KRATON CORPORATION INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 8. Financial Statements and Supplementary Data. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Item 1A. Risk Factors and below under the caption "Factors Affecting Our Results of Operations." Actual results may differ materially from those contained in any forward-looking statements. Our Annual Report on Form 10-K for the year endedDecember 31, 2020 includes a discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2019 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
OVERVIEW
We are a leading global sustainable 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. On September 27, 2021 , we entered
into the Merger Agreement pursuant to which DL Chemical, a subsidiary of DL
Holdings Co., Ltd. (formerly Daelim Industrial Co., Ltd.), agreed to acquire
100.0% of us in an all-cash transaction.
Polymer Segment
SBCs are highly-engineered synthetic elastomers, which we invented and
commercialized over 50 years ago. We developed the first unhydrogenated styrenic
block copolymers ("USBC") in 1964 and the first hydrogenated styrenic block
copolymers ("HSBC") in the late 1960s. Our SBCs enhance the performance of
numerous products by imparting greater flexibility, resilience, strength,
durability, and processability, and are used in a wide range of applications,
including adhesives, coatings, consumer and personal care products, sealants,
lubricants, medical, packaging, automotive, paving, roofing, and footwear
products.
Our polymers are typically formulated or compounded with other products to
achieve improved, customer-specific performance characteristics in a variety of
applications. We seek to maximize the value of our product portfolio by
emphasizing complex or specialized polymers and innovations that yield higher
margins than more commoditized products. We sometimes refer to these complex or
specialized polymers or innovations as being more "differentiated." We believe
our SBC products offer many characteristics that help our customers drive
towards their sustainability goals. Among others, our SBCs may offer features
such as greater recyclability, increased durability that reduces the costly need
for maintenance and replacement, and alternatives to less environmentally
friendly materials, such as PVCs.
Our USBC paving and roofing applications provide a sustainable alternative by
increasing durability, which extend road and roof life. Our products are also
found in medical applications, personal care products such as disposable
diapers, oil additives, gels, and various other consumer goods. Our products are
also used to impart tack and shear properties in a wide variety of adhesive
products and to impart characteristics such as flexibility and durability in
sealants and corrosion resistance in coatings.
Our HSBC offerings are often the more sustainable choice when compared to
alternatives. Among other features, our HSBCs can offer improved recyclability
of polyethylene-terephthalate and polypropylene streams, and function as
replacements for less sustainable alternatives such as PVC, mainly in medical
applications.
Prior to the sale of our Cariflex business, we produced Cariflex IR and IRL. Our
Cariflex products are based on synthetic polyisoprene polymer and do not contain
natural rubber latex or other natural rubber products making them an ideal
substitute for natural rubber latex, particularly in applications with high
purity requirements such as medical, healthcare, personal care, and food
contact. Cariflex is included in the results of operations through March 6,
2020 .
On March 6, 2020 , we completed the sale of our Cariflex business to Daelim
Industrial Co, Ltd. (subsequently renamed "DL Holdings Co., Ltd. "). As part of
the sale, we entered into a multi-year IRSA with DL Chemical. In accordance with
the IRSA, we will supply IR to DL Chemical for a period of five years, with an
optional extension for an additional five years. As the IRSA product sales are
at cost, we deferred approximately $180.6 million of the aggregate purchase
price for our Cariflex business. The deferred income will be amortized into
revenue as a non-cash transaction when the products are sold. See Note 4
Disposition and Exit of Business Activities for further discussion of the IRSA.
Chemical Segment
We manufacture and sell high value sustainable products primarily derived from
pine wood pulping co-products. We refine and further upgrade two primary
feedstocks, crude tall oil ("CTO") and crude sulfate turpentine ("CST"), both of
which are co-products of the wood pulping process, into value-added biobased
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
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("DTO"); and tall oil pitch. We further upgrade TOFA and TOR 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 specialty 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.
Recent Developments and Known Trends
Our business is subject to a number of known risks and uncertainties, some of which are a result of recent developments.
COVID-19 Pandemic. The continued global impact of COVID-19 has resulted in various emergency measures to combat the spread of the virus. With the development of variants and increased vaccination rates, the status of ongoing measures varies widely depending on the country and locality. We continue to monitor the progression of the COVID-19 pandemic on a daily basis, and we have a dedicated COVID-19 crisis management team that meets regularly. The safety and well-being of our employees, our stakeholders, and the communities in which we operate remain our primary concern. While our essential plant and laboratory personnel remain on-site, many of our other employees around the world are working remotely. We are continuing to follow the orders and guidance of federal, regional, and local governmental agencies, as we maintain our own stringent protocols in an effort to mitigate the spread of the virus and protect the health of our employees, customers, and suppliers as well as the communities in which we operate. To date, our plants have continued to operate at normal capacities. Importantly, under theU.S. Department of Homeland Security guidance issued onApril 17, 2020 , and supplemented onAugust 18, 2020 , as well as many related regional and local governmental orders, chemical manufacturing sites are considered essential critical infrastructure, and as such, are not currently subject to closure in the locations where we operate. WhileEurope ,Asia , andSouth America issue critical infrastructure orders on a country-by-country basis, thus far they have taken a similar approach to theU.S. Department of Homeland Security guidance. We recently opened up some of our offices to flex schedule staffing for select employees, but have since reverted to remote work due to a spike in Omicron cases. We anticipate returning all employees when current infection rates subside. Our supply chain has encountered significant constraints as described below, including the sourcing of key raw materials and logistical market constraints. Although there has been significant disruption in global supply chain and logistics environment, we have been able to continue to leverage available logistics sources to serve our customers without meaningful disruption. In our Chemical segment, during the second half of 2020, we saw improvement in demand trends within the tires, automotive, oilfield, and lubricants/fuel additives applications, compared to the first half of 2020. While COVID-19 continues to be a risk, during the year endedDecember 31, 2021 we have seen demand growth and margin expansion in the majority of our product groups and end applications relative to the pre-COVID-19 environment. In our Polymer segment, we continue to see improved global demand in most end market applications, compared to the first half of 2020. During the year endedDecember 31, 2021 , the Polymer segment continues to see demand growth across most geographies and in various market applications such as consumer, automotive, adhesives, paving and roofing markets. We are unable to accurately predict the impact that the pandemic will have on our business and results of operations for 2022 and beyond (including how the impact of the pandemic on our business and results of operations may change from quarter to quarter) due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, additional actions that may be taken by governmental authorities, and other unintended consequences. Furthermore, the pandemic has adversely impacted, and may further adversely impact, the national and global economy, particularly in less essential end markets. There can also be no assurance that demand for our products will not be adversely affected by the continued impact of the COVID-19 pandemic on the national and global economy. Moreover, we are unable to predict actions that may be taken by our competitors that could negatively impact pricing or demand for our products. In spite of the uncertainty of the potential future impact of the COVID-19 pandemic, we expect that our geographic and end market diversification, such as medical, adhesives, food packaging, automotive, and consumer durables may partially mitigate our financial exposure to the pandemic. We will continue to monitor the impacts of COVID-19 and implement 36 -------------------------------------------------------------------------------- operational efficiencies and cost initiatives as needed. We do not currently anticipate any material impairments, with respect to intangible assets, long-lived assets, or right of use assets, increases in allowances for credit losses from our customers, restructuring charges, other expenses, or changes in accounting judgments to have a material impact on our financial statements. However, we are continuing to assess the impact from the pandemic, if any. Market Conditions. Certain fundamental market conditions that affected our business and financial results prior to 2020, coupled with the impacts of the COVID-19 pandemic, have improved, however, we remain cognizant of the continued risks associated with the COVID-19 pandemic. Our Chemical segment has seen significant improvement mainly inNorth America andEurope and in various market applications such as adhesives, tires, and industrial markets. Additionally, we have seen a recovery in certain end uses such as fuel/energy and mining applications. Despite the continued excess availability of competitive hydrocarbon tackifiers and in all hydrocarbon resins, the current rosin market fundamentals continue to improve, especially as compared to fiscal year 2020. We expect the positive momentum in the adhesives, tires, and industrial markets to continue in the near term. Furthermore, prices for upgraded products within our CST chain continue to improve compared to the fiscal year 2020 pricing levels. We expect the Chemical segment's favorable performance to continue in the near term. Global supply chain and logistics environment. The global supply chain and logistics environment has been constrained for the year endedDecember 31, 2021 as a result of the global congestion of supply chains and logistic equipment rebalance resulting from the COVID-19 pandemic and severe weather events. As a result, the Company experienced some supply-side constraints in our ability to source key raw materials, as well as constraints in shipping to our customers. Additionally, these constraints resulted in higher logistics cost per ton compared to historical trends. We implemented a number of mitigation measures, including cross-regional optimization, planning contingencies, and utilization of alternative carriers. Although we implemented mitigation measures, the global supply chain and logistics constraints resulted in earnings pressure during the year endedDecember 31, 2021 . Given the current global supply chain and logistics environment outlook, we expect these trends to continue into fiscal year 2022. BiaXamTM Granted Section 18 Emergency Exemption by theU.S. Environmental Protection Agency (the "EPA "). OnApril 21, 2021 , theEPA approved a public health emergency exemption under Section 18 of the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") submitted by theGeorgia ,Utah , and Minnesota Departments of Agriculture for the deployment of BiaXamTM in specific applications. TheEPA exemption will allow Delta Air Lines to use BiaXam in specific applications in these states to protect against the SARS-CoV-2 virus. We do not expect the approval of this emergency exemption to have a material impact to the Company's near term results of operations. We continue efforts to obtain Section 3 approval from theEPA which we expect to allow for broader commercial application. Agreement and Plan of Merger. OnSeptember 27, 2021 , the Company entered into the Merger Agreement with DL Chemical, Intermediate Merger Subsidiary, and Merger Subsidiary. Parent is a subsidiary ofDL Holdings Co., Ltd. (formerly Daelim Industrial Co., Ltd.). Pursuant to the Merger Agreement, and subject to the terms and conditions thereof, the Merger Subsidiary will merge with and into the Company, with the Company surviving the Merger as an indirect and wholly-owned subsidiary of Parent. Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time, each share of common stock of the Company then outstanding will be converted into the right to receive$46.50 in cash, without interest, other than (1) those shares owned by Parent or any subsidiary of Parent or the Company (which will be cancelled without any consideration) and (2) any shares as to which appraisal rights have been properly exercised, and not withdrawn, in accordance with the Delaware General Corporation Law. OnDecember 9, 2021 , the Company held a special meeting of the stockholders of the Company, at which stockholders ofKraton overwhelmingly approved and adopted the Merger Agreement. The acquisition is subject to certain customary closing conditions, including the receipt of regulatory approvals, and is expected to close by the end of the first quarter of 2022. For additional information related to the Merger Agreement and related transactions, please refer to our Current Report on Form 8-K filed with theSEC onSeptember 27, 2021 , our Proxy Statement filed with theSEC onNovember 4, 2021 and Note 1 General. RESULTS OF OPERATIONS
Factors Affecting Our Results of Operations
Raw Materials. We use butadiene, styrene, and isoprene in our Polymer segment and CTO and CST in our Chemical segment as our primary raw materials. 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 for natural and synthetic rubber. Average purchase prices of our raw materials increased during 2021 compared to 2020 for the Polymer and Chemical segments.
In our Polymer segment, during the year ended
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In our Chemical segment, during the year ended
Additionally, as discussed within Results of Operations, we continue to
experience inflationary pressures within our utilities and secondary costs,
which have added to the increase in our conversion costs during the year ended
We use the FIFO basis of accounting for inventory and cost of goods sold, and
therefore gross profit. In periods of raw material price volatility, reported
results under FIFO will differ from what the results would have been if cost of
goods sold were based on estimated current replacement cost ("ECRC").
Specifically, in periods of rising raw material costs, reported gross profit
will be higher under FIFO than under ECRC. Conversely, in periods of declining
raw material costs, reported gross profit will be lower under FIFO than under
ECRC. In recognition of the fact that the cost of raw materials affects our
results of operations and the comparability of our results of operations, we
provide the difference, or spread, between FIFO and ECRC to arrive at our
Adjusted EBITDA.
International Operations and Currency Fluctuations. We operate a geographically
diverse business, serving customers in numerous countries from thirteen
manufacturing facilities on three continents. Our sales and production costs are
mainly denominated in U.S. dollars, Brazilian Real, Euro, Japanese Yen, Swedish
Krona, and NTD. From time to time, we use hedging strategies to reduce our
exposure to currency fluctuations.
We generated our revenue from customers located in the following regions:
Years Ended December 31,
Revenue by Geography 2021 2020 2019
Americas 46.1 % 44.9 % 41.8 %
Europe, Middle East, and Africa 36.5 % 34.7 % 33.9 %
Asia Pacific 17.4 % 20.4 % 24.3 %
Seasonality. Seasonal changes and weather conditions typically affect our sales
of products in our paving, pavement markings, 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.
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KRATON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
2021 2020 2019
Revenue $
1,970,129
1,381,373 1,165,279 1,390,007
Gross profit 588,756 397,871 414,429
Operating expenses:
Research and development 40,406 40,743 41,073
Selling, general, and administrative 164,167 161,944 149,800
Depreciation and amortization 126,475 126,022 136,171
Gain on insurance proceeds - - (32,850)
Loss on disposal of fixed assets 879 750 773
Impairment of goodwill - 400,000 -
Operating income (loss) 256,829 (331,588) 119,462
Other income (expense) (209) 995 3,339
Gain (loss) on disposition and exit of business activities (149) 175,189 -
Loss on extinguishment of debt - (40,843) (3,521)
Earnings of unconsolidated joint venture 461 457 506
Interest expense, net (41,840) (57,930) (75,782)
Income (loss) before income taxes 215,092 (253,720) 44,004
Income tax benefit (expense) (39,502) 32,034 11,813
Consolidated net income (loss) 175,590 (221,686) 55,817
Net income attributable to noncontrolling interest (5,364) (3,916) (4,512)
Net income (loss) attributable to Kraton $ 170,226 $ (225,602) $ 51,305
Earnings (loss) per common share:
Basic $ 5.30 $ (7.08) $ 1.61
Diluted $ 5.21 $ (7.08) $ 1.60
Weighted average common shares outstanding:
Basic 32,098 31,746 31,581
Diluted 32,642 31,746 31,881
Consolidated Results
Year Ended
Revenue was$1,970.1 million for the year endedDecember 31, 2021 compared to$1,563.2 million for the year endedDecember 31, 2020 , an increase of$407.0 million , or 26.0%. Revenue increased$241.2 million and$165.8 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$1,381.4 million for the year endedDecember 31, 2021 compared to$1,165.3 million for the year endedDecember 31, 2020 , an increase of$216.1 million , or 18.5%. Cost of goods sold increased$148.5 million and$67.6 million for the Polymer and Chemical segments, respectively. For additional information regarding the changes in cost of goods sold, see our segment disclosures below. Selling, general, and administrative expenses were$164.2 million for the year endedDecember 31, 2021 compared to$161.9 million for the year endedDecember 31, 2020 . The$2.2 million increase is primarily attributable to higher employee related costs, partially offset by lower transaction, acquisition, and restructuring costs and the benefit of cost reduction initiatives.
Depreciation and amortization was
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During the third quarter of 2020, we recorded a non-cash impairment charge of
$400.0 million within the Chemical segment. For more information regarding the
goodwill impairment charge, see Note 13 Industry Segments and Foreign
Operations.
Other expense was $0.2 million for the year ended December 31, 2021 compared to
other income of $1.0 million for the year ended December 31, 2020 . The decrease
of $1.2 million is due to the legal settlement of a supplier dispute in the
second quarter of 2021, partially offset by the benefit to other income related
to a reduction in net periodic pension expense.
Disposition and exit of business activities was a loss of $0.1 million and a
gain of $175.2 million for the year ended December 31, 2021 and 2020,
respectively, related to the sale of our Cariflex business. See Note 4
Disposition and Exit of Business Activities for further discussion on the sale
of our Cariflex business.
We recorded a $40.8 million loss on extinguishment of debt during the year ended
December 31, 2020 . This includes $14.0 million in the first quarter of 2020 for
the write off of previously capitalized deferred financing costs, the write off
of original issue discount, and a loss on the settlement of the ineffective
portion of interest rate swaps due to the repayment in full of our U.S. dollar
denominated tranche (the "USD Tranche") and a partial repayment of our Euro
Tranche with the net cash proceeds from the sale of our Cariflex business.
During the fourth quarter of 2020, we called for redemption and satisfied and
discharged our 7.0% Senior Notes due 2025 (the "7.0% Senior Notes") and issued
our 4.25% Senior Notes, for which we incurred $25.7 million for the write off of
previously capitalized deferred financing costs and the call premium on our 7.0%
Senior Notes. See Note 8 Long-Term Debt for further discussion.
Interest expense, net, was $41.8 million for the year ended December 31, 2021
compared to $57.9 million for the year ended December 31, 2020 , a decrease of
$16.1 million . The decrease is due to the refinancing activities discussed above
and lower overall indebtedness and an improvement in borrowing rates.
Our income tax provision was a $39.5 million expense and a $32.0 million benefit
for the years ended December 31, 2021 and 2020, respectively. Our effective tax
rates for the years ended December 31, 2021 and 2020 were a 18.4% expense and
12.6% benefit, respectively. During the year ended December 31, 2021 , our
effective tax rate differed from the U.S. corporate statutory tax rate of 21%,
primarily related to reassessment of prior year tax accruals and minimum tax of
foreign entities offset by the mix of our pre-tax income or loss generated in
various foreign jurisdictions. During the year ended December 31, 2020 , our
effective tax rate differed from the U.S. corporate statutory tax rate of 21.0%,
primarily due to the non-deductible goodwill impairment loss and reorganization
income, offset by a tax benefit related to Dutch intellectual property rights
and the tax impact of the sale of our Cariflex business.
As of December 31, 2021 and December 31, 2020 , a valuation allowance of $33.9
million and $39.5 million , respectively, has been provided for NOL carryforwards
and other deferred tax assets. We decreased our valuation allowance by $5.6
million during the year ended December 31, 2021 , which includes a $3.8 million
decrease due to changes in the deferred tax asset related to employee benefits
and $1.8 million primarily related to deferred tax rate changes and the
utilization of NOL carryforwards in France and the United Kingdom . We consider
the reversal of deferred tax liabilities within the NOL carryforward period,
projected future taxable income, and tax planning strategies in making this
assessment.
Net income attributable to Kraton was $170.2 million , or $5.21 per diluted
share, for the year ended December 31, 2021 , an increase of $395.8 million
compared to a net loss of $225.6 million , or $7.08 per diluted share, for the
year ended December 31, 2020 . Adjusted Diluted Earnings per Share (non-GAAP) was
$2.87 for the year ended December 31, 2021 compared to $1.29 for the year ended
December 31, 2020 . See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for a reconciliation of U.S. generally
accepted accounting principles ("U.S. GAAP") diluted earnings (loss) per share
to Adjusted Diluted Earnings per Share.
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--------------------------------------------------------------------------------EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share
We consider EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share to be important supplemental measures of our performance and believe they are frequently used by investors, securities analysts, and other interested parties in the evaluation of our performance and/or that of other companies in our industry, including period-to-period comparisons. In addition, management uses these measures, as well as ECRC of our inventory and cost of goods sold to evaluate operating performance, and our incentive compensation plan bases incentive compensation payments on our Adjusted EBITDA performance, along with other factors. EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share have limitations as analytical tools and in some cases can vary substantially from other measures of our performance. You should not consider any of them in isolation, or as substitutes for analysis of our results underU.S. GAAP. Years Ended December 31, 2021 2020 2019 (In
thousands, except per share data)
EBITDA (1)(4)$ 383,407 $ (69,768) $ 255,957 Adjusted EBITDA (2)(3)(4)$ 294,727 $ 262,097 $ 320,592 Adjusted Diluted Earnings Per Share (2)(4)$ 2.87
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(1)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, other income (expense), 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. (2)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 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 theU.S. GAAP carrying value creates the spread betweenU.S. 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 underU.S. GAAP and ECRC, we then have the ability to report cost of goods sold and therefore Adjusted EBITDA and Adjusted Diluted Earnings Per Share under both ourU.S. GAAP convention and ECRC. (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 withU.S. GAAP; and •Adjusted EBITDA may, and often will, vary significantly from EBITDA calculations under the terms of our debt agreements and should not be used for assessing compliance or non-compliance with financial covenants under our debt agreements. (4)Included in EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share: •$32.9 million, which was recognized as a gain on insurance proceeds, reimbursing us for the lost margin, direct costs, and capital expenditures known to date for the year endedDecember 31, 2019 ; •$10.3 million and$54.6 million for the years endedDecember 31, 2020 and 2019, respectively, related to divestiture of our Cariflex business inMarch 2020 ; and •IR sales toDaelim under the IRSA. Sales under the IRSA are transacted at cost. The IRSA sales include amortization of non-cash deferred income of$25.7 million and$18.5 million for the year endedDecember 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA. 41 -------------------------------------------------------------------------------- Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as measures 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 ourU.S. GAAP results and using EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share only as supplemental measures. See our financial statements included under Item 8 of this Form 10-K.
We reconcile each of consolidated net income (loss) and reporting segment operating income to EBITDA, and then to Adjusted EBITDA as follows:
Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019
Polymer Chemical Total Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income (loss) attributable to
Kraton $ 170,226 $ (225,602) $ 51,305
Net income attributable to
noncontrolling interest 5,364 3,916 4,512
Consolidated net income (loss) 175,590 (221,686) 55,817
Add (deduct):
Income tax (benefit) expense 39,502 (32,034) (11,813)
Interest expense, net 41,840 57,930 75,782
Earnings of unconsolidated joint
venture (461) (457) (506)
Loss on extinguishment of debt - 40,843 3,521
Other (income) expense 209 (995) (3,339)
(Gain) loss on disposition and exit
of business activities 149 (175,189) -
Operating income (loss) $ 150,418 $ 106,411 256,829 $ 56,802 $ (388,390) (331,588) $ 57,343 $ 62,119 119,462
Add (deduct):
Depreciation and amortization 51,042 75,433 126,475 52,910 73,112 126,022 59,151 77,020 136,171
Gain (loss) on disposition and exit
of business activities (149) - (149) 175,189 - 175,189 - - -
Other income (expense) (2,291) 2,082 (209) (87) 1,082 995 (1,923) 5,262 3,339
Loss on extinguishment of debt - - - (40,843) - (40,843) (3,521) - (3,521)
Earnings of unconsolidated joint
venture 461 - 461 457 - 457 506 - 506
EBITDA (non-GAAP) (a) 199,481 183,926 383,407 244,428 (314,196) (69,768) 111,556 144,401 255,957
Add (deduct):
Transaction, acquisition related
costs, restructuring, and other
costs (b) 10,743 2,817 13,560 13,656 1,392 15,048 10,475 946 11,421
(Gain) loss on disposition and exit
of business activities 149 - 149 (175,189) - (175,189) - - -
(Gain) loss on disposal of fixed
assets - - - - (1,316) (1,316) 535 - 535
Loss on extinguishment of debt - - - 40,843 - 40,843 3,521 - 3,521
Impairment of goodwill - - - - 400,000 400,000 - - -
Hurricane related costs (c) - - - - - - - 15,025 15,025
Hurricane reimbursements (d) - - - - - - - (26,561) (26,561)
KFPC startup costs (e) - - - - - - 3,019 - 3,019
Gain on contractual settlement (f) - (4,668) (4,668) - - - - - -
(Sale) loss of emissions credits (g) 647 - 647 - - - - (4,601) (4,601)
Non-cash compensation expense 11,342 - 11,342 11,361 - 11,361 9,493 - 9,493
Spread between FIFO and ECRC (84,230) (25,480) (109,710) 32,384 8,734 41,118 49,565 3,218 52,783
Adjusted EBITDA (non-GAAP) $ 138,132 $ 156,595 _________________________________________________
(a)Included in EBITDA is a$32.9 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. 42 -------------------------------------------------------------------------------- Also included in EBITDA are IR sales toDaelim under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of$25.7 million and$18.5 million for the year endedDecember 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA. (b)Charges related to the evaluation of acquisition and disposition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses. (c)Incremental costs related to Hurricane Michael and Hurricane Dorian, 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, which are recorded in cost of goods sold. (f)Relates to the historical period gain of a settlement of a raw material supply agreement in the fourth quarter of 2021. (g)We recorded a gain of$4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity in 2019. We recorded a loss of$0.6 million related to historical third party emission credit adjustments in 2021. We reconcileU.S. GAAP Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share as follows: Years Ended December 31, 2021 2020 2019 Diluted Earnings (Loss) Per Share$ 5.21
0.32 0.36 0.27
(Gain) loss on disposition and exit of business activities 0.01
(4.77) -
(Gain) loss on disposal of fixed assets - (0.03) 0.01
Loss on extinguishment of debt - 0.99 0.08
Impairment of goodwill - 12.39 -
Tax restructuring - (1.56) -
Hurricane related costs (b) - - 0.55
Hurricane reimbursements (c) - - (0.83)
Gain on contractual settlement (d) (0.11) - -
KFPC startup costs (e) - - 0.04
(Sale) loss of emissions credits (f) 0.01 - (0.11)
Spread between FIFO and ECRC (2.57) 0.99 1.33
Adjusted Diluted Earnings Per Share (non-GAAP) $ 2.87 _________________________________________________
(a)Charges related to the evaluation of acquisition and disposition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses. (b)Incremental costs related to Hurricane Michael and Hurricane Dorian, which are recorded in cost of goods sold. (c)Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds. (d)Relates to the historical period gain of a settlement of a raw material supply agreement in the fourth quarter of 2021. (e)Startup costs related to the joint venture company, KFPC, which are recorded in cost of goods sold. (f)We recorded a gain of$4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity in 2019. We recorded a loss of$0.6 million related to historical third party emission credit adjustments in 2021. 43
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Segment Results
•Polymer Segment. Our Polymer segment is comprised of our SBCs and other engineered polymers business.
•Chemical Segment. Our Chemical segment is comprised of our pine-based specialty
products business.
Polymer Segment
Years Ended December 31,
2021 2020 2019
Revenue ($ In thousands)
Performance Products $ 627,618 57.1 % $ 459,906 53.6 % $ 531,437 50.5 %
Specialty Polymers 409,736 37.3 % 316,206 36.9 % 334,726 31.7 %
Cariflex (1) - - % 36,930 4.3 % 186,266 17.7 %
Isoprene Rubber (1) 59,899 5.5 % 42,986 5.0 % - - %
Other 1,532 0.1 % 1,530 0.2 % 539 0.1 %
$ 1,098,785 $ 857,558 $ 1,052,968
Operating income $ 150,418 $ 56,802 $ 57,343
Adjusted EBITDA (non-GAAP) (2)(4) $ 138,132 $ 167,483 $ 188,164
Adjusted EBITDA margin (non-GAAP) 12.6 % 19.5 %
(3) 17.9 %
____________________________________________________
(1)Our Cariflex revenue includes sales throughMarch 6, 2020 . We continue to sell IR to DL Chemical under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of$25.7 million and$18.5 million for the year endedDecember 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA. (2)See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation ofU.S. GAAP operating income to non-GAAP Adjusted EBITDA. (3)Defined as Adjusted EBITDA as a percentage of revenue. (4)Included are$10.3 million and$54.6 million for the years endedDecember 31, 2020 and 2019, respectively, related to divestiture of our Cariflex business inMarch 2020 .
Year Ended
Revenue for the Polymer segment was$1,098.8 million for the year endedDecember 31, 2021 compared to$857.6 million for the year endedDecember 31, 2020 . The increase was driven by demand improvements driving higher sales volumes in our Specialty Polymers and Performance Products product lines, as well as higher average sales prices implemented in response to significantly higher raw material, logistics, utilities, and secondary costs as part of our Price Right strategy. These increases were partially offset by the divestiture of our Cariflex business inMarch 2020 , which contributed$36.9 million of revenue in the first quarter of 2020. The positive effect from changes in currency exchange rates between the periods was$24.4 million . Polymer Segment Sales Volume % Change Year Ended December 31, 2021 Performance Products 5.9 % Specialty Polymers 12.3 % Isoprene Rubber 16.5 % Subtotal 7.8 % Cariflex (100.0) % Total 6.0 % Sales volumes were 309.4 kilotons for the year endedDecember 31, 2021 , an increase of 17.6 kilotons, or 6.0%, compared to the year endedDecember 31, 2020 . Volume for our Specialty Polymers volumes increased 12.3% driven by strong demand across all regions, particularly in automotive applications, and consumer durable applications. The 5.9% increase in Performance Products sales volumes was primarily driven by improved sales into paving and roofing applications and higher sales into adhesive applications associated with continued demand strength across all regions. IR sales volumes are 16.5% higher due to a full year of sales under the IRSA. Cost of goods sold was$775.8 million for the year endedDecember 31, 2021 compared to$627.3 million for the year endedDecember 31, 2020 , an increase of$148.5 million , or 23.7%. The increase in cost of goods sold reflects the impact of higher sales volumes, approximately$20.0 million of costs related to the significant statutory turnaround at our Berre,France , location, and inflationary pressures resulting in higher raw material, logistics, utilities, and secondary costs, which we continue 44 -------------------------------------------------------------------------------- to address through increases in selling prices consistent with our Price Right strategy. These higher costs were partially offset by lower cost of consumed raw materials, which has lower average costs on a FIFO measurement basis of accounting, and the divestiture of our Cariflex business. Additionally, changes in currency exchange rates between the periods resulted in a negative impact of$20.6 million . For the year endedDecember 31, 2021 , the Polymer segment operating income was$150.4 million compared to$56.8 million for the year endedDecember 31, 2020 . The$93.6 million increase is largely related to lower cost of consumed raw materials, which has lower average costs on a FIFO measurement basis of accounting, partially offset by the divestiture of our Cariflex business. For the year endedDecember 31, 2021 , the Polymer segment generated Adjusted EBITDA (non-GAAP) of$138.1 million compared to$167.5 million for the year endedDecember 31, 2020 . The decrease in Adjusted EBITDA (non-GAAP) is partially due to the divestiture of our Cariflex business inMarch 2020 . Excluding the net impact of$10.3 million attributable to the disposition of our Cariflex business, Adjusted EBITDA excluding Cariflex (non-GAAP) would have been down$19.0 million driven largely by approximately$20.0 million of costs associated with a significant statutory turnaround at our Berre,France , location. Additionally, the contribution from higher sales volumes is largely offset by inflation in raw material, logistics, utilities, and secondary costs, which we continue to address through increases in selling prices, consistent with our Price Right strategy. The positive effect from changes in currency exchange rates between the periods was$0.8 million . See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation ofU.S. GAAP operating income to Adjusted EBITDA (non-GAAP). Chemical Segment Years Ended December 31, 2021 2020 2019 Revenue ($ In thousands) Adhesives$ 306,662 35.2 %$ 257,855 36.5 %$ 262,941 35.0 % Performance Chemicals 503,135 57.7 % 406,152 57.6 % 438,146 58.3 % Tires 61,547 7.1 % 41,585 5.9 % 50,381 6.7 %$ 871,344 $ 705,592 $ 751,468 Operating income (loss) (1)$ 106,411 $ (388,390) $ 62,119 Adjusted EBITDA (non-GAAP) (2)$ 156,595 $ 94,614 $ 132,428 Adjusted EBITDA margin (non-GAAP) (3) 18.0 % 13.4 % 17.6 %
____________________________________________________
(1)For the year endedDecember 31, 2020 , includes the$400.0 million non-cash goodwill impairment charge in the Chemical segment. (2)See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation ofU.S. GAAP operating income to non-GAAP Adjusted EBITDA. (3)Defined as Adjusted EBITDA as a percentage of revenue.
Year Ended
Revenue for the Chemical segment was$871.3 million for the year endedDecember 31, 2021 compared to$705.6 million for the year endedDecember 31, 2020 . The increase was primarily attributable to successful price increase implementations globally and across all product chains driven by favorable market fundamentals and inflationary pressures. The increase was also due to stronger sales volumes of TOFA and TOR chains associated with demand recovery post COVID-19. The positive effect from changes in currency exchange rates between the periods was$14.4 million . Chemical Segment Sales Volume % Change Year EndedDecember 31, 2021 Adhesives 7.2 % Performance Chemicals 1.0 % Tires (1) 26.4 % Total 3.8 %
____________________________________________________
(1)Tires volumes are less than 5% of total Chemical segment volumes.
Sales volumes were 441.7 kilotons for the year ended
45
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markets compared to the year ended
Cost of goods sold was$605.6 million for the year endedDecember 31, 2021 compared to$538.0 million for the year endedDecember 31, 2020 , an increase of$67.6 million , or 12.6%. The increase was driven by higher average raw material, logistics, utilities, and secondary costs and higher sales volumes. Additionally, the changes in currency exchange rates between the periods resulted in a negative impact of$10.5 million . For the year endedDecember 31, 2021 , the Chemical segment operating income was$106.4 million compared to operating loss of$388.4 million for the year endedDecember 31, 2020 , an increase of$494.8 million , largely due to a non-cash impairment charge of$400.0 million during the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , the Chemical segment generated$156.6 million of Adjusted EBITDA (non-GAAP) compared to$94.6 million for the year endedDecember 31, 2020 . The 65.5% increase in Adjusted EBITDA (non-GAAP) was primarily driven by the significant demand recovery, favorable market fundamentals, and portfolio diversification resulting in higher sales volumes and expanded unit margins across all product groups, including continued favorability in the rosin chain. These increases were partially offset by higher average raw material, logistics, utilities, and secondary costs. The positive effect from changes in currency exchange rates between the periods was$2.2 million . See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation ofU.S. GAAP operating income to non-GAAP Adjusted EBITDA. 46 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of these financial statements in conformity withU.S. GAAP requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statements. Certain critical accounting policies and estimates requiring significant judgments, estimates, and assumptions are described in this section. We consider an accounting estimate to be critical if it requires assumptions to be made that are uncertain at the time the estimate is made and changes to the estimate or different estimates that could have reasonably been used would materially change our consolidated financial statements. We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, should our actual experience differ from these assumptions and other considerations used in estimating these amounts, the impact of these differences could have a material impact on our consolidated financial statements. Inventories. Inventory values include all costs directly associated with manufacturing products and are stated at the lower of cost or net realizable value, primarily determined on a first-in, first-out basis. We evaluate the carrying cost of our inventory on a quarterly basis for this purpose. If the cost of the inventories exceeds their net realizable value, provisions are made for the difference between the cost and the net realizable value. Impairment of Long-Lived Assets. In accordance with the Impairment or Disposal of Long-Lived Assets Subsections ofFinancial Accounting Standards Board ("FASB") ASC Subtopic 360-10, Property, Plant, and Equipment-Overall, long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.Goodwill . We record goodwill when the purchase price of an acquired business exceeds the fair value of the net identifiable assets acquired.Goodwill is allocated to the reporting unit level based on the estimated fair value at the date of acquisition.Goodwill was recorded as a result of the Arizona Chemical Acquisition and is recorded in the Chemical operating segment.Goodwill is tested for impairment at the reporting unit level annually or more frequently as deemed necessary. Our annual measurement date for testing impairment isOctober 1st . First, we have the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is more likely than not that an impairment indicator exists utilizing the qualitative method, we then test for impairment via estimating the fair value of our reporting units utilizing a combination of market and income approaches. This provides a fair value to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill. The estimated fair value of our reporting units are subject to a number of estimates which include, but are not limited to, discount rates, revenue growth rates, cash flow assumptions, and market information. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. For further discussion on goodwill, see Note 13 Industry Segment and Foreign Operations. Share-Based Compensation. Share-based compensation cost is measured at the grant date based on the fair value of the award. We recognize these costs using the straight-line method over the requisite service period. We recognize actual forfeitures by reducing the employee share-based compensation expense in the same period as the forfeitures occur. We estimate the fair value of performance-based restricted share units using a combination ofMonte Carlo simulations and internal metrics. The expected term represents the period of time that performance share units granted are expected to be outstanding. Our expected volatilities are based on historical volatilities forKraton and the members of the peer group. The risk free interest rate for the periods within the contractual life of the performance-based restricted share units is equal to the yield, as of the valuation date, of the zero couponU.S. Treasury STRIPS that have a remaining term equal to the length of the remaining performance period. The expected dividend yield is assumed to be zero, which is the equivalent of reinvesting dividends in the underlying company's stock. Forfeitures are recognized when they occur. See Note 5 Share-Based Compensation to the consolidated financial statements.
Income Taxes. We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in our consolidated financial statements for each of those jurisdictions.
47
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Income taxes are recorded utilizing an asset and liability approach. This method
gives consideration to the future tax consequences associated with the
differences between the financial accounting and tax basis of the assets and
liabilities as well as the ultimate realization of any deferred tax asset
resulting from such differences.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
In assessing the realizability of deferred tax assets, we consider all available evidence both positive and negative, to determine whether a valuation allowance is necessary relative to net deferred tax assets. In making this determination, we consider the current year and two preceding years for potential cumulative losses, and sources of income for sufficient taxable income. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances. Benefit Plans Valuations. We sponsor defined benefit pension plans in both theU.S. and non-U.S. entities ("Pension Plans"), as well as a post-retirement benefit plan in theU.S. ("Retiree Medical Plan"). We annually evaluate significant assumptions related to the benefits and obligations of these plans. Our estimation of the projected benefit obligations and related benefit expense requires that certain assumptions be made regarding such variables such as expected return on plan assets, discount rates, rates of future compensation increases, estimated future employee turnover rates and retirement dates, distribution election rates, mortality rates, retiree utilization rates for health care services, and health care cost trend rates. The determination of the appropriate assumptions requires considerable judgment concerning future events and has a significant impact on the amount of the obligations and expense recorded. We rely in part on actuarial studies when determining the appropriateness of certain of the assumptions used in determining the benefit obligations and the annual expenses for these plans. The discount rates are determined annually and are based on rates of return of high-quality long-term fixed income securities currently available with maturities consistent with the projected benefit payout period. The expected long-term rate of return on assets is derived from a review of anticipated future long-term performance of individual asset classes and consideration of an appropriate asset allocation strategy, given the anticipated requirements of the Pension Plans, to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. We also consider recent fund performance and historical returns in establishing the expected rate of return. We estimated a range of returns on the plan assets using a historical stochastic simulation model that determines the compound average annual return (assuming these asset classes-stocks, bonds and cash) over a 20-year historical period (the approximate duration of our liabilities under the Pension Plans). The distribution of results from these simulations is then used to determine a median expected asset return. Movements in the capital markets impact the market value of the investment assets used to fund our Pension Plans. Future changes in plan asset returns, assumed discount rates, and various other factors related to our pension and post-retirement plans will impact future pension expenses and liabilities. The information below summarizes the results of sensitivities to significant estimates in our Pension Plans and Retiree Medical Plan, which would result in additional expense for fiscal year 2022. For additional information about our benefit plans, see Note 12 Employee Benefits to the consolidated financial statements. 48 --------------------------------------------------------------------------------
Change from Baseline
(In thousands)
U.S. Pension Plans
Discount rate
1% Increase $ 140
Expected return on assets
1% Decrease $ 1,490
Non-U.S. Pension Plans
Discount rate
1% Decrease $ 627
Expected return on assets
1% Decrease $ 742
Expected salary rate
1% Increase $ 268
Retiree Medical Plan
Discount rate
1% Decrease $ 210
Health care trend
1% Increase $ -
Revenue Recognition. Revenue is recognized in accordance with the provisions of
ASC 606, Revenue from Contracts with Customers, 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 products are generally sold free on board shipping point or, with
respect to countries other than the U.S. , an equivalent basis. 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 and price supports), 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
with the associated sale has been met. We do not expect to have significant
changes in our estimates for variable considerations.
49
--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Kraton Corporation is a holding company without any operations or assets other than the operations of its subsidiaries. Cash flows from operations of our subsidiaries, cash on hand, and available borrowings under the ABL Facility, and other debt offerings we may conduct from time to time, are our principal sources of liquidity.
COVID-19 Pandemic Governmental Liquidity Programs
We also continue to monitor government economic stabilization efforts in response to the COVID-19 pandemic and are participating, and may in the future participate, in certain legislative provisions to enhance our liquidity, including certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the American Rescue Plan Act of 2021 (the "ARP Act"), and similar federal or foreign governmental programs. For example, we elected certain cash deferral options under the CARES Act and ARP Act. Elections made under the CARES Act and ARP Act did not have a material impact on our cash flows and results of operations. We will continue to evaluate our options under the CARES Act, ARP Act, and similar federal or foreign programs as legislative provisions occur. Changes in Debt and Net Debt We reduced our consolidated debt by$52.8 million and our consolidated net debt by$97.4 million , including the effect of foreign currency of$31.8 million , for the year endedDecember 31, 2021 . The decrease in our consolidated net debt was driven primarily by favorable operating income, partially offset by increases in working capital, including the impacts of higher raw material costs due to the current inflationary environment and associated increases in accounts receivable as a result of higher sales prices. Further, we had approximately$389.7 million of available liquidity, comprised of$130.5 million of cash on hand and a borrowing base of$259.2 million on our ABL Facility as ofDecember 31, 2021 . As of the date of this filing, our available borrowing capacity under the ABL Facility was$262.7 million , with no outstanding borrowings and$3.6 million of letters of credit outstanding under the facility. Management uses consolidated net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using consolidated net debt is useful to investors in determining our leverage because we could choose to use cash and cash equivalents to retire debt. We also present consolidated net debt as adjusted for foreign exchange impact accounts for the foreign exchange effect on our foreign currency denominated debt agreements. Summary of principal amounts for indebtedness and a reconciliation ofKraton debt to consolidated net debt (non-GAAP) and consolidated net debt excluding the effect of foreign currency (non-GAAP): December 31, December 31, 2021 2020 (In thousands) Kraton debt$ 829,614 $ 860,360 KFPC loans (1) 67,726 89,733 Consolidated debt 897,340 950,093 Kraton cash 120,629 82,804 KFPC cash (2) 9,890 3,097 Consolidated cash 130,519 85,901 Consolidated net debt$ 766,821 $ 864,192 Effect of foreign currency on consolidated net debt 31,815
Consolidated net debt excluding effect of foreign currency
__________________________________________________
(1)KFPC executed the KFPC Revolving Facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the KFPC Loan Agreement. (2)Cash at our KFPC joint venture, located in Mailiao,Taiwan , which we own a 50% stake in and consolidate within our financial statements. 50 --------------------------------------------------------------------------------
Principal Balances of Debt and Liquidity Considerations
As ofDecember 31, 2021 , our outstanding borrowings included (i) €85.0 million, or approximately$96.7 million , under the Euro Tranche of the Term Loan Facility, (ii)$400.0 million and €290.0 million, or approximately$329.8 million , under the 4.25% Senior Notes and 5.25% Senior Notes, respectively, and (iii)$3.2 million in finance lease obligations. As ofDecember 31, 2021 , we had no outstanding borrowings under our ABL Facility.
In addition, as of
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 operations and meet our short-term and long-term cash requirements, including our expected financial obligations, planned capital expenditures, anticipated liquidity requirements, working capital requirements, our investment in the KFPC joint venture, debt payments, interest payments, benefit plan contributions, and income tax obligations. Our cash flows are subject to a number of risks and uncertainties, including, but not limited to, earnings, sensitivities to the cost of raw materials, seasonality, market conditions (including the impact of COVID-19), and fluctuations in foreign currency exchange rates. Because feedstock costs generally represent a substantial portion of our cost of goods sold, in periods of rising feedstock costs, we generally consume cash in operating activities due to increases in accounts receivable and inventory costs, partially offset by increased value of accounts payable. Conversely, during periods in which feedstock costs are declining, we generate cash flow from decreases in working capital. Excluding the impact of the proposed Merger with DL Chemical, 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, we had no outstanding borrowings under the ABL Facility with a remaining available borrowing capacity of$262.7 million . 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.
Pension and Other Retirement Benefit Plan Contributions
We made contributions of$17.1 million to our Pension Plans and Retiree Medical Plan for the year endedDecember 31, 2021 and$10.3 million for the year endedDecember 31, 2020 . We expect our total Pension Plans and Retiree Medical Plan contributions for the year endedDecember 31, 2022 to be approximately$6.2 million . Our Pension Plans and Retiree Medical Plan obligations are predicated on a number of factors, the primary ones being the return on our Pension Plans' assets and the discount rates used in deriving our Pension Plans and Retiree Medical Plan obligations. If the investment returns on our Pension Plans' assets do not meet or exceed expectations during 2022, and the discount rates decrease on our Pension Plans and Retiree Medical Plan from the prior year, higher levels of contributions could be required in 2023 and beyond.
Additional Liquidity Considerations
As of
InDecember 2017 , the Tax Act was enacted and resulted in a one-time transition tax on accumulated foreign subsidiary earnings. After 2017, our foreign earnings held by foreign subsidiaries are no longer subject toU.S. tax upon repatriation to theU.S. As ofDecember 31, 2021 , the remaining long-term tax payable related to the Tax Act of$9.4 million is presented within income tax payable, non-current on our Consolidated Balance Sheets. As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025. Turbulence inU.S. and international markets and economies (including the impact of COVID-19) may adversely affect our liquidity and financial condition, the liquidity and financial condition of our customers, and our ability to timely replace maturing liabilities and access the capital markets to meet liquidity needs, resulting in adverse effects on our financial condition and results of operations. However, to date we have been able to access borrowings available to us in amounts sufficient to fund liquidity needs. 51 -------------------------------------------------------------------------------- Our ability to pay principal and interest on our indebtedness, fund working capital, to make anticipated capital expenditures, and to fund our investment in the KFPC joint venture depends on our future performance, which is subject to general economic conditions and other factors, some of which are beyond our control. See Part I, Item 1A. Risk Factors for further discussion.
Operating Cash Flows
Net cash provided by operating activities totaled$171.2 million for the year endedDecember 31, 2021 and$151.3 million for the year endedDecember 31, 2020 . This represents a net increase of$19.9 million , which was primarily driven by increases in operating income, partially offset by increases in working capital. The period-over-period changes in working capital are as follows: •$151.7 million decrease in cash flows associated with inventories of products, materials, and supplies due to higher raw material costs, partially offset by lower inventory volumes;
•$57.2 million decrease in cash flows for accounts receivable due to higher average selling prices;
•$13.3 million decrease in cash flows associated with other long term liabilities due to higher pension contributions;
•$8.9 million decrease in cash flows associated with timing of other items, including, value added taxes and related party transactions; and
•$4.4 million decrease in cash flows for other payables and accruals due to timing of employee related and income tax accruals and payments; partially offset by
•$76.4 million increase in cash flows associated with trade accounts payable due to higher raw material costs and timing of payments.
Net cash provided by operating activities totaled$151.3 million for the year endedDecember 31, 2020 and$234.9 million for the year endedDecember 31, 2019 . This represents a net decrease of$83.6 million , which was primarily driven by decreases in operating income, partially offset by decreases in working capital. The period-over-period changes in working capital are as follows:
•$28.3 million decrease in cash flows associated with inventories of products, materials, and supplies due to higher inventory volumes;
•$6.4 million decrease in cash flows for accounts receivable, primarily related to lower selling prices; and
•$7.9 million decrease in cash flows due to the timing of payments of other items, including, pension costs, value added taxes, and related party transactions; partially offset by
•$25.6 million increase in cash flows for other payables and accruals due to employee related and income taxes;
•$10.5 million increase in cash flows associated with other long term liabilities due to lower pension contributions; and
•$3.8 million increase in cash flows associated with trade accounts payable due to timing of payments.
Investing Cash Flows OnMarch 6, 2020 , we completed the sale of our Cariflex business toDaelim for gross proceeds of$530.0 million and net proceeds of$510.5 million . During the year endedDecember 31, 2021 , we completed final customary post-closing working capital adjustments, reducing cash proceeds received to date by an additional$5.8 million . Net cash used in investing activities totaled$107.0 million forDecember 31, 2021 compared to net cash provided by investing activities totaling$424.5 million and used in investing activities totaling$108.7 million for the years endedDecember 31, 2020 and 2019, respectively. Capital projects in 2021 included the following: •$63.0 million related to infrastructure and maintenance, and health, safety, environmental, and security projects to improve operating reliability and safety performance; •$21.0 million related to projects to optimize the production capabilities of our manufacturing assets, including projects to deliver strategic cost savings or additional capacity; and •$14.0 million of capital expenditures related to information technology and research and development. 52 -------------------------------------------------------------------------------- Capital projects in 2020 included the following: •$53.8 million related to infrastructure and maintenance, and health, safety, environmental, and security projects to improve operating reliability and safety performance; •$15.9 million related to projects to optimize the production capabilities of our manufacturing assets, including projects to deliver strategic cost savings or additional capacity; and •$7.8 million of capital expenditures related to information technology and research and development. Expected Capital Expenditures We currently expect 2022 capital expenditures, excluding expenditures by the KFPC joint venture, will be approximately$100.0 million , which includes approximately$4.0 million of capitalized interest. Also included is approximately$75.0 million for infrastructure and maintenance, and health, safety, environmental, and security projects. The remaining anticipated 2022 capital expenditures are primarily associated with projects to optimize the production capabilities of our manufacturing assets, to support our innovation platform, and to upgrade our information technology systems.
Financing Cash Flows and Liquidity
Our consolidated capital structure as ofDecember 31, 2021 was approximately 45.7% equity, 51.4% debt, and 2.9% noncontrolling interest, compared to approximately 37.8% equity, 59.4% debt, and 2.8% noncontrolling interest as ofDecember 31, 2020 . Net cash used in financing activities totaled$22.9 million for the year endedDecember 31, 2021 compared to$520.9 million and$176.1 million for the years endedDecember 31, 2020 and 2019, respectively. During the year endedDecember 31, 2021 , we decreased indebtedness, excluding impacts on foreign currency, by$20.9 million . In addition, cash on hand increased by approximately$44.6 million due to cash from operations, partially offset by our reinvestment in the business for capital expenditures and increased working capital. We evaluate ongoing opportunities to refinance our debt, if available, on terms, rates, or time periods more favorable to us. As a result of the divestiture of our Cariflex business, we fully repaid$290.0 million of outstanding borrowings under the USD Tranche and repaid €160.0 million (or approximately$184.8 million ) of outstanding borrowings under the Euro Tranche of our Term Loan Facility. Additionally, in an effort to improve our debt portfolio, during the fourth quarter of 2020, we called for redemption and satisfied and discharged our 7.0% Senior Notes and issued our 4.25% Senior Notes. In connection with the debt reductions associated with the divestiture of our Cariflex business and our fourth quarter of 2020 refinancing, we recorded a$40.8 million loss on extinguishment of debt during the year endedDecember 31, 2020 . This includes a write off of$20.7 million related to the call premium on the redemption of our outstanding 7.0% Senior Notes, a write off of$13.9 million related to previously capitalized deferred financing costs on our Term Loan Facility and 7.0% Senior Notes, a write off of$4.9 million related to original issue discount on our USD Tranche, and a$1.3 million loss on the settlement of the ineffective portion of interest rate swaps. See Note 8 Long-Term Debt for further discussion.
Share Repurchase Program
InFebruary 2019 , we announced a repurchase program for up to$50.0 million of the Company's common stock. Repurchases were 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. From inception of the program, we repurchased 311,152 shares of our common stock at an average price of$32.14 per share and a total cost of$10.0 million . The program ended onFebruary 7, 2021 .
On
Other Contingencies
As a chemicals manufacturer, our operations in the
Pursuant to these laws and regulations, our facilities are required to obtain
and comply with a wide variety of environmental permits and authorizations for
different aspects of their operations. Generally, many of these environmental
laws and regulations are becoming increasingly stringent, and the cost of
compliance with these various requirements can be expected to increase over
time.
53
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In connection with our separation from Shell Chemicals in February 2001 , Shell
Chemicals agreed to indemnify us for specific categories of environmental claims
brought with respect to matters occurring before the separation. However, the
indemnity from Shell Chemicals is subject to dollar and time limitations.
Coverage under the indemnity also varies depending upon the nature of the
environmental claim, the location giving rise to the claim and the manner in
which the claim is triggered. Therefore, if claims arise in the future related
to past operations, we cannot give assurances that those claims will be covered
by the Shell Chemicals' indemnity and also cannot be certain that any amounts
recoverable will be sufficient to satisfy claims against us.
In connection with International Paper's divestiture of Arizona Chemical in
February 2007 , International Paper provided an indemnity to the buyer for
specific known environmental liabilities and other environmental liabilities
pertaining to former properties. At the closing of the Arizona Chemical
Acquisition, Kraton was assigned the right to International Paper's indemnity
for such environmental liabilities and assumed certain related obligations.
Certain liabilities may fall outside the scope of the indemnity and therefore we
cannot be certain that the indemnity will be sufficient to satisfy all
environmental liabilities of Arizona Chemical.
In addition, we may in the future be subject to claims that arise solely from
events or circumstances occurring after February 2001 for legacy Kraton
manufacturing sites or after February 2007 for legacy Arizona Chemical
manufacturing sites, which would not, in any event, be covered by the Shell
Chemicals or International Paper indemnities, respectively. While we recognize
that we may in the future be held liable for remediation activities beyond those
identified to date, at present we are not aware of any circumstances that are
reasonably expected to give rise to remediation claims that would have a
material adverse effect on our results of operations or cause us to exceed our
projected level of anticipated capital expenditures.
Except for the foregoing, we currently estimate that any expenses incurred in
maintaining compliance with environmental laws and regulations will not
materially affect our results of operations or cause us to exceed our level of
anticipated capital expenditures. However, we cannot give assurances that
unknown contingencies may not arise or that regulatory requirements or permit
conditions will not change, and we cannot predict the aggregate costs of
additional measures that may be required to maintain compliance as a result of
such changes or expenses.
We had no material operating expenditures for environmental fines, penalties,
government imposed remedial, or corrective actions during the years ended
54
--------------------------------------------------------------------------------Contractual Obligations
Our principal outstanding contractual obligations relate to the Term Loan Facility, Senior Notes, KFPC Loan Agreement, interest payments, the operating leases of some of our facilities, the minimum purchase obligations required under our KFPC joint venture agreement and other agreements, and the feedstock contracts with LyondellBasell and others to provide us with raw materials. The following table summarizes our contractual cash obligations as ofDecember 31, 2021 for the periods indicated. Payments Due by Period 2027 and Total 2022 2023 2024 2025 2026 thereafter (In millions)
Long-term debt obligations (1)
-
Estimated interest payments on debt 155.3 38.2 37.8 37.8 35.0 6.5 - Operating lease obligations 111.1 23.4 20.5 15.9 13.6 12.1 25.6 Purchase obligations (2)(3) 2,738.8 544.1 334.3 267.9 166.7 148.7 1,277.1 Uncertain tax positions, including interest and penalties (4) 8.8 - - - - - 8.8 Estimated pension obligations 6.2 6.2 - - - - - Total contractual cash obligations$ 3,917.5 $ 680.6 $ 393.7 $ 322.7 $ 712.0 $ 497.1 $ 1,311.5
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(1)Includes finance lease obligations. (2)Included in this line are our estimated minimum purchases required under our KFPC joint venture agreement. Due to the indefinite term of this joint venture, we have based our minimum purchases on an assumed 20 year useful life of the facility. (3)Pursuant to operating agreements with LyondellBasell, we are currently paying the costs incurred by them in connection with the operation and maintenance of, and other services related to, our Berre,France , and Wesseling,Germany , facilities. These obligations are not included in this table. (4)Due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities, we are unable to determine the timing of payments related to uncertain tax positions, including interest and penalties. Amounts beyond the current year are therefore reflected in "2027 and thereafter." Impact of Inflation. Our results of operations and financial condition are presented based on historical cost. In the fiscal year 2021, we continued to experience inflationary pressures with increasing raw material, logistics, utilities and secondary costs in both segments. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, including our actions to pass these costs onto our customers through higher sales prices, consistent with our price-right strategy. We did experience these inflationary impacts, in particular within our Polymer segment, as we experienced margin compression versus fiscal year 2020. Within our Chemical segment, due to favorable market dynamics, we were able to expand margins in excess of the aforementioned inflationary pressures. 55
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