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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34581
Kraton Corporation
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
20-0411521
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
  
15710 John F. Kennedy Blvd.
Suite 300
Houston,TX77032281504-4700
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01KRANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated 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 26, 2021: 32,148,136.


Index to Quarterly Report
on Form 10-Q for
Quarter Ended June 30, 2021
 
 
PART I. FINANCIAL INFORMATIONPage
   
  
   
   
   
   
   
   
  
  
  
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,” “foresees,” “future,” or by discussions of strategy, plans, or intentions. The statements in this report that are not historical statements, are forward-looking statements, including, but not limited to, statements regarding our expectations as to:
the continued impact of the coronavirus (“COVID-19”) pandemic (including governmental and regulatory actions relating thereto) on demand for our products, on the national and global economy and on our customers, suppliers, employees, business and results of operations;
the potential impact of actions by our competitors in response to the COVID-19 pandemic on the price and demand for our products;
expectations regarding the possibility for future impairment of goodwill or other assets, including as a result of the impact of the COVID-19 pandemic;
the anticipated benefits or performance of our products;
beliefs regarding opportunities for new, differentiated applications, and other innovations;
our ability to obtain necessary additional regulatory approvals for BIAXAM on our anticipated timeline, or at all, and whether the expected benefits of the product will be realized;
our expectations with respect to debt reduction and our ability to refinance our debt from time to time;
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;
expected benefits from our acquisitions, business dispositions, or other business combinations and expectations regarding our ability to timely execute and close such transactions;
our anticipated capital expenditures, health, safety, environmental, and security and infrastructure and maintenance projects, expected facility turnaround costs and timing, 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;
expectations regarding inflation of transportation and logistics costs and associated availability;
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 extraordinary events such as natural disasters, other weather events, or terrorist attacks;
estimated impacts of changing tariff rates;
expectations or estimated impacts of anticipated legislative or regulatory changes;
the estimates and matters described in our latest Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
projections regarding environmental costs and capital expenditures and related operational savings.
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
3


contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements include, but are not limited to the factors set forth in this report, in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other filings with the Securities and Exchange Commission (the “SEC”). Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic.
There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information.
Forward-looking statements are based on current plans, estimates, assumptions and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.
Presentation of Financial Statements
The terms “Kraton,” “our company,” “we,” “our,” “ours,” and “us” as used in this report refer collectively to Kraton Corporation and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations, comprehensive income (loss), changes in equity, and cash flows of Kraton. Kraton Corporation is a holding company whose only material asset is its investment in its wholly owned subsidiary, Kraton Polymers LLC. Kraton Polymers LLC and its subsidiaries own all of our consolidated operating assets.
4


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

Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Kraton Corporation and subsidiaries (the Company) as of June 30, 2021, the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2021 and 2020, the related condensed consolidated statements of changes in equity for the three-month periods ended June 30 and March 31, 2021 and 2020, and the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2021 and 2020, 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, 2020, 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 26, 2021, 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, 2020, 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 29, 2021
5


PART I. FINANCIAL INFORMATION
Item 1.     Condensed Consolidated Financial Statements.
KRATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 
June 30, 2021December 31, 2020
(unaudited)
ASSETS  
Current assets: 
Cash and cash equivalents$58,132 $85,901 
Receivables, net of allowance for doubtful accounts of $765 and $598
257,567 180,258 
Inventories of products, net364,329 318,885 
Inventories of materials and supplies, net34,658 34,164 
Prepaid expenses16,202 11,844 
Other current assets17,150 15,338 
Total current assets748,038 646,390 
Property, plant, and equipment, net of accumulated depreciation of $763,649 and $732,279
937,544 942,703 
Goodwill374,089 375,061 
Intangible assets, net of accumulated amortization of $350,031 and $330,070
276,166 294,734 
Investment in unconsolidated joint venture12,201 12,723 
Deferred income taxes79,531 83,534 
Long-term operating lease assets, net86,274 84,042 
Other long-term assets21,019 21,770 
Total assets$2,534,862 $2,460,957 
LIABILITIES AND EQUITY  
Current liabilities:  
Current portion of long-term debt$80,974 $72,347 
Accounts payable-trade211,571 176,229 
Other payables and accruals166,981 167,364 
Due to related party16,086 17,147 
Total current liabilities475,612 433,087 
Long-term debt, net of current portion836,804 865,516 
Deferred income taxes128,191 125,559 
Long-term operating lease liabilities70,748 67,898 
Deferred income140,375 151,329 
Other long-term liabilities157,217 168,566 
Total liabilities1,808,947 1,811,955 
Commitments and contingencies (Note 11)
Equity:  
Kraton stockholders' equity:  
Preferred stock, $0.01 par value; 100,000 shares authorized; none issued
  
Common stock, $0.01 par value; 500,000 shares authorized; 32,148 shares issued and outstanding at June 30, 2021; 31,873 shares issued and outstanding at December 31, 2020
321 319 
Additional paid in capital407,189 401,445 
Retained earnings309,038 240,464 
Accumulated other comprehensive loss(38,947)(37,865)
Total Kraton stockholders' equity677,601 604,363 
Noncontrolling interest48,314 44,639 
Total equity725,915 649,002 
Total liabilities and equity$2,534,862 $2,460,957 
See Notes to Condensed Consolidated Financial Statements
6


KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Revenue$493,623 $355,679 $930,894 $782,948 
Cost of goods sold354,098 262,635 655,336 570,704 
Gross profit139,525 93,044 275,558 212,244 
Operating expenses:    
Research and development9,723 9,912 19,243 20,704 
Selling, general, and administrative34,037 38,402 75,316 87,460 
Depreciation and amortization31,716 31,342 63,273 62,515 
Loss on disposal of fixed assets42 557 346 493 
Operating income64,007 12,831 117,380 41,072 
Other income (expense)(2,493)251 (1,685)578 
Disposition and exit of business activities (25) 175,189 
Loss on extinguishment of debt (141) (14,095)
Earnings of unconsolidated joint venture135 128 255 229 
Interest expense, net(10,417)(13,466)(21,364)(30,927)
Income (loss) before income taxes51,232 (422)94,586 172,046 
Income tax benefit (expense)(12,881)(6,659)(21,642)29,893 
Consolidated net income (loss)38,351 (7,081)72,944 201,939 
Net income attributable to noncontrolling interest(1,940)(887)(3,304)(1,821)
Net income (loss) attributable to Kraton$36,411 $(7,968)$69,640 $200,118 
Earnings (loss) per common share:    
Basic$1.13 $(0.25)$2.17 $6.29 
Diluted$1.11 $(0.25)$2.14 $6.20 
Weighted average common shares outstanding:    
Basic32,146 31,782 32,037 31,698 
Diluted32,679 31,782 32,569 32,133 
See Notes to Condensed Consolidated Financial Statements
7


KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Net income (loss) attributable to Kraton$36,411 $(7,968)$69,640 $200,118 
Other comprehensive income (loss):    
Foreign currency translation adjustments, net of tax of $0
10,330 10,886 (9,782)2,480 
Reclassification of foreign currency translation adjustments from disposition and exit of business activities, net of tax of $0
   66,533 
Unrealized gain on cash flow hedges, net of tax expense of $458
   1,387 
Reclassification of loss on cash flow hedge, net of tax benefit of $293
   1,002 
Unrealized gain (loss) on net investment hedge, net of tax benefit of $783, expense of $1,444, $2,583, and $19, respectively
(2,637)(7,826)8,700 (2,655)
Reclassification of gain on net investment hedge, net of tax of $0
   (899)
Other comprehensive income (loss), net of tax7,693 3,060 (1,082)67,848 
Comprehensive income (loss) attributable to Kraton44,104 (4,908)68,558 267,966 
Comprehensive income attributable to noncontrolling interest2,963 2,036 3,675 2,563 
Consolidated comprehensive income (loss)$47,067 $(2,872)$72,233 $270,529 
See Notes to Condensed Consolidated Financial Statements
8


KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In thousands)
 
 Common StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Kraton Stockholders' EquityNoncontrolling InterestTotal Equity
Balance at December 31, 2019$318 $392,208 $464,712 $(105,795)$751,443 $37,985 $789,428 
Consolidated net income— — 208,086 — 208,086 934 209,020 
Other comprehensive income (loss)— — — 64,788 64,788 (407)64,381 
Retired treasury stock from employee tax withholdings— (1,927)1,249 — (678)— (678)
Non-cash compensation related to equity awards1 2,847 — — 2,848 — 2,848 
Balance at March 31, 2020$319 $393,128 $674,047 $(41,007)$1,026,487 $38,512 $1,064,999 
Consolidated net income (loss)— — (7,968)— (7,968)887 (7,081)
Other comprehensive income— — — 3,060 3,060 1,149 4,209 
Retired treasury stock from employee tax withholdings— (160)94 — (66)— (66)
Non-cash compensation related to equity awards 1,897 — — 1,897 — 1,897 
Balance at June 30, 2020$319 $394,865 $666,173 $(37,947)$1,023,410 $40,548 $1,063,958 
 Common StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Kraton Stockholders' EquityNoncontrolling InterestTotal Equity
Balance at December 31, 2020$319 $401,445 $240,464 $(37,865)$604,363 $44,639 $649,002 
Consolidated net income— — 33,229 — 33,229 1,364 34,593 
Other comprehensive loss— — — (8,775)(8,775)(652)(9,427)
Retired treasury stock from employee tax withholdings1 (3,816)(1,047)— (4,862)— (4,862)
Exercise of stock options1 4,091 — — 4,092 — 4,092 
Non-cash compensation related to equity awards 2,924 — — 2,924 — 2,924 
Balance at March 31, 2021$321 $404,644 $272,646 $(46,640)$630,971 $45,351 $676,322 
Consolidated net income— — 36,411 — 36,411 1,940 38,351 
Other comprehensive income— — — 7,693 7,693 1,023 8,716 
Retired treasury stock from employee tax withholdings (50)(19)— (69)— (69)
Non-cash compensation related to equity awards— 2,595 — — 2,595 — 2,595 
Balance at June 30, 2021$321 $407,189 $309,038 $(38,947)$677,601 $48,314 $725,915 

See Notes to Condensed Consolidated Financial Statements
9


KRATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June 30,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES  
Consolidated net income$72,944 $201,939 
Adjustments to reconcile consolidated net income to net cash provided by operating activities:  
Depreciation and amortization63,273 62,515 
Lease amortization12,082 12,428 
Amortization of debt original issue discount 148 
Amortization of debt issuance costs1,240 1,724 
Amortization of deferred income(8,103)(7,799)
Loss on disposal of property, plant, and equipment346 108 
Loss on extinguishment of debt  14,095 
Earnings from unconsolidated joint venture, net of dividends received211 279 
Deferred income tax (benefit) provision2,693 (66,441)
Release of uncertain tax positions (3,316)
Gain on disposition and exit of business activities (175,189)
Share-based compensation5,519 4,745 
Decrease (increase) in:  
Accounts receivable(77,466)1,859 
Inventories of products, materials, and supplies(50,008)(36,024)
Other assets(6,092)(4,366)
Increase (decrease) in:  
Accounts payable-trade40,609 (14,765)
Other payables and accruals(14,703)30,767 
Other long-term liabilities(9,589)(2,824)
Due to related party143 (888)
Net cash provided by operating activities33,099 18,995 
CASH FLOWS FROM INVESTING ACTIVITIES  
Kraton purchase of property, plant, and equipment(43,012)(39,122)
KFPC purchase of property, plant, and equipment(345)(3,224)
Purchase of software and other intangibles(3,938)(3,456)
Cash proceeds (payments) from disposition and exit of business activities(876)510,500 
Net cash provided by (used in) investing activities(48,171)464,698 
CASH FLOWS FROM FINANCING ACTIVITIES  
Proceeds from debt43,000 77,000 
Repayments of debt(43,000)(437,174)
KFPC proceeds from debt32,004 49,967 
KFPC repayments of debt(42,157)(59,769)
Finance lease payments(616)(88)
Purchase of treasury stock(4,931)(744)
Proceeds from the exercise of stock options4,092  
Settlement of interest rate swap  (1,295)
Debt issuance costs (1,234)
Net cash used in financing activities(11,608)(373,337)
Effect of exchange rate differences on cash(1,089)(8,024)
Net increase (decrease) in cash and cash equivalents(27,769)102,332 
Cash and cash equivalents, beginning of period85,901 35,033 
Cash and cash equivalents, end of period$58,132 $137,365 
See Notes to Condensed Consolidated Financial Statements
10


Six Months Ended June 30,
 20212020
Supplemental disclosures during the period:  
Cash paid for income taxes, net of refunds received$4,308 $3,486 
Cash paid for interest, net of capitalized interest$19,124 $29,259 
Capitalized interest$1,491 $827 
Supplemental non-cash disclosures: increase (decrease) during the period 
Property, plant, and equipment accruals$(2,688)$(12,930)
Operating leases$12,927 $13,626 
See Notes to Condensed Consolidated Financial Statements
11


KRATON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Description of our Business. We are a leading global sustainable specialty chemicals company that manufactures styrenic block copolymers (“SBCs”), specialty polymers, and high-value bio-based products primarily derived from pine wood pulping co-products. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment.
SBCs are highly-engineered synthetic elastomers, which we originally invented and commercialized. Our SBCs enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability, and processability, and are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants, lubricants, medical, packaging, automotive, and paving and roofing products. We manufacture and sell isoprene rubber through a multi-year Isoprene Rubber Supply Agreement (“IRSA”) with Daelim Industrial Co, Ltd. (“Daelim”).
We refine and further upgrade crude tall oil and crude sulfate turpentine, into value-added specialty chemicals. These pine-based specialty products are sold into adhesive and tire markets, and we produce and sell a broad range of performance chemicals into markets that include fuel additives, oilfield chemicals, coatings, metalworking fluids and lubricants, inks, flavors and fragrances, and mining.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements presented in this report are for us and our consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in our joint venture, Kraton Formosa Polymers Corporation (“KFPC”), located in Mailiao, Taiwan. KFPC is a variable interest entity for which we have determined that we are the primary beneficiary and, therefore, have consolidated into our financial statements. Our 50% investment in our joint venture located in Kashima, Japan, is accounted for under the equity method of accounting. All significant intercompany transactions have been eliminated. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods or any other interim period, in particular due to the effect of seasonal changes and weather conditions that typically affect our sales into paving, roadmarking, roofing, and construction applications. In particular, sales volumes into these applications are generally higher in the second and third quarter of the calendar year as warm and dry weather is more conducive to paving and roofing activity.
Reclassifications. Certain amounts reported in the condensed consolidated financial statements and notes to the condensed consolidated financial statements for the prior periods may have been reclassified to conform to the current reporting presentation.
Significant Accounting Policies. Our significant accounting policies have been disclosed in Note 1 Description of Business, Basis of Presentation, and Significant Accounting Policies in our most recent Annual Report on Form 10-K.
There have been no changes to the accounting policies, which are disclosed in our most recent Annual Report on Form 10-K. The accompanying unaudited condensed consolidated financial statements we present in this report have been prepared in accordance with our policies.
Use of Estimates. The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant items subject to such estimates and assumptions include:
the useful lives of long-lived assets;
allowances for doubtful accounts and sales returns;
valuation of goodwill;
the valuation of derivatives, deferred taxes, property, plant and equipment, inventory, share-based compensation, and deferred income; and
liabilities for employee benefit obligations, environmental matters, asset retirement obligations, income tax uncertainties, and other contingencies.
12


Income Tax in Interim Periods. We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in these condensed consolidated financial statements for each of those jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. Overall effective tax rate may therefore vary considerably from quarter to quarter and from year to year based on the actual or projected location of operations, levels of income, intercompany gains or losses, and other factors.
In accordance with U.S. GAAP for interim reporting, we have historically estimated our full-year effective tax rate and applied this rate to ordinary income or loss for the reporting period. We have determined that since small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rate this historical method would not provide reliable results for the quarter ended June 30, 2021. Therefore, a discrete year-to-date method of reporting was used for the quarter ended June 30, 2021. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.
We have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets to the amount that is deemed more likely than not to be recoverable. Our ability to realize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. If we fail to achieve our operating income targets, we may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. A change in our valuation allowance would impact our income tax benefit (expense) and our stockholders’ equity and could have a significant impact on our results of operations or financial condition in future periods.
2. New Accounting Pronouncements
Accounting Standards Adopted in the Current Period
We have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our financial statements.
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is effective for fiscal years beginning after December 15, 2020. Adoption of this standard did not materially impact our financial position, results of operations, and cash flows. We adopted ASU 2019-12 effective January 1, 2021.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. This standard provides practical expedients and exceptions for applying U.S.
GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
This standard is applicable to our contracts and hedging relationships that reference LIBOR. The amendments may be applied
through December 31, 2022. We will apply this guidance to transactions and modifications of these arrangements as
appropriate.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This standard is effective beginning on January 7, 2021. Our analysis of ASU 2021-01 was completed during 2021, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2021-01 effective January 7, 2021.
New Accounting Standards to be Adopted in Future Periods
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This standard is effective for fiscal years beginning after December 15, 2021. 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 2020-06 effective on January 1, 2022.
13


3. Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs at a point in time when the risk of loss and title to the product transfers to the customer. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and invoices. As such, all revenue is considered revenue recognized from contracts with customers, and we do not have other sources of revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of sales tax, value-added taxes, and other taxes. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale. Certain customers may receive cash-based incentives (including rebates, price supports, and sales commission), which are accounted for as variable consideration. We estimate rebates and price supports based on the expected amount to be provided to customers and reduce revenues recognized once the performance obligation has been met. Sales commissions are recorded as an increase in cost of goods sold once the performance obligation has been met. We do not expect to have significant changes in our estimates for variable considerations.
We have deferred revenue of $167.2 million related to contractual commitments with customers for which the performance obligation will be satisfied over time, which currently ranges from one to nine years. The revenue associated with these performance obligations is recognized as the obligation is satisfied, which occurs as a volume based metric over time with the transfer of risk and title of finished products to the customer. The IRSA did not provide any Isoprene Rubber sales revenue for the three months ended June 30, 2021. The IRSA provided Isoprene Rubber sales revenue of $8.7 million for the three months ended June 30, 2020 and $15.9 million and $15.6 million for the six months ended June 30, 2021 and 2020, respectively. Included within Isoprene Rubber sales revenue is amortization of deferred income of $3.9 million for the three months ended June 30, 2020 and $7.6 million and $7.2 million for the six months ended June 30, 2021 and 2020, respectively, which represents non-cash revenue realized as the products are sold under the IRSA.
Occasionally, we enter into bill-and-hold contracts, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products are shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it is ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer. Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer. We did not recognize any revenue related to bill-and-hold arrangements for the three months ended June 30, 2021. During the three months ended June 30, 2020, we recognized $0.2 million, of revenue related to these bill-and-hold arrangements, respectively. During the six months ended June 30, 2021 and 2020, we recognized $1.7 million and $4.4 million of revenue related to these bill-and-hold arrangements, respectively.
We disaggregate our revenue by segment product lines, which is how we market our products and review results of operations. The following tables disaggregate our segment revenue by major product lines:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Polymer Segment(In thousands)
Performance Products$177,154 $118,339 $305,099 $237,099 
Specialty Polymers101,069 76,305 197,808 154,222 
Cariflex(1)
   36,930 
Isoprene Rubber(26)8,744 15,930 15,603 
Other249 464 759 378 
Polymer Product Line Revenue$278,446 $203,852 $519,596 $444,232 
____________________________________________________ 
(1)     Cariflex is included in the results of operations through March 6, 2020. See Note 4 Disposition and Exit of Business Activities for further information on the divestiture of our Cariflex business.
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Chemical Segment(In thousands)
Adhesives$74,330 $60,993 $146,056 $125,888 
Performance Chemicals126,164 84,848 237,339 195,590 
Tires14,683 5,986 27,903 17,238 
Chemical Product Line Revenue$215,177 $151,827 $411,298 $338,716 
14


June 30, 2021December 31, 2020
(In thousands)
Contract receivables(1)
$255,364 $179,805 
Contract liabilities(2)
$167,200 $175,511 
____________________________________________________ 
(1)     Contract receivables are recorded within receivables, net of allowances on our Condensed Consolidated Balance Sheets.
(2)    Our contract liability consists of $154.9 million of non-cash deferred income related to the IRSA and $10.1 million of non-cash deferred income related to a supply agreement with a significant lubricant additive customer. The impact from currency exchange rates is $2.1 million.
4. Disposition and Exit of Business Activities
On March 6, 2020, we completed the sale of our Cariflex business to Daelim for gross proceeds of $530.0 million, adjusted for incremental working capital of $4.9 million, less contractual capital contributions of $25.3 million. The original $5.8 million of incremental working capital was reduced in the second quarter of 2021 by $0.9 million due to payment of a statutory tax obligation. The sale closed and is subject to a customary post-closing working capital adjustment and a contractual capital contribution post-closing adjustment. Upon closing, we recognized a gain of $175.2 million, and as part of the consideration received, entered into a multi-year IRSA with Daelim. As the IRSA product sales are at cost, we deferred approximately $180.6 million, of which $158.2 million and $22.4 million were recorded within deferred income and other payables and accruals, respectively, on the Condensed Consolidated Balance Sheet as of March 31, 2020. The deferred income will be amortized into revenue as a non-cash transaction when the products are sold. In accordance with the IRSA, we will supply Isoprene Rubber to Daelim for a period of five years from the sale closing date, with an optional extension for an additional five years.
We used the $509.6 million net proceeds from the sale of our Cariflex business principally for repayment of the full outstanding balance of $290.0 million under the U.S. dollar denominated tranche (the “USD Tranche”) of the Company’s senior secured term loan facility (the “Term Loan Facility”) and repayment in the amount of €145.0 million, or approximately $166.8 million, of borrowings under the Euro dollar denominated tranche (the “Euro Tranche”) of the Term Loan Facility. We used the remaining proceeds in accordance with the terms of the Term Loan Facility to make additional repayments of debt and invested in strategic assets of the Company.
For further discussion on assets held for sale, see Note 5 Assets Held for Sale to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.
5. Share-Based Compensation
We account for share-based awards under the provisions of ASC 718, Compensation—Stock Compensation. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award, and we expense these costs using the straight-line method over the requisite service period, generally three years. Share-based compensation expense was $2.6 million and $1.9 million for the three months ended June 30, 2021 and 2020, respectively, and $5.5 million and $4.7 million for the six months ended June 30, 2021 and 2020, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter under our Kraton Corporation Amended and Restated 2016 Equity and Cash Incentive Plan, as amended (the “A&R 2016 Plan”).
15


6. Detail of Certain Balance Sheet Accounts
June 30, 2021December 31, 2020
 (In thousands)
Inventories of products:  
Finished products$260,031 $240,021 
Work in progress5,356 3,074 
Raw materials106,794 84,039 
Inventories of products, gross372,181 327,134 
Inventory reserves(7,852)(8,249)
Total inventories of products, net$364,329 $318,885 
Intangible assets:  
Contractual agreements$264,076 $265,375 
Technology146,504 147,011 
Customer relationships60,498 60,623 
Tradenames/trademarks83,904 83,519 
Software71,215 68,276 
Intangible assets626,197 624,804 
Less accumulated amortization:  
Contractual agreements121,254 110,811 
Technology77,675 74,693 
Customer relationships40,881 40,205 
Tradenames/trademarks56,642 53,951 
Software53,579 50,410 
Total accumulated amortization350,031 330,070 
Intangible assets, net of accumulated amortization$276,166 $294,734 
Other payables and accruals:  
Employee related$34,172 $52,145 
Short-term operating lease liabilities17,474 18,299 
Interest payable4,233 3,873 
Capital project accruals6,552 1,149 
Customer related10,760 10,484 
Short-term deferred income26,825 24,182 
Income tax payable34,345 26,367 
Utilities payable3,291 2,886 
Property and other taxes1,947 1,303 
Other27,382 26,676 
Total other payables and accruals$166,981 $167,364 
Other long-term liabilities:  
Pension and other post-retirement benefits$122,949 $133,634 
Long-term tax liability18,413 19,530 
Other15,855 15,402 
Total other long-term liabilities$157,217 $168,566 

16


Changes in accumulated other comprehensive income (loss) by component were as follows:
Cumulative Foreign Currency TranslationCash Flow Hedges, Net of TaxNet Investment Hedges, Net of TaxBenefit Plans Liability, Net of TaxTotal
(In thousands)
December 31, 2019