember kra:SeniorSecuredTermLoanFacilityMember us-gaap:MediumTermNotesMember 2018-03-08 0001321646 us-gaap:SecuredDebtMember kra:EuroSeniorSecuredTermLoanMember us-gaap:MediumTermNotesMember kra:EURIBORMember 2018-03-08 2018-03-08 0001321646 kra:KFPCShortTermFacilityMember 2019-06-30 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:SeniorNotesMember 2019-01-01 2019-06-30 0001321646 us-gaap:OtherCurrentAssetsMember kra:ABLFacilityMember 2019-06-30 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:SeniorNotesMember 2017-03-31 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember 2019-06-30 0001321646 us-gaap:SecuredDebtMember kra:SeniorSecuredTermLoanFacilityMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member 2018-05-31 0001321646 us-gaap:RevolvingCreditFacilityMember kra:ABLFacilityMember 2019-06-30 0001321646 srt:EuropeMember 2018-12-31 0001321646 kra:ABLFacilityMember 2019-06-30 0001321646 kra:EuroSeniorSecuredTermLoanMember us-gaap:MediumTermNotesMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember 2018-12-31 0001321646 kra:ABLFacilityMember 2018-12-31 0001321646 kra:SeniorSecuredTermLoanFacilityMember us-gaap:MediumTermNotesMember 2018-12-31 0001321646 kra:SeniorSecuredTermLoanFacilityMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member us-gaap:SeniorNotesMember 2018-12-31 0001321646 kra:EuroSeniorSecuredTermLoanMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member us-gaap:SeniorNotesMember 2019-06-30 0001321646 kra:KFPCShortTermFacilityMember 2018-12-31 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:SeniorNotesMember 2019-06-30 0001321646 us-gaap:OtherCurrentAssetsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:OtherNoncurrentAssetsMember us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:OtherNoncurrentAssetsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:OtherNoncurrentAssetsMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:AccountsPayableAndAccruedLiabilitiesMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:OtherCurrentAssetsMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:AccountsPayableAndAccruedLiabilitiesMember us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:AccountsPayableAndAccruedLiabilitiesMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 us-gaap:OtherCurrentAssetsMember us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0001321646 kra:SeniorSecuredTermLoanFacilityMember us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:FairValueInputsLevel1Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2019-06-30 0001321646 kra:ABLFacilityMember us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:FairValueInputsLevel1Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:SeniorNotesMember 2018-12-31 0001321646 kra:EuroSeniorSecuredTermLoanMember us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member us-gaap:FairValueInputsLevel1Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember us-gaap:CarryingReportedAmountFairValueDisclosureMember 2018-12-31 0001321646 us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:CapitalLeaseObligationsMember 2019-06-30 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0001321646 kra:EuroSeniorSecuredTermLoanMember us-gaap:FairValueInputsLevel2Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:MediumTermNotesMember 2018-12-31 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:FairValueInputsLevel1Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2018-12-31 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member us-gaap:FairValueInputsLevel1Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:SeniorNotesMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member us-gaap:FairValueInputsLevel1Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:SeniorNotesMember 2019-06-30 0001321646 kra:EuroSeniorSecuredTermLoanMember us-gaap:FairValueInputsLevel2Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 kra:SeniorSecuredTermLoanFacilityMember us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:MediumTermNotesMember 2018-12-31 0001321646 kra:FivePointTwoFivePercentSeniorNotesdueApril152023Member us-gaap:FairValueInputsLevel1Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:SeniorNotesMember 2019-06-30 0001321646 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:CapitalLeaseObligationsMember 2018-12-31 0001321646 kra:ABLFacilityMember us-gaap:CarryingReportedAmountFairValueDisclosureMember 2018-12-31 0001321646 kra:ABLFacilityMember us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationLoanAgreementMember us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-06-30 0001321646 us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:CapitalLeaseObligationsMember 2019-06-30 0001321646 kra:KFPCShortTermFacilityMember us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0001321646 kra:SeniorSecuredTermLoanFacilityMember us-gaap:FairValueInputsLevel2Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:MediumTermNotesMember 2019-06-30 0001321646 us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:CapitalLeaseObligationsMember 2018-12-31 0001321646 kra:SevenPointZeroPercentSeniorNotesdueApril152025Member us-gaap:FairValueInputsLevel1Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:SeniorNotesMember 2019-06-30 0001321646 kra:KFPCShortTermFacilityMember us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0001321646 kra:KFPCShortTermFacilityMember us-gaap:CarryingReportedAmountFairValueDisclosureMember 2018-12-31 0001321646 kra:EuroSeniorSecuredTermLoanMember us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:MediumTermNotesMember 2018-12-31 0001321646 kra:SeniorSecuredTermLoanFacilityMember us-gaap:FairValueInputsLevel2Member us-gaap:CarryingReportedAmountFairValueDisclosureMember us-gaap:MediumTermNotesMember 2018-12-31 0001321646 kra:KFPCShortTermFacilityMember us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-06-30 0001321646 kra:ABLFacilityMember us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-06-30 0001321646 us-gaap:OtherNoncurrentAssetsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:OtherNoncurrentAssetsMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:OtherNoncurrentAssetsMember us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:OtherCurrentAssetsMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:AccountsPayableAndAccruedLiabilitiesMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:OtherCurrentAssetsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:OtherCurrentAssetsMember us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:AccountsPayableAndAccruedLiabilitiesMember us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:AccountsPayableAndAccruedLiabilitiesMember us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0001321646 us-gaap:InterestRateSwapMember us-gaap:ShortMember 2018-05-31 0001321646 srt:EuropeMember 2019-01-01 2019-06-30 0001321646 us-gaap:InterestRateSwapMember 2018-04-01 2018-06-30 0001321646 us-gaap:InterestRateSwapMember us-gaap:ShortMember 2018-12-31 0001321646 us-gaap:InterestRateSwapMember 2018-01-01 2018-06-30 0001321646 us-gaap:InterestRateSwapMember 2017-01-03 0001321646 kra:ForeignCurrencyHedgesMember 2018-01-01 2018-06-30 0001321646 srt:EuropeMember 2018-01-01 2018-06-30 0001321646 us-gaap:InterestRateSwapMember 2019-06-30 0001321646 us-gaap:InterestRateSwapMember 2019-04-01 2019-06-30 0001321646 us-gaap:InterestRateSwapMember 2018-06-04 0001321646 kra:ForeignCurrencyHedgesMember 2019-01-01 2019-06-30 0001321646 kra:ForeignCurrencyHedgesMember 2019-04-01 2019-06-30 0001321646 kra:ForeignCurrencyHedgesMember 2018-04-01 2018-06-30 0001321646 us-gaap:InterestRateSwapMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-06-30 0001321646 us-gaap:InterestRateSwapMember 2019-01-01 2019-06-30 0001321646 2017-01-01 2017-12-31 0001321646 kra:FederalTaxAdministrationFTAMember 2018-01-01 2018-12-31 0001321646 srt:ScenarioForecastMember kra:ClosingofUSTaxAuditsMember 2019-01-01 2019-12-31 0001321646 srt:ScenarioForecastMember 2019-01-01 2019-12-31 0001321646 2018-01-01 2018-12-31 0001321646 srt:MinimumMember 2019-06-30 0001321646 kra:ShellChemicalsMember 2018-06-30 0001321646 us-gaap:EquipmentMember kra:ChemicalMember 2019-06-30 0001321646 kra:RailcarsMember kra:PolymerMember 2019-06-30 0001321646 us-gaap:OtherAssetsMember 2019-01-01 2019-06-30 0001321646 kra:RailcarsMember kra:ChemicalMember 2019-06-30 0001321646 kra:OperatingLeaseLiabilityMember kra:OperatingLeaseConcentrationRiskMember us-gaap:BuildingMember 2019-01-01 2019-06-30 0001321646 kra:PolymerMember 2019-06-30 0001321646 kra:RailcarsMember 2019-01-01 2019-06-30 0001321646 kra:OperatingLeaseLiabilityMember kra:OperatingLeaseConcentrationRiskMember kra:RailcarsMember 2019-01-01 2019-06-30 0001321646 us-gaap:LandMember kra:PolymerMember 2019-06-30 0001321646 us-gaap:EquipmentMember 2019-01-01 2019-06-30 0001321646 us-gaap:OtherAssetsMember kra:ChemicalMember 2019-06-30 0001321646 kra:OperatingLeaseLiabilityMember kra:OperatingLeaseConcentrationRiskMember us-gaap:LandMember 2019-01-01 2019-06-30 0001321646 us-gaap:BuildingMember kra:PolymerMember 2019-06-30 0001321646 us-gaap:LandMember kra:ChemicalMember 2019-06-30 0001321646 us-gaap:EquipmentMember kra:PolymerMember 2019-06-30 0001321646 us-gaap:BuildingMember kra:ChemicalMember 2019-06-30 0001321646 kra:OperatingLeaseLiabilityMember kra:OperatingLeaseConcentrationRiskMember us-gaap:EquipmentMember 2019-01-01 2019-06-30 0001321646 kra:OperatingLeaseLiabilityMember kra:OperatingLeaseConcentrationRiskMember us-gaap:OtherAssetsMember 2019-01-01 2019-06-30 0001321646 us-gaap:BuildingMember 2019-01-01 2019-06-30 0001321646 us-gaap:LandMember 2019-01-01 2019-06-30 0001321646 kra:ChemicalMember 2019-06-30 0001321646 us-gaap:OtherAssetsMember kra:PolymerMember 2019-06-30 0001321646 us-gaap:OtherAssetsMember 2019-06-30 0001321646 us-gaap:EquipmentMember 2019-06-30 0001321646 us-gaap:BuildingMember 2019-06-30 0001321646 kra:RailcarsMember 2019-06-30 0001321646 us-gaap:LandMember 2019-06-30 0001321646 country:US us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2018-04-01 2018-06-30 0001321646 country:US us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2019-01-01 2019-06-30 0001321646 country:US us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2019-04-01 2019-06-30 0001321646 country:US us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2018-01-01 2018-06-30 0001321646 us-gaap:ForeignPlanMember us-gaap:PensionPlansDefinedBenefitMember 2019-01-01 2019-06-30 0001321646 country:US us-gaap:PensionPlansDefinedBenefitMember 2019-01-01 2019-06-30 0001321646 country:US us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-06-30 0001321646 country:US us-gaap:PensionPlansDefinedBenefitMember 2019-04-01 2019-06-30 0001321646 us-gaap:ForeignPlanMember us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-06-30 0001321646 country:US us-gaap:PensionPlansDefinedBenefitMember 2018-04-01 2018-06-30 0001321646 us-gaap:ForeignPlanMember us-gaap:PensionPlansDefinedBenefitMember 2019-04-01 2019-06-30 0001321646 us-gaap:ForeignPlanMember us-gaap:PensionPlansDefinedBenefitMember 2018-04-01 2018-06-30 0001321646 srt:MaximumMember us-gaap:HurricaneMember 2019-01-01 2019-06-30 0001321646 us-gaap:HurricaneMember 2019-06-30 0001321646 us-gaap:HurricaneMember 2019-01-01 2019-06-30 0001321646 us-gaap:HurricaneMember 2018-10-01 2018-12-31 0001321646 us-gaap:HurricaneMember 2019-01-01 2019-03-31 0001321646 srt:MinimumMember us-gaap:HurricaneMember 2019-01-01 2019-06-30 0001321646 country:DE 2019-01-01 2019-06-30 0001321646 kra:AllOtherCountriesMember 2019-01-01 2019-06-30 0001321646 country:DE 2018-01-01 2018-06-30 0001321646 kra:AllOtherCountriesMember kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:AllOtherCountriesMember kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 country:DE kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 country:US kra:PolymerMember 2019-01-01 2019-06-30 0001321646 country:US kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 country:DE kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 country:DE kra:PolymerMember 2018-01-01 2018-06-30 0001321646 country:US 2018-01-01 2018-06-30 0001321646 country:US kra:ChemicalMember 2018-01-01 2018-06-30 0001321646 country:US kra:PolymerMember 2018-01-01 2018-06-30 0001321646 kra:AllOtherCountriesMember kra:PolymerMember 2018-01-01 2018-06-30 0001321646 kra:AllOtherCountriesMember kra:ChemicalMember 2019-01-01 2019-06-30 0001321646 country:DE kra:PolymerMember 2019-01-01 2019-06-30 0001321646 kra:AllOtherCountriesMember 2018-01-01 2018-06-30 0001321646 country:US 2019-01-01 2019-06-30 0001321646 country:DE kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 country:US 2018-04-01 2018-06-30 0001321646 kra:AllOtherCountriesMember kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 country:DE kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:AllOtherCountriesMember 2018-04-01 2018-06-30 0001321646 country:US kra:ChemicalMember 2019-04-01 2019-06-30 0001321646 country:DE 2018-04-01 2018-06-30 0001321646 kra:AllOtherCountriesMember kra:PolymerMember 2019-04-01 2019-06-30 0001321646 country:US kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 country:US 2019-04-01 2019-06-30 0001321646 kra:AllOtherCountriesMember 2019-04-01 2019-06-30 0001321646 kra:AllOtherCountriesMember kra:PolymerMember 2018-04-01 2018-06-30 0001321646 country:DE kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 country:DE 2019-04-01 2019-06-30 0001321646 country:US kra:PolymerMember 2018-04-01 2018-06-30 0001321646 country:DE kra:PolymerMember 2018-04-01 2018-06-30 0001321646 country:US kra:PolymerMember 2019-04-01 2019-06-30 0001321646 kra:AllOtherCountriesMember kra:ChemicalMember 2018-04-01 2018-06-30 0001321646 kra:PolymerMember 2018-12-31 0001321646 kra:ChemicalMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationMember us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2019-01-01 2019-06-30 0001321646 kra:StyrenicBlockCopolymerJointVentureMember 2019-04-01 2019-06-30 0001321646 kra:KratonFormosaPolymersCorporationMember us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2019-06-30 0001321646 kra:StyrenicBlockCopolymerJointVentureMember 2018-01-01 2018-06-30 0001321646 kra:KratonFormosaPolymersCorporationMember us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationMember us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2019-04-01 2019-06-30 0001321646 kra:KratonFormosaPolymersCorporationMember us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2018-01-01 2018-06-30 0001321646 kra:KratonFormosaPolymersCorporationMember us-gaap:VariableInterestEntityPrimaryBeneficiaryMember 2018-04-01 2018-06-30 0001321646 kra:StyrenicBlockCopolymerJointVentureMember 2018-04-01 2018-06-30 0001321646 kra:StyrenicBlockCopolymerJointVentureMember 2019-01-01 2019-06-30 0001321646 kra:StyrenicBlockCopolymerJointVentureMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationMember 2018-12-31 0001321646 kra:KratonFormosaPolymersCorporationMember 2019-06-30 0001321646 kra:FormosaPetrochemicalCorporationMember country:TW us-gaap:CorporateJointVentureMember 2019-06-30 xbrli:shares iso4217:USD xbrli:shares iso4217:USD xbrli:pure iso4217:EUR iso4217:TWD kra:facility utreg:kt iso4217:BRL kra:segment
 

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 June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34581
LOGOA05.JPG
 
Kraton Corp oration
(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, 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 July 23, 2019 : 31,706,512 .

 


Index to Quarterly Report
on Form 10-Q for
Quarter Ended June 30, 2019
 
 
PART I. FINANCIAL INFORMATION
Page
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Some of the statements and information in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make written or oral forward-looking statements in our reports on Forms 10-K, 10-Q, and 8-K, in press releases and other written materials and in oral statements made by our officers, directors, or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as “outlook,” “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans,” “anticipates,” “forsees,” “future,” or by discussions of strategy, plans, or intentions; anticipated benefits of or performance of our products; beliefs regarding opportunities for new, differentiated applications, and other innovations; beliefs regarding strengthening relationships with customers; adequacy of cash flows to fund our working capital requirements; our investment in the joint venture with Formosa Petrochemical Corporation (“FPCC”); our expectations regarding indebtedness to be incurred by our joint venture with FPCC; debt payments, interest payments, benefit plan contributions, and income tax obligations; nonrealization of expected benefits from our acquisitions or business dispositions and our ability to timely execute and close such acquisitions and dispositions; our anticipated capital expenditures, health, safety, environmental, and security and infrastructure and maintenance projects, projects to optimize the production capabilities of our manufacturing assets and to support our innovation platform; our ability to fully access our senior secured credit facilities; expectations regarding future dividend payments; expectations regarding our counterparties’ ability to perform, including with respect to trade receivables; estimates regarding tax expense of repatriating certain cash and short-term investments related to foreign operations; expectations regarding differentiated applications; our ability to realize certain deferred tax assets and our beliefs with respect to tax positions; expectations regarding our full year effective tax rate; estimates related to the useful lives of certain assets for tax purposes; expectations regarding our pension contributions; estimates or expectations related to raw material costs or availability, ending inventory levels and related estimated charges; the outcome and financial impact of legal proceedings; expectations regarding the spread between FIFO and ECRC (each as defined herein) in future periods; expectations regarding the impact of natural disasters and replacement costs resulting therefrom; estimated impacts of changing tariff rates and logistics costs; 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—Recent Developments and Known Trends ;” and projections regarding environmental costs and capital expenditures and related operational savings.
Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements include, but are not limited to the factors set forth in this report, in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other filings with the Securities and Exchange Commission (the “SEC”).
There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information.
Forward-looking statements are based on current plans, estimates, assumptions and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.
Presentation of Financial Statements
The terms “Kraton,” “our company,” “we,” “our,” “ours,” and “us” as used in this report refer collectively to Kraton Corporation and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations, comprehensive income (loss), and cash flows of Kraton. Kraton Corporation is a holding company whose only material asset is its investment in its wholly owned subsidiary, Kraton Polymers LLC. Kraton Polymers LLC and its subsidiaries own all of our consolidated operating assets.

3


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

Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Kraton Corporation and subsidiaries (the Company) as of June 30, 2019 , the related condensed consolidated statements of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2019 and 2018 , the related condensed consolidated statements of changes in equity and cash flows for the six-month periods ended June 30, 2019 and 2018 , 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, 2018 , 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 28, 2019 , 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, 2018 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP
Houston, Texas
July 25, 2019

4



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

 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
63,854

 
$
85,891

Receivables, net of allowances of $976 and $784
262,204

 
198,046

Inventories of products, net
431,380

 
410,640

Inventories of materials and supplies, net
31,691

 
30,843

Prepaid expenses
13,001

 
10,156

Other current assets
19,262

 
29,980

Total current assets
821,392

 
765,556

Property, plant, and equipment, less accumulated depreciation of $634,052 and $597,785
944,740

 
941,476

Goodwill
772,939

 
772,886

Intangible assets, less accumulated amortization of $268,874 and $246,648
345,486

 
362,038

Investment in unconsolidated joint venture
11,852

 
12,070

Debt issuance costs
585

 
1,170

Deferred income taxes
8,198

 
10,434

Long-term operating lease assets, net
72,520

 

Other long-term assets
30,993

 
29,074

Total assets
$
3,008,705

 
$
2,894,704

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
110,105

 
$
45,321

Accounts payable-trade
195,001

 
182,153

Other payables and accruals
112,080

 
100,695

Due to related party
17,282

 
20,918

Total current liabilities
434,468

 
349,087

Long-term debt, net of current portion
1,424,323

 
1,487,298

Deferred income taxes
127,604

 
127,827

Long-term operating lease liabilities
55,888

 

Other long-term liabilities
166,992

 
182,893

Total liabilities
2,209,275

 
2,147,105

Commitments and contingencies (note 10)

 

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

 

Common stock, $0.01 par value; 500,000 shares authorized; 31,868 shares issued and outstanding at June 30, 2019; 31,917 shares issued and outstanding at December 31, 2018
319

 
319

Additional paid in capital
389,680

 
385,921

Retained earnings
470,127

 
420,597

Accumulated other comprehensive loss
(95,959
)
 
(91,699
)
Total Kraton stockholders' equity
764,167

 
715,138

Noncontrolling interest
35,263

 
32,461

Total equity
799,430

 
747,599

Total liabilities and equity
$
3,008,705

 
$
2,894,704


See Notes to Condensed Consolidated Financial Statements
5



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
495,280

 
$
538,395

 
$
951,691

 
$
1,040,787

Cost of goods sold
366,078

 
367,686

 
715,487

 
723,000

Gross profit
129,202

 
170,709

 
236,204

 
317,787

Operating expenses:
 
 
 
 
 
 
 
Research and development
10,173

 
10,474

 
20,724

 
21,271

Selling, general, and administrative
38,457

 
41,975

 
79,351

 
80,698

Depreciation and amortization
31,904

 
35,140

 
63,426

 
70,516

Gain on insurance proceeds
(7,500
)
 

 
(18,600
)
 

Loss on disposal of fixed assets

 
333

 

 
360

Operating income
56,168

 
82,787

 
91,303

 
144,942

Other expense
(417
)
 
(1,107
)
 
(676
)
 
(2,220
)
Gain (loss) on extinguishment of debt

 
(72,330
)
 
210

 
(79,921
)
Earnings of unconsolidated joint venture
140

 
120

 
261

 
257

Interest expense, net
(19,339
)
 
(25,416
)
 
(38,280
)
 
(54,692
)
Income (loss) before income taxes
36,552

 
(15,946
)
 
52,818

 
8,366

Income tax benefit (expense)
6,846

 
1,842

 
4,192

 
(409
)
Consolidated net income (loss)
43,398

 
(14,104
)
 
57,010

 
7,957

Net income attributable to noncontrolling interest
(2,190
)
 
(826
)
 
(3,134
)
 
(815
)
Net income (loss) attributable to Kraton
$
41,208

 
$
(14,930
)
 
$
53,876

 
$
7,142

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
1.29

 
$
(0.47
)
 
$
1.69

 
$
0.22

Diluted
$
1.28

 
$
(0.47
)
 
$
1.67

 
$
0.22

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
31,692

 
31,441

 
31,663

 
31,342

Diluted
32,017

 
31,441

 
31,959

 
31,797


See Notes to Condensed Consolidated Financial Statements
6



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss) attributable to Kraton
$
41,208

 
$
(14,930
)
 
$
53,876

 
$
7,142

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $0
2,597

 
(14,575
)
 
(1,899
)
 
(10,956
)
Unrealized gain (loss) on cash flow hedges, net of tax benefit of $598, expense of $210, benefit of $985, and expense of $1,077, respectively
(2,031
)
 
674

 
(3,347
)
 
3,567

Reclassification of gain on cash flow hedge, net of tax expense of $588

 

 

 
(1,999
)
Unrealized gain (loss) on net investment hedge, net of tax benefit of $1,062, expense of $825, $290, and $825, respectively
(3,608
)
 
2,641

 
986

 
2,641

Other comprehensive loss, net of tax
(3,042
)
 
(11,260
)
 
(4,260
)
 
(6,747
)
Comprehensive income (loss) attributable to Kraton
38,166

 
(26,190
)
 
49,616

 
395

Comprehensive income (loss) attributable to noncontrolling interest
1,967

 
(597
)
 
2,802

 
(75
)
Consolidated comprehensive income (loss)
$
40,133

 
$
(26,787
)
 
$
52,418

 
$
320


See Notes to Condensed Consolidated Financial Statements
7



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

 
$
377,957

 
$
356,503

 
$
(98,295
)
 
$
636,481

 
$
30,038

 
$
666,519

Consolidated net income (loss)

 

 
22,072

 

 
22,072

 
(11
)
 
22,061

Other comprehensive loss

 

 

 
4,513

 
4,513

 
533

 
5,046

Retired treasury stock from employee tax withholdings
(1
)
 
(3,020
)
 
(2,727
)
 

 
(5,748
)
 

 
(5,748
)
Exercise of stock options
1

 
1,367

 

 

 
1,368

 

 
1,368

Non-cash compensation related to equity awards
3

 
2,899

 

 

 
2,902

 

 
2,902

Balance at March 31, 2018
$
319

 
$
379,203

 
$
375,848

 
$
(93,782
)
 
$
661,588

 
$
30,560

 
$
692,148

Consolidated net income (loss)
$

 
$

 
$
(14,930
)
 
$

 
$
(14,930
)
 
$
826

 
$
(14,104
)
Other comprehensive loss

 

 

 
(11,260
)
 
(11,260
)
 
(1,423
)
 
(12,683
)
Retired treasury stock from employee tax withholdings
2

 
(123
)
 
(140
)
 

 
(261
)
 

 
(261
)
Exercise of stock options

 
264

 

 

 
264

 

 
264

Non-cash compensation related to equity awards
(2
)
 
2,225

 

 

 
2,223

 

 
2,223

Balance at June 30, 2018
$
319

 
$
381,569

 
$
360,778

 
$
(105,042
)
 
$
637,624

 
$
29,963

 
$
667,587

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


See Notes to Condensed Consolidated Financial Statements
8



KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Consolidated net income
$
57,010

 
$
7,957

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
63,426

 
70,516

Lease amortization
11,315

 

Amortization of debt original issue discount
536

 
1,675

Amortization of debt issuance costs
2,310

 
3,325

Loss on disposal of property, plant, and equipment

 
360

(Gain) loss on extinguishment of debt
(210
)
 
79,921

Earnings from unconsolidated joint venture, net of dividends received
183

 
288

Deferred income tax provision (benefit)
2,948

 
(2,656
)
Release of uncertain tax positions
(13,457
)
 

Share-based compensation
5,499

 
5,125

Decrease (increase) in:
 
 
 
Accounts receivable
(64,657
)
 
(80,178
)
Inventories of products, materials, and supplies
(22,048
)
 
(35,134
)
Other assets
3,794

 
5,608

Increase (decrease) in:
 
 
 
Accounts payable-trade
13,491

 
20,175

Other payables and accruals
(13,470
)
 
(25,547
)
Other long-term liabilities
(6,744
)
 
(529
)
Due to related party
(3,968
)
 
(2,812
)
Net cash provided by operating activities
35,958

 
48,094

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Kraton purchase of property, plant, and equipment
(49,985
)
 
(42,223
)
KFPC purchase of property, plant, and equipment
(425
)
 
(653
)
Purchase of software and other intangibles
(4,821
)
 
(3,228
)
Net cash used in investing activities
(55,231
)
 
(46,104
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt
40,250

 
713,540

Repayments of debt
(22,560
)
 
(718,370
)
KFPC proceeds from debt
14,600

 
10,197

KFPC repayments of debt
(26,400
)
 
(28,661
)
Capital lease payments
(83
)
 
(520
)
Purchase of treasury stock
(7,725
)
 
(6,009
)
Proceeds from the exercise of stock options
1,639

 
1,632

Settlement of interest rate swap

 
2,587

Debt issuance costs

 
(10,345
)
Net cash used in financing activities
(279
)
 
(35,949
)
Effect of exchange rate differences on cash
(2,485
)
 
211

Net decrease in cash and cash equivalents
(22,037
)
 
(33,748
)
Cash and cash equivalents, beginning of period
85,891

 
89,052

Cash and cash equivalents, end of period
$
63,854

 
$
55,304


See Notes to Condensed Consolidated Financial Statements
9



 
Six Months Ended June 30,
 
2019
 
2018
Supplemental disclosures during the period:
 
 
 
Cash paid for income taxes, net of refunds received
$
9,774

 
$
1,470

Cash paid for interest, net of capitalized interest
$
21,353

 
$
57,063

Capitalized interest
$
2,040

 
$
1,577

Supplemental non-cash disclosures: increase (decrease) during the period
 
 
 
Property, plant, and equipment accruals
$
(923
)
 
$
(5,919
)
Operating leases
$
86,739

 
$


See Notes to Condensed Consolidated Financial Statements
10



KRATON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Description of our Business. We are a leading global specialty chemicals company that manufactures styrenic block copolymers (“SBCs”), specialty polymers, and high-value performance products primarily derived from pine wood pulping co-products.
SBCs are highly-engineered synthetic elastomers, which we originally invented and commercialized. Our SBCs enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability, and processability, and are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants, lubricants, medical, packaging, automotive, and paving and roofing products. We manufacture and sell isoprene rubber and isoprene rubber latex, which are non-SBC products primarily used in applications such as medical products, personal care, adhesives, tackifiers, paints, and coatings.
We refine and further upgrade crude tall oil and crude sulfate turpentine, into value-added specialty chemicals. These pine-based specialty products are sold into adhesive and tire markets, and we produce and sell a broad range of performance chemicals (which we formerly referred to as chemical intermediates) into markets that include fuel additives, oilfield chemicals, coatings, metalworking fluids and lubricants, inks, flavors and fragrances, and mining.
Basis of Presentation. The accompanying unaudited Condensed Consolidated Financial Statements presented in this report are for us and our consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in our joint venture, Kraton Formosa Polymers Corporation (“KFPC”), located in Mailiao, Taiwan. KFPC is a variable interest entity for which we have determined that we are the primary beneficiary and, therefore, have consolidated into our financial statements. Our 50% investment in our joint venture located in Kashima, Japan, is accounted for under the equity method of accounting. All significant intercompany transactions have been eliminated. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods or any other interim period, in particular due to the effect of seasonal changes and weather conditions that typically affect our sales into paving, roadmarking, roofing, and construction applications. In particular, sales volumes into these applications are generally higher in the second and third quarter of the calendar year as warm and dry weather is more conducive to paving and roofing activity.
Reclassifications. Certain amounts reported in the condensed consolidated financial statements and notes to the consolidated financial statements for the prior periods have been reclassified to conform to the current reporting presentation.
Significant Accounting Policies. Our significant accounting policies have been disclosed in Note 1 Description of Business, Basis of Presentation, and Significant Accounting Policies in our most recent Annual Report on Form 10-K. Except for the changes below, the Company has consistently applied the accounting policies presented in the Condensed Consolidated Financial Statements.
Leases. See Note 2 New Accounting Pronouncements , for the impact of ASC 842, Leases , adopted in the current period .
There have been no other changes to the accounting policies, which are disclosed in our most recent Annual Report on Form 10-K. The accompanying unaudited Condensed Consolidated Financial Statements we present in this report have been prepared in accordance with our policies.
Use of Estimates. The preparation of these Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (“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;
estimates of fair value for assets acquired and liabilities assumed in business combinations;
allowances for doubtful accounts and sales returns;
the valuation of derivatives, deferred tax assets, property, plant and equipment, intangible assets, inventory, investments, and share-based compensation; and
liabilities for employee benefit obligations, environmental matters, asset retirement obligations, income tax uncertainties, and other contingencies.

11



Income Tax in Interim Periods. We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in these Condensed Consolidated Financial Statements for each of those jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period.
Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which there is uncertainty that they may be realized. The effects of unusual and infrequent items are recognized in the impacted interim period as discrete items.
The estimated annual effective tax rate may be significantly affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets to the amount that is deemed more likely than not to be recoverable. Our ability to realize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. If we fail to achieve our operating income targets, we may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. A change in our valuation allowance would impact our income tax benefit (expense) and our stockholders’ equity and could have a significant impact on our results of operations or financial condition in future periods.
2. New Accounting Pronouncements
Accounting Standards Adopted in the Current Period
We have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our financial statements.
In February 2016, the FASB established Topic 842, Leases , by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 ; ASU 2018-10, Codification Improvements to Topic 842, Leases ; and ASU 2018-11, Targeted Improvements . The new standard establishes a right-of-use model (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. The new standard provides a number of optional practical expedients in transition. We elected the following practical expedients: (1) ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs; (2) the short-term lease recognition exemption for all leases that qualify; and (3) the practical expedient to not separate lease and non-lease components for all of our leases.
This standard had a material effect on our financial statements. The most significant effects relate to: (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our equipment, building, and vehicle operating leases; (2) the derecognition of existing assets and liabilities for straight line lease accounting under ASC 840 Leases ; and (3) providing significant new disclosures about our leasing activities. On adoption, we recognized additional operating liabilities of $70.9 million , with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities . The objective of this ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This standard is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted for any interim period after issuance of the ASU. Our analysis of ASU 2017-12 was completed during 2018 and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2017-12 effective January 1, 2019.

12



In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815)-Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This standard is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted for any interim period after issuance of the ASU. Our analysis of ASU 2018-16 was completed during 2018, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2018-16 effective January 1, 2019.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for any interim period after issuance of the ASU. Our analysis of ASU 2018-02 was completed during 2018, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2018-02 effective January 1, 2019.
New Accounting Standards to be Adopted in Future Periods
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. Our evaluation of this standard is currently ongoing, and we expect to adopt ASU 2017-04 effective on 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, and early adoption is permitted for any interim period after issuance of the ASU. Our evaluation of this standard is currently ongoing, and we expect to adopt ASU 2018-18 effective on January 1, 2020.
3. Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs at a point in time when the transfer of risk and title to the product transfers to the customer. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and invoices. As such, all revenue is considered revenue recognized from contracts with customers, and we do not have other sources of revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of sales tax, value-added taxes, and other taxes. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale. Certain customers may receive cash-based incentives (including rebates, price supports, and sales commission), which are accounted for as variable consideration. We estimate rebates and price supports based on the expected amount to be provided to customers and reduce revenues recognized once the performance obligation has been met. Sales commissions are recorded as an increase in cost of goods sold once the performance obligation has been met. We do not expect to have significant changes in our estimates for variable considerations.
We have deferred revenue of $13.2 million related to contractual commitments with customers for which the performance obligation will be satisfied over time, which will range from one to ten years . The revenue associated with these performance obligations is recognized as the obligation is satisfied, which occurs as a volume based metric over time when the transfer of risk and title of finished products transfer to the customer.
Occasionally, we enter into bill-and-hold contracts, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products will be shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it 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 and six months ended June 30, 2019 , we recognized $0.3 million and $6.0 million of revenue related to these arrangements, respectively. During the three and six months ended June 30, 2018 , we recognized $0.7 million and $4.5 million of revenue related to these arrangements, respectively.

13



We disaggregate our revenue by segment product lines, which is how we market our products and review results of operations. The following tables disaggregate our segment revenue by major product lines:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Polymer Segment
(In thousands)
Performance Products
$
143,181

 
$
180,738

 
$
281,273

 
$
326,468

Specialty Polymers
103,487

 
108,289

 
185,497

 
212,307

Cariflex
51,009

 
48,976

 
91,876

 
88,501

Other
184

 
147

 
270

 
(55
)
Polymer Product Line Revenue
$
297,861

 
$
338,150

 
$
558,916

 
$
627,221

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Chemical Segment
(In thousands)
Adhesives
$
68,818

 
$
73,978

 
$
134,394

 
$
147,126

Performance Chemicals
115,646

 
114,813

 
232,399

 
237,754

Tires
12,955

 
11,454

 
25,982

 
28,686

Chemical Product Line Revenue
$
197,419

 
$
200,245

 
$
392,775

 
$
413,566


 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Contract receivables (1)
$
263,036

 
$
197,739

Contract liabilities (2)
$
13,234

 
$
13,906

____________________________________________________ 
(1)
Contract receivables are recorded within receivables, net of allowances on our Condensed Consolidated Balance Sheets.
(2)
Our contract liability decreased by $0.6 million , as a result of meeting the performance obligation, which was recognized in our Specialty Polymers product line revenue, and decreased approximately $0.1 million due to the change in currency exchange rates.
4. Share-Based Compensation
We account for share-based awards under the provisions of ASC 718, Compensation—Stock Compensation . Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award, and we expense these costs using the straight-line method over the requisite service period, generally three years . Share-based compensation expense was $2.2 million for both the three months ended June 30, 2019 and 2018 , respectively, and $5.5 million and $5.1 million for the six months ended June 30, 2019 and 2018 , respectively.

14



5. Detail of Certain Balance Sheet Accounts
 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Inventories of products:
 
 
 
Finished products
$
330,034

 
$
315,361

Work in progress
6,080

 
5,781

Raw materials
102,792

 
97,550

Inventories of products, gross
438,906

 
418,692

Inventory reserves
(7,526
)
 
(8,052
)
Total inventories of products, net
$
431,380

 
$
410,640

Intangible assets:
 
 
 
Contractual agreements
$
262,477

 
$
262,624

Technology
145,880

 
145,698

Customer relationships
60,344

 
60,359

Tradenames/trademarks
80,744

 
80,557

Software
64,915

 
59,448

Intangible assets
614,360

 
608,686

Less accumulated amortization:
 
 
 
Contractual agreements
76,841

 
65,958

Technology
65,074

 
62,019

Customer relationships
38,087

 
37,409

Tradenames/trademarks
45,495

 
42,797

Software
43,377

 
38,465

Total accumulated amortization
268,874

 
246,648

Intangible assets, net of accumulated amortization
$
345,486

 
$
362,038

Other payables and accruals:
 
 
 
Employee related
$
27,976

 
$
35,015

Interest payable
16,447

 
2,201

Property, plant, and equipment accruals
10,358

 
10,982

Short-term operating lease liabilities
19,570

 

Other
37,729

 
52,497

Total other payables and accruals
$
112,080

 
$
100,695

Other long-term liabilities:
 
 
 
Pension and other post-retirement benefits
$
119,524

 
$
122,194

Other
47,468

 
60,699

Total other long-term liabilities
$
166,992

 
$
182,893




15



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, 2017
$
(9,654
)
 
$
4,550

 
$
(1,926
)
 
$
(91,265
)
 
$
(98,295
)
Other comprehensive income (loss) before reclassifications
(10,956
)
 
3,567

 
2,641

 

 
(4,748
)
Amounts reclassified from accumulated other comprehensive loss

 
(1,999
)
 

 

 
(1,999
)
Net other comprehensive income (loss) for the year
(10,956
)
 
1,568

 
2,641

 

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

 
$
715

 
$
(91,265
)
 
$
(105,042
)
 
 
 
 
 
 
 
 
 
 
December 31, 2018
$
(24,093
)
 
$
3,922

 
$
6,153

 
$
(77,681
)
 
$
(91,699
)
Other comprehensive income (loss) before reclassifications
(1,899
)
 
(3,347
)
 
986

 

 
(4,260
)
Net other comprehensive income (loss) for the year
(1,899
)
 
(3,347
)
 
986

 

 
(4,260
)
June 30, 2019
$
(25,992
)
 
$
575

 
$
7,139

 
$
(77,681
)
 
$
(95,959
)


16



6. Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income attributable to Kraton by the weighted-average number of shares outstanding excluding non-vested restricted stock awards during the period. Diluted EPS is computed by dividing net income attributable to Kraton by the diluted weighted-average number of shares outstanding during the period and, accordingly, reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised, settled, or converted into common stock and were dilutive. The diluted weighted-average number of shares used in our diluted EPS calculation is determined using the treasury stock method.
The calculations of basic and diluted EPS are as follows:
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Net Income Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Earnings Per Share
 
Net Loss Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Loss Per Share
 
(In thousands, except per share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
As reported
$
41,208

 
31,920

 
 
 
$
(14,930
)
 
31,890

 
 
Amounts allocated to unvested restricted shares
(294
)
 
(228
)
 
 
 
210

 
(449
)
 
 
Amounts available to common stockholders
40,914

 
31,692

 
$
1.29

 
(14,720
)
 
31,441

 
$
(0.47
)
Diluted:
 
 
 
 
 
 
 
 
 
 
 
Amounts allocated to unvested restricted shares
294

 
228

 
 
 
(210
)
 
449

 
 
Non participating share units

 
266

 
 
 

 

 
 
Stock options added under the treasury stock method

 
59

 
 
 

 

 
 
Amounts reallocated to unvested restricted shares
(291
)
 
(228
)
 
 
 
210

 
(449
)
 
 
Amounts available to stockholders and assumed conversions
$
40,917

 
32,017

 
$
1.28

 
$
(14,720
)
 
31,441

 
$
(0.47
)
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Net Income Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Earnings Per Share
 
Net Income Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Earnings Per Share
 
(In thousands, except per share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
As reported
$
53,876

 
31,938

 
 
 
$
7,142

 
31,831

 
 
Amounts allocated to unvested restricted shares
(464
)
 
(275
)
 
 
 
(110
)
 
(489
)
 
 
Amounts available to common stockholders
53,412

 
31,663

 
$
1.69

 
7,032

 
31,342

 
$
0.22

Diluted:
 
 
 
 
 
 
 
 
 
 
 
Amounts allocated to unvested restricted shares
464

 
275

 
 
 
110

 
489

 
 
Non participating share units

 
235

 
 
 

 
201

 
 
Stock options added under the treasury stock method

 
61

 
 
 

 
254

 
 
Amounts reallocated to unvested restricted shares
(460
)
 
(275
)
 
 
 
(108
)
 
(489
)
 
 
Amounts available to stockholders and assumed conversions
$
53,416

 
31,959

 
$
1.67

 
$
7,034

 
31,797

 
$
0.22



17



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 six months ended June 30, 2019 , we repurchased 152,986 shares of our common stock at an average price of $32.68 per share and a total cost of $5.0 million . We are not obligated to acquire any specific number of shares of our common stock.

18



7. Long-Term Debt
Long-term debt consists of the following:
 
June 30, 2019
 
December 31, 2018
 
Principal
 
Discount
 
Debt Issuance Costs
 
Total
 
Principal
 
Discount
 
Debt Issuance Costs
 
Total
 
(In thousands)
USD Tranche
$
362,000

 
$
(6,859
)
 
$
(9,453
)
 
$
345,688

 
$
362,000

 
$
(7,395
)
 
$
(10,171
)
 
$
344,434

Euro Tranche
341,580

 

 
(4,344
)
 
337,236

 
342,900

 

 
(4,711
)
 
338,189

7.0% Senior Notes
394,750

 

 
(6,234
)
 
388,516

 
399,060

 

 
(6,622
)
 
392,438

5.25% Senior Notes
330,194

 

 
(5,191
)
 
325,003

 
331,470

 

 
(5,503
)
 
325,967

ABL Facility
27,000

 

 

 
27,000

 
5,000

 

 

 
5,000

KFPC Loan Agreement
95,441

 

 
(47
)
 
95,394

 
112,489

 

 
(94
)
 
112,395

KFPC Revolving Facilities
14,490

 

 

 
14,490

 
13,012

 

 

 
13,012

Capital lease obligation
1,101

 

 

 
1,101

 
1,184

 

 

 
1,184

Total debt
1,566,556

 
(6,859
)
 
(25,269
)
 
1,534,428

 
1,567,115

 
(7,395
)
 
(27,101
)
 
1,532,619

Less current portion of total debt
110,105

 

 

 
110,105

 
45,321

 

 

 
45,321

Long-term debt
$
1,456,451

 
$
(6,859
)
 
$
(25,269
)
 
$
1,424,323

 
$
1,521,794

 
$
(7,395
)
 
$
(27,101
)
 
$
1,487,298

 
Senior Secured Term Loan Facility. As of June 30, 2019 , we had outstanding borrowings under the U.S. dollar denominated tranche (the “USD Tranche”) of our senior secured term loan facility (the “Term Loan Facility”) of $362.0 million and outstanding borrowings under the Euro denominated tranche (the “Euro Tranche”) of the Term Loan Facility of €300.0 million (or approximately $341.6 million ). Our USD Tranche interest rate applicable margin is 2.5% and our alternative base rate applicable margin is 1.5% . 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 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
As of the date of this filing, the effective interest rate for the USD Tranche is 4.29% and the effective interest rate for the Euro Tranche is 2.75% . The Term Loan Facility contains a number of customary affirmative and negative covenants, and we were in compliance with 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.
On December 6, 2018, we commenced a repurchase program for up to $20.0 million of our 7.0% Senior Notes. Purchases under the program took place from time to time in the open market and through privately negotiated transactions, including pursuant to a 10b5-1 Plan. During the six months ended June 30, 2019 , we repurchased $4.3 million of our 7.0% Senior Notes. We recorded a $0.2 million gain on extinguishment of debt during the six months ended June 30, 2019 , which includes a write off of $0.1 million related to previously capitalized deferred financing costs. The repurchase program ended 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 $330.2 million as of June 30, 2019 ) aggregate principal amount of 5.25% Senior Notes due 2026 (the 5.25% Senior Notes”) in May 2018, which mature on May 15, 2026. The 5.25% Senior Notes are general unsecured, senior obligations, and are unconditionally guaranteed on a senior unsecured basis by each of Kraton Corporation and certain of our wholly-owned domestic subsidiaries. We pay interest on the senior notes at 5.25%  per annum, semi-annually in arrears on May 15 and November 15 of each year.
ABL Facility. Our asset-based revolving credit facility provides financing of up to $250.0 million (the “ABL Facility”). The ABL Facility also provides that we have the right at any time to request up to $100.0 million of additional commitments, provided that we satisfy certain additional conditions. Our outstanding borrowings under the ABL facility were $27.0 million as of June 30, 2019 . The ABL Facility matures on January 6, 2021.

19



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. For a summary of additional terms of the ABL Facility, see Note 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
KFPC Loan Agreement. As of June 30, 2019 , NTD 3.0 billion (or approximately $95.4 million ) was drawn on KFPC's syndicated loan agreement (the “KFPC Loan Agreement”). For the three and six months ended June 30, 2019 , our effective interest rate for borrowings on the KFPC Loan Agreement was 1.8% . The KFPC Loan Agreement contains certain financial covenants that change during the term of the KFPC Loan Agreement. KFPC was in compliance with certain covenants as of the date of this filing. Additionally, due to a waiver received from the majority of lenders, we are no longer subject to the remaining 2019 financial covenants. In each case, these covenants are calculated and tested on an annual basis at December 31 st each year.
The KFPC Loan Agreement matures January 17, 2020. Subject to the terms within the KFPC Loan Agreement, we expect to elect the extension provision whereby we have the option, up to six months prior to the final maturity date, to apply to the facility agent in writing for an extension of the facility period for another two years, or January 17, 2022. We anticipate approvals by the lender syndicate by end of the third quarter 2019. For a summary of additional terms of the KFPC Loan Agreement, see Note 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
KFPC Revolving Facilities. KFPC also has five revolving credit facilities (the “KFPC Revolving Facilities”) to provide funding for working capital requirements and/or general corporate purposes, which allow for total borrowings of up to NTD 2.2 billion (or approximately $69.2 million ). All of the KFPC Revolving Facilities are subject to variable interest rates. As of June 30, 2019 , NTD 450.0 million (or approximately $14.5 million ) was drawn on the KFPC Revolving Facilities.
Debt Issuance Costs. We had net debt issuance cost of $27.0 million as of June 30, 2019 , of which $1.8 million related to the ABL Facility which is recorded as an asset (of which $1.2 million was included in other current assets) and $25.3 million is recorded as a reduction to long-term debt. We amortized $1.2 million and $1.4 million for the three months ended June 30, 2019 , and 2018 , respectively, and $2.3 million and $3.3 million during the six months ended June 30, 2019 and 2018 , respectively.
Debt Maturities . The remaining principal payments on our outstanding total debt as of June 30, 2019 , are as follows:
 
Principal Payments
 
(In thousands)
July 1, 2019 through June 30, 2020
$
110,105

July 1, 2020 through June 30, 2021
27,185

July 1, 2021 through June 30, 2022
196

July 1, 2022 through June 30, 2023
208

July 1, 2023 through June 30, 2024
221

Thereafter
1,428,641

Total debt
$
1,566,556


See Note 8 Fair Value Measurements, Financial Instruments, and Credit Risk for fair value information related to our long-term debt.
8. Fair Value Measurements, Financial Instruments, and Credit Risk
ASC 820, Fair Value Measurements and Disclosures defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.

20



In accordance with ASC 820, these two types of inputs have created the following fair value hierarchy:
Level 1—Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in markets that are not active;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
Level 3—Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
Recurring Fair Value Measurements . The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 . 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 June 30, 2019 and December 31, 2018 , 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
 
June 30, 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
 
$
258

 
$

 
$
258

Derivative asset – noncurrent
Other long-term assets
 
603

 

 
603

Retirement plan asset – noncurrent
Other long-term asset
 
2,640

 
2,640

 

Derivative liability – current
Other payables and accruals
 
112

 

 
112

Total
 
 
$
3,613

 
$
2,640

 
$
973

 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance Sheet Location
 
December 31, 2018
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
 
 
(In thousands)
Derivative asset – current
Other current assets
 
$
1,558

 
$

 
$
1,558

Derivative asset – noncurrent
Other long-term assets
 
3,635

 

 
3,635

Retirement plan asset – noncurrent
Other long-term assets
 
2,485

 
2,485

 

Derivative liability – current
Other payables and accruals
 
13

 

 
13

Total
 
 
$
7,691

 
$
2,485

 
$
5,206



21



The following table presents the carrying values and approximate fair values of our long-term debt.
 
June 30, 2019
 
December 31, 2018
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
USD Tranche (significant other observable inputs – level 2)
$
362,000

 
$
361,323

 
$
362,000

 
$
352,498

Euro Tranche (significant other observable inputs – level 2)
$
341,580

 
$
342,434

 
$
342,900

 
$
338,830

7.0% Senior Notes (quoted prices in active market for identical assets – level 1)
$
394,750

 
$
400,194

 
$
399,060

 
$
369,561

5.25% Senior Notes (quoted prices in active market for identical assets – level 1)
$
330,194

 
$
341,790

 
$
331,470

 
$
299,125

ABL Facility
$
27,000

 
$
27,000

 
$
5,000

 
$
5,000

Capital lease obligation
$
1,101

 
$
1,101

 
$
1,184

 
$
1,184

KFPC Loan Agreement
$
95,441

 
$
95,441

 
$
112,489

 
$
112,489

KFPC Revolving Facilities
$
14,490

 
$
14,490

 
$
13,012

 
$
13,012


The ABL Facility, Capital lease obligation, KFPC Loan Agreement, and KFPC Revolving Facilities are variable rate instruments, and as such, the fair value approximates the carrying value.
Financial Instruments     
Interest Rate Swap Agreements. Periodically, we enter into interest rate swap agreements to hedge or otherwise protect against interest rate fluctuation on a portion of our variable rate debt. These interest rate swap agreements are designated as cash flow hedges on our exposure to the variability of future cash flows.
In an effort to convert a substantial portion of our future interest payments pursuant to the USD Tranche to a fixed interest rate, in February and March 2016 we entered into several interest rate swap agreements with an aggregate notional value of $925.4 million , effective dates of January 3, 2017 and maturity dates of December 31, 2020. In May 2018 we entered into an interest rate swap agreement with a notional value of $90.0 million , effective date of June 4, 2018 and maturity date of December 31, 2018. We exited out of $715.4 million of our interest rate swaps as of December 31, 2018, including the expiration of the notional value of $90.0 million interest rate swap agreement entered into in May 2018. As a result, at June 30, 2019 , the total notional value of our interest rate swaps was $300.0 million , which effectively hedges the outstanding USD Tranche, fixing LIBOR at 1.608% . We recorded an unrealized loss of $2.6 million and an unrealized gain of $0.9 million for the three months ended June 30, 2019 and 2018 , respectively, and an unrealized loss of $4.3 million and an unrealized gain of $4.6 million during the six months ended June 30, 2019 and 2018 , respectively, in other comprehensive income (loss) related to the effective portion of these interest rate swap agreements. In addition, we reclassified out of other comprehensive income (loss) the settlement of a portion of our interest rate swap that amounted to a $2.6 million gain for the six months ended June 30, 2018 .
Foreign Currency Hedges. Periodically, we enter into foreign currency agreements to hedge or otherwise protect against fluctuations in foreign currency exchange rates. These agreements do not qualify for hedge accounting, and gains/losses resulting from both the up-front premiums and/or settlement of the hedges at expiration of the agreements are recognized in the period in which they are incurred. We settled these hedges and recorded a gain of $0.3 million and a loss of $0.2 million for the three months ended June 30, 2019 and 2018 , respectively, and a loss of $1.9 million and $0.2 million for the six months ended June 30, 2019 and 2018 , respectively, which are recorded in cost of goods sold in the Condensed Consolidated Statements of Operations. These contracts are structured such that these gains/losses from the mark-to-market impact of the hedging instruments materially offset the underlying foreign currency exchange gains/losses to reduce the overall impact of foreign currency exchange movements throughout the period.
Net Investment Hedge. During the year ended December 31, 2018, we designated €290.0 million of euro-denominated borrowing as a hedge against a portion of our net investment in the Company's European operations. The mark to market of this instrument was a gain of $1.3 million and $3.5 million for the six months ended June 30, 2019 and 2018 , 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.

22



We analyze our counterparties’ financial condition prior to extending credit, and we establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit, or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.
9. Income Taxes
Our income tax provision was a benefit of $6.8 million and $1.8 million for the three months ended June 30, 2019 and 2018 , respectively, and a benefit of $4.2 million and an expense of $0.4 million for the six months ended June 30, 2019 and 2018 , respectively. Our effective tax rate was 18.7% and 11.6% for the three months ended June 30, 2019 and 2018 , respectively, and 7.9% and 4.9% for the six months ended June 30, 2019 and 2018 , respectively. During the six months ended June 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. During the six months ended June 30, 2018 , our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the mix of our pretax income or loss generated in various foreign jurisdictions and our uncertain tax positions.
The provision for income taxes differs from the amount computed by applying the U.S. corporate statutory income tax rate to income (loss) before income taxes for the reasons set forth below.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Income taxes at the statutory rate
21.0
 %
 
21.0
 %
 
21.0
 %
 
21.0
 %
State taxes, net of federal benefit
1.3

 
1.3

 
1.3

 
1.8

Foreign tax rate differential
(9.2
)
 
8.5

 
(6.3
)
 
(50.2
)
Permanent differences
7.3

 
(11.8
)
 
2.1

 
(1.7
)
Uncertain tax positions
(38.4
)
 
(3.3
)
 
(25.4
)
 
12.6

Valuation allowance
(0.8
)
 
(4.0
)
 
(0.8
)
 
5.3

Return to provision adjustments
0.1

 
(0.1
)
 
0.2

 
16.1

Other

 

 

 

Effective tax rate
(18.7
)%
 
11.6
 %
 
(7.9
)%
 
4.9
 %

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We consider all available material evidence, both positive and negative, in assessing the appropriateness of a valuation allowance for our deferred tax assets. In determining whether a valuation allowance is required during the period, we evaluate primarily (a) cumulative earnings and losses in recent years, (b) historical taxable income or losses as it relates to our ability to utilize operating loss and tax credit carryforwards within the expiration period, (c) trends indicating earnings or losses expected in future years along with our ability in prior years to reasonably project these future trends or operating results, (d) length of the carryback and carryforward period, and (e) prudent and feasible tax-planning strategies, particularly related to operational changes and the impact on the timing or taxability of relative amounts.
As of June 30, 2019 and December 31, 2018 , we recorded a valuation allowance of $42.1 million and $42.5 million , respectively, against our net operating loss carryforwards and other deferred tax assets. We decreased our valuation allowances by $0.3 million and $0.4 million for the three and six months ended June 30, 2019 , respectively, primarily related to current period utilization of net operating loss carryforwards in certain jurisdictions. We increased our valuation allowances by $0.6 million and $0.4 million for the three and six months ended June 30, 2018 , respectively, primarily related to current period net operating losses in the U.S.
For the period ending June 30, 2019, a portion of the unremitted foreign earnings are permanently reinvested in the corresponding country of origin. Accordingly, we have not provided deferred taxes for the differences between the book basis and underlying tax basis in those subsidiaries or on the foreign currency translation adjustment amounts related to such operations.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. For our U.S. federal income tax returns, the statute of limitations has expired through the tax year ended December 31, 2003. As a result of net operating loss carryforwards from 2004, the statute remains open for all years subsequent to 2003. In addition, open tax years for state and foreign jurisdictions remain subject to examination.

23



We recognize the tax impact of certain tax positions only when it is more likely than not those such positions are sustainable. The taxes are recorded in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes , which prescribes the minimum recognition threshold.
As of June 30, 2019 and December 31, 2018 , we had total unrecognized tax benefits of $16.1 million and $29.6 million , respectively, related to uncertain tax positions, all of which, if recognized, would impact our effective tax rate. During the three and six months ended June 30, 2019 , we had a decrease of $13.9 million and $13.5 million , respectively, primarily related to the closing of the U.S. tax audit for the pre-acquisition tax return filing. During the three and six months ended June 30, 2018 , we had an increase of $0.1 million and $0.9 million , respectively, primarily related to our uncertain tax positions in the U.S. and Europe. We recorded interest and penalties related to unrecognized tax benefits within the provision for income taxes. For the year ending December 31, 2019, we expect to release $19.7 million in reserves, of which $14.0 million was released during the three months ended June 30, 2019 as a result of the closing of certain U.S. tax audits.
The Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) introduced significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 35.0% to 21.0% and created new taxes on certain foreign-sourced earnings and certain related-party payments.
One-time transition tax
The Tax Act required us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8.0% on the remaining earnings. Related to the 2017 tax year, we recorded a $15.7 million one-time transitional tax liability. Any legislative changes, including the final Section 965 transition tax regulations issued on January 15, 2019, whose impact is currently being assessed due to the complexity and interdependency of the legislative provisions, as well as any other new or proposed Treasury regulations, which have yet to be issued, may result in additional income tax impacts which could be material in the period any such changes are enacted.
Deferred tax effects
Due to the change in the statutory tax rate from the Tax Act, we remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a deferred tax benefit of $95.0 million , of which $68.9 million relates to the reduction of the U.S. statutory tax rate from 35.0% to 21.0% for years after 2017 and the remaining relates to changes in our investments in foreign subsidiaries. For the period ending December 31, 2018, we completed our analysis based on legislative updates relating to the Tax Act and made no adjustments to the provisional amounts previously recorded.
10. Commitments and Contingencies
(a) Lease Commitments - accounted for under ASC 842 Leases
Substantially all our operating lease ROU assets and operating lease liability represents leases, with a term greater than one year , for railcars, office space, and equipment used to conduct our operations. We currently have no finance leases. These leases were discounted using a rate of 3.125% , which is based on a weighted average borrowing rate of specific debt. Non-variable lease costs include the amortization of the asset recorded on a straight-line basis. Variable lease components are non-index based payments based on performance or usage of the underlying asset. We have no material lessor or sublease income.
The components of lease cost for operating leases are as follows:
 
Six Months Ended June 30, 2019
 
(In thousands)
Lease cost
$
11,315

Variable lease cost
115

Operating lease expense
$
11,430


The operating lease liabilities arising from obtaining ROU assets as of June 30, 2019 were comprised as follows:

24



Leased Asset Class
 
Polymer
 
Chemical
 
Percentage
 
Average Months Remaining on the Lease
 
Weighted Average in Months
 
 
(in thousands)
 
 
 
 
 
 
Railcars
 
$
1,703

 
$
24,800

 
35.1
%
 
49
 
17.2
Buildings
 
13,986

 
9,263

 
30.8
%
 
37
 
11.4
Equipment
 
2,582

 
9,750

 
16.3
%
 
27
 
4.4
Land
 
7,083

 
43

 
9.4
%
 
468
 
44.2
Other
 
651

 
5,597

 
8.3
%
 
19
 
1.6
Total
 
$
26,005

 
$
49,453

 
 
 
 
 
78.8

The following tables show the undiscounted cash flows for the operating lease liabilities.
 
June 30, 2019
 
(In thousands)
July 1, 2019 through December 31, 2019
$
11,641

2020
20,180

2021
15,538

2022
10,301

2023
7,040

Thereafter
17,776

Total undiscounted operating lease liabilities
82,476

 
 
Present value discount
(7,476
)
Foreign currency and other
458

Total discounted operating lease liabilities
$
75,458


 
December 31, 2018
 
(In thousands)
2019
$
19,065

2020
16,891

2021
12,385

2022
8,284

2023
5,137

Thereafter
8,498

Total undiscounted operating lease liabilities
$
70,260


(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 which were subsequently applied by us against taxes owed. The tax authorities are currently assessing R $9.6 million , or approximately $2.5 million . We have appealed the assertion by the tax authorities in Brazil that the goods purchased were not eligible to earn the credits. While the outcome of this proceeding cannot be predicted with certainty, we do not expect this matter to have a material adverse effect upon our financial position, results of operations or cash flows.
We and certain of our subsidiaries, from time to time, are parties to various other legal proceedings, claims and disputes that have arisen in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance. A substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our financial position, results of operations or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not expect any of these existing matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations or cash flows.

25



(c) Asset Retirement Obligations.
The changes in the aggregate carrying amount of our asset retirement obligations are as follows:
 
Six Months Ended June 30,
 
2019
 
2018
 
(In thousands)
Beginning balance
$
5,703

 
$
5,712

Accretion expense
177

 
168

Obligations settled
(206
)
 
(40
)
Foreign currency translation
(15
)
 
(141
)
Ending balance
$
5,659

 
$
5,699


Pursuant to the indemnity included in the February 2001 separation agreement from Shell Chemical, we recorded a receivable of $0.2 million as of June 30, 2018 .
Except for the presentation on the Condensed Consolidated Balance Sheets for the impact of ASU 842, there have been no other material changes to our Commitments and Contingencies disclosed in our most recently filed Annual Report on Form 10-K.

26



11. Employee Benefits
The components of net periodic benefit costs related to pension benefits are as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
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
$
557

 
$
389

 
$
906

 
$
632

 
$
1,310

 
$
778

 
$
1,793

 
$
1,283

Interest cost
1,946

 
516

 
1,795

 
527

 
3,884

 
1,049

 
3,590

 
1,068

Expected return on plan assets
(2,513
)
 
(611
)
 
(2,453
)
 
(684
)
 
(5,030
)
 
(1,244
)
 
(4,905
)
 
(1,384
)
Amortization of prior service cost

 
8

 
(1,235
)
 
4

 

 
17

 

 
7

Amortization of net actuarial loss
990

 
104

 
2,452

 
163

 
1,835

 
210

 
2,452

 
331

Net periodic benefit cost
$
980

 
$
406

 
$
1,465

 
$
642

 
$
1,999

 
$
810

 
$
2,930

 
$
1,305


The components of net periodic benefit costs other than the service cost component are included in Other expense on our Condensed Consolidated Statements of Operations.
We made contributions of $6.5 million and $6.6 million to our pension plans in the six months ended June 30, 2019 and 2018 , respectively.
The components of net periodic benefit cost related to other post-retirement benefits are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
U.S. Plans
 
U.S. Plans
 
U.S. Plans
 
U.S. Plans
 
(In thousands)
Service cost
$
90

 
$
124

 
$
180

 
$
279

Interest cost
240

 
344

 
480

 
679

Amortization of prior service cost
(438
)
 
194

 
(875
)
 
382

Amortization of net actuarial loss
175

 

 
350

 

Net periodic benefit cost
$
67

 
$
662

 
$
135

 
$
1,340


During the year ended December 31, 2018, we amended the post-retirement benefits plan for post- 65 retirees to provide an annual subsidy based on years of service. The annual subsidy replaces a company-sponsored medical plan. This plan modification resulted in a $13.1 million reduction in pension and other post-retirement liabilities during the year ended December 31, 2018.
The components of net periodic benefit costs other than the service cost component are included in Other expense on our Condensed Consolidated Statements of Operations.
12. Industry Segments and Foreign Operations
Our operations are managed through two operating segments: (i) Polymer segment; and (ii) Chemical segment. In accordance with the provisions of ASC 280, Segment Reporting , our chief operating decision maker has been identified as 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.

27



 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Revenue
$
297,861

 
$
197,419

 
$
495,280

 
$
338,150

 
$
200,245

 
$
538,395

Cost of goods sold
218,995

 
147,083

 
366,078

 
228,304

 
139,382

 
367,686

Gross profit
78,866

 
50,336

 
129,202

 
109,846

 
60,863

 
170,709

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
7,338

 
2,835

 
10,173

 
7,386

 
3,088

 
10,474

Selling, general, and administrative
22,206

 
16,251

 
38,457

 
24,461

 
17,514

 
41,975

Depreciation and amortization
14,343

 
17,561

 
31,904

 
17,598

 
17,542

 
35,140

Gain on insurance proceeds

 
(7,500
)
 
(7,500
)
 

 

 

Loss on disposal of fixed assets

 

 

 
170

 
163

 
333

Operating income
$
34,979

 
$
21,189

 
56,168

 
$
60,231

 
$
22,556

 
82,787

Other expense
 
 
 
 
(417
)
 
 
 
 
 
(1,107
)
Loss on extinguishment of debt
 
 
 
 

 
 
 
 
 
(72,330
)
Earnings of unconsolidated joint venture
 
 
 
 
140

 
 
 
 
 
120

Interest expense, net
 
 
 
 
(19,339
)
 
 
 
 
 
(25,416
)
Income (loss) before income taxes
 
 
 
 
$
36,552

 
 
 
 
 
$
(15,946
)
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Revenue
$
558,916

 
$
392,775

 
$
951,691

 
$
627,221

 
$
413,566

 
$
1,040,787

Cost of goods sold
426,164

 
289,323

 
715,487

 
435,944

 
287,056

 
723,000

Gross profit
132,752

 
103,452

 
236,204

 
191,277

 
126,510

 
317,787

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Research and development
14,905

 
5,819

 
20,724

 
14,833

 
6,438

 
21,271

Selling, general, and administrative
45,304

 
34,047

 
79,351

 
47,981

 
32,717

 
80,698

Depreciation and amortization
28,314

 
35,112

 
63,426

 
35,360

 
35,156

 
70,516

Gain on insurance proceeds

 
(18,600
)
 
(18,600
)
 

 

 

Loss on disposal of fixed assets

 

 

 
72

 
288

 
360

Operating income
$
44,229

 
$
47,074

 
91,303

 
$
93,031

 
$
51,911

 
144,942

Other expense
 
 
 
 
(676
)
 
 
 
 
 
(2,220
)
Gain (loss) on extinguishment of debt
 
 
 
 
210

 
 
 
 
 
(79,921
)
Earnings of unconsolidated joint venture
 
 
 
 
261

 
 
 
 
 
257

Interest expense, net
 
 
 
 
(38,280
)
 
 
 
 
 
(54,692
)
Income before income taxes
 
 
 
 
$
52,818

 
 
 
 
 
$
8,366


The following table presents long-lived assets including goodwill and total assets.
 
June 30, 2019
 
December 31, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Property, plant, and equipment, net
$
545,998

 
$
398,742

 
$
944,740

 
$
543,086

 
$
398,390

 
$
941,476

Investment in unconsolidated joint venture
$
11,852

 
$

 
$
11,852

 
$
12,070

 
$

 
$
12,070

Goodwill
$

 
$
772,939

 
$
772,939

 
$

 
$
772,886

 
$
772,886

Total assets
$
1,215,208

 
$
1,793,497

 
$
3,008,705

 
$
1,160,029

 
$
1,734,675

 
$
2,894,704


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.

28



Following is a summary of revenue by geographic region:
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
United States
$
104,178

 
$
85,266

 
$
189,444

 
$
110,260

 
$
81,231

 
$
191,491

Germany
29,086

 
12,297

 
41,383

 
39,665

 
12,850

 
52,515

All other countries
164,597

 
99,856

 
264,453

 
188,225

 
106,164

 
294,389

 
$
297,861

 
$
197,419

 
$
495,280

 
$
338,150

 
$
200,245

 
$
538,395

 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
United States
$
192,146

 
$
165,623

 
$
357,769

 
$
213,989

 
$
162,555

 
$
376,544

Germany
54,997

 
27,278

 
82,275

 
71,507

 
29,086

 
100,593

All other countries
311,773

 
199,874

 
511,647

 
341,725

 
221,925

 
563,650

 
$
558,916

 
$
392,775

 
$
951,691

 
$
627,221

 
$
413,566

 
$
1,040,787


Our capital expenditures for the Polymer segment, excluding capital expenditures by the KFPC joint venture, were $29.9 million and $19.5 million during the six months ended June 30, 2019 and 2018 , respectively, and capital expenditures for our Chemical segment were $20.1 million and $22.7 million during the six months ended June 30, 2019 and 2018 , respectively.
Impact of Hurricane Michael
During the six months ended June 30, 2019, we incurred an incremental $12.8 million of direct costs as we continued to ramp production back to operating capacity. Our insurance carrier provided an additional $17.5 million of advance reimbursement under our insurance policies, recorded as a gain on insurance proceeds in the Condensed Consolidated Statement of Operations (including $1.1 million of proceeds received during the fourth quarter of 2018, but which was deferred at that time as unearned until realizable, during the first quarter of 2019). The $18.6 million gain on insurance fully offsets the lost margin in the first quarter of 2019 and reimburses us for a portion of the direct costs we have incurred to date. We currently estimate the replacement cost associated with damaged equipment to be in a range of $9.0 million to $11.0 million . We have spent $5.6 million as of June 30, 2019. We continue to work with our insurance carriers to resolve all claims under our business interruption and property coverage.
13. Related Party Transactions
We own a 50% equity investment in an SBC manufacturing joint venture in Kashima, Japan. Our outstanding payables were $16.5 million and $20.1 million as of June 30, 2019 and December 31, 2018 , respectively, which were recorded in “Due to related party” liability on the Condensed Consolidated Balance Sheets. Our total purchases from the joint venture were $8.2 million and $7.2 million for the three months ended June 30, 2019 and 2018 , respectively, and $16.4 million and $16.3 million for the six months ended June 30, 2019 and 2018 , 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 $0.7 million and $0.8 million as of June 30, 2019 and December 31, 2018 , respectively, which were recorded in “Due to related party” liability on the Condensed Consolidated Balance Sheets. Our total purchases from this joint venture were $13.6 million and $7.4 million for the three months ended June 30, 2019 and 2018 , respectively, and $25.4 million and $13.1 million for the six months ended June 30, 2019 and 2018 , respectively. See Note 14 Variable Interest Entity, for further discussion related to the KFPC joint venture.

29



14. 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 June 30, 2019 and December 31, 2018 for KFPC before intercompany eliminations.
 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Cash and cash equivalents
$
5,204

 
$
6,640

Other current assets
18,035

 
18,363

Property, plant, and equipment, net
154,529

 
159,893

Intangible assets
8,178

 
8,590

Long-term operating lease assets, net
6,953

 

Other long-term assets
8,939

 
11,838

Total assets
$
201,838

 
$
205,324

 
 
 
 
Current portion of long-term debt
$
109,931

 
$
45,152

Current liabilities
14,704

 
14,996

Long-term debt

 
80,255

Long-term operating lease liabilities
6,677

 

Total liabilities
$
131,312

 
$
140,403


15. Subsequent Events
We have evaluated events and transactions that occurred after the balance sheet date and determined that there were no significant events or transactions, other than described above, that would require recognition or disclosure in our condensed consolidated financial statements for the period ended June 30, 2019 .

30



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, 2018 . 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 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.
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. We also sell isoprene rubber (“IR”) and isoprene rubber latex (“IRL”), which are non-SBC products primarily used in applications such as medical products, personal care, adhesives, tackifiers, paints, and coatings.
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.”
Our paving and roofing applications provide 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.
We also produce Cariflex TM 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. We believe the versatility of Cariflex provides opportunities for new, differentiated applications.
Chemical Segment
We manufacture and sell high value 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 functionalities and properties, determining their respective applications and end markets.
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.

31



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, Swedish Krona, and Brazilian Real. F ro m 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue by Geography:
(In thousands)
Americas
$
211,456

 
$
231,562

 
$
401,729

 
$
441,640

Europe, Middle East, and Africa
160,394

 
189,945

 
319,775

 
367,534

Asia Pacific
123,430

 
116,888

 
230,187

 
231,613

Total revenue
$
495,280

 
$
538,395

 
$
951,691

 
$
1,040,787

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 segment and increased for the Chemical segment during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 . Average purchase prices of our raw materials decreased for the Polymer segment and increased for the Chemical segment during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 .
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.
Tariffs. Effective September 24, 2018, the Office of the U.S. Trade Representative enacted a 10.0% tariff on certain goods imported from China under Section 301 of the Trade Expansion Act of 1974, which increased up to 25.0% in 2019 on raw material imports of ours. In addition, China has enacted tariffs on certain goods imported into China from the United States ranging from 0.0% to 25.0% impacting our sales into China during 2019. We have implemented certain mitigation efforts to minimize the effects of any pricing and supply conditions.
Hurricane Michael. In October 2018, our Panama City, Florida, facility was damaged by Hurricane Michael. In November 2018, restoration of operations for the CTO refinery were complete. Our CST refinery was restored to full operational capacity during the first quarter of 2019.
During the six months ended June 30, 2019, we estimate the margin associated with lost sales due to Hurricane Michael to be $5.9 million, and we incurred an incremental $12.8 million of direct costs as we continued to ramp production back to operating capacity. Our insurance carrier provided an additional $17.5 million of advance reimbursement under our insurance policies. The $18.6 million gain on insurance, recorded as a gain on insurance proceeds in the Condensed Consolidated Statement of Operations (including $1.1 million of proceeds received during the fourth quarter of 2018, but which was deferred at that time as unearned until realizable, during the first quarter of 2019) fully offsets the lost margin in the first quarter of 2019 and reimburses us for a portion of the direct costs we have incurred to date. We currently estimate the replacement cost associated with damaged equipment to be in a range of $9.0 million to $11.0 million. We have spent $5.6 million as of June 30, 2019. We continue to work with our insurance carriers to resolve all claims under our business interruption and property coverage.
Logistics cost . We, like many others, have experienced an increase in transportation and logistics costs. The higher costs began for us in 2018, and we believe are the result of a shortage of U.S. truck drivers, coupled with a recent consolidation of ocean freight carriers. This is a trend we expect to continue throughout 2019.


32



Strategic alternatives for Cariflex business. In February 2019, the Company's board of directors initiated a process to review strategic alternatives for our Cariflex business, which may result in a sale of that business. The initial phase of due diligence is in the process of being completed. There can be no assurance that the strategic review of Cariflex will result in the completion of a transaction. The Company's board of directors has not set a timetable for the completion of the strategic review. As of June 30, 2019, no assets are classified as held for sale.

33



RESULTS OF OPERATIONS
KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
495,280

 
$
538,395

 
$
951,691

 
$
1,040,787

Cost of goods sold
366,078

 
367,686

 
715,487

 
723,000

Gross profit
129,202

 
170,709

 
236,204

 
317,787

Operating expenses:
 
 
 
 
 
 
 
Research and development
10,173

 
10,474

 
20,724

 
21,271

Selling, general, and administrative
38,457

 
41,975

 
79,351

 
80,698

Depreciation and amortization
31,904

 
35,140

 
63,426

 
70,516

Gain on insurance proceeds
(7,500
)
 

 
(18,600
)
 

Loss on disposal of fixed assets

 
333

 

 
360

Operating income
56,168

 
82,787

 
91,303

 
144,942

Other expense
(417
)
 
(1,107
)
 
(676
)
 
(2,220
)
Gain (loss) on extinguishment of debt

 
(72,330
)
 
210

 
(79,921
)
Earnings of unconsolidated joint venture
140

 
120

 
261

 
257

Interest expense, net
(19,339
)
 
(25,416
)
 
(38,280
)
 
(54,692
)
Income (loss) before income taxes
36,552

 
(15,946
)
 
52,818

 
8,366

Income tax benefit (expense)
6,846

 
1,842

 
4,192

 
(409
)
Consolidated net income (loss)
43,398

 
(14,104
)
 
57,010

 
7,957

Net income attributable to noncontrolling interest
(2,190
)
 
(826
)
 
(3,134
)
 
(815
)
Net income (loss) attributable to Kraton
$
41,208

 
$
(14,930
)
 
$
53,876

 
$
7,142

Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
$
1.29

 
$
(0.47
)
 
$
1.69

 
$
0.22

Diluted
$
1.28

 
$
(0.47
)
 
$
1.67

 
$
0.22

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
31,692

 
31,441

 
31,663

 
31,342

Diluted
32,017

 
31,441

 
31,959

 
31,797

Consolidated Results
Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018
Revenue was $495.3 million for the three months ended June 30, 2019 compared to $538.4 million for the three months ended June 30, 2018 , a decrease of $43.1 million or 8.0% . Revenue decline d $40.3 million and $2.8 million for the Polymer and Chemical segment, respectively. For additional information regarding the changes in revenue, see our segment disclosures below.
Cost of goods sold was $366.1 million for the three months ended June 30, 2019 compared to $367.7 million for the three months ended June 30, 2018 , a decrease of $1.6 million or 0.4% . Cost of goods sold decrease d $9.3 million for the Polymer segment and increase d $7.7 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 $38.5 million for the three months ended June 30, 2019 compared to $42.0 million for the three months ended June 30, 2018 . The $3.5 million decrease is primarily attributable to lower employee related costs, partially offset by higher transaction, acquisition, and restructuring costs.

34



Depreciation and amortization was $31.9 million for the three months ended June 30, 2019 compared to $35.1 million for the three months ended June 30, 2018 . The decrease of $3.2 million was primarily attributable to certain assets being fully depreciated as of December 31, 2018 and impacts from foreign exchange rates.
We recorded a $72.3 million loss on extinguishment of debt during the three months ended June 30, 2018 , which includes the write off of previously capitalized deferred financing costs and original issue discount, as well as the tender offer and subsequent redemption of our 10.5% Senior Notes. See Note 7 Long-Term Debt to the consolidated financial statement included in this Quarterly Report on Form 10-Q.
Interest expense, net, was $19.3 million for the three months ended June 30, 2019 compared to $25.4 million for the three months ended June 30, 2018 , a decrease of $6.1 million . The decrease is due to refinancing activities and lower overall indebtedness.
Income tax provision was a benefit of $6.8 million and $1.8 million for the three months ended June 30, 2019 and 2018 , respectively. Our effective tax rate was 18.7% and 11.6% for the three months ended June 30, 2019 and 2018 , respectively. During the three months ended June 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. During the three months ended June 30, 2018 , our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the mix of our pretax income or loss generated in various jurisdictions and permanent items.
Net income attributable to Kraton was $41.2 million , or $1.28 per diluted share, for the three months ended June 30, 2019 , an increase of $56.1 million compared to net loss of $14.9 million , or $0.47 per diluted share, for the three months ended June 30, 2018 . Adjusted Diluted Earnings Per Share (non-GAAP) was $1.58 for the three months ended June 30, 2019 compared to Adjusted Diluted Earnings Per Share (non-GAAP) of $0.88 for the three months ended June 30, 2018 . See a reconciliation of generally accepted accounting principles (“GAAP”) Diluted Earnings (Loss) Per Share to non-GAAP Adjusted Diluted Earnings (Loss) Per Share below.
Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018
Revenue was $951.7 million for the six months ended June 30, 2019 compared to $1,040.8 million for the six months ended June 30, 2018 , a decrease of $89.1 million or 8.6% . Revenue decrease d $68.3 million and $20.8 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 $715.5 million for the six months ended June 30, 2019 compared to $723.0 million for the six months ended June 30, 2018 , a decrease of $7.5 million or 1.0% . Cost of goods sold decrease d $9.8 million for the Polymer segment and increased $2.3 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 $79.4 million for the six months ended June 30, 2019 compared to $80.7 million for the six months ended June 30, 2018 . The $1.3 million decrease is primarily attributable to lower employee related costs, partially offset by higher transaction, acquisition, and restructuring costs.
Depreciation and amortization was $63.4 million for the six months ended June 30, 2019 compared to $70.5 million for the six months ended June 30, 2018 . The decrease of $7.1 million was primarily attributable to certain assets being fully depreciated as of December 31, 2018 and impacts from foreign exchange rates.
We recorded a $79.9 million loss on extinguishment of debt during the six months ended June 30, 2018 , which includes the write off of previously capitalized deferred financing costs and original issue discount, the tender offer and subsequent redemption of our 10.5% Senior Notes, partially offset by a gain on the settlement of the ineffective portion of interest rate swaps. See Note 7 Long-Term Debt to the consolidated financial statement included in this Quarterly Report on Form 10-Q.
Interest expense, net, was $38.3 million for the six months ended June 30, 2019 compared to $54.7 million for the six months ended June 30, 2018 , a decrease of $16.4 million . The decrease is due to refinancing activities and lower overall indebtedness.
Our income tax provision was a benefit of $4.2 million and an expense $0.4 million for the six months ended June 30, 2019 and 2018 , respectively. Our effective tax rate was 7.9% and 4.9% for the six months ended June 30, 2019 and 2018 , respectively. During the six months ended June 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. During the six months ended June 30, 2018 , our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the mix of our pretax income or loss generated in various jurisdictions and permanent items.

35



Net income attributable to Kraton was $53.9 million , or $1.67 per diluted share, for the six months ended June 30, 2019 , an increase of $46.7 million compared to net income of $7.1 million , or $0.22 per diluted share, for the six months ended June 30, 2018 . Adjusted Diluted Earnings Per Share (non-GAAP) was $2.46 for the six months ended June 30, 2019 compared to Adjusted Diluted Earnings Per Share (non-GAAP) of $1.47 for the six months ended June 30, 2018 . See a reconciliation of GAAP Diluted Earnings (Loss) Per Share to non-GAAP Adjusted Diluted Earnings (Loss) Per Share below.
Polymer Segment
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018

(In thousands)
Performance Products
$
143,181

 
$
180,738

 
$
281,273

 
$
326,468

Specialty Polymers
103,487

 
108,289

 
185,497

 
212,307

Cariflex
51,009

 
48,976

 
91,876

 
88,501

Other
184

 
147

 
270

 
(55
)
Polymer Segment Revenue
$
297,861

 
$
338,150

 
$
558,916

 
$
627,221

 
 
 
 
 
 
 
 
Operating income
$
34,979

 
$
60,231

 
$
44,229

 
$
93,031

Adjusted EBITDA (non-GAAP) (1)
$
60,178

 
$
68,695

 
$
108,331

 
$
113,461

Adjusted EBITDA margin (non-GAAP) (2)
20.2
%
 
20.3
%
 
19.4
%
 
18.1
%
 ____________________________________________________
(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 June 30, 2019 compared to Three Months Ended June 30, 2018
Revenue for the Polymer segment was $297.9 million for the three months ended June 30, 2019 compared to $338.2 million for the three months ended June 30, 2018 . The decrease was driven by lower sales volumes, and to a lesser extent, lower average sales prices resulting from lower raw material costs. Sales volumes of 80.2 kilotons for the three months ended June 30, 2019 declined 8.6% compared to the three months ended June 30, 2018 sales volumes of 87.7 kilotons. Performance Products sales volumes decreased 13.9% due to a slow start to the paving and roofing season, as a result of poor weather conditions in North America and Europe, coupled with competitive pressures from Asia. Cariflex sales volumes increased 10.1% primarily from higher latex sales into surgical glove applications and Specialty Polymers sales volumes increased 1.9% due to higher sales into lubricant additive applications. The negative effect from changes in currency exchange rates between the periods was $9.9 million .
Cost of goods sold was $219.0 million for the three months ended June 30, 2019 compared to $228.3 million for the three months ended June 30, 2018 , a decrease of $9.3 million or 4.1% . The decrease in cost of goods sold reflects lower sales volumes, and to a lesser extent, lower raw material costs. These decreases are partially offset by the cost of consumed raw materials, which has higher average costs on a first-in, first-out measurement basis of accounting. Additionally, changes in currency exchange rates between the periods resulted in a positive impact of $6.7 million .
For the three months ended June 30, 2019 , the Polymer segment operating income was $35.0 million compared to $60.2 million for the three months ended June 30, 2018 .
For the three months ended June 30, 2019 , the Polymer segment generated Adjusted EBITDA (non-GAAP) of $60.2 million compared to $68.7 million for the three months ended June 30, 2018 . The decline in Adjusted EBITDA was due to the aforementioned slow start to the paving and roofing season, coupled with competitive pressures from Asia, impacting sales in Performance Products. This was partially offset by higher sales volumes in the Cariflex product group. The negative effect from changes in currency exchange rates between the periods was $2.6 million . See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018
Revenue for the Polymer segment was $558.9 million for the six months ended June 30, 2019 compared to $627.2 million for the six months ended June 30, 2018 . The decrease was driven by lower sales volumes, and to a lesser extent, lower average sales prices resulting from lower raw material costs. Sales volumes of 154.0 kilotons for the six months ended June 30, 2019 decrease d 6.8% compared to the six months ended June 30, 2018 . Specialty Products sales volumes decreased 9.0% as a result of economic slow down in China and greater Asia. The 7.4% decline in Performance Products sales volumes is largely associated with a slow start to the paving and roofing season, as a result of poor weather conditions in North America and Europe, coupled with competitive pressures from Asia. Cariflex sales volumes increased 7.8% , primarily from higher latex

36



sales into surgical glove applications. The negative impact from changes in currency exchange rates between the periods was $18.3 million .
Cost of goods sold was $426.2 million for the six months ended June 30, 2019 compared to $435.9 million for the six months ended June 30, 2018 , a decrease of $9.8 million or 2.2% . The decrease in cost of goods sold reflects lower sales volumes, and to a lesser extent, lower raw material costs. These decreases are partially offset by the cost of consumed raw materials, which has higher average costs on a first-in, first-out measurement basis of accounting. These higher costs were partially offset by overall improved operating performance at our manufacturing sites. The positive effect from changes in currency exchange rates between the periods was $12.2 million .
For the six months ended June 30, 2019 , the Polymer segment operating income was $44.2 million compared to $93.0 million for the six months ended June 30, 2018 .
For the six months ended June 30, 2019 , the Polymer segment generated Adjusted EBITDA (non-GAAP) of $108.3 million compared to $113.5 million for the six months ended June 30, 2018 . The 4.5% decrease in Adjusted EBITDA is due to the economic slow down in China and greater Asia impacting sales of Specialty Polymers and the slow start to the paving and roofing season, coupled with competitive pressures from Asia, impacting sales in Performance Products. This was partially offset by overall improved operating performance and higher sales volumes in the Cariflex product group. The negative 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018

(In thousands)
Adhesives
$
68,818

 
$
73,978

 
$
134,394

 
$
147,126

Performance Chemicals
115,646

 
114,813

 
232,399

 
237,754

Tires
12,955

 
11,454

 
25,982

 
28,686

Chemical Segment Revenue
$
197,419

 
$
200,245

 
$
392,775

 
$
413,566

 
 
 
 
 
 
 
 
Operating income
$
21,189

 
$
22,556

 
$
47,074

 
$
51,911

Adjusted EBITDA (non-GAAP) (1)
$
41,882

 
$
36,929

 
$
83,161

 
$
80,788

Adjusted EBITDA margin (non-GAAP) (2)(3)
21.2
%
 
18.4
%
 
21.2
%
 
19.5
%
 ____________________________________________________
(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.
(3)
For the six months ended June 30, 2019 , Adjusted EBITDA margin adjusted for lost revenues from Hurricane Michael would be 20.7% .
Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018
Revenue for the Chemical segment was $197.4 million for the three months ended June 30, 2019 compared to $200.2 million for the three months ended June 30, 2018 . The decrease in revenue was attributable to lower sales volumes, partially offset by higher average selling prices for upgraded product streams. Sales volumes were 103.8 kilotons for the three months ended June 30, 2019 , a decrease of 7.0 kilotons or 6.3% , as a result of constrained availability of raw materials primarily in North America, a trend that we expect to continue during 2019, and lower non-recurring raw materials sales when compared to the second quarter of 2018. The decline resulted in an 8.9% and 1.7% decrease in Performance Chemicals and Adhesives sales volumes, respectively, partially offset by a 4.8% increase in Tires sales volumes. The negative effect from changes in currency exchange rates between the periods was $5.1 million .
Cost of goods sold was $147.1 million for the three months ended June 30, 2019 compared to $139.4 million for the three months ended June 30, 2018 , an increase of $7.7 million or 5.5% . The increase was driven by higher average raw material costs as a result of increased energy costs, partially offset by lower sales volumes and reflecting lower planned maintenance activities in 2019, when compared to the same period in 2018. The positive impact from changes in currency exchange rates between the periods of $4.9 million .
During the three months ended June 30, 2019, we incurred an incremental $6.9 million of direct costs associated with Hurricane Michael. Our insurance carrier also provided an additional $7.5 million of advance reimbursement under our insurance policies, which was recorded as a gain on insurance proceeds in the Condensed Consolidated Statement of Operations. The $7.5 million gain on insurance proceeds reimburses us for a portion of the direct costs we have incurred to

37



date. We continue to work with our insurance carriers to resolve all claims under our business interruption and property coverage.
For the three months ended June 30, 2019 , the Chemical segment operating income was $21.2 million compared $22.6 million for the three months ended June 30, 2018 .
For the three months ended June 30, 2019 , the Chemical segment generated $41.9 million of Adjusted EBITDA (non-GAAP) compared to $36.9 million for the three months ended June 30, 2018 . The increase in Adjusted EBITDA was primarily driven by higher margins for upgraded product streams and lower fixed costs largely due to lower planned maintenance activities in 2019, when compared to the same period in 2018, partially offset by lower sales volumes. The positive effect from changes in currency exchange rates between the periods was $0.0 million . See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018
Revenue for the Chemical segment was $392.8 million for the six months ended June 30, 2019 compared to $413.6 million for the six months ended June 30, 2018 . The decrease in Chemical segment revenue was primarily attributable to lower sales volumes, partially offset by higher average selling prices for upgraded product streams. Sales volumes were 207.5 kilotons for the six months ended June 30, 2019 , a decrease of 19.2 kilotons or 8.5% , as a result of constrained availability of raw materials primarily in North America, a trend which we expect to continue during 2019, and lower non-recurring raw materials sales when compared to the six months ended June 30, 2018 and lower operating rates during the six months ended June 30, 2019 at our Panama City facility due to the impacts of Hurricane Michael. As a result, Performance Chemicals and Adhesives sales volumes decreased 11.9% and 1.6% , respectively, partially offset by an increase of 2.1% in Tires sales volumes. The negative effect from changes in currency exchange rates between the periods was $12.5 million .
Cost of goods sold was $289.3 million for the six months ended June 30, 2019 compared to $287.1 million for the six months ended June 30, 2018 , an increase of $2.3 million or 0.8% . The increase was driven by higher average raw material costs as a result of increased energy costs, partially offset by lower sales volumes, and reflecting lower planned maintenance activities in 2019, when compared to the same period in 2018. The positive impact from changes in currency exchange rates between the periods was $11.4 million .
During the six months ended June 30, 2019, we estimate the margin associated with lost sales due to Hurricane Michael to be $5.9 million, and we incurred an incremental $12.8 million of direct costs as we continued to ramp production back to operating capacity. Our insurance carrier provided an additional $17.5 million of advance reimbursement under our insurance policies. The $18.6 million gain on insurance, recorded as a gain on insurance proceeds in the Condensed Consolidated Statement of Operations (including $1.1 million of proceeds received during the fourth quarter of 2018, but which was deferred at that time as unearned until realizable, during the first quarter of 2019) fully offsets the lost margin in the first quarter of 2019 and reimburses us for a portion of the direct costs we have incurred to date. We continue to work with our insurance carriers to resolve all claims under our business interruption and property coverage.
For the six months ended June 30, 2019 , the Chemical segment operating income was $47.1 million compared to $51.9 million for the six months ended June 30, 2018 .
For the six months ended June 30, 2019 , the Chemical segment generated $83.2 million of Adjusted EBITDA (non-GAAP) compared to $80.8 million for the six months ended June 30, 2018 . The 2.9% increase in Adjusted EBITDA was primarily driven by higher margins for upgraded product streams and lower fixed costs largely due to lower planned maintenance activities in 2019, when compared to the same period in 2018, partially offset by lower sales volumes. The negative effect from changes in currency exchange rates between the periods was $0.4 million . See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.
NON-GAAP FINANCIAL MEASURES
EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings (Loss) Per Share
We consider EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings (Loss) 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 (Loss) 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.

38



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share amounts)
EBITDA (2)(4)
$
87,795

 
$
44,610

 
$
154,524

 
$
133,574

Adjusted EBITDA (1)(3)(4)
$
102,060

 
$
105,624

 
$
191,492

 
$
194,249

Adjusted Diluted Earnings Per Share (1)(4)
$
1.58

 
$
0.88

 
$
2.46

 
$
1.47

____________________________________________________ 
(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 (Loss) 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, 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 (Loss) Per Share is $7.5 million and $18.6 million, which was recognized as a gain on insurance proceeds in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019, respectively, associated with Hurricane Michael.
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 (Loss) Per Share only as supplemental measures. See our financial statements included in Part I of this Form 10-Q.

39



We reconcile consolidated net income (loss) and operating income to EBITDA and Adjusted EBITDA as follows:
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Net income (loss) attributable to Kraton
 
 
 
 
$
41,208

 
 
 
 
 
$
(14,930
)
Net income attributable to noncontrolling interest
 
 
 
 
2,190

 
 
 
 
 
826

Consolidated net income (loss)
 
 
 
 
43,398

 
 
 
 
 
(14,104
)
Add (deduct):
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit
 
 
 
 
(6,846
)
 
 
 
 
 
(1,842
)
Interest expense, net
 
 
 
 
19,339

 
 
 
 
 
25,416

Earnings of unconsolidated joint venture
 
 
 
 
(140
)
 
 
 
 
 
(120
)
Loss on extinguishment of debt
 
 
 
 

 
 
 
 
 
72,330

Other expense
 
 
 
 
417

 
 
 
 
 
1,107

Operating income
$
34,979

 
$
21,189

 
56,168

 
$
60,231

 
$
22,556

 
82,787

Add (deduct):
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
14,343

 
17,561

 
31,904

 
17,598

 
17,542

 
35,140

Other income (expense)
(618
)
 
201

 
(417
)
 
(1,318
)
 
211

 
(1,107
)
Loss on extinguishment of debt

 

 

 
(72,330
)
 

 
(72,330
)
Earnings of unconsolidated joint venture
140

 

 
140

 
120

 

 
120

EBITDA (a)
48,844

 
38,951

 
87,795

 
4,301

 
40,309

 
44,610

Add (deduct):
 
 
 
 
 
 
 
 
 
 
 
Transaction, acquisition related costs, restructuring, and other costs (b)
2,395

 
166

 
2,561

 
768

 
473

 
1,241

Loss on extinguishment of debt

 

 

 
72,330

 

 
72,330

Hurricane related costs (c)

 
6,944

 
6,944

 

 

 

Hurricane reimbursements (d)

 
(7,500
)
 
(7,500
)
 

 

 

KFPC startup costs (e)

 

 

 
897

 

 
897

Non-cash compensation expense
2,190

 

 
2,190

 
2,223

 

 
2,223

Spread between FIFO and ECRC
6,749

 
3,321

 
10,070

 
(11,824
)
 
(3,853
)
 
(15,677
)
Adjusted EBITDA
$
60,178

 
$
41,882

 
$
102,060

 
$
68,695

 
$
36,929

 
$
105,624

_____________________________________________________
(a)
Included in EBITDA is a $7.5 million gain on insurance, a reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.
(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. As we continue to work with our insurance carriers to finalize our claim for reimbursement of incremental costs incurred, we have identified an additional $2.6 million of costs incurred during the six months ended June 30, 2019. Of this amount, $1.6 million was incurred during the first quarter of 2019.
(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.

40



 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Polymer
 
Chemical
 
Total
 
Polymer
 
Chemical
 
Total
 
(In thousands)
Net income attributable to Kraton
 
 
 
 
$
53,876

 
 
 
 
 
$
7,142

Net income attributable to noncontrolling interest
 
 
 
 
3,134

 
 
 
 
 
815

Consolidated net income
 
 
 
 
57,010

 
 
 
 
 
7,957

Add (deduct):
 
 
 
 
 
 
 
 
 
 
 
Income tax (benefit) expense
 
 
 
 
(4,192
)
 
 
 
 
 
409

Interest expense, net
 
 
 
 
38,280

 
 
 
 
 
54,692

Earnings of unconsolidated joint venture
 
 
 
 
(261
)
 
 
 
 
 
(257
)
Gain (loss) on extinguishment of debt
 
 
 
 
(210
)
 
 
 
 
 
79,921

Other expense
 
 
 
 
676

 
 
 
 
 
2,220

Operating income
$
44,229

 
$
47,074

 
91,303

 
$
93,031

 
$
51,911

 
144,942

Add (deduct):
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
28,314

 
35,112

 
63,426

 
35,360

 
35,156

 
70,516

Other income (expense)
(1,045
)
 
369

 
(676
)
 
(2,642
)
 
422

 
(2,220
)
Gain (loss) on extinguishment of debt
210

 

 
210

 
(79,921
)
 

 
(79,921
)
Earnings of unconsolidated joint venture
261

 

 
261

 
257

 

 
257

EBITDA (a)
71,969

 
82,555

 
154,524

 
46,085

 
87,489

 
133,574

Add (deduct):
 
 
 
 
 
 
 
 
 
 
 
Transaction, acquisition related costs, restructuring, and other costs (b)
3,109

 
564

 
3,673

 
1,373

 
(786
)
 
587

(Gain) loss on extinguishment of debt
(210
)
 

 
(210
)
 
79,921

 

 
79,921

Hurricane related costs (c)

 
12,805

 
12,805

 

 

 

Hurricane reimbursements (d)

 
(12,720
)
 
(12,720
)
 

 

 

KFPC startup costs (e)

 

 

 
897

 

 
897

Non-cash compensation expense
5,499

 

 
5,499

 
5,125

 

 
5,125

Spread between FIFO and ECRC
27,964

 
(43
)
 
27,921

 
(19,940
)
 
(5,915
)
 
(25,855
)
Adjusted EBITDA
$
108,331

 
$
83,161

 
$
191,492

 
$
113,461

 
$
80,788

 
$
194,249

_____________________________________________________
(a)
Included in EBITDA is an $18.6 million gain on insurance, 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.
(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.

41



We reconcile GAAP Diluted Earnings (Loss) Per Share to Adjusted Diluted Earnings (Loss) Per Share (non-GAAP) as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Diluted Earnings (Loss) Per Share
$
1.28

 
$
(0.47
)
 
$
1.67

 
$
0.22

Transaction, acquisition related costs, restructuring, and other costs (a)
0.06

 
0.03

 
0.09

 
0.01

(Gain) loss on extinguishment of debt

 
1.71

 
(0.01
)
 
1.89

Hurricane related costs (b)
0.22

 

 
0.40

 

Hurricane reimbursements (c)
(0.23
)
 

 
(0.39
)
 

KFPC startup costs (d)

 
0.01

 

 
0.01

Spread between FIFO and ECRC
0.25

 
(0.40
)
 
0.70

 
(0.66
)
Adjusted Diluted Earnings Per Share (non-GAAP)
$
1.58

 
$
0.88

 
$
2.46

 
$
1.47

_____________________________________________________
(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 continue to work with our insurance carriers to finalize our claim for reimbursement of incremental costs incurred, we have identified an additional $2.6 million of costs incurred during the six months ended June 30, 2019. Of this amount, $1.6 million was incurred during the first 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.

42



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, 2018 .
Leases. In February 2016, the FASB established Topic 842, Leases , by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 ; ASU 2018-10, Codification Improvements to Topic 842, Leases ; and ASU 2018-11, Targeted Improvements . The new standard establishes a ROU model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. We elected the following practical expedients: (1) ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs; (2) the short-term lease recognition exemption for all leases that qualify; and (3) the practical expedient to not separate lease and non-lease components for all of our leases.
This standard had a material effect on our financial statements. The most significant effects relate to: (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our equipment, building, and vehicle operating leases; (2) the derecognition of existing assets and liabilities for straight line lease accounting under ASC 840 Leases ; and (3) providing significant new disclosures about our leasing activities.
On adoption, we recognized additional operating liabilities of $70.9 million , with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

43



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 Term Loan Facility and ABL Facility are our principal sources of liquidity.
As of June 30, 2019 , our outstanding borrowings included (i) $362.0 million and €300.0 million (or approximately $341.6 million ) under the USD Tranche and Euro Tranche, respectively, of the Term Loan Facility, (ii) $394.8 million and €290.0 million (or approximately $330.2 million as of June 30, 2019 ) under the 7.0% Senior Notes and 5.25% Senior Notes, respectively, and (iii) $27.0 million under our ABL Facility.
In addition, as of June 30, 2019 , KFPC had NTD 3.0 billion (or approximately $95.4 million ) and NTD 450.0 million (or approximately $14.5 million ) of borrowings under the KFPC Loan Agreement and KFPC Revolving Facilities, respectively. The KFPC Loan Agreement matures January 17, 2020. Subject to the terms within the KFPC Loan Agreement, we expect to elect the extension provision whereby we have the option, up to six months prior to the final maturity date, to apply to the facility agent in writing for an extension of the facility period for another two years, or January 17, 2022. We anticipate approvals by the lender syndicate by end of the third quarter 2019.
On December 6, 2018, we commenced a repurchase program for up to $20.0 million of our 7.0% Senior Notes. Purchases under the program may take place from time to time in the open market and through privately negotiated transactions, including pursuant to a 10b5-1 Plan. During the six months ended June 30, 2019 , we repurchased $4.3 million of our 7.0% Senior Notes. As of the date of this filing, we repurchased $5.3 million of our 7.0% Senior Notes. The repurchase program ended March 4, 2019.
See Note 7 Long-Term Debt to the consolidated financial statement included in this Quarterly Report on Form 10-Q and Note 9 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. As of the date of this filing, our available borrowing capacity under the ABL was $208.2 million, with $36.0 million of outstanding borrowings. 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 $6.5 million and $6.6 million to our pension plans during the six months ended June 30, 2019 and 2018 , respectively. We expect our total pension plan contributions for the year ended December 31, 2019 to be approximately $11.2 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 2019 , and the discount rate decreases from the prior year, higher levels of contributions could be required in 2020 and beyond.
As of June 30, 2019 , we had $57.9 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 June 30, 2019, the remaining long-term tax payable related to the Tax Act of $11.9 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 $36.0 million during the six months ended June 30, 2019 compared to net cash provided by operating activities of $48.1 million during the six months ended June 30, 2018 . This represents a net

44



decrease in operating cash flows of $12.1 million , which was primarily driven by decreases in operating income, partially offset by a decrease in working capital. The period-over-period changes in working capital are as follows:
$15.5 million increase in cash flows associated with lower accounts receivables, largely due to lower selling prices; and
$13.1 million increase in cash flows associated with lower inventories of products, materials, and supplies largely due to lower raw material costs, partially offset by higher inventory levels; and
$12.1 million increase in cash flows associated with higher other payables and accruals, primarily driven by timing of interest payments; partially offset by;
$6.7 million decrease in cash flows associated with lower accounts payable due to lower raw material costs; and
$9.2 million decrease in cash flows associated with other items, including other assets, other long term liabilities, and due to related parties, primarily due to timing of transactions and payments.
Investing Cash Flows
Net cash used in investing activities totaled $55.2 million  for the six months ended June 30, 2019 and $46.1 million for the six months ended June 30, 2018 .
Expected Capital Expenditures
We currently expect 2019 capital expenditures in aggregate will be approximately $110.0 million , which excludes capitalized interest. Included in this estimate is $55.0 million for health, safety, environmental, and security and infrastructure and maintenance projects. We also anticipate spending approximately $25.0 million 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. We are evaluating certain strategic capital activities, for which we expect to fund approximately $30.0 million of capital expenditures.
Financing Cash Flows
Our consolidated capital structure as of June 30, 2019 was approximately 32.3% equity, 66.2% debt and 1.5% noncontrolling interest compared to approximately 30.9% equity, 67.7% debt and 1.4% noncontrolling interest December 31, 2018 .
On December 6, 2018, we commenced a repurchase program for up to $20.0 million of our 7.0% Senior Notes. During the six months ended June 30, 2019 , we repurchased $4.3 million of our 7.0% Senior Notes.
During the six months ended June 30, 2019 , we increased indebtedness, excluding impacts on foreign currency, by $3.2 million , while decreasing cash on hand by approximately $22.0 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 six months ended June 30, 2019 , we repurchased 152,986 shares of our common stock at an average price of $32.68 per share and a total cost of $5.0 million . We are not obligated to acquire any specific number of shares of our common stock.
Contractual Commitments
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, 2018 . See Note 7 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, 2018 .
Off-Balance Sheet Arrangements
We are not involved in any material off-balance sheet arrangements as of June 30, 2019 .

45



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, 2018 . 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, 2018 . See Note 8 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 June 30, 2019 , 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.
Effective January 1, 2019, we implemented ASC 842, Leases . This standard had a material effect on our financial statements. The most significant effects relate to: (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our equipment, building, and vehicle operating leases; (2) the derecognition of existing assets and liabilities for straight line lease accounting under ASC 840 Leases ; and (3) providing significant new disclosures about our leasing activities. We implemented changes to our processes related to lease accounting and the control activities related to leases. These included the development of new policies largely impacting lessee accounting in the new standard, training, ongoing contract review requirements, and gathering of information provided for disclosures.
There has been no other changes in our internal control over financial reporting that occurred during the three months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

46



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 10 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 six months ended June 30, 2019 , we repurchased 152,986 shares of our common stock at an average price of $32.68 per share and a total cost of $5.0 million . 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 date when the withholding is made.
 
 
Issuer Purchases of Equity Securities
 
 
(a) Total Number of Shares (or Units) Purchased (1)
 
(b) Average Price Paid Per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)
 
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans of Programs (2)
January 1, 2019 through January 31, 2019
 
1,049

 
$
25.55

 


 


February 1, 2019 through February 28, 2019
 
43,469

 
35.67

 


 


March 1, 2019 through March 31, 2019
 
688

 
35.75

 


 


April 1, 2019 through April 30, 2019
 
13,445

 
32.91

 
12,654

 
$
49,583,619

May 1, 2019 through May 31, 2019
 
140,456

 
32.66

 
140,332

 
45,000,015

June 1, 2019 through June 30, 2019
 

 

 

 
45,000,015

Total
 
199,107

 
$
33.31

 
152,986

 
$
45,000,015

_____________________________________________________
(1)
The total number of shares disclosed in this column includes 46,121 shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted stock awards which vested.
(2)
This column contains repurchases under the Share Repurchase Program.
Item 3.
Default Upon Senior Securities.
None.

47



Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.
On May 23, 2019, the Company’s board of directors approved the ratification of certain grants of stock options, restricted stock awards, performance restricted stock units, and restricted stock units, (collectively, the “Awards”) under the Kraton Corporation 2009 Cash and Equity Incentive Plan, as amended, and the Kraton Corporation 2016 Equity Incentive Plan (collectively, the “Plan”), pursuant to and in accordance with Section 204 of the General Corporation Law of the State of Delaware. The Awards were made on various dates from January 28, 2010 through March 4, 2019 to employees of Kraton Corporation who are not subject to Section 16 of the Securities Exchange Act of 1934, as amended, and non-employee directors. The board of directors approved the ratification of such Awards after it determined that the Awards may not have been duly authorized in accordance with Section 152 and Section 157 of the General Corporation Law. Any claim that the Awards are void or voidable due to the foregoing failure of authorization, or that the Court of Chancery of the State of Delaware should declare in its discretion that the ratification not be effective or be effective only on certain conditions, must be brought within 120 days from the later of the validation effective time and the giving of this notice (which is deemed given on the date that this Quarterly Report on Form 10-Q is filed with the SEC).

48



Item 6.
Exhibits.
Exhibit
Number
 
 
 
Form of the Kraton Corporation Restricted Stock Unit Inducement Award Agreement (1 year vest) under the Kraton Corporation 2019 Equity Inducement Plan
 
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 Quarterly Report on Form 10-Q for the three and six months ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited), (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (Unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018 (Unaudited), (iv) Condensed Consolidated Statement of Changes in Equity for the six months ended June 30, 2019 and 2018 (Unaudited), (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited)
_________________________________________________
*
Filed herewith.
+
Denotes management contract or compensatory plan or agreement.

49



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:
July 25, 2019
/s/ Kevin M. Fogarty
 
 
Kevin M. Fogarty
 
 
President and Chief Executive Officer
 
 
 
Date:
July 25, 2019
/s/ Atanas H. Atanasov
 
 
Atanas H. Atanasov
 
 
Senior Vice President and Chief Financial Officer

50
Kraton (NYSE:KRA)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Kraton Charts.
Kraton (NYSE:KRA)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Kraton Charts.