Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Kraton Corpkraexhibit311q12015.htm
EX-32.1 - EXHIBIT 32.1 - Kraton Corpkraexhibit321q12015.htm
EX-31.2 - EXHIBIT 31.2 - Kraton Corpkraexhibit312q12015.htm
EXCEL - IDEA: XBRL DOCUMENT - Kraton CorpFinancial_Report.xls
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34581
 
KRATON PERFORMANCE POLYMERS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 

Delaware
20-0411521
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
15710 John F. Kennedy Blvd.
Suite 300
Houston, TX 77032
281-504-4700
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
 
  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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  ý    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:
ý
 
Accelerated filer:
¨
Non-accelerated filer:
¨
 
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  ý
Number of shares of Kraton Performance Polymers, Inc. Common Stock, $0.01 par value, outstanding as of April 27, 2015: 31,328,930.

 


Index to Quarterly Report
on Form 10-Q for
Quarter Ended March 31, 2015
 
 
PART I. FINANCIAL INFORMATION
Page
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
  

2


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 “outlook,” “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans” or “anticipates,” or by discussions of strategy, plans or intentions; anticipated benefits of or performance of our products; beliefs regarding opportunities for new, high-margin applications and other innovations; adequacy of cash flows to fund our working capital requirements; our investment in the joint venture with Formosa Petrochemical Corporation (“FPCC”); our expectations regarding indebtedness to be incurred by our joint venture with FPCC; debt payments, interest payments, benefit plan contributions, and income tax obligations; our anticipated 2015 capital expenditures, compliance with the MACT rule, health, safety and environmental and infrastructure and maintenance projects, projects to optimize the production capabilities of our manufacturing assets and to support our innovation platform; our ability to fully access our senior secured credit facilities; expectations regarding our counterparties’ ability to perform, including with respect to trade receivables; estimates regarding the tax expense of repatriating certain cash and short-term investments related to foreign operations; expectations regarding high-margin applications; our ability to realize certain deferred tax assets and our beliefs with respect to tax positions; expectations regarding our full year effective tax rate; estimates related to the useful lives of certain assets for tax purposes; expectations regarding our pension contributions for fiscal year 2015; estimates or expectations related to monomer costs, ending inventory levels and related estimated charges; the outcome and financial impact of legal proceedings; expectations regarding the spread between FIFO and ECRC in future periods; the estimates and matters described under the caption “Item 2. Management's Discussion and Analysis—Results of Operations—Outlook” and projections regarding environmental costs and capital expenditures and related operational savings. 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 this report, in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other filings with the Securities and Exchange Commission, and include, but are not limited to, risks related to:
our reliance on LyondellBasell Industries for the provision of significant operating and other services;
conditions in the global economy and capital markets;
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;
significant fluctuations in raw material costs may result in volatility in our quarterly operating results and impact the market price of our common stock;
competition from other producers of styrenic block copolymers and from 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;
the possibility that our products infringe upon the intellectual property rights of others;
a major failure of our information systems, which could harm our business;
seasonality in our business, particularly for sales into paving and roofing applications;
our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations under the senior secured credit facilities, the senior notes, and the KFPC loan agreement;
financial and operating constraints related to our indebtedness;

3


the inherently hazardous nature of chemical manufacturing;
product liability claims and other lawsuits arising from environmental damage, personal injuries, other damages associated with chemical manufacturing or our products;
lawsuits arising from the termination of the Combination Agreement with LCY Chemical Corp.;
political, economic and local business risks in the various countries in which we operate;
health, safety and environmental laws, including laws that govern our employees’ exposure to chemicals deemed harmful to humans;
regulation of our company or our customers, which could affect the demand for our products or result in increased compliance and other costs;
customs, 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;
fluctuations in currency exchange rates;
we may have additional tax liabilities;
our formation of a joint venture to expand HSBC capacity in Asia;
our relationship with our employees;
loss of key personnel or our inability to attract and retain new qualified personnel;
the fact that we generally do not enter into long-term contracts with our customers;
a decrease in the fair value of our pension assets could require us to materially increase future funding requirements of the pension plan;
domestic or international natural disasters or terrorist attacks may disrupt our operations;
Delaware law and some provisions of our organizational documents that make a takeover of our company more difficult;
our expectation that we will not pay dividends for the foreseeable future; and
we are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.
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.

Presentation of Financial Statements
The terms “Kraton,” “our company,” “we,” “our,” “ours” and “us” as used in this report refer collectively to Kraton Performance Polymers, Inc. and its consolidated subsidiaries.
This Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations, comprehensive loss, and cash flows of Kraton and its subsidiaries. Kraton is a holding company whose only material asset is its investment in its wholly owned subsidiary, Kraton Polymers LLC. Kraton Polymers LLC and its subsidiaries own all of our consolidated operating assets.

4


Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kraton Performance Polymers, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Kraton Performance Polymers, Inc. and subsidiaries (the Company) as of March 31, 2015, and the related condensed consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for the three-month periods ended March 31, 2015 and 2014. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Houston, Texas
April 30, 2015

5



PART I. FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements.

KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 
 
March 31, 2015
 
December 31, 2014
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
39,791

 
$
53,818

Receivables, net of allowances of $301 and $245
121,004

 
107,432

Inventories of products
279,438

 
326,992

Inventories of materials and supplies
10,782

 
10,968

Deferred income taxes
7,487

 
7,247

Other current assets
22,406

 
24,521

Total current assets
480,908

 
530,978

Property, plant and equipment, less accumulated depreciation of $382,482 and $387,463
455,644

 
451,765

Intangible assets, less accumulated amortization of $91,723 and $88,939
48,518

 
49,610

Investment in unconsolidated joint venture
11,235

 
12,648

Debt issuance costs
6,473

 
7,153

Deferred income taxes
2,142

 
2,176

Other long-term assets
26,532

 
28,122

Total assets
$
1,031,452

 
$
1,082,452

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
135

 
$
87

Accounts payable-trade
51,210

 
72,786

Other payables and accruals
41,169

 
50,888

Deferred income taxes
1,431

 
1,633

Due to related party
15,573

 
18,121

Total current liabilities
109,518

 
143,515

Long-term debt, net of current portion
392,517

 
351,785

Deferred income taxes
11,853

 
15,262

Other long-term liabilities
102,499

 
103,739

Total liabilities
616,387

 
614,301

Commitments and contingencies (note 10)

 

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

 

Common stock, $0.01 par value; 500,000 shares authorized; 31,377 shares issued and outstanding at March 31, 2015; 31,831 shares issued and outstanding at December 31, 2014
314

 
318

Additional paid in capital
354,644

 
361,342

Retained earnings
154,648

 
168,041

Accumulated other comprehensive loss
(132,302
)
 
(99,218
)
Total Kraton stockholders' equity
377,304

 
430,483

Noncontrolling interest
37,761

 
37,668

Total equity
415,065

 
468,151

Total liabilities and equity
$
1,031,452

 
$
1,082,452


See Notes to Condensed Consolidated Financial Statements
6



KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 
Three months ended
March 31,
 
2015
 
2014
Revenue
$
261,429

 
$
311,656

Cost of goods sold
214,868

 
254,583

Gross profit
46,561

 
57,073

Operating expenses:
 
 
 
Research and development
7,947

 
8,297

Selling, general and administrative
26,949

 
34,218

Depreciation and amortization
15,296

 
16,409

Total operating expenses
50,192

 
58,924

Earnings of unconsolidated joint venture
76

 
117

Interest expense, net
6,120

 
6,338

Loss before income taxes
(9,675
)
 
(8,072
)
Income tax expense
66

 
122

Consolidated net loss
(9,741
)
 
(8,194
)
Net loss attributable to noncontrolling interest
(285
)
 
(285
)
Net loss attributable to Kraton
$
(9,456
)
 
$
(7,909
)
Loss per common share:
 
 
 
Basic
$
(0.30
)
 
$
(0.24
)
Diluted
$
(0.30
)
 
$
(0.24
)
Weighted average common shares outstanding:
 
 
 
Basic
31,067

 
32,162

Diluted
31,067

 
32,162


See Notes to Condensed Consolidated Financial Statements
7



KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
 
 
Three months ended
March 31,
 
2015
 
2014
Net loss attributable to Kraton
$
(9,456
)
 
$
(7,909
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments, net of tax of $0
(33,084
)
 
1,799

Other comprehensive income (loss), net of tax
(33,084
)
 
1,799

Comprehensive loss attributable to Kraton
(42,540
)
 
(6,110
)
Comprehensive income (loss) attributable to noncontrolling interest
93

 
(866
)
Consolidated comprehensive loss
$
(42,447
)
 
$
(6,976
)

See Notes to Condensed Consolidated Financial Statements
8



KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands)
 
 
Common Stock
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Kraton Stockholders' Equity
 
Noncontrolling Interest
 
Total Equity
Balance at December 31, 2013
$
325

 
$
363,590

 
$
170,827

 
$
(21,252
)
 
$
513,490

 
$
40,908

 
$
554,398

Net loss

 

 
(7,909
)
 

 
(7,909
)
 
(285
)
 
(8,194
)
Other comprehensive income (loss)

 

 

 
1,799

 
1,799

 
(581
)
 
1,218

Retired treasury stock from employee tax withholdings

 
(429
)
 

 

 
(429
)
 

 
(429
)
Exercise of stock options
1

 
534

 

 

 
535

 

 
535

Non-cash compensation related
   to equity awards
2

 
3,612

 

 

 
3,614

 

 
3,614

Balance at March 31, 2014
$
328

 
$
367,307

 
$
162,918

 
$
(19,453
)
 
$
511,100

 
$
40,042

 
$
551,142

Balance at December 31, 2014
$
318

 
$
361,342

 
$
168,041

 
$
(99,218
)
 
$
430,483

 
$
37,668

 
$
468,151

Net loss

 

 
(9,456
)
 

 
(9,456
)
 
(285
)
 
(9,741
)
Other comprehensive income (loss)

 

 

 
(33,084
)
 
(33,084
)
 
378

 
(32,706
)
Retired treasury stock from employee tax withholdings

 
(548
)
 

 

 
(548
)
 

 
(548
)
Retired treasury stock from share repurchases
(7
)
 
(8,937
)
 
(3,937
)
 

 
(12,881
)
 

 
(12,881
)
Exercise of stock options

 
181

 

 

 
181

 

 
181

Non-cash compensation related to equity awards
3

 
2,606

 

 

 
2,609

 

 
2,609

Balance at March 31, 2015
$
314

 
$
354,644

 
$
154,648

 
$
(132,302
)
 
$
377,304

 
$
37,761

 
$
415,065


See Notes to Condensed Consolidated Financial Statements
9



KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three months ended
March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Consolidated net loss
$
(9,741
)
 
$
(8,194
)
Adjustments to reconcile consolidated net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
15,296

 
16,409

Amortization of debt premium
(42
)
 
(40
)
Amortization of debt issuance costs
551

 
553

Loss (gain) on disposal of property, plant and equipment
17

 
(17
)
Earnings from unconsolidated joint venture, net of dividends received
287

 
370

Deferred income tax benefit
(2,254
)
 
(2,393
)
Share-based compensation
2,609

 
3,614

Decrease (increase) in:
 
 
 
Accounts receivable
(20,464
)
 
(20,748
)
Inventories of products, materials and supplies
35,361

 
(14,300
)
Other assets
177

 
573

Increase (decrease) in:
 
 
 
Accounts payable-trade
(16,958
)
 
(24,362
)
Other payables and accruals
(7,091
)
 
(6,617
)
Other long-term liabilities
(1,688
)
 
582

Due to related party
(2,557
)
 
983

Net cash used in operating activities
(6,497
)
 
(53,587
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Kraton purchase of property, plant and equipment
(14,725
)
 
(15,205
)
KFPC purchase of property, plant and equipment
(15,968
)
 
(4,980
)
Purchase of software and other intangibles
(541
)
 
(1,062
)
Net cash used in investing activities
(31,234
)
 
(21,247
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from debt
25,000

 

Repayments of debt
(5,000
)
 

KFPC proceeds from debt
19,977

 

Capital lease payments
(32
)
 
(3,011
)
Purchase of treasury stock
(13,429
)
 
(429
)
Proceeds from the exercise of stock options
181

 
535

Net cash provided by (used in) financing activities
26,697

 
(2,905
)
Effect of exchange rate differences on cash
(2,993
)
 
(814
)
Net decrease in cash and cash equivalents
(14,027
)
 
(78,553
)
Cash and cash equivalents, beginning of period
53,818

 
175,872

Cash and cash equivalents, end of period
$
39,791

 
$
97,319

Supplemental disclosures:
 
 
 
Cash paid during the period for income taxes, net of refunds received
$
1,963

 
$
2,293

Cash paid during the period for interest, net of capitalized interest
$
11,183

 
$
11,608

Capitalized interest
$
1,016

 
$
636

Supplemental non-cash disclosures:
 
 
 
Property, plant and equipment accruals
$
3,410

 
$
15,168

Asset acquired through capital lease
$
681

 
$
7,033


See Notes to Condensed Consolidated Financial Statements
10



KRATON PERFORMANCE POLYMERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General
Description of our Business. We are a leading global producer of styrenic block copolymers (“SBCs”) and other engineered polymers. SBCs are highly-engineered synthetic elastomers, which we invented and commercialized almost 50 years ago, that enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability and processability. 
Our polymers are typically formulated or compounded with other products to achieve improved, customer-specific performance characteristics in a variety of applications. We seek to maximize the value of our product portfolio by emphasizing complex or specialized polymers and innovations that yield higher margins than more commoditized products. We refer to these complex or specialized polymers or innovations as being more “differentiated.”
Our products are found in many everyday applications, including personal care products such as disposable diapers and the rubberized grips of toothbrushes, razor blades and power tools. Our products are also used to impart tack and shear properties in a wide variety of adhesive products and to impart characteristics such as flexibility and durability in sealants and corrosion resistance in coatings. Our paving and roofing applications provide durability, extending road and roof life.
We also produce CariflexTM isoprene rubber and isoprene rubber latex. Our Cariflex products are based on synthetic polyisoprene polymer and do not contain natural rubber latex or other natural rubber products making them an ideal substitute for natural rubber latex, particularly in applications with high purity requirements such as medical, healthcare, personal care and food contact. We believe the versatility of Cariflex products provides opportunities for new, high margin applications.
We manufacture our polymers at five manufacturing facilities globally, including our flagship facility in Belpre, Ohio, as well as facilities in Germany, France, Brazil and Japan. The facility in Japan is operated by an unconsolidated manufacturing joint venture. The terms “Kraton,” “our company,” “we,” “our,” “ours” and “us” as used in this report refer collectively to Kraton Performance Polymers, Inc. and its consolidated subsidiaries.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements presented herein are for us and our consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in our joint venture, Kraton Formosa Polymers Corporation (“KFPC”), located in Mailiao, Taiwan. KFPC is a variable interest entity for which we have determined that we are the primary beneficiary and, therefore, have consolidated into our financial statements. Our 50% investment in our joint venture located in Kashima, Japan is accounted for under the equity method of accounting. All significant intercompany transactions have been eliminated. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods or any other interim period, in particular due to the effect of seasonal changes and weather conditions that typically affect our sales into paving and roofing applications.
Significant Accounting Policies. Our significant accounting policies have been disclosed in Note 1 Description of Business, Basis of Presentation and Significant Accounting Policies in our most recent Annual Report on Form 10-K. There have been no changes to the policies disclosed therein. The accompanying unaudited condensed consolidated financial statements we present in this report 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.

11



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, environmental matters, asset retirement obligations (“ARO”), income tax uncertainties and other contingencies.
Income Tax in Interim Periods. We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in these condensed consolidated financial statements for each of those jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period.
Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which no benefit can be realized. The effects of unusual and infrequent items are recognized in the impacted interim period as discrete items.
The estimated annual effective tax rate may be significantly affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets to the amount that is deemed more likely than not to be recoverable. Our ability to realize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. If we fail to achieve our operating income targets, we may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. A change in our valuation allowance would impact our income tax expense/benefit and our stockholders’ equity and could have a significant impact on our results of operations or financial condition in future periods.

2. New Accounting Pronouncements
Adoption of Accounting Standards
We have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our financial statements.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. Our evaluation of this standard is currently ongoing and therefore, the effects of this standard on our financial position, results of operations and cash flows are not yet known.
In April 2015, the Financial Accounting Standards Board issued ASU No. 2015-03, Interest-Imputation of Interest. This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of such debt liability. In adopting ASU 2015-03, companies must apply the guidance on a retrospective basis. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and early adoption is permitted. We plan to adopt ASU 2015-03 in accordance with these requirements. We have assessed the impact of this new standard on our Condensed Consolidated Financial Statements and concluded that it would result in reductions of approximately $2.3 million, $6.5 million, and $8.8 million of other current assets, debt issuance costs, and long-term debt, respectively, as of March 31, 2015.


12



3. Share-Based Compensation
We account for share-based awards under the provisions of ASC 718, “Compensation—Stock Compensation.” Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and we expense these costs using the straight-line method over the requisite service period. Share-based compensation expense was $2.6 million and $3.6 million for the three months ended March 31, 2015 and 2014, respectively.

4. Detail of Certain Balance Sheet Accounts
     
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Inventories of products:
 
 
 
Finished products
$
229,033

 
$
253,834

Work in progress
3,769

 
5,552

Raw materials
46,636

 
67,606

Total inventories of products
$
279,438

 
$
326,992

Other payables and accruals:
 
 
 
Employee related
$
14,659

 
$
16,156

Interest payable
2,236

 
7,959

Other
24,274

 
26,773

Total other payables and accruals
$
41,169

 
$
50,888

Other long-term liabilities:
 
 
 
Pension and other postretirement benefits
$
89,157

 
$
86,605

Other
13,342

 
17,134

Total other long-term liabilities
$
102,499

 
$
103,739

Accumulated other comprehensive loss:
 
 
 
Foreign currency translation adjustments
$
(54,954
)
 
$
(21,870
)
Net unrealized loss on net investment hedge
(1,926
)
 
(1,926
)
Benefit plans liability
(75,422
)
 
(75,422
)
Total accumulated other comprehensive loss
$
(132,302
)
 
$
(99,218
)

5. Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income attributable to Kraton by the weighted-average number of shares outstanding during the period.
Diluted EPS is computed by dividing net income attributable to Kraton by the diluted weighted-average number of shares outstanding during the period and, accordingly, reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised, settled or converted into common stock and were dilutive. The diluted weighted-average number of shares used in our diluted EPS calculation is determined using the treasury stock method.
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 therefore, 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 is excluded from the calculation of EPS allocated to common stock. Our restricted stock awards are subject to forfeiture and restrictions on transfer until vested and have identical voting, income and distribution rights to the unrestricted common shares outstanding. Our weighted average restricted stock awards outstanding were 536,790 and 458,319 for the three months ended March 31, 2015 and 2014, respectively. We withheld 27,028 and 15,707 shares of restricted stock upon vesting to satisfy employee payroll tax withholding requirements for the three months ended March 31, 2015 and 2014, respectively. We immediately retired all shares withheld and the transactions were reflected in additional paid in capital in the Condensed Consolidated Statements of Changes in Equity and as a purchase of treasury stock in the Condensed Consolidated Statements of Cash Flows.

13



The computation of diluted EPS excludes weighted average restricted share units of 112,594 and 66,973 for the three months ended March 31, 2015 and 2014 as they are anti-dilutive due to a net loss attributable to Kraton for each period.
The computation of diluted EPS excludes weighted average performance share units of 35,732 for the three months ended March 31, 2015 as they are anti-dilutive due to a net loss attributable to Kraton for this period. The computation of diluted earnings per share also excludes the effect of performance share units for which the performance contingencies had not been met as of the reporting date, amounting to 281,605 and 157,771 as of March 31, 2015 and 2014, respectively.
The computation of diluted earnings per share excludes the effect of the potential exercise of stock options that are anti-dilutive, amounting to 1,591,970 and 1,711,814 for the three months ended March 31, 2015 and 2014, respectively.
The calculations of basic and diluted EPS are as follows:
 
Three months ended March 31, 2015
 
Three months ended March 31, 2014
 
Net Loss Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Loss Per Share
 
Net Loss Attributable to Kraton
 
Weighted Average Shares Outstanding
 
Loss Per Share
 
(In thousands, except per share data)
 
(In thousands, except per share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
As reported
$
(9,456
)
 
31,604

 
 
 
$
(7,909
)
 
32,620

 
 
Amounts allocated to unvested restricted shares
161

 
(537
)
 
 
 
111

 
(458
)
 
 
Amounts available to common stockholders
(9,295
)
 
31,067

 
$
(0.30
)
 
(7,798
)
 
32,162

 
$
(0.24
)
Diluted:
 
 
 
 
 
 
 
 
 
 
 
Amounts allocated to unvested restricted shares
(161
)
 
537

 
 
 
(111
)
 
458

 
 
Amounts reallocated to unvested restricted shares
161

 
(537
)
 
 
 
111

 
(458
)
 
 
Amounts available to stockholders and assumed conversions
$
(9,295
)
 
31,067

 
$
(0.30
)
 
$
(7,798
)
 
32,162

 
$
(0.24
)
Share Repurchase Program. On October 27, 2014, our board of directors approved a share repurchase program through which we may repurchase outstanding shares of our common stock having an aggregate purchase price of up to $50.0 million. We plan to repurchase shares of our common stock over the next two years in the open market at prevailing market prices, through privately negotiated transactions, or through a trading program under Rule 10b5-1, subject to market and business conditions, applicable legal requirements and other considerations. From the inception of the program through March 31, 2015, we have repurchased a total of 1,660,623 shares of our common stock at an average price of $18.97 per share and a total cost of $31.5 million (excluding trading commissions). We are financing the share repurchase program through a combination of cash and debt. We are not obligated to acquire any specific number of shares of our common stock.

6. Long-Term Debt
Long-term debt consists of the following:
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
6.75% unsecured notes
$
350,783

 
$
350,825

KFPC loan agreement
20,135

 

Senior secured credit facilities
20,000

 

Capital lease obligation
1,734

 
1,047

Total debt
392,652

 
351,872

Less current portion of total debt
135

 
87

Long-term debt
$
392,517

 
$
351,785

 
Senior Secured Credit Facilities. In March 2013, we entered into an asset-based revolving credit facility consisting of a $150.0 million U.S. senior secured revolving credit facility (the “U.S. Facility”) and a $100.0 million Dutch senior secured revolving credit facility (the “Dutch Facility,” and together with the U.S. Facility, the “Senior Secured Credit Facilities”). Borrowing under the Senior Secured Credit Facilities is subject to borrowing base limitations based on the level of receivables and inventory available for security.

14



We may request up to an aggregate of $100.0 million of additional revolving facility commitments of which up to an aggregate of $40.0 million may be additional Dutch revolving facility commitments, provided that we satisfy additional conditions described in the Senior Secured Credit Facilities, and provided further that the U.S. revolver commitment is at least 60% of the commitments after giving effect to such increase.
Kraton Polymers U.S. LLC and Kraton Polymers Nederland B.V. are the borrowers under the Senior Secured Credit Facilities, and Kraton Performance Polymers, Inc., Kraton Polymers LLC, Elastomers Holdings LLC and Kraton Polymers Capital Corporation are the guarantors for both the U.S. Facility and the Dutch Facility. In addition, K.P. Global Holdings C.V. and Kraton Polymers Holdings B.V. are guarantors for the Dutch Facility. The Senior Secured Credit Facilities terminate on March 27, 2018; however, we may from time to time request that the lenders extend the maturity of their commitments. Availability under the Senior Secured Credit Facilities is limited to the lesser of the borrowing base and total commitments (less certain reserves).
The Senior Secured Credit Facilities are primarily secured by receivables and inventory. The U.S. Facility provides for borrowings in the United States and is secured by assets located in the United States. The Dutch Facility provides for borrowings outside of the United States and is secured by assets located outside of the United States.
Borrowings under the U.S. Facility (other than swingline loans) bear interest at a rate equal to, at the applicable borrower’s option, either (a) a base rate determined by reference to the greater of (1) the prime rate of Bank of America, N.A., (2) the federal funds rate plus 0.5% and (3) LIBOR plus 1.0%, or (b) a rate based on LIBOR, in each case plus an applicable margin. U.S. swingline loans shall bear interest at a base rate determined by reference to the greater of (1) the prime rate of Bank of America, N.A., (2) the federal funds rate plus 0.5% or (3) LIBOR plus 1.0%, in each case plus an applicable margin.
Borrowings under the Dutch Facility (other than swingline loans) bear interest at a rate equal to, at the applicable borrower’s option, either (a) a fluctuating rate, with respect to Euros, Pounds Sterling and Dollars outside of the U.S. and Canada, equal to the rate announced by the European Central Bank and used as a base rate by the local branch of Bank of America in the jurisdiction in which such currency is funded, or (b) a rate based on LIBOR, in each case plus an applicable margin. Dutch swingline loans shall bear interest at a fluctuating rate, with respect to Euros, Pounds Sterling and Dollars outside of the U.S. and Canada, equal to the rate announced by the European Central Bank and used as a base rate by the local branch of Bank of America in the jurisdiction in which such currency is funded.
The applicable margin is subject to a minimum of 0.5% and a maximum of 1.0% with respect to U.S. base rate loans, and a minimum of 1.5% and maximum of 2.0% for foreign base rate borrowings, and a minimum of 1.5% and maximum of 2.0% for both U.S. and foreign LIBOR loans and is subject to adjustment based on the borrowers’ excess availability of the applicable facility for the most recent fiscal quarter. For the three months ended March 31, 2015, our effective interest rate for borrowings on the Senior Secured Credit Facilities was 2.2%.
In addition to paying interest on outstanding principal amounts under the Senior Secured Credit Facilities, the borrowers will be required to pay a commitment fee in respect of the unutilized commitments at an annual rate of 0.375%.
The Senior Secured Credit Facilities contain a financial covenant that if either (a) excess availability is less than the greater of (i) 12.5% of the lesser of the commitments and the borrowing base and (ii) $31,250,000 or (b) U.S. availability is less than the greater of (i) 12.5% of the lesser of the U.S. commitments and U.S. borrowing base and (ii) $18,750,000, then following such event, Kraton and its restricted subsidiaries must maintain a fixed charge coverage ratio of at least 1.0 to 1.0 for four fiscal quarters (or for a shorter duration if certain financial conditions are met). The Senior Secured Credit Facilities contain certain customary events of default, including, without limitation, a failure to make payments under the facility, cross-default and cross-judgment default, certain bankruptcy events and certain change of control events.
As of March 31, 2015, our total borrowing capacity was $175.5 million of which $20.0 million was drawn. As of the date of this filing, our total borrowing capacity was $177.7 million, of which $15.0 million was drawn.
6.75% Senior Notes due 2019. Kraton Polymers LLC and its wholly-owned financing subsidiary Kraton Polymers Capital Corporation issued $350.0 million aggregate principal amount of 6.75% senior notes that mature on March 1, 2019 pursuant to an indenture dated February 11, 2011 ($250.0 million senior notes) and supplemental indenture thereto dated March 20, 2012 ($100.0 million senior notes). The indenture provides that the notes are general unsecured, senior obligations and will be unconditionally guaranteed on a senior unsecured basis. We pay interest on the notes at 6.75% per annum, semi-annually in arrears on March 1 and September 1 of each year.

15



Capital Lease. In January 2014, we entered into a 10 year capital lease with a principal amount of $7.0 million to fund a portion of our capital expenditures. In March 2015, this capital lease increased by $0.7 million based on final project construction costs.
KFPC Loan Agreement. On July 17, 2014, KFPC executed a syndicated loan agreement (the “KFPC” Loan Agreement”) in the amount of 5.5 billion New Taiwan Dollars (“NTD”), or $176.3 million (converted at the March 31, 2015 exchange rate), to provide additional funding to construct the HSBC facility in Taiwan and to provide funding for working capital requirements and/or general corporate purposes.
The KFPC Loan Agreement is comprised of a NTD 4.29 billion Tranche A, or $137.5 million (converted at the March 31, 2015 exchange rate), to fund KFPC’s capital expenditures, and a NTD 1.21 billion Tranche B, or $38.8 million (converted at the March 31, 2015 exchange rate), to fund working capital requirements and/or general corporate purposes. As of March 31, 2015, NTD 0.6 billion, or $20.1 million (converted at the March 31, 2015 exchange rate) was drawn on the KFPC Loan Agreement. The facility period of the KFPC Loan Agreement is five years from January 17, 2015 (the first drawdown date). KFPC may continue to draw on the KFPC Loan Agreement for the first 28 months following the first drawdown date. Subject to certain conditions, KFPC can request a two-year extension of the facility period of the KFPC Loan Agreement.
The total outstanding principal amount is payable in six semi-annual installments with the first payment due upon the expiry of a thirty-month period commencing on the date of the first drawing of loans and each subsequent payment due every six months thereafter. The first five installments shall be in an amount equal to 10% of the outstanding principal amount and the final installment shall be in an amount equal to the remaining 50% of the outstanding principal amount. In the event the extension period is granted, the final 50% of the outstanding principal amount shall be repaid in five equal semi-annual installments with the first installment due on the original final maturity date.
The KFPC Loan Agreement is subject to a variable interest rate composed of a fixed 0.8% margin plus the three-month or six-month fixing rate of the Taipei Interbank Offered Rate (depending on the interest period as selected by KFPC in the drawdown request or the interest period notice), subject to a floor of 1.7%. Interest is payable on a monthly basis. For the three months ended March 31, 2015, our effective interest rate for borrowings on the KFPC Loan Agreement was 1.8%.
The KFPC Loan Agreement contains certain financial covenants which change during the term of the KFPC Loan Agreement. The financial covenants include a maximum debt to equity ratio of 3.0 to 1.0 commencing in 2014, which will decrease over time to 1.2 to 1.0 in 2018; a minimum tangible net worth requirement of $50.0 million commencing in 2014, which will increase to $100.0 million in 2019; and a minimum interest coverage ratio of 2.5 to 1.0 commencing in 2016, which will increase to 5.0 to 1.0 in 2017. In each case, these covenants are calculated and tested on an annual basis. Formosa Petrochemical Corporation and Kraton Polymers LLC are the guarantors of the KFPC Loan Agreement with each guarantor guaranteeing 50% of the indebtedness.
Debt Maturities. The remaining principal payments on our outstanding total debt as of March 31, 2015, are as follows:
 
Principal Payments
 
(In thousands)
March 31:
 
2016
$
135

2017
143

2018
24,179

2019
354,189

2020
12,252

Thereafter
971

Total debt
$
391,869

 
See Note 8 Fair Value Measurements, Financial Instruments and Credit Risk for fair value information related to our long-term debt.
 

16



7. Debt Issuance Costs
We capitalize the debt issuance costs related to issuing long-term debt and amortize these costs using the effective interest method, except for costs related to revolving debt, which are amortized using the straight-line method. Amortization of debt issuance costs and the accelerated write-off of debt issuance costs in connection with refinancing activities are recorded as a component of interest expense. We had net debt issuance costs of $8.8 million and $9.5 million (of which $2.3 million and $2.3 million were included in other current assets) as of March 31, 2015 and December 31, 2014, respectively. During the year ended December 31, 2014, our consolidated joint venture, KFPC, capitalized $0.5 million of debt issuance costs related to the KFPC Loan Agreement executed in July 2014. We amortized $0.6 million and $0.6 million of debt issuance costs for the three months ended March 31, 2015 and 2014, respectively.
 
8. Fair Value Measurements, Financial Instruments and Credit Risk
ASC 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
In accordance with ASC 820, these two types of inputs have created the following fair value hierarchy:
Level 1—Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
Quoted prices for similar assets or liabilities in active markets
Quoted prices for identical or similar assets or liabilities in markets that are not active
Inputs other than quoted prices that are observable for the asset or liability
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
Level 3—Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
Recurring Fair Value Measurements. The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which judgment may affect the valuation of their fair value and their placement within the fair value hierarchy levels.
 
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance Sheet Location
 
March 31, 2015
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
(In thousands)
Retirement plan asset – current
Other current assets
 
$
272

 
$
272

 
$

 
$

Retirement plan asset – noncurrent
Other long-term assets
 
$
2,127

 
$
2,127

 
$

 
$

Total
 
 
$
2,399

 
$
2,399

 
$

 
$

 

17



 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance Sheet Location
 
December 31, 2014
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
(In thousands)
Retirement plan asset – current
Other current assets
 
$
272

 
$
272

 
$

 
$

Retirement plan asset – noncurrent
Other long-term assets
 
$
2,055

 
$
2,055

 
$

 
$

Total
 
 
$
2,327

 
$
2,327

 
$

 
$

 
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, which we seek to minimize by limiting our counterparties to major financial institutions with acceptable credit ratings and by monitoring the total value of positions with individual counterparties. In the event of a default by one of our counterparties, we may not receive payments provided for under the terms of our derivatives.
The following table presents the carrying values and approximate fair values of our long-term debt.
 
 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
 
(In thousands)
6.75% unsecured notes (quoted prices in active market for identical assets – level 1)
$
350,783

 
$
358,750

 
$
350,825

 
$
358,750

Capital lease obligation (significant other observable inputs – level 2)
$
1,734

 
$
1,734

 
$
1,047

 
$
1,047

Financial Instruments    
Foreign Currency Hedges. Periodically, we enter into foreign currency agreements to hedge or otherwise protect against fluctuations in foreign currency exchange rates. These agreements do not qualify for hedge accounting and gains/losses resulting from both the up-front premiums and/or settlement of the hedges at expiration of the agreements are recognized in the period in which they are incurred. For the three months ended March 31, 2015 and 2014, we settled these hedges and recorded a loss of $3.9 million and a loss of $0.2 million, respectively, which are recorded in cost of goods sold. These contracts are structured such that these gains/losses from the mark-to-market impact of the hedging instruments materially offset the underlying foreign currency exchange gains/losses to reduce the overall impact of foreign currency exchange movements throughout the period.
Credit Risk
We analyze our counterparties’ financial condition prior to extending credit and we establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.


18



9. Income Taxes
 
Our income tax expense was $0.1 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively. Our effective tax rate was a 0.7% expense and a 1.5% expense for the three months ended March 31, 2015 and 2014, respectively. Our effective tax rates differed from the U.S. corporate statutory tax rate of 35.0%, primarily due to the mix of pre-tax income or loss earned in certain jurisdictions and the change in our valuation allowance.
We record a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. As of March 31, 2015 and December 31, 2014, a valuation allowance of $91.4 million and $90.4 million, respectively, has been provided for net operating loss carryforwards and other deferred tax assets. We increased our valuation allowance by $1.0 million for the three months ended March 31, 2015, which includes $2.6 million related to current period net operating losses, partially offset by a $1.6 million decrease related to changes in other comprehensive income (loss). We increased our valuation allowance by $0.5 million for the three months ended March 31, 2014, primarily due to current period net operating losses. Excluding the change in our valuation allowance, our effective tax rate would have been a 26.2% benefit and a 4.2% benefit for the three months ended March 31, 2015 and 2014, respectively.
As of March 31, 2015 and December 31, 2014, we had total unrecognized tax benefits of $4.4 million and $4.7 million, respectively, related to uncertain foreign tax positions, all of which, if recognized, would impact our effective tax rate. During the three months ended March 31, 2015 and 2014, we had a decrease in uncertain tax positions of $0.3 million and an increase of $0.3 million, respectively, primarily related to uncertain tax positions in Europe. We recorded interest and penalties related to unrecognized tax benefits within the provision for income taxes. We believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within one year.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. For our U.S. federal income tax returns, the statute of limitations has expired through the tax year ended December 31, 2003. As a result of net operating loss carryforwards from 2004, the statute of limitations remains open for all years subsequent to 2003. In addition, open tax years for state and foreign jurisdictions remain subject to examination.
      
    
10. Commitments and Contingencies
(a) Legal Proceedings
We received notice from the tax authorities in Brazil assessing R$6.1 million, or $1.9 million (converted at the March 31, 2015 exchange rate), in connection with tax credits that were generated from the purchase of certain goods which were subsequently applied by us against taxes owed. We have appealed the assertion by the tax authorities in Brazil that the goods purchased were not eligible to earn the credits. While the outcome of this proceeding cannot be predicted with certainty, we do not expect this matter to have a material adverse effect upon our financial position, results of operations or cash flows.
On January 28, 2014, we executed a definitive agreement (the “Combination Agreement”) to combine with the styrenic block copolymer (“SBC”) operations of Taiwan-based LCY Chemical Corp. (“LCY”). The Combination Agreement called for LCY to contribute its SBC business in exchange for newly issued shares in the combined company, such that our existing stockholders and LCY would each own 50% of the outstanding shares of the combined enterprise.  
On June 30, 2014, we notified LCY that our Board of Directors intended to withdraw its recommendation to our stockholders to approve the Combination Agreement unless the parties could agree upon mutually acceptable revised terms to the Combination Agreement. This notice cited the decline in operating results for LCY’s SBC business in the first quarter of 2014 and a related decline in forecasted results thereafter, together with the decline in our stock price and negative reactions from our stockholders. Following our notification of our Board’s intention to change its recommendation, the parties engaged in discussions to determine whether they could mutually agree to changes to the terms of the Combination Agreement that would enable our Board to continue to recommend that our stockholders approve the Combination Agreement. The parties engaged in numerous discussions subsequent to June 30, 2014 regarding possible revisions to the terms of the Combination Agreement.
On July 31, 2014, an explosion occurred in a pipeline owned by LCY in Kaohsiung, Taiwan, causing substantial property damage and loss of life, and numerous governmental and private investigations and claims have been initiated and asserted against LCY. On August 4, 2014, LCY notified us that it would no longer negotiate, and would not agree to, any revisions to the terms of the Combination Agreement. On August 6, 2014, our Board withdrew its recommendation that our stockholders approve the Combination Agreement. On August 8, 2014, we received notice from LCY that LCY had exercised its right to terminate the Combination Agreement.

19



The provisions of the Combination Agreement provide for us to pay LCY a $25 million break-up fee upon a termination of the Combination Agreement following a withdrawal of our Board’s recommendation, unless an LCY material adverse effect has occurred and is continuing at the time of the withdrawal of our Board’s recommendation. In LCY’s notice terminating the Combination Agreement, LCY requested payment of such $25 million termination fee. On October 6, 2014, LCY filed a lawsuit against us in connection with our refusal to pay the $25 million termination fee. We believe that the impact upon LCY of the July 31, 2014 explosion in a gas pipeline in Kaohsiung, Taiwan, constitutes an LCY material adverse effect as defined in the Combination Agreement, and we have notified LCY that accordingly we are not obligated to pay the termination fee. While the ultimate resolution of this matter cannot be predicted with certainty, we do not expect any material adverse effect upon our financial position, results of operations or cash flows from the ultimate outcome of this matter.
We and certain of our subsidiaries, from time to time, are parties to various other legal proceedings, claims and disputes that have arisen in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance. A substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our financial position, results of operations or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not expect any of these existing matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations or cash flows.
(b) Asset Retirement Obligations.
The changes in the aggregate carrying amount of our ARO liability are as follows:
 
Three months ended
March 31,
 
2015
 
2014
 
(In thousands)
Beginning balance
$
10,394

 
$
10,497

Accretion expense
104

 
136

Obligations settled

 
(45
)
Foreign currency translation, net
(439
)
 
3

Ending Balance
$
10,059

 
$
10,591


For a portion of our ARO liability related to the decommissioning of the coal boilers at our Belpre, Ohio, facility, we have recorded a $3.5 million receivable from Shell Chemicals as of March 31, 2015 pursuant to the indemnity included in the February 2001 separation agreement, which serves to offset the related ARO asset which is included in property, plant and equipment.

(c) Production downtime
In the first quarter of 2014, we experienced weather-related downtime at our Belpre, Ohio, facility. In addition, our facility in Berre, France, experienced an operating disruption resulting from a small fire that impacted one of the production lines at this facility. We incurred $13.0 million of costs in the three months ended March 31, 2014 associated with these two events, of which $3.7 million was included in other payables and accruals at March 31, 2014 based on management’s estimates of the remaining costs to be incurred.
There have been no other material changes to our Commitments and Contingencies disclosed in our most recently filed Annual Report on Form 10-K.
 

20



11. Employee Benefits
Retirement Plans.
The components of net periodic benefit cost related to U.S. pension benefits are as follows:
 
 
Three months ended
March 31,
 
2015
 
2014
 
(In thousands)
Service cost
$
930

 
$
753

Interest cost
1,613

 
1,510

Expected return on plan assets
(2,130
)
 
(1,915
)
Amortization of prior service cost
1,110

 
430

Net periodic benefit cost
$
1,523

 
$
778

 
We made no contributions to our pension plan in the three months ended March 31, 2015. For the three months ended March 31, 2014, we contributed $1.4 million to our pension plan.
The components of net periodic benefit cost related to other post-retirement benefits are as follows:

 
Three months ended
March 31,
 
2015
 
2014
 
(In thousands)
Service cost
$
163

 
$
125

Interest cost
320

 
320

Amortization of prior service cost
200

 
113

Net periodic benefit cost
$
683

 
$
558


12. Industry Segment and Foreign Operations
We operate in one segment for the manufacturing and marketing of engineered polymers. 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 reviews operating results 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.
Our products are manufactured and our commercial activities are organized in the following product groups based upon polymer chemistry and process technologies: 
 
Revenue for the
three months ended March 31,
 
2015
 
2014
 
(In thousands)
Performance Products
$
134,768

 
$
167,852

Specialty Polymers
91,674

 
108,346

Cariflex
34,837

 
35,363

Other
150

 
95

 
$
261,429

 
$
311,656

 
For geographic reporting, revenue is attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant and equipment, which are attributed to the geographic location in which they are located and are presented at historical cost.

21



Following is a summary of revenue by geographic region:
 
Three months ended
March 31,
 
2015
 
2014
 
(In thousands)
Revenue:
 
 
 
United States
$
83,702

 
$
101,662

Germany
30,676

 
40,641

China
18,372

 
18,992

Japan
16,435

 
17,681

Thailand
12,668

 
16,248

Brazil
9,591

 
14,143

France
8,909

 
12,479

Malaysia
7,881

 
6,482

Italy
7,304

 
10,221

Netherlands
7,121

 
7,027

Belgium
6,885

 
8,186

United Kingdom
6,794

 
8,152

South Korea
4,468

 
2,941

Canada
4,297

 
4,033

Taiwan
4,097

 
4,567

Mexico
3,662

 
3,747

Sweden
3,099

 
4,425

Turkey
2,936

 
3,307

Argentina
2,211

 
4,190

Austria
2,137

 
2,815

All other countries
18,184

 
19,717

 
$
261,429

 
$
311,656

Following is a summary of long-lived assets by geographic region:
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Long-lived assets, at cost:
 
 
 
United States
$
502,944

 
$
495,313

France
108,948

 
115,987

Taiwan
73,004

 
56,994

Brazil
62,330

 
71,970

Germany
53,610

 
60,022

Netherlands
28,162

 
29,838

China
7,286

 
7,273

Japan
1,672

 
1,637

All other countries
170

 
194

 
$
838,126

 
$
839,228



22



13. Related Party Transactions
We own a 50% equity investment in a SBC manufacturing joint venture in Kashima, Japan. Our due to related party liability on the condensed consolidated balance sheet is related to this joint venture and the purchases from the joint venture amounted to $6.5 million and $13.8 million for the three months ended March 31, 2015 and 2014, respectively.
 
14. Variable Interest Entity
The following table summarizes the carrying amounts of assets and liabilities as of March 31, 2015 and December 31, 2014 for KFPC before intercompany eliminations. See Note 6 Long Term Debt, for further discussion related to the KFPC Loan Agreement executed on July 17, 2014. 
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Cash and cash equivalents
$
11,035

 
$
7,993

Other current assets
3,315

 
2,533

Property, plant and equipment
72,891

 
56,904

Intangible assets
9,676

 
9,579

Other long-term assets
1,243

 
1,098

Total assets
$
98,160

 
$
78,107

Current liabilities
2,503

 
2,771

Long-term debt
20,135

 

Total liabilities
$
22,638

 
$
2,771

 
15. Subsequent Events
We have evaluated significant events and transactions that occurred after the balance sheet date and determined that there were no events or transactions that would require recognition or disclosure in our condensed consolidated financial statements for the period ended March 31, 2015.
 
16. Supplemental Guarantor Information
Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, (“the Issuers”), are co-issuers of the 6.75% senior notes due March 1, 2019. Kraton Performance Polymers, Inc. and Elastomers Holdings LLC, a U.S. holding company and wholly-owned subsidiary of Kraton Polymers LLC, collectively, (“the Guarantors”), fully and unconditionally guarantee on a joint and several basis, the Issuers’ obligations under the 6.75% senior notes. Our remaining subsidiaries are not guarantors of the 6.75% senior 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.

23



KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2015
(Unaudited)
(In thousands, except par value)
 
Kraton
 
Kraton Polymers LLC (1)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
271

 
$
2,216

 
$
37,304

 
$

 
$
39,791

Receivables, net of allowances

 
139

 
48,478

 
72,387

 

 
121,004

Inventories of products

 
200

 
176,403

 
102,835

 

 
279,438

Inventories of materials and supplies

 

 
9,202

 
1,580

 

 
10,782

Deferred income taxes

 
3,566

 

 
3,921

 

 
7,487

Other current assets

 
4,634

 
916

 
16,856

 

 
22,406

Total current assets

 
8,810

 
237,215

 
234,883

 

 
480,908

Property, plant and equipment, less accumulated depreciation

 
43,460

 
250,747

 
161,437

 

 
455,644

Intangible assets, less accumulated amortization

 
44,228

 
2,885

 
1,405

 

 
48,518

Investment in consolidated subsidiaries
509,606

 
1,384,102

 

 

 
(1,893,708
)
 

Investment in unconsolidated joint venture

 
813

 

 
10,422

 

 
11,235

Debt issuance costs

 
4,330

 
1,153

 
990

 

 
6,473

Deferred income taxes

 
411

 

 
1,731

 

 
2,142

Other long-term assets

 
12,068

 
625,386

 
92,051

 
(702,973
)
 
26,532

Total assets
$
509,606

 
$
1,498,222

 
$
1,117,386

 
$
502,919

 
$
(2,596,681
)
 
$
1,031,452

LIABILITIES AND STOCKHOLDERS' AND
   MEMBER'S EQUITY
 

 
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$

 
$
135

 
$

 
$

 
$
135

Accounts payable-trade

 
496

 
23,712

 
27,002

 

 
51,210

Other payables and accruals

 
13,403

 
14,278

 
13,488

 

 
41,169

Deferred income taxes

 

 

 
1,431

 

 
1,431

Due to related party

 

 

 
15,573

 

 
15,573

Total current liabilities

 
13,899

 
38,125

 
57,494

 

 
109,518

Long-term debt, net of current portion

 
350,783

 
21,599

 
20,135

 

 
392,517

Deferred income taxes

 
11,670

 

 
183

 

 
11,853

Other long-term liabilities

 
613,364

 
95,316

 
96,792

 
(702,973
)
 
102,499

Total liabilities

 
989,716

 
155,040

 
174,604

 
(702,973
)
 
616,387

Commitments and contingencies (note 10)


 


 


 


 


 


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
314

 

 

 

 

 
314

Additional paid in capital
354,644

 

 

 

 

 
354,644

Member's equity

 
509,606

 
1,031,553

 
352,549

 
(1,893,708
)
 

Retained earnings
154,648

 

 

 

 

 
154,648

Accumulated other comprehensive loss

 
(1,100
)
 
(69,207
)
 
(61,995
)
 

 
(132,302
)
Kraton stockholders' and member's equity
509,606

 
508,506

 
962,346

 
290,554

 
(1,893,708
)
 
377,304

Noncontrolling interest

 

 

 
37,761

 

 
37,761

Total stockholders' and member's equity
509,606

 
508,506

 
962,346

 
328,315

 
(1,893,708
)
 
415,065

Total liabilities and stockholders' and member's equity
$
509,606

 
$
1,498,222

 
$
1,117,386

 
$
502,919

 
$
(2,596,681
)
 
$
1,031,452

________________________________________________________ 
(1)
Kraton Polymers LLC and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 6.75% senior notes due March 1, 2019. 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 material to investors in making an investment decision.

24



KRATON PERFORMANCE POLYMERS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2014
(In thousands, except par value) 
 
Kraton
 
Kraton Polymers LLC (1)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
646

 
$
5,881

 
$
47,291

 
$

 
$
53,818

Receivables, net of allowances

 
553

 
37,266

 
69,613

 

 
107,432

Inventories of products

 
35

 
201,146

 
125,811

 

 
326,992

Inventories of materials and supplies

 

 
9,092

 
1,876

 

 
10,968

Deferred income taxes

 

 
3,566

 
3,681

 

 
7,247

Other current assets

 
5,317

 
931

 
18,273

 

 
24,521

Total current assets

 
6,551

 
257,882

 
266,545

 

 
530,978

Property, plant and equipment, less accumulated depreciation

 
46,081

 
248,220

 
157,464

 

 
451,765

Intangible assets, less accumulated amortization

 
45,356

 
4,000

 
254

 

 
49,610

Investment in consolidated subsidiaries
529,701

 
1,382,584

 

 

 
(1,912,285
)
 

Investment in unconsolidated joint venture

 
813

 

 
11,835

 

 
12,648

Debt issuance costs

 
4,674

 
1,297

 
1,182

 

 
7,153

Deferred income taxes

 
428

 

 
1,748

 

 
2,176

Other long-term assets

 
6,384

 
591,841

 
85,520

 
(655,623
)
 
28,122

Total assets
$
529,701

 
$
1,492,871

 
$
1,103,240

 
$
524,548

 
$
(2,567,908
)
 
$
1,082,452

LIABILITIES AND STOCKHOLDERS’ AND MEMBER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt

 

 
87

 

 

 
87

Accounts payable-trade

 
637

 
30,332

 
41,817

 

 
72,786

Other payables and accruals

 
21,913

 
14,017

 
14,958

 

 
50,888

Deferred income taxes

 

 

 
1,633

 

 
1,633

Due to related party

 

 

 
18,121

 

 
18,121

Total current liabilities

 
22,550

 
44,436

 
76,529

 

 
143,515

Long-term debt, net of current portion

 
350,825

 
960

 

 

 
351,785

Deferred income taxes

 
8,443

 
3,566

 
3,253

 

 
15,262

Other long-term liabilities

 
582,462

 
93,191

 
83,709

 
(655,623
)
 
103,739

Total liabilities

 
964,280

 
142,153

 
163,491

 
(655,623
)
 
614,301

Commitments and contingencies (note 10)

 

 

 

 

 

Stockholders’ and member’s equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, $.01 par value; 100,000 shares authorized; none issued

 

 

 

 

 

Common stock, $.01 par value; 500,000 shares authorized
318

 

 

 

 

 
318

Additional paid in capital
361,342

 

 

 

 

 
361,342

Member’s equity

 
529,701

 
1,030,294

 
352,290

 
(1,912,285
)
 

Retained earnings
168,041

 

 

 

 

 
168,041

Accumulated other comprehensive loss

 
(1,110
)
 
(69,207
)
 
(28,901
)
 

 
(99,218
)
Kraton stockholders’ and member’s equity
529,701

 
528,591

 
961,087

 
323,389

 
(1,912,285
)
 
430,483

Noncontrolling interest

 

 

 
37,668

 

 
37,668

Total stockholders’ and member’s equity
529,701

 
528,591

 
961,087

 
361,057

 
(1,912,285
)
 
468,151

Total liabilities and stockholders’ and member’s equity
$
529,701