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EX-32.1 - SECTION 906 CERTIFICATIONS OF CEO AND CFO - Kraton Corpdex321.htm
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Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number

 

Kraton Performance Polymers, Inc.   001-34581
Kraton Polymers LLC   333-123747

 

 

KRATON PERFORMANCE POLYMERS, INC.

KRATON POLYMERS LLC

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Kraton Performance Polymers, Inc.   Delaware   20-0411521
Kraton Polymers LLC   Delaware   26-3739386
 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

15710 John F. Kennedy Blvd,

Suite 300

Houston, TX 77032

  281-504-4700
  (Address of principal executive offices, including zip code)  

(Registrant’s telephone number,

including area code)

 

 

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.

 

Kraton Performance Polymers, Inc.

   YES  x    NO   ¨

Kraton Polymers LLC

   YES  x    NO   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act. (Check one):

 

Large accelerated filer:  ¨   Accelerated filer:                    ¨
Non-accelerated filer:    x   Smaller reporting company:  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

Number of shares of Kraton Performance Polymers, Inc. Common Stock, $0.01 par value, outstanding as of July 30, 2010: 30,868,495.

 

 

 


Index to Financial Statements

Index to Quarterly Report

on Form 10-Q for

Quarter Ended June 30, 2010

 

     Page

PART I. FINANCIAL INFORMATION

  

Item 1.

   Kraton Performance Polymers, Inc.   
   Financial Statements (Unaudited)    5
   Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009    5
  

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009

   6
  

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   7
   Notes to Condensed Consolidated Financial Statements    8
   Kraton Polymers LLC   
   Financial Statements (Unaudited)   
   Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009    32
  

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009

   33
  

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   34
   Notes to Condensed Consolidated Financial Statements    35

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    57

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    71

Item 4.

   Controls and Procedures    72

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    73

Item 1A.

   Risk Factors    73

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    73

Item 3.

   Defaults Upon Senior Securities    73

Item 4.

   Removed and Reserved    73

Item 5.

   Other Information    73

Item 6.

   Exhibits    74
   Signatures    75

 

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Index to Financial Statements

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Some of the statements in this Quarterly Report on Form 10-Q under the headings “Condensed Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere 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 periodic 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 “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans” or “anticipates,” or by discussions of strategy, plans or intentions. Such forward-looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Further description of these risks and uncertainties and other important factors are set forth in our latest Annual Report on Form 10-K, as amended, including but not limited to “Part 1, Item 1A. Risk Factors” and “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, and include risks related to: conditions in the global economy and capital markets; our reliance on LyondellBasell Industries for the provision of significant operating and other services; the failure of our raw materials suppliers to perform their obligations under long-term supply agreements, or our inability to replace or renew these agreements when they expire; limitations in the availability of raw materials we need to produce our products in the amounts or at the prices necessary for us to effectively and profitably operate our business; competition in our end-use markets, by other producers of SBCs and by producers of products that can be substituted for our products; our ability to produce and commercialize technological innovations; our ability to protect our intellectual property, on which our business is substantially dependent; infringement of our products on the intellectual property rights of others; seasonality in our Paving and Roofing business; financial and operating constraints related to our substantial level of indebtedness; product liability claims and other lawsuits arising from environmental damage or personal injuries associated with chemical manufacturing; political and economic risks in the various countries in which we operate; the inherently hazardous nature of chemical manufacturing; health, safety and environmental laws, including laws that govern our employees’ exposure to chemicals deemed harmful to humans; regulation of our customers, which could affect the demand for our products or result in increased compliance costs; international trade, export control, antitrust, zoning and occupancy and labor and employment laws that could require us to modify our current business practices and incur increased costs; our relationship with our employees; loss of key personnel or our inability to attract and retain new qualified personnel; fluctuations in currency exchange rates; the fact that we do not enter into long-term contracts with our customers; a decrease in the fair value of our pension assets, which could require us to materially increase future funding of the pension plan; and concentration of ownership among our principal stockholders, which may prevent new investors from influencing significant corporate decisions. There may be other factors of which we are currently unaware or that we deem immaterial that may cause our actual results to differ materially from the expectations we express in our forward-looking statements. Although we believe the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions could themselves prove to be inaccurate.

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 publicly in light of new information or future events.

 

3


Index to Financial Statements

Presentation of Financial Statements.

The terms “Kraton Performance Polymers,” “our company,” “we,” “our,” “ours” and “us” as used in this report refer collectively to Kraton Performance Polymers, Inc. and its consolidated subsidiaries; “Kraton” refers to Kraton Polymers LLC, unless we indicate or the context suggests otherwise. This combined Form 10-Q is separately filed by Kraton Performance Polymers and Kraton. Information contained herein relating to Kraton is filed by Kraton Performance Polymers and separately by Kraton on its own behalf.

This Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations and cash flows of Kraton Performance Polymers and its subsidiaries and the condensed consolidated financial position, results of operations and cash flows of Kraton and its subsidiaries. Kraton Performance Polymers is a holding company whose only material asset is its investment in Kraton, which is its wholly-owned subsidiary. Kraton and its subsidiaries own all of the consolidated operating assets of our company.

 

4


Index to Financial Statements

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

     June 30,
2010
   December 31,
2009
 

ASSETS

     

Current Assets

     

Cash and cash equivalents

   $ 39,405    $ 69,291   

Receivables, net of allowances of $1,232 and $1,335

     166,020      115,329   

Inventories of products, net

     304,364      284,258   

Inventories of materials and supplies, net

     10,521      10,862   

Deferred income taxes

     3,107      3,107   

Other current assets

     19,478      16,770   
               

Total current assets

     542,895      499,617   

Property, plant and equipment, less accumulated depreciation of $212,794 and $236,558

     342,143      354,860   

Identifiable intangible assets, less accumulated amortization of $46,836 and $42,741

     73,564      75,801   

Investment in unconsolidated joint venture

     12,104      12,078   

Deferred financing costs

     6,272      7,318   

Other long-term assets

     20,201      24,825   
               

Total Assets

   $ 997,179    $ 974,499   
               

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current Liabilities

     

Current portion of long-term debt

   $ 2,304    $ 2,304   

Accounts payable-trade

     85,013      93,494   

Other payables and accruals

     56,790      68,271   

Due to related party

     16,833      19,006   

Insurance note payable

     2,566      —     
               

Total current liabilities

     163,506      183,075   

Long-term debt, net of current portion

     381,523      382,675   

Deferred income taxes

     15,841      13,488   

Other long-term liabilities

     48,500      46,477   
               

Total Liabilities

     609,370      625,715   
               

Commitments and contingencies (note 11)

     

Stockholders’ equity

     

Preferred stock, $0.01 par value; 100,000 shares authorized; none issued

     

Common stock, $0.01 par value; 500,000 shares authorized; 30,851 shares issued and outstanding

     309      297   

Additional paid in capital

     325,145      311,665   

Retained earnings

     58,376      (14

Accumulated other comprehensive income

     3,979      36,836   
               

Total stockholders’ equity

     387,809      348,784   
               

Total Liabilities and Stockholders’ Equity

   $ 997,179    $ 974,499   
               

See Notes to Condensed Consolidated Financial Statements

 

5


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

Operating Revenues

          

Sales

   $ 332,086    $ 233,741      $ 604,818    $ 411,607   

Other

     —        10,080        —        17,172   
                              

Total operating revenues

     332,086      243,821        604,818      428,779   

Cost of Goods Sold

     242,973      208,060        446,578      384,085   
                              

Gross Profit

     89,113      35,761        158,240      44,694   
                              

Operating Expenses

          

Research and development

     5,572      5,071        11,556      10,040   

Selling, general and administrative

     21,772      18,052        43,834      36,303   

Depreciation and amortization of identifiable intangibles

     11,969      12,542        23,015      25,106   
                              

Total operating expenses

     39,313      35,665        78,405      71,449   
                              

Gain on Extinguishment of Debt

     —        4,340        —        23,831   

Earnings of Unconsolidated Joint Venture

     162      102        236      176   

Interest Expense, net

     6,272      7,832        12,336      16,738   
                              

Income (Loss) Before Income Taxes

     43,690      (3,294     67,735      (19,486

Income Tax Expense

     5,095      891        9,345      1,160   
                              

Net Income (Loss)

   $ 38,595    $ (4,185   $ 58,390    $ (20,646
                              

Earnings (Loss) per common share (note 7)

          

Basic

   $ 1.25    $ (0.22   $ 1.90    $ (1.06

Diluted

   $ 1.24    $ (0.22   $ 1.88    $ (1.06

Weighted average common shares outstanding

          

Basic

     30,806      19,410        30,751      19,409   

Diluted

     31,244      19,410        31,023      19,409   

See Notes to Condensed Consolidated Financial Statements

 

6


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Six months ended
June 30,
 
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income (loss)

   $ 58,390      $ (20,646

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization of identifiable intangibles

     23,015        25,106   

Accretion of debt discount

     —          5   

Inventory impairment

     —          669   

Amortization of deferred financing costs

     1,036        1,582   

Loss on disposal of fixed assets

     3        431   

Gain on extinguishment of debt

     —          (23,831

Change in fair value of interest rate swaps

     (450     (842

Distributed earnings in unconsolidated joint venture

     167        257   

Deferred income tax expense

     3,853        (910

Non-cash compensation related to equity awards

     1,771        1,237   

Decrease (increase) in

    

Accounts receivable

     (60,335     (29,542

Inventories of products, materials and supplies

     (39,002     90,670   

Other assets

     (30,167     (6,365

(Decrease) in

    

Accounts payable-trade, other payables and accruals, and other long-term liabilities

     (6,444     (18,564

Due to related party

     (2,874     (14,550
                

Net cash provided by (used in) operating activities

     (51,037     4,707   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchase of property, plant and equipment

     (17,545     (19,972

Purchase of software

     (1,857     (6,685

Proceeds from sale of property, plant and equipment

     —          3,833   
                

Net cash used in investing activities

     (19,402     (22,824
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from debt

     69,000        53,000   

Repayment of debt

     (70,152     (115,341

Proceeds from issuance of common stock

     11,197        —     

Costs associated with the issuance of common stock

     (534     —     

Proceeds from stock based compensation

     1,087        —     

Proceeds from insurance note payable

     3,518        4,506   

Repayment of insurance note payable

     (952     (1,487
                

Net cash provided by (used in) financing activities

     13,164        (59,322
                

Effect of exchange rate differences on cash

     27,389        (6,247
                

Net decrease in cash and cash equivalents

     (29,886     (83,686

Cash and cash equivalents, beginning of period

     69,291        101,396   
                

Cash and cash equivalents, end of period

   $ 39,405      $ 17,710   
                

Supplemental Disclosures

    

Cash paid during the period for income taxes, net of refunds received

   $ 2,026      $ 7,455   

Cash paid during the period for interest

   $ 12,192      $ 16,489   

See Notes to Condensed Consolidated Financial Statements

 

7


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Organization and Description of Business. Kraton Performance Polymers, Inc., or Kraton Performance Polymers, and its direct and indirect subsidiaries, are, unless the context requires otherwise, collectively referred to herein as “we,” “our,” “ours,” “us,” “our company” and/or “the Company.” Kraton Performance Polymers is the sole Member and 100% equity owner of Kraton Polymers LLC. As used herein, the term “Kraton” refers to Kraton Polymers LLC, and, unless the context herein requires otherwise, said term shall include the direct and indirect subsidiaries of Kraton Polymers LLC. Kraton Polymers LLC directly or indirectly owns 100% of the equity interests in (1) Elastomers Holdings LLC (holding company of Kraton’s U.S. operations), (2) K.P. Global Holdings C.V. (holding company of the remainder of our global operations) and (3) Kraton Polymers Capital Corporation (finance subsidiary with no operations). We believe we are the world’s leading producer in terms of sales revenues of styrenic block copolymers, or SBCs, a family of performance polymer products whose chemistry we pioneered almost 50 years ago. SBCs are highly-engineered synthetic elastomers that enhance the performance of numerous products by delivering a variety of performance-enhancing characteristics, including greater flexibility, resilience, strength, durability and processability. SBCs are a fast growing subset of the elastomers industry. Our polymers are typically formulated or compounded with other products to achieve improved customer specific performance characteristics in a variety of applications. We manufacture products at five plants globally, including our flagship plant in Belpre, Ohio, the most diversified SBC plant in the world, as well as plants in Germany, France, Brazil and Japan. The plant in Japan is operated by an unconsolidated manufacturing joint venture.

Basis of Presentation. The accompanying Condensed Consolidated Financial Statements presented herein are for Kraton Performance Polymers, Inc. (formerly Polymer Holdings LLC) and its consolidated subsidiaries, each of which is a wholly-owned subsidiary. 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 year ended December 31, 2009, as amended, and reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present our results of operations and financial position. Amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods, in particular due to the effect of seasonal changes and weather conditions that typically affect our polymer product sales into our Paving and Roofing end use market.

Our significant accounting policies have been disclosed in Note 1 Summary of Operations and Significant Accounting Policies in our most recent Annual Report on Form 10-K, as amended. There have been no changes to the policies disclosed therein. The accompanying Condensed Consolidated Financial Statements presented herein have been prepared in accordance with those policies.

Use of Estimates. The preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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 fixed assets; allowances for doubtful accounts and sales returns; the valuation of derivatives, deferred tax assets, property, plant and equipment, inventory, investments and share-based compensation; and liabilities for employee benefit obligations, asset retirement obligations, income tax uncertainties and other contingencies.

Income Tax in Interim Periods. Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the political and economic climate in those countries. We file our tax returns in accordance with our

 

8


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which no benefit can be realized. In addition, the effects of unusual and infrequent items are recognized in the impacted interim period as discrete items. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and our projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised. Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carry-forwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize 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. Failure to achieve our operating income targets 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. An increase in a valuation allowance would result in additional income tax expense and lower stockholders’ equity and could have a significant impact on our earnings in future periods. The release of valuation allowances in periods when these tax attributes become realizable would reduce our effective tax rate.

Correction of immaterial errors. We have corrected immaterial errors in the accompanying Condensed Consolidated Statements of Operations related to cost of goods sold for the three months ended March 31, 2010. The correction increased cost of goods sold and decreased inventory by $3.0 million. The correction is not material to our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010.

2. New Accounting Pronouncements

Adoption of Accounting Standards

We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.

Future Adoption of Accounting Standards

The following new accounting pronouncement has been issued, but has not yet been adopted as of June 30, 2010:

In October 2009, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (“ASU”), Number 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force.” This update amends the revenue recognition guidance for arrangements with multiple deliverables. The amendments allow vendors to account for products and services separately rather than as a combined unit. A selling price hierarchy for determining the selling price of each deliverable is established in this ASU, along with eliminating the residual method. The amendments are effective for revenue arrangements that begin or are changed in fiscal years that start June 15, 2010 or later. We are in the process of assessing the provisions of this new guidance and currently do not expect that the adoption will have a material impact on our consolidated financial statements.

 

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Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Share-Based Compensation

We account for share-based awards under the provisions of ASC 718, “Stock Compensation,” which established the accounting for share-based awards exchanged for employee services. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. We record non-cash compensation expense for the restricted stock awards, notional units and stock options over the vesting period using the straight-line method. We awarded 22,202 shares of restricted stock during the six months ended June 30, 2010. See Note 7 Common Stock and Earnings per Common Share for further discussion.

Information pertaining to option activity for the six months ended June 30, 2010 is as follows:

 

     Options     Weighted-
Average
Exercise
Price
     (in thousands)      

Outstanding at December 31, 2009

   1,585      $ 13.51

Granted

   612        15.39

Exercised

   (81     13.51

Cancelled

   (3     13.51
            

Outstanding at June 30, 2010

   2,113      $ 14.05
            

Exercisable at June 30, 2010

   1,165      $ 13.51
            

We value stock options issued using the Black-Scholes Merton option-pricing model and there have been no changes to our methodology disclosed in our most recently filed Annual Report on Form 10-K, as amended.

4. Restructuring and Restructuring-Related Costs

As part of our ongoing efforts to improve efficiencies and increase productivity, we have implemented a number of restructuring initiatives in recent years.

We ceased production at our Pernis, the Netherlands, facility on December 31, 2009, where, prior to the exit, we manufactured isoprene rubber. In connection with the exit, we incurred $3.9 million in asset retirement obligations (“ARO”), $6.0 million in restructuring costs and a $1.1 million non-cash charge to write-down our inventory of spare parts.

For the six months ended June 30, 2010, the original estimated ARO of $3.9 million was reduced to $2.6 million as a result of our completing the exit of the facility two months earlier than originally anticipated. As a result, included in depreciation and amortization of intangible assets in the six months ended June 30, 2010 is a reduction in the accrued restructuring cost, which lowered depreciation expense by approximately $1.3 million. The following is a summary of the 2010 activity associated with the exit of the Pernis facility:

 

     Pernis
Restructuring
 
     (in thousands)  

Accrued Pernis restructuring at December 31, 2009

   $ 9,989   

Payments

     (8,698

Change in estimate for demolition cost

     (1,291
        

Accrued Pernis restructuring at June 30, 2010

   $ —     
        

 

10


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Detail of Certain Balance Sheet Accounts

The components of inventories of products and other payables and accruals are as follows:

 

     June 30,
2010
   December 31,
2009
     (in thousands)

Inventories of products, net:

     

Finished products

   $ 230,112    $ 223,500

Work in progress

     4,807      3,254

Raw materials

     69,445      57,504
             
   $ 304,364    $ 284,258
             

Other payables and accruals:

     

Employee related

   $ 12,665    $ 5,783

Interest

     6,796      7,366

Property and other taxes

     669      4,255

Customer rebates

     2,309      2,960

Income taxes payable

     7,506      4,000

Derivative liabilities

     2,172      2,926

Pernis restructuring

     —        9,874

Other

     24,673      31,107
             
   $ 56,790    $ 68,271
             

6. Comprehensive Income

Comprehensive income includes net income (loss) and all other non-owner changes in equity. Components of comprehensive income are as follows:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2009     2010     2009  
     (in thousands)     (in thousands)  

Net income (loss)

   $ 38,595      $ (4,185   $ 58,390      $ (20,646

Other comprehensive income (loss)

        

Foreign currency translation adjustments, net of tax

     (30,438     22,464        (33,000     5,398   

Reclassification of interest rate swaps into earnings

     —          (421     (450     (842

Net unrealized gain (loss) on interest rate swaps

     660        (211     519        (358

Net unrealized gain on net investment hedge

     74        —          74        —     
                                

Total comprehensive income (loss)

   $ 8,891      $ 17,647      $ 25,533      $ (16,448
                                

 

11


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Accumulated other comprehensive income consists of the following:

 

     June 30,
2010
    December 31,
2009
 
     (in thousands)  

Foreign currency translation adjustments, net of tax

   $ 22,765      $ 55,765   

Net unrealized loss on interest rate swaps

     (1,711     (1,780

Net unrealized gain on net investment hedge

     74        —     

Increase in pension liability, net of tax

     (17,149     (17,149
                

Total accumulated other comprehensive income

   $ 3,979      $ 36,836   
                

7. Common Stock and Earnings per Common Share

Common stock—Kraton Performance Polymers, Inc. has authorized 500.0 million shares of common stock with a par value of $0.01 per share and 100.0 million shares of preferred stock with a par value of $0.01 per share. No preferred stock has been issued.

As of June 30, 2010, there were 30,851,281 common shares issued and outstanding.

Earnings per share (“EPS”)—Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the diluted weighted-average number of common shares outstanding during the period. The diluted weighted-average number of common shares used in the diluted EPS calculation is determined using the treasury stock method. Diluted EPS reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, stock-based performance awards and preferred stock, were exercised, settled or converted into common stock and were dilutive.

Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock.

 

12


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table summarizes the effect of the share-based compensation awards on the diluted weighted- average number of shares outstanding used in calculating diluted EPS:

 

    Three months ended
June 30,
    Six months ended
June 30,
 
        2010             2009             2010             2009      
    (in thousands, except per share data)     (in thousands, except per share data)  
     

Net income (loss) as reported

  $ 38,595      $ (4,185   $ 58,390      $ (20,646

Less (income) loss allocated to restricted shares

    (173     6        (258     27   
                               

Income (loss) allocated to common shares for basic and diluted EPS

  $ 38,422      $ (4,179   $ 58,132      $ (20,619
                               

Total weighted-average number of shares for basic EPS

    30,668        19,383        30,615        19,386   

Incremental effect of dilutive common share equivalents:

     

Notional units

    35        —          35        —     

Stock options

    403        —          237        —     
                               

Total weighted-average number of shares for diluted EPS

    31,106        19,383        30,887        19,386   
                               

Total Basic Earnings per Common Share

  $ 1.25      $ (0.22   $ 1.90      $ (1.06

Total Dilutive Earnings per Share

  $ 1.24      $ (0.22   $ 1.88      $ (1.06

Restricted common shares outstanding totaled 118,413 and 46,699 at June 30, 2010 and 2009, respectively, and are subject to time vesting and restrictions on transfer until vested and have identical voting, income and distribution rights to the unrestricted common shares outstanding.

Notional units of 63,221 and stock options of 1,584,970 were outstanding at June 30, 2009 and were not included in the computation of diluted EPS because such units and options were anti-dilutive.

8. Long-Term Debt

Long-term debt consists of the following:

 

     June 30,
2010
    December 31,
2009
 
     (in thousands)  

Term loans(a)

   $ 220,577      $ 221,729   

12% discount notes(b)

     250        250   

8.125% discount notes(c)

     170,000        170,000   

8.125% discount notes held in treasury(c)

     (7,000     (7,000
                

Total debt

     383,827        384,979   

Less current portion of long-term debt(a)

     2,304        2,304   
                

Total long-term debt

   $ 381,523      $ 382,675   
                

 

13


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

(a) Term Loans and Revolving Loans. Kraton is the borrower under our senior secured credit agreement dated as of December 23, 2003, as amended, (the “Credit Agreement”), and Kraton’s wholly-owned domestic subsidiaries along with us, as successor to Polymer Holdings, are guarantors under the Credit Agreement. We refer to these guarantors, together with Kraton, as the Loan Parties. The Credit Agreement is secured by a perfected first priority security interest in substantially all of each Loan Party’s tangible and intangible assets, including intellectual property, real property, all of Kraton’s capital stock, the capital stock of Kraton’s domestic subsidiaries and 65% of the capital stock of the direct foreign subsidiaries of each Loan Party. There have been no material changes to our Credit Agreement since the disclosure made in our most recently filed Annual Report on Form 10-K, as amended. In these notes to the Condensed Consolidated Financial Statements, the loans made under the revolving facility are referred to as the Revolving Loans, and the loans made under the term facility are referred to as the Term Loans.

Pursuant to Amendment No. 7 to the Credit Agreement, dated November 30, 2009 (the “November 2009 Amendment”), the maximum available borrowings under the Revolving Loans increased from $75.5 million to $80.0 million and the maturity on $79.8 million of the Revolving Loans was extended from May 2011 to May 2013.

In December 2009, Kraton applied a portion of the proceeds from our initial public offering as a prepayment on the term portion of its senior secured credit facility in the amount of $100.0 million, which resulted in the write off of approximately $1.5 million of deferred financing cost. As of June 30, 2010, Kraton had no outstanding borrowings under the Revolving Loans.

The following is a summary of the material terms of the Credit Agreement. This description does not purport to be complete and is qualified in its entirety by reference to the provisions of the Credit Agreement.

Maturity. The Revolving Loans extended pursuant to the November 2009 Amendment are payable in a single maturity on May 12, 2013. The $0.2 million portion of the Revolving Loans that were not extended pursuant to November 2009 Amendment are payable on May 12, 2011. The Term Loans are payable in 8 remaining consecutive equal quarterly installments, in an aggregate annual amount equal to 1.0% of the original principal amount of such loans. The remaining balance is payable in four equal quarterly installments commencing on September 30, 2012 and ending on May 12, 2013.

Interest. The Term Loans bear interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at Kraton’s option, the base rate plus 1.00% per annum. The average effective interest rates on the Term Loans for the six months ended June 30, 2010 and 2009 were 3.4% and 4.3%, respectively. The Revolving Loans extended pursuant to the November 2009 Amendment bear interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 3.00% and 3.50% per annum (depending on Kraton’s consolidated leverage ratio) or at Kraton’s option, the base rate plus a margin of between 2.00% and 2.50% per annum (also depending on Kraton’s consolidated leverage ratio). In addition, with respect to the extended portion of the Revolving Loans, an annual commitment fee equal to 0.75% payable quarterly on the daily average undrawn portion of the Revolving Loans extended pursuant to the November 2009 Amendment accrues and is payable quarterly in arrears.

The terms of the $0.2 million portion of the Revolving Loans that were not extended pursuant to November 2009 Amendment were not changed. These Revolving Loans bear interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 2.00% and 2.50% per annum (depending on Kraton’s leverage ratio), or at Kraton’s option, the base rate plus a margin of between 1.00% and 1.50% per annum (also depending on Kraton’s leverage ratio). The unused commitment fee for the unextended Revolving Loan is 0.5%.

 

14


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Mandatory Prepayments. The existing term facility is subject to mandatory prepayments as discussed in our most recently filed Annual Report on Form 10-K, as amended.

Covenants. The Credit Agreement contains certain affirmative and negative covenants, as discussed in our most recently filed Annual Report on Form 10-K, as amended. As of June 30, 2010, we were in compliance with all covenants contained in the Credit Agreement.

(b) Senior 12% Discount Notes Due July 15, 2014. As part of a refinancing of indebtedness on November 2, 2004, Polymer Holdings issued $150.0 million of 12% discount notes. On May 12, 2006 all but $0.25 million of the 12% discount notes were repaid.

(c) Senior Subordinated 8.125% Notes Due January 15, 2014. On December 23, 2003, Kraton and Kraton Polymers Capital Corporation issued the 8.125% Notes in an aggregate principal amount of $200.0 million. The 8.125% Notes are subject to the provisions for mandatory and optional prepayment and acceleration and are payable in full on January 15, 2014. Each of Kraton Polymers U.S. LLC and Elastomers Holdings LLC has guaranteed the 8.125% Notes.

Interest. The 8.125% Notes bear interest at a fixed rate of 8.125% per annum. Interest is payable semi-annually on January 15 and July 15.

Optional Redemption. We may redeem all or a part of the 8.125% Notes at the redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest, if any.

Purchase of a Portion of the Senior Subordinated 8.125% Notes. On March 16, 2009, Kraton purchased and retired $30 million face value of the 8.125% Notes for cash consideration of $10.9 million, which included accrued interest of $0.4 million. We recorded a gain of approximately $19.5 million in the quarter ended March 31, 2009 related to the purchase and retirement of these 8.125% Notes.

In April 2009, TJ Chemical purchased approximately $6.3 million face value of the 8.125% Notes for cash consideration of $2.5 million, which included accrued interest of $0.1 million. Immediately upon purchasing the 8.125% Notes, TJ Chemical contributed the purchased notes to us, and we in turn contributed the notes to Kraton. No equity interest or other consideration was issued in exchange for the contribution of the 8.125% Notes, although equity of each of Kraton Performance Polymers and Kraton was increased by an amount equal to the cash consideration paid by TJ Chemical. Kraton holds the 8.125% Notes as treasury notes. Also in April 2009, Kraton purchased approximately $0.7 million face value of the 8.125% Notes for cash consideration of $0.3 million, which Kraton is holding as treasury notes. We recorded a gain of approximately $4.3 million on the extinguishment of debt in the quarter ended June 30, 2009.

Covenants. The 8.125% Notes contain certain affirmative and negative covenants, as discussed in our most recently filed Annual Report on Form 10-K, as amended. As of June 30, 2010, we were in compliance with all covenants under the 8.125% Notes.

See Note 9 Financial Instruments, Hedging Activities and Credit Risk for fair value information related to our long-term debt.

 

15


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9. Financial Instruments and Credit Risk

Financial Instruments

(a) Interest Rate Swap Agreements. In February 2008, we entered into a $325 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.77%, which resulted in a fixed rate of 4.77%, and a term through April 1, 2010. This agreement was designated as a cash flow hedge on the exposure of the variability of future cash flows subject to the variable quarterly interest rates on $325 million of the term loan portion of the Term Facility. We settled the swap early in June 2008 and realized cash proceeds of $4.6 million, resulting in a gain on the sale of $4.6 million. The gain was deferred in accumulated other comprehensive income and was being reclassified as a reduction in interest expense through March 31, 2010 using the effective interest method. We reclassified $0.5 million and $0.8 million into earnings for the six months ended June 30, 2010 and 2009, respectively.

In May 2009, we entered into a $310 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. This agreement was effective on January 4, 2010 and expires on January 3, 2011 and has a fixed rate of 1.53%, which results in a fixed rate of 3.53%. In December 2009, we made a $100.0 million payment of outstanding indebtedness under the Term Facility, reducing the principal amount outstanding from approximately $323.0 million to approximately $223.0 million. As a result, we were required to discontinue hedge accounting prospectively as the hedging relationship failed to meet all of the criteria set forth in ASC 815, “Derivatives and Hedging,” specifically the notional amount of the swap and the principal amount of the debt were no longer equal and the forecasted transaction was no longer probable of occurring based on the original hedge documentation. We have elected to redesignate the cash flow hedge relationship for approximately $218.0 million notional amount out of the total $310.0 million notional amount interest rate swap agreement. We recorded a gain of $0.3 million and $0.0 million in interest expense related to the ineffective portion and a gain of $0.5 million and a loss of $0.5 million in accumulated other comprehensive income related to the effective portion of the hedge for the six months ended June 30, 2010 and June 30, 2009, respectively.

In June 2010, we entered into a $215.0 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. This agreement will be effective on January 3, 2011 and expires on January 3, 2012 and has a fixed rate of 0.87%, which will result in a fixed rate of 2.87%. We recorded an unrealized loss of $0.2 million in accumulated other comprehensive income related to the effective portion of this hedge for the quarter ended June 30, 2010.

(b) Foreign Currency Hedges. In February 2009, we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of €47.3 million, which expired on December 29, 2009. The option contract did not qualify for hedge accounting. During the six months ended June 30, 2009, we recorded a gain of $0.8 million, which represented the mark-to-market impact of the purchased option contract. The gain was recorded in selling, general and administrative expense on the Condensed Consolidated Statements of Operations. We settled the hedge on December 31, 2009, with a gain of $1.9 million, which represented the mark-to-market impact of the purchased option contract.

(c) Net Investment Hedges. In May 2010, we entered into multiple non-deliverable forward contracts to reduce our exposure to fluctuations in the Brazilian Real to the U.S. dollar associated with the funding of the debottleneck and expansion of our isoprene rubber latex capacity at our Paulina, Brazil plant, for the notional

 

16


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

amounts of R$2.7 million, R$7.0 million, and R$7.8 million with expiration dates of June 30, September 30, and December 31, 2010, respectively. The non-deliverable forward contracts qualify for hedge accounting and were designated as net investment hedges in accordance with ASC 815-35 “Net Investment Hedges.” We recorded a $0.1 million gain in accumulated other comprehensive income related to the effective portion of the hedge for the quarter ended June 30, 2010.

(d) Fair Value of Financial Instruments. Effective January 1, 2008, we adopted ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. In accordance with ASC 820, these two types of inputs have created the following fair value hierarchy:

 

   

Level 1—Quoted unadjusted prices for identical instruments in active markets.

 

   

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

   

Level 3—Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

The following table presents the carrying values and approximate fair values of our long-term debt at June 30, 2010 and December 31, 2009:

 

     June 30, 2010    December 31, 2009
     Carrying
Value
   Fair Value    Carrying
Value
   Fair Value
     (in thousands)    (in thousands)

Senior Secured Credit Facilities:

           

Term loans

   $ 220,577    $ 220,577    $ 221,729    $ 221,729

12% discount notes

     250      250      250      250

8.125% discount notes

     163,000      163,408      163,000      146,089

8.125% discount notes held in treasury

     7,000      7,018      7,000      6,274

The Term Loans and Revolving Loans are variable interest rate securities, and as such, the fair value approximates their carrying value.

 

17


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The financial assets and liabilities measured at fair value on a recurring basis are included below:

 

    Balance Sheet Location   June 30,
2010
  Fair Value Measurements at Reporting Date Using
      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
    (in thousands)

Derivative liabilities—2009 Interest rate swap

  Other payables and accruals   $ 2,016   $ —     $ 2,016   $ —  

Derivative liabilities—2010 Interest rate swap

  Other payables and accruals   $ 156   $ —     $ 156   $ —  

Derivative liabilities—2010 Net Investment hedge

  Other current assets   $ 74   $ —     $ 74   $ —  
    Balance Sheet Location   December 31,
2009
  Fair Value Measurements at Reporting Date Using
      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
        (in thousands)

Derivative liabilities—2009 Interest rate swap

  Other payables and accruals   $ 2,926   $ —     $ 2,926   $ —  

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In the event of a default by one of our counterparties, we may not receive payments provided for under the terms of our derivatives. We do not anticipate any defaults by our derivative instrument contract counterparties.

Credit Risk. Our customers are diversified by industry and geography with approximately 700 customers in approximately 60 countries worldwide. We do not have concentrations of receivables from these industry sectors throughout these countries. Where exposed to credit risk, we analyze the counterparties’ financial condition prior to entering into an agreement, establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.

10. Income Taxes

Income tax expense for the six months ended June 30, 2010 was $9.3 million compared to $1.2 million for the six months ended June 30, 2009. The effective tax rate for the six months ended June 30, 2010 was 13.8% compared to (6.0)% for the six months ended June 30, 2009. Our effective tax rate for the six months ended June 30, 2010 was lower than the statutory rate of 35% primarily due to the mix of pre-tax income earned in foreign jurisdictions and the recognition of the tax benefit for certain net operating loss carryforwards.

We are required to provide a valuation allowance for certain deferred tax assets in excess of deferred tax liabilities because we have concluded that it is more likely than not that such deferred tax assets ultimately will not be realized.

 

18


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As of June 30, 2010, we had unrecognized tax benefits related to foreign tax positions, all of which, if recognized, would impact the effective tax rate. We had no substantial change in uncertain tax positions and have recorded $1.3 million of unrecognized tax benefits, including interest and penalties, as a long-term liability.

Our tax jurisdictions include the United States and various state and foreign jurisdictions. The U.S. federal income tax return has been examined by the tax authorities through December 31, 2004; all years subsequent to 2004 remain subject to examination. In addition, open tax years to state and foreign jurisdictions remain subject to examination.

11. Commitments and Contingencies

Legal Proceedings. We and certain of our subsidiaries are parties to several legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations or cash flows. Furthermore, Shell Chemicals L.P. (“Shell Chemicals”) has agreed, subject to certain limitations, to indemnify us for certain claims brought with respect to matters occurring before February 28, 2001. As of the date of this Quarterly Report on Form 10-Q, we have not been named as parties in any of these claims. Our right to indemnification from Shell Chemicals is subject to certain time limitations disclosed under “Business—Environmental Regulation” in our most recently filed Annual Report on Form 10-K, as amended. During the first quarter of 2010, we received a communication from a law firm asserting that approximately $13.5 million in alleged payments to us from SemGroup, L.P. and/or one or more of its affiliates (collectively “SemGroup”) during the 90-day period preceding SemGroup’s Chapter 11 bankruptcy filing on July 22, 2008 appear to constitute preferential payments avoidable and recoverable under sections 547 and 550 of the United States Bankruptcy Code. This matter was settled for a de minimis sum in July 2010 in a manner that provides Kraton with a release of claims in connection with the matter. This resolution is final and completed and will not have a material adverse impact on our business, financial condition or results of operations. Except as provided immediately above, there have been no material changes to our Commitments and Contingencies disclosed in our most recently filed Annual Report on Form 10-K, as amended.

12. Employee Benefits

Retirement Plans. The components of net periodic benefit cost related to pension benefits and other post-retirement benefits for the three and six months ended June 30, 2010 and June 30, 2009 are as follows:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2009     2010     2009  
     (in thousands)     (in thousands)  

Defined Benefit

        

Components of net period benefit cost:

        

Service cost

   $ 580      $ 709      $ 1,203      $ 1,445   

Interest cost

     1,230        1,186        2,446        2,364   

Expected return on plan assets

     (1,213     (1,170     (2,426     (2,357

Amortization of prior service cost

     17        135        21        262   
                                

Net periodic benefit cost

   $ 614      $ 860      $ 1,244      $ 1,714   
                                

 

19


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     Three months
ended

June 30,
   Six months
ended

June 30,
     2010    2009    2010    2009
     (in thousands)    (in thousands)

Other Post-retirement Benefits

           

Components of net period benefit cost:

           

Service cost

   $ 98    $ 100    $ 196    $ 200

Interest cost

     280      230      560      460

Amortization of prior service cost

     39      18      78      36
                           

Net periodic benefit cost

   $ 417    $ 348    $ 834    $ 696
                           

Contributions. Based on December 31, 2009 valuations, we expect to make contributions of $3.9 million to our employee benefit plans in 2010 versus $6.2 million in 2009. We made contributions of $1.1 million to our pension plan for the six months ended June 30, 2010. See Note 7 Employee Benefits in our most recent Annual Report on Form 10-K, as amended, for further discussion.

13. Industry Segment and Foreign Operations

We operate in one segment for the manufacture and marketing of styrenic block copolymers. In accordance with the provisions of ASC 280, “Segment Reporting,” our chief operating decision-maker has been identified as the President and Chief Executive Officer, who regularly reviews financial information to make decisions about allocating resources and assessing performance for the entire company. Since we operate in one segment and in one group of similar products, all financial segment and product line information required by ASC 280 can be found in the Condensed Consolidated Financial Statements.

 

20


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

For geographic reporting, revenues are attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant and equipment, which are attributed to the geographic location in which they are located. Total operating revenues and long-lived assets by geographic region were as follows:

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009
     (in thousands)    (in thousands)

Total Operating Revenues:

           

United States

   $ 115,602    $ 78,641    $ 225,407    $ 139,188

Germany

     41,910      29,072      72,516      50,642

Japan

     21,559      16,040      37,478      26,969

China

     15,172      8,826      27,351      12,443

Brazil

     12,934      7,937      24,197      14,335

Italy

     11,822      9,168      22,648      16,049

France

     10,419      6,569      17,913      14,304

United Kingdom

     9,531      7,672      15,741      13,987

Thailand

     8,946      6,704      16,391      12,513

Turkey

     7,691      3,568      11,865      5,680

The Netherlands

     6,980      16,057      14,703      24,702

Taiwan

     6,189      5,111      11,937      7,655

Canada

     5,942      4,100      10,896      7,828

Australia

     5,143      2,346      8,373      3,202

Austria

     4,457      2,227      6,728      2,938

Sweden

     4,384      3,730      7,472      6,181

South Korea

     3,836      2,706      7,269      4,600

Belgium

     3,785      1,677      5,792      14,659

Mexico

     3,637      3,584      5,893      5,806

Argentina

     3,208      2,657      5,812      5,303

Poland

     3,065      4,943      3,611      5,602

Malaysia

     2,630      1,337      4,672      2,400

Denmark

     2,553      3,276      4,256      6,079

Spain

     2,348      1,112      3,516      1,451

Czech Republic

     1,523      1,157      2,722      2,264

Norway

     1,457      1,875      1,709      1,969

Russian Federation

     1,416      682      1,562      713

India

     1,343      1,162      2,683      2,263

All other countries

     12,604      9,885      23,705      17,054
                           
   $ 332,086    $ 243,821    $ 604,818    $ 428,779
                           

 

      June 30,
2010
   December 31,
2009
     (in thousands)

Long Lived Assets:

  

United States

   $ 324,748    $ 317,719

France

     114,920      125,839

Brazil

     65,455      64,385

Germany

     36,123      42,724

The Netherlands

     10,179      36,971

China

     2,670      2,334

All other countries

     842      1,446
             
   $ 554,937    $ 591,418
             

 

21


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

14. Related Party Transactions

We own a 50% equity investment in a manufacturing joint venture with JSR Corporation (“JSR”) under the name of Kraton JSR Elastomers K.K. (“KJE”) located in Kashima, Japan. KJE manufactures thermoplastic rubber, which is wholly or predominantly composed of a block copolymer comprising styrene blocks with butadiene and/or isoprene polymer blocks. KJE produces thermoplastic rubber for sale to third party customers only through Kraton and JSR. We and JSR separately, but with equal rights, participate as distributors in the sales of the thermoplastic rubber produced by KJE.

The aggregate amounts of related-party transactions were as follows:

 

     Three months ended
June  30,
   Six months ended
June 30,
     2010    2009    2010    2009
     (in thousands)    (in thousands)

Purchases from related party

   $ 6,503    $ 2,574    $ 16,157    $ 8,323

In October 2009, we entered into a contract with Amyris Biotechnologies, Inc. to explore the development of an alternative source of certain raw materials and, subject to Amyris’s meeting developmental and manufacturing milestones, to purchase raw materials from Amyris. We have not made any purchases to date. TPG Biotechnology II, L.P., a private investment fund that may be deemed to be an affiliate of TPG Partners III and TPG Partners IV, has an ownership interest in Amyris.

15. Supplemental Guarantor Information

Kraton and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 8.125% Notes. Elastomers Holdings LLC, a U.S. holding company, and Kraton Polymers U.S. LLC, a U.S. operating subsidiary, collectively, the Guarantor Subsidiaries, fully and unconditionally guarantee on a joint and several basis the Issuers’ obligations under the 8.125% Notes. Our remaining subsidiaries are not guarantors of the 8.125% Notes. We do not believe that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would provide any additional information that would be material to investors in making an investment decision.

 

22


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2010

(Unaudited)

(In thousands, except par value)

 

    Kraton
Performance
Polymers(1)
  Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
  Eliminations     Consolidated

ASSETS

           

Current Assets

           

Cash and cash equivalents

  $ —     $ —        $ 14,849      $ 24,556   $ —        $ 39,405

Receivables, net of allowance

    —       —          73,102        92,918     —          166,020

Inventories of products, net

    —       —          153,866        150,498     —          304,364

Inventories of materials and supplies, net

    —       —          7,011        3,510     —          10,521

Deferred income taxes

    —       —          —          3,107     —          3,107

Other current assets

    —       3,357        5,223        10,898     —          19,478
                                         

Total current assets

    —       3,357        254,051        285,487     —          542,895

Property, plant and equipment, less accumulated depreciation

    —       80,751        174,270        87,122     —          342,143

Identifiable intangible assets, less accumulated amortization

    —       10,255        16,399        46,910     —          73,564

Investment in consolidated subsidiaries

    384,080     1,053,498        —          —       (1,437,578     —  

Investment in unconsolidated joint venture

    —       400        —          11,704     —          12,104

Deferred financing costs

    —       6,272        —          —       —          6,272

Deferred income taxes

    —       —          —          1,697     (1,697     —  

Other long-term assets

    —       12,625        512,704        201,803     (706,931     20,201
                                         

Total Assets

  $ 384,080   $ 1,167,158      $ 957,424      $ 634,723   $ (2,146,206   $ 997,179
                                         

LIABILITIES AND STOCKHOLDERS’ AND MEMBER’S EQUITY

           

Current Liabilities

           

Current portion of long-term debt

  $ —     $ 2,304      $ —        $ —     $ —        $ 2,304

Accounts payable-trade

    —       2,250        46,493        36,270     —          85,013

Other payables and accruals

    —       9,158        20,904        26,728     —          56,790

Due to related party

    —       —          —          16,833     —          16,833

Insurance note payable

    —       2,566        —          —       —          2,566
                                         

Total current liabilities

    —       16,278        67,397        79,831     —          163,506

Long-term debt, net of current portion

    250     381,273        —          —       —          381,523

Deferred income taxes

    —       17,538        —          —       (1,697     15,841

Other long-term liabilities

    —       377,559        65,811        312,061     (706,931     48,500
                                         

Total liabilities

    250     792,648        133,208        391,892     (708,628     609,370

Commitments and contingencies (note 11)

           

Stockholders’ and Member’s equity

           

Preferred stock, $0.01 par value; 100,000 shares authorized; none issued

           

Common stock, $0.01 par value; 500,000 shares authorized; 30,851 shares issued and outstanding

    309     —          —          —       —          309

Additional paid in capital

    325,145     —          —          —       —          325,145

Member’s equity

    —       384,080        834,790        218,708     (1,437,578     —  

Retained Earnings

    58,376     —          —          —       —          58,376

Accumulated other comprehensive income

    —       (9,570     (10,574     24,123     —          3,979
                                         

Total stockholders’ and member’s equity

    383,830     374,510        824,216        242,831     (1,437,578     387,809
                                         

Total Liabilities and Stockholders’ and Member’s Equity.

  $ 384,080   $ 1,167,158      $ 957,424      $ 634,723   $ (2,146,206   $ 997,179
                                         

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

23


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2009

(In thousands, except par value)

 

    Kraton
Performance
Polymers(1)
    Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
  Eliminations     Consolidated  

ASSETS

           

Current Assets

           

Cash and cash equivalents

  $ —        $ —        $ 36,567      $ 32,724   $ —        $ 69,291   

Receivables, net of allowance

    —          —          41,194        74,135     —          115,329   

Inventories of products, net

    —          —          124,003        160,255     —          284,258   

Inventories of materials and supplies, net

    —          —          6,830        4,032     —          10,862   

Deferred income taxes

    —          —          —          3,107     —          3,107   

Other current assets

    —          1,086        1,421        14,263     —          16,770   
                                             

Total current assets

    —          1,086        210,015        288,516     —          499,617   

Property, plant and equipment, less accumulated depreciation

    —          85,284        171,024        98,552     —          354,860   

Identifiable intangible assets, less accumulated amortization

    —          13,541        15,322        46,938     —          75,801   

Investment in consolidated subsidiaries

    312,164        971,995        —          —       (1,284,159     —     

Investment in unconsolidated joint venture

    —          813        —          11,265     —          12,078   

Deferred financing costs

    —          7,309        —          9     —          7,318   

Deferred income taxes

    34        —          —          —       (34     —     

Other long-term assets

    —          1,142        468,794        95,054     (540,165     24,825   
                                             

Total Assets

  $ 312,198      $ 1,081,170      $ 865,155      $ 540,334   $ (1,824,358   $ 974,499   
                                             

LIABILITIES AND STOCKHOLDERS’ AND MEMBER’S EQUITY

           

Current Liabilities

           

Current portion of long-term debt

  $ —        $ 2,304      $ —        $ —     $ —        $ 2,304   

Accounts payable-trade

    —          2,699        37,732        53,063     —          93,494   

Other payables and accruals

    —          18,251        15,010        35,118     (108     68,271   

Due to related party

    —          —          —          19,006     —          19,006   
                                             

Total current liabilities

    —          23,254        52,742        107,187     (108     183,075   

Long-term debt, net of current portion

    250        382,425        —          —       —          382,675   

Deferred income taxes

    —          12,858        —          630     —          13,488   

Other long-term liabilities

    —          351,353        47,494        187,721     (540,091     46,477   
                                             

Total liabilities

    250        769,890        100,236        295,538     (540,199     625,715   

Commitments and contingencies (note 11)

           

Stockholders’ and Member’s equity

           

Preferred stock, $0.01 par value; 100,000 shares authorized; none issued

           

Common stock, $0.01 par value; 500,000 shares authorized; 29,709 shares issued and outstanding

    297        —          —          —       —          297   

Additional paid in capital

    311,665        —          —          —       —          311,665   

Member’s equity

    —          312,164        775,493        196,502     (1,284,159     —     

Retained Earnings

    (14     —          —          —       —          (14

Accumulated other comprehensive income

    —          (884     (10,574     48,294     —          36,836   
                                             

Total stockholders’ and member’s equity

    311,948        311,280        764,919        244,796     (1,284,159     348,784   
                                             

Total Liabilities and Stockholders’ and Member’s Equity

  $ 312,198      $ 1,081,170      $ 865,155      $ 540,334   $ (1,824,358   $ 974,499   
                                             

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

24


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three months ended June 30, 2010

(Unaudited)

(In thousands)

 

    Kraton
Performance
Polymers(1)
  Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
  Eliminations     Consolidated

Operating Revenues

           

Sales

  $ —     $ —        $ 179,710      $ 190,659   $ (38,283   $ 332,086
                                         

Total operating revenues

    —       —          179,710        190,659     (38,283     332,086

Cost of Goods Sold

    —       —          120,224        161,032     (38,283     242,973
                                         

Gross Profit

    —       —          59,486        29,627     —          89,113
                                         

Operating Expenses

           

Research and development expenses

    —       —          3,526        2,046     —          5,572

Selling, general and administrative expenses

    —       13        16,167        5,592     —          21,772

Depreciation and amortization of identifiable intangibles

    —       3,909        5,887        2,173     —          11,969
                                         

Total operating expenses

    —       3,922        25,580        9,811     —          39,313
                                         

Earnings in Consolidated Subsidiaries

    38,629     47,939        —          —       (86,568     —  

Earnings of Unconsolidated Joint Venture

    —       —          —          162     —          162

Interest Expense (Income), net

    —       8,274        (2,871     869     —          6,272
                                         

Income Before Income Taxes

    38,629     35,743        36,777        19,109     (86,568     43,690

Income Tax Expense (Benefit)

    34     (2,886     566        7,381     —          5,095
                                         

Net Income

  $ 38,595   $ 38,629      $ 36,211      $ 11,728   $ (86,568   $ 38,595
                                         

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

25


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three months ended June 30, 2009

(Unaudited)

(In thousands)

 

    Kraton
Performance
Polymers(1)
    Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating Revenues

           

Sales

  $ —        $ —        $ 122,112      $ 151,539      $ (39,910   $ 233,741   

Other

    1        —          —          10,079        —          10,080   
                                               

Total operating revenues

    1        —          122,112        161,618        (39,910     243,821   

Cost of Goods Sold

    2        5,449        95,779        146,740        (39,910     208,060   
                                               

Gross Profit

    (1     (5,449     26,333        14,878        —          35,761   
                                               

Operating Expenses

           

Research and development expenses

    —          —          3,485        1,586        —          5,071   

Selling, general and administrative expenses

    1        (272     9,123        9,200        —          18,052   

Depreciation and amortization of identifiable intangibles

    —          3,973        5,522        3,047        —          12,542   
                                               

Total operating expenses

    1        3,701        18,130        13,833        —          35,665   
                                               

Gain on Extinguishment of Debt

    —          4,340        —          —          —          4,340   

Earnings of Consolidated Subsidiaries

    (4,178     12,781        —          —          (8,603     —     

Earnings of Unconsolidated Joint Venture

    —          —          —          102        —          102   

Interest Expense (Income), net

    5        9,725        (2,746     848        —          7,832   
                                               

Income (Loss) Before Income Taxes

    (4,185     (1,754     10,949        299        (8,603     (3,294

Income Tax Expense (Benefit)

    —          2,424        33        (1,566     —          891   
                                               

Net Income (Loss)

  $ (4,185   $ (4,178   $ 10,916      $ 1,865      $ (8,603   $ (4,185
                                               

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

26


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Six months ended June 30, 2010

(Unaudited)

(In thousands)

 

    Kraton
Performance
Polymers(1)
  Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
  Eliminations     Consolidated

Operating Revenues

           

Sales

  $ —     $ —        $ 344,208      $ 333,343   $ (72,733   $ 604,818
                                         

Total operating revenues

    —       —          344,208        333,343     (72,733     604,818

Cost of Goods Sold

    —       —          240,286        279,025     (72,733     446,578
                                         

Gross Profit

    —       —          103,922        54,318     —          158,240
                                         

Operating Expenses

           

Research and development expenses

    —       —          7,080        4,476     —          11,556

Selling, general and administrative expenses

    —       (82     32,694        11,222     —          43,834

Depreciation and amortization of identifiable intangibles

    —       7,818        11,712        3,485     —          23,015
                                         

Total operating expenses

    —       7,736        51,486        19,183     —          78,405
                                         

Earnings in Consolidated Subsidiaries

    58,424     79,762        —          —       (138,186     —  

Earnings of Unconsolidated Joint Venture

    —       —          —          236     —          236

Interest Expense (Income), net

    —       16,581        (5,654     1,409     —          12,336
                                         

Income Before Income Taxes

    58,424     55,445        58,090        33,962     (138,186     67,735

Income Tax Expense (Benefit)

    34     (2,979     566        11,724     —          9,345
                                         

Net Income

  $ 58,390   $ 58,424      $ 57,524      $ 22,238   $ (138,186   $ 58,390
                                         

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

27


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Six months ended June 30, 2009

(Unaudited)

(In thousands)

 

    Kraton
Performance
Polymers(1)
    Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating Revenues

  

 

Sales

  $ —        $ —        $ 218,973      $ 273,425      $ (80,791   $ 411,607   

Other

    —          —          —          17,172        —          17,172   
                                               

Total operating revenues

    —          —          218,973        290,597        (80,791     428,779   

Cost of Goods Sold

    —          (3,706     191,552        277,030        (80,791     384,085   
                                               

Gross Profit

    —          3,706        27,421        13,567        —          44,694   
                                               

Operating Expenses

           

Research and development expenses

    —          —          6,060        3,980        —          10,040   

Selling, general and administrative expenses

    —          (625     19,354        17,574        —          36,303   

Depreciation and amortization of identifiable intangibles

    —          8,141        11,025        5,940        —          25,106   
                                               

Total operating expenses

    —          7,516        36,439        27,494        —          71,449   
                                               

Gain on Extinguishment of Debt

    —          23,831        —          —          —          23,831   

Earnings of Consolidated Subsidiaries

    (20,644     (18,948     —          —          39,592        —     

Earnings of Unconsolidated Joint Venture

    —          —          —          176        —          176   

Interest Expense (Income), net

    5        19,858        (5,471     2,346        —          16,738   
                                               

Income (Loss) Before Income Taxes

    (20,649     (18,785     (3,547     (16,097     39,592        (19,486

Income Tax Expense (Benefit)

    (3     1,859        67        (763     —          1,160   
                                               

Net Loss

  $ (20,646   $ (20,644   $ (3,614   $ (15,334   $ 39,592      $ (20,646
                                               

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

28


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six months ended June 30, 2010

(Unaudited)

(In thousands)

 

    Kraton
Performance
Polymers(1)
    Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows provided by (used in) operating activities

  $ —        $ (12,315   $ 6,231      $ (44,953   $ —        $ (51,037

Cash flows provided by (used in) investing activities

           

Proceeds from (payments on) intercompany loans

    —          (849     —          —          849        —     

Purchase of plant and equipment, net of proceeds from sales of equipment

    —          —          (14,178     (3,367     —          (17,545

Purchase of software

    —          —          (1,857     —          —          (1,857
                                               

Net cash provided by (used in) investing activities

    —          (849     (16,035     (3,367     849        (19,402
                                               

Cash flows provided by (used in) financing activities

           

Proceeds from debt

    —          69,000        —          —          —          69,000   

Repayment of debt

    —          (70,152     —          —          —          (70,152

Cash contribution from member

    —          11,750        —          —          (11,750     —     

Cash distribution to member

    (11,750     —          —          —          11,750        —     

Proceeds from issuance of common stock

    11,197        —          —          —          —          11,197   

Proceeds from stock based compensation

    1,087        —          —          —          —          1,087   

Costs associated with the issuance of common stock

    (534     —          —          —          —          (534

Proceeds from insurance note payable

    —          3,518        —          —          —          3,518   

Repayment of insurance note payable

    —          (952     —          —          —          (952

Proceeds from (payments on) intercompany loans

    —          —          (11,914     12,763        (849     —     
                                               

Net cash provided by (used in) financing activities

    —          13,164        (11,914     12,763        (849     13,164   
                                               

Effect of exchange rate differences on cash

    —          —          —          27,389        —          27,389   
                                               

Net decrease in cash and cash equivalents

    —          —          (21,718     (8,168     —          (29,886

Cash and cash equivalents at beginning of period

    —          —          36,567        32,724        —          69,291   
                                               

Cash and cash equivalents at end of period

  $ —        $ —        $ 14,849      $ 24,556      $ —        $ 39,405   
                                               

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

29


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six months ended June 30, 2009

(Unaudited)

(In thousands)

 

    Kraton
Performance
Polymers(1)
  Kraton(2)     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows provided by (used in) operating activities

  $ —     $ (22,334   $ 19,861      $ 7,180      $ —        $ 4,707   

Cash flows provided by (used in) investing activities

           

Proceeds from (payments on) intercompany loans

      81,656            (81,656     —     

Purchase of property, plant and equipment, net of proceeds from sales of equipment

    —       —          (15,562     (577     —          (16,139

Purchase of Software

        (6,685         (6,685
                                             

Net cash provided by (used in) investing activities

    —       81,656       (22,247     (577     (81,656 )     (22,824
                                             

Cash flows provided by (used in) financing activities

           

Proceeds from debt

    —       53,000        —          —          —          53,000   

Repayment of debt

    —       (115,341     —          —          —          (115,341

Proceeds from (payments on) intercompany loans

    —       —          (60,588     (21,068     81,656        —     

Proceeds from insurance note payable

    —       4,506        —          —          —          4,506   

Repayment of insurance note payable

    —       (1,487     —          —          —          (1,487
                                             

Net cash provided by (used in) financing activities

    —       (59,322     (60,588     (21,068     81,656       (59,322
                                             

Effect of exchange rate differences on cash

    —       —          —          (6,247     —          (6,247
                                             

Net decrease in cash and cash equivalents

    —       —          (62,974     (20,712     —          (83,686

Cash and cash equivalents at beginning of period

    —       —          65,460        35,936        —          101,396   
                                             

Cash and cash equivalents at end of period

  $ —     $ —        $ 2,486      $ 15,224      $ —        $ 17,710   
                                             

 

(1) Kraton Performance Polymers and Polymer Holdings Capital Corporation are the issuers of the 12% Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the issuers would provide additional information that would be useful.
(2) Kraton and Kraton Polymers Capital Corporation are the issuers of the 8.125% Notes. Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

 

30


Index to Financial Statements

KRATON PERFORMANCE POLYMERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

16. Subsequent Events

During the first quarter of 2010, we received a communication from a law firm asserting that approximately $13.5 million in alleged payments to us from SemGroup, L.P. and/or one or more of its affiliates (collectively “SemGroup”) during the 90-day period preceding SemGroup’s Chapter 11 bankruptcy filing on July 22, 2008 appear to constitute preferential payments avoidable and recoverable under sections 547 and 550 of the United States Bankruptcy Code. This matter was settled for a de minimis sum in July 2010 in a manner which provides Kraton with a release of claims in connection with the matter. This resolution is final and completed and will not have a material adverse impact on our business, financial condition or results of operations.

We have evaluated significant events and transactions that have occurred and have determined that there were no other events or transactions other than those disclosed in this report that would require recognition or disclosure in our Condensed Consolidated Financial Statements for the quarterly period ended June 30, 2010.

 

31


Index to Financial Statements

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

     June 30,
2010
   December 31,
2009

ASSETS

     

Current Assets

     

Cash and cash equivalents

   $ 39,405    $ 69,291

Receivables, net of allowances $1,232 and $1,335

     166,020      115,329

Inventories of products, net

     304,364      284,258

Inventories of materials and supplies, net

     10,521      10,862

Deferred income taxes

     3,107      3,107

Other current assets

     19,478      16,770
             

Total current assets

     542,895      499,617

Property, plant and equipment, less accumulated depreciation of $212,794 and $236,558

     342,143      354,860

Identifiable intangible assets, less accumulated amortization of $46,836 and $42,741

     73,564      75,801

Investment in unconsolidated joint venture

     12,104      12,078

Deferred financing costs

     6,272      7,318

Other long-term assets

     20,201      24,825
             

Total Assets

   $ 997,179    $ 974,499
             

LIABILITIES AND MEMBER’S EQUITY

     

Current Liabilities

     

Current portion of long-term debt

   $ 2,304    $ 2,304

Accounts payable-trade

     85,013      93,494

Other payables and accruals

     56,790      68,305

Due to related party

     16,833      19,006

Insurance note payable

     2,566      —  
             

Total current liabilities

     163,506      183,109

Long-term debt, net of current portion

     381,273      382,425

Deferred income taxes

     15,841      13,488

Other long-term liabilities

     48,500      46,477
             

Total Liabilities

     609,120      625,499
             

Commitments and contingencies (note 10)

     

Member’s equity

     

Common equity

     384,080      312,164

Accumulated other comprehensive income

     3,979      36,836

Total member’s equity

     388,059      349,000
             

Total Liabilities and Member’s Equity

   $ 997,179    $ 974,499
             

See Notes to Condensed Consolidated Financial Statements

 

32


Index to Financial Statements

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

Operating Revenues

          

Sales

   $ 332,086    $ 233,741      $ 604,818    $ 411,607   

Other

     —        10,080        —        17,172   
                              

Total operating revenues

     332,086      243,821        604,818      428,779   

Cost of Goods Sold

     242,973      208,060        446,578      384,085   
                              

Gross Profit

     89,113      35,761        158,240      44,694   
                              

Operating Expenses

          

Research and development

     5,572      5,071        11,556      10,040   

Selling, general and administrative

     21,772      18,052        43,834      36,303   

Depreciation and amortization of identifiable intangibles

     11,969      12,542        23,015      25,106   
                              

Total operating expenses

     39,313      35,665        78,405      71,449   
                              

Gain on Extinguishment of Debt

     —        4,340        —        23,831   

Earnings of Unconsolidated Joint Venture

     162      102        236      176   

Interest Expense, net

     6,272      7,825        12,336      16,733   
                              

Income (Loss) Before Income Taxes

     43,690      (3,287     67,735      (19,481

Income Tax Expense

     5,061      891        9,311      1,163   
                              

Net Income (Loss)

   $ 38,629    $ (4,178   $ 58,424    $ (20,644
                              

See Notes to Condensed Consolidated Financial Statements

 

33


Index to Financial Statements

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

    Six months ended
June 30,
 
    2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES

   

Net income (loss)

  $ 58,424      $ (20,644

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

   

Depreciation and amortization of identifiable intangibles

    23,015        25,106   

Inventory impairment

    —          669   

Amortization of deferred financing costs

    1,036        1,582   

Loss on disposal of fixed assets

    3        431   

Gain on extinguishment of debt

    —          (23,831

Change in fair value of interest rate swaps

    (450     (842

Distributed earnings in unconsolidated joint venture

    167        257   

Deferred income tax expense

    3,853        (907

Non-cash compensation related to equity awards

    1,771        1,237   

Decrease (increase) in

   

Accounts receivable

    (60,335     (29,542

Inventories of products, materials and supplies

    (39,002     90,670   

Other assets

    (30,167     (6,365

(Decrease) in

   

Accounts payable-trade, other payables and accruals, and other long-term liabilities

    (6,478     (18,564

Due to related party

    (2,874     (14,550
               

Net cash provided by (used in) operating activities

    (51,037     4,707   
               

CASH FLOWS FROM INVESTING ACTIVITIES

   

Purchase of property, plant and equipment

    (17,545     (19,972

Purchase of software

    (1,857     (6,685

Proceeds from sale of property, plant and equipment

    —          3,833   
               

Net cash used in investing activities

    (19,402     (22,824
               

CASH FLOWS FROM FINANCING ACTIVITIES

   

Proceeds from debt

    69,000        53,000   

Repayment of debt

    (70,152     (115,341

Cash contribution from member

    11,750        —     

Proceeds from insurance note payable

    3,518        4,506   

Repayment of insurance note payable

    (952     (1,487
               

Net cash provided by (used in) financing activities

    13,164        (59,322
               

Effect of exchange rate differences on cash

    27,389        (6,247
               

Net decrease in cash and cash equivalents

    (29,886     (83,686

Cash and cash equivalents, beginning of period

    69,291        101,396   
               

Cash and cash equivalents, end of period

  $ 39,405      $ 17,710   
               

Supplemental Disclosures

   

Cash paid during the period for income taxes, net of refunds received

  $ 2,026      $ 7,455   

Cash paid during the period for interest

  $ 12,192      $ 16,489   

See Notes to Condensed Consolidated Financial Statements

 

34


Index to Financial Statements

KRATON POLYMERS LLC

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. General

Organization and Description of Business. Kraton Polymers LLC, together with its direct and indirect subsidiaries, are, unless the context requires otherwise, collectively referred to herein as “we,” “our,” “ours,” “us” or “Kraton.” Kraton directly or indirectly owns 100% of the equity interests in (1) Elastomers Holdings LLC (holding company of Kraton’s U.S. operations), (2) K.P. Global Holdings C.V. (holding company of the remainder of our global operations) and (3) Kraton Polymers Capital Corporation (a finance subsidiary with no operations). We believe we are the world’s leading producer in terms of sales revenues of styrenic block copolymers, or SBCs, a family of performance polymer products whose chemistry we pioneered almost 50 years ago. SBCs are highly-engineered synthetic elastomers that enhance the performance of numerous products by delivering a variety of performance-enhancing characteristics, including greater flexibility, resilience, strength, durability and processability. SBCs are a fast growing subset of the elastomers industry. Our polymers are typically formulated or compounded with other products to achieve improved customer specific performance characteristics in a variety of applications. We manufacture products at five plants globally, including our flagship plant in Belpre, Ohio, the most diversified SBC plant in the world, as well as plants in Germany, France, Brazil and Japan. The plant in Japan is operated by an unconsolidated manufacturing joint venture.

Basis of Presentation. The accompanying Condensed Consolidated Financial Statements presented herein are for Kraton and its consolidated subsidiaries, each of which is a wholly-owned subsidiary. 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 year ended December 31, 2009, as amended, and reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present our results of operations and financial position. Amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods, in particular due to the effect of seasonal changes and weather conditions that typically affect our polymer product sales into our Paving and Roofing end use market.

Our significant accounting policies have been disclosed in Note 1 Summary of Operations and Significant Accounting Policies in our most recent Annual Report on Form 10-K, as amended. There have been no changes to the policies disclosed therein. The accompanying Condensed Consolidated Financial Statements presented herein have been prepared in accordance with those policies.

Use of Estimates. The preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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 fixed assets; allowances for doubtful accounts and sales returns; the valuation of derivatives, deferred tax assets, property, plant and equipment, inventory, investments and share-based compensation; and liabilities for employee benefit obligations, asset retirement obligations, income tax uncertainties and other contingencies.

Income Tax in Interim Periods. Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to

 

35


Index to Financial Statements

KRATON POLYMERS LLC

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which no benefit can be realized. In addition, the effects of unusual and infrequent items are recognized in the impacted interim period as discrete items. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and our projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised. Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carry-forwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize 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. Failure to achieve our operating income targets 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. An increase in a valuation allowance would result in additional income tax expense and lower member’s equity and could have a significant impact on our earnings in future periods. The release of valuation allowances in periods when these tax attributes become realizable would reduce our effective tax rate.

Correction of immaterial errors. We have corrected immaterial errors in the accompanying Condensed Consolidated Statements of Operations related to cost of goods sold for the three months ended March 31, 2010. The correction increased cost of goods sold and decreased inventory by $3.0 million. The correction is not material to our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010.

2. New Accounting Pronouncements.

Adoption of Accounting Standards

We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.

Future Adoption of Accounting Standards

The following new accounting pronouncement has been issued, but has not yet been adopted as of June 30, 2010:

In October 2009, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (“ASU”), Number 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force.” This update amends the revenue recognition guidance for arrangements with multiple deliverables. The amendments allow vendors to account for products and services separately rather than as a combined unit. A selling price hierarchy for determining the selling price of each deliverable is established in this ASU, along with eliminating the residual method. The amendments are effective for revenue arrangements that begin or are changed in fiscal years that start June 15, 2010 or later. We are in the process of assessing the provisions of this new guidance and currently do not expect that the adoption will have a material impact on our consolidated financial statements.

 

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Index to Financial Statements

KRATON POLYMERS LLC

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

3. Share-Based Compensation

We account for share-based awards under the provisions of ASC 718, “Stock Compensation,” which established the accounting for share-based awards exchanged for employee services. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. We record non-cash compensation expense for the restricted stock awards, notional units and stock options over the vesting period using the straight-line method. We awarded 22,202 shares of restricted stock during the six months ended June 30, 2010.

Information pertaining to option activity for the six months ended June 30, 2010 is as follows:

 

     Options     Weighted-
Average
Exercise
Price
     (in thousands)      

Outstanding at December 31, 2009

   1,585      $ 13.51

Granted

   612        15.39

Exercised

   (81     13.51

Cancelled

   (3     13.51
            

Outstanding at June 30, 2010

   2,113      $ 14.05
            

Exercisable at June 30, 2010

   1,165      $ 13.51
            

We value stock options issued using the Black-Scholes Merton option-pricing model and there have been no changes to our methodology disclosed in our most recently filed Annual Report on Form 10-K, as amended.

4. Restructuring and Restructuring-Related Costs

As part of our ongoing efforts to improve efficiencies and increase productivity, we have implemented a number of restructuring initiatives in recent years.

We ceased production at our Pernis, the Netherlands, facility on December 31, 2009, where, prior to the exit, we manufactured isoprene rubber. In connection with the exit, we incurred $3.9 million in asset retirement obligations (“ARO”), $6.0 million in restructuring costs and a $1.1 million non-cash charge to write-down our inventory of spare parts.

For the six months ended June 30, 2010, the original estimated ARO of $3.9 million was reduced to $2.6 million as a result of our completing the exit of the facility two months earlier than originally anticipated. As a result, included in depreciation and amortization of intangible assets in the six months ended June 30, 2010 is a reduction in the accrued restructuring cost, which lowered depreciation expense by approximately $1.3 million. The following is a summary of the 2010 activity associated with the exit of the Pernis facility: