UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

Commission File Number 001-34581

Kraton Corporation

(Exact Name of Registrant as Specified in its Charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	KRA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer:	☐	Smaller reporting company:	☐
		Emerging growth company:	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Number of shares of Kraton Corporation Common Stock, $0.01 par value, outstanding as of April 26, 2021: 32,144,047.

Index to Quarterly Report

on Form 10-Q for

Quarter Ended March 31, 2021

PART I. FINANCIAL INFORMATION		Page
	Report of KPMG LLP, Independent Registered Public Accounting Firm	5
Item 1	Condensed Consolidated Financial Statements (Unaudited)	6
	Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	6
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020	7
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020	8
	Condensed Consolidated Statement of Changes in Equity for the three months ended March 31, 2021 and 2020	9
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020	10
	Notes to the Condensed Consolidated Financial Statements	12
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4	Controls and Procedures	44
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	45
Item 1A	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3	Defaults Upon Senior Securities	45
Item 4	Mine Safety Disclosures	45
Item 5	Other Information	45
Item 6	Exhibits	47
	Signatures	48

2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Some of the statements and information in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make written or oral forward-looking statements in our reports on Forms 10-K, 10-Q, and 8-K, in press releases and other written materials and in oral statements made by our officers, directors, or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as “outlook,” “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans,” “anticipates,” “foresees,” “future,” or by discussions of strategy, plans, or intentions. The statements in this report that are not historical statements, are forward-looking statements, including, but not limited to, statements regarding our expectations as to:

•the continued impact of the coronavirus (“COVID-19”) pandemic (including governmental and regulatory actions relating thereto) on demand for our products, on the national and global economy and on our customers, suppliers, employees, business and results of operations;

•the potential impact of actions by our competitors in response to the COVID-19 pandemic on the price and demand for our products;

•expectations regarding the possibility for future impairment of goodwill or other assets, including as a result of the impact of the COVID-19 pandemic;

•the anticipated benefits or performance of our products;

•beliefs regarding opportunities for new, differentiated applications, and other innovations;

•our ability to obtain necessary additional regulatory approvals for BIAXAM on our anticipated timeline, or at all, and whether the expected benefits of the product will be realized;

•our expectations with respect to debt reduction and our ability to refinance our debt from time to time;

•beliefs regarding strengthening relationships with customers;

•adequacy of cash flows to fund our working capital requirements;

•our investment in the joint venture with Formosa Petrochemical Corporation (“FPCC”);

•our expectations regarding indebtedness to be incurred by our joint venture with FPCC;

•debt payments, interest payments, benefit plan contributions, and income tax obligations;

•expected benefits from our acquisitions, business dispositions, or other business combinations and expectations regarding our ability to timely execute and close such transactions;

•our anticipated capital expenditures, health, safety, environmental, and security and infrastructure and maintenance projects, projects to optimize the production capabilities of our manufacturing assets and to support our innovation platform;

•our ability to fully access our senior secured credit facilities;

•expectations regarding future dividend payments;

•expectations regarding our counterparties’ ability to perform, including with respect to trade receivables;

•estimates regarding tax expense of repatriating certain cash and short-term investments related to foreign operations;

•expectations regarding differentiated applications;

•our ability to realize certain deferred tax assets and our beliefs with respect to tax positions;

•expectations regarding our full year effective tax rate;

•estimates related to the useful lives of certain assets for tax purposes;

•expectations regarding our pension contributions;

•estimates or expectations related to raw material costs or availability, ending inventory levels and related estimated charges;

•the outcome and financial impact of legal proceedings;

•expectations regarding the spread between FIFO and ECRC (each as defined herein) in future periods;

•expectations regarding the impact of extraordinary events such as natural disasters, other weather events, or terrorist attacks;

•estimated impacts of changing tariff rates;

•expectations or estimated impacts of anticipated regulatory changes following the 2020 Presidential elections;

•the estimates and matters described in our latest Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and

•projections regarding environmental costs and capital expenditures and related operational savings.

Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as

3

forward-looking statements include, but are not limited to the factors set forth in this report, in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other filings with the Securities and Exchange Commission (the “SEC”). Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic.

There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information.

Forward-looking statements are based on current plans, estimates, assumptions and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Presentation of Financial Statements

The terms “Kraton,” “our company,” “we,” “our,” “ours,” and “us” as used in this report refer collectively to Kraton Corporation and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q includes financial statements and related notes that present the condensed consolidated financial position, results of operations, comprehensive income (loss), changes in equity, and cash flows of Kraton. Kraton Corporation is a holding company whose only material asset is its investment in its wholly owned subsidiary, Kraton Polymers LLC. Kraton Polymers LLC and its subsidiaries own all of our consolidated operating assets.

4

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Kraton Corporation:

Results of Review of Interim Financial Information

We have reviewed the condensed consolidated balance sheet of Kraton Corporation and subsidiaries (the Company) as of March 31, 2021, the related condensed consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for the three-month period ended March 31, 2021 and 2020, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Houston, Texas

April 29, 2021

5

PART I. FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements.

KRATON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value) 

	March 31, 2021		December 31, 2020
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	60,781	$	85,901
Receivables, net of allowance for doubtful accounts of $681 and $598	220,830		180,258
Inventories of products, net	340,616		318,885
Inventories of materials and supplies, net	33,885		34,164
Prepaid expenses	10,414		11,844
Other current assets	17,167		15,338
Total current assets	683,693		646,390
Property, plant, and equipment, net of accumulated depreciation of $739,987 and $732,279	928,081		942,703
Goodwill	373,828		375,061
Intangible assets, net of accumulated amortization of $339,236 and $330,070	284,144		294,734
Investment in unconsolidated joint venture	11,978		12,723
Deferred income taxes	80,783		83,534
Long-term operating lease assets, net	82,119		84,042
Other long-term assets	21,451		21,770
Total assets	$	2,466,077	$	2,460,957
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	84,488	$	72,347
Accounts payable-trade	178,362		176,229
Other payables and accruals	163,653		167,364
Due to related party	16,274		17,147
Total current liabilities	442,777		433,087
Long-term debt, net of current portion	847,125		865,516
Deferred income taxes	131,469		125,559
Long-term operating lease liabilities	66,424		67,898
Deferred income	141,291		151,329
Other long-term liabilities	160,669		168,566
Total liabilities	1,789,755		1,811,955
Commitments and contingencies (Note 11)
Equity:
Kraton stockholders' equity:
Preferred stock, $0.01 par value; 100,000 shares authorized; none issued	—		—
Common stock, $0.01 par value; 500,000 shares authorized; 32,144 shares issued and outstanding at March 31, 2021; 31,873 shares issued and outstanding at December 31, 2020	321		319
Additional paid in capital	404,644		401,445
Retained earnings	272,646		240,464
Accumulated other comprehensive loss	(46,640)		(37,865)
Total Kraton stockholders' equity	630,971		604,363
Noncontrolling interest	45,351		44,639
Total equity	676,322		649,002
Total liabilities and equity	$	2,466,077	$	2,460,957

See Notes to Condensed Consolidated Financial Statements

6

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended March 31,
	2021		2020
Revenue	$	437,271	$	427,269
Cost of goods sold	301,238		308,069
Gross profit	136,033		119,200
Operating expenses:
Research and development	9,520		10,792
Selling, general, and administrative	41,279		49,058
Depreciation and amortization	31,557		31,173
(Gain) loss on disposal of fixed assets	304		(64)
Operating income	53,373		28,241
Other income	808		327
Disposition and exit of business activities	—		175,214
Loss on extinguishment of debt	—		(13,954)
Earnings of unconsolidated joint venture	120		101
Interest expense, net	(10,947)		(17,461)
Income before income taxes	43,354		172,468
Income tax benefit (expense)	(8,761)		36,552
Consolidated net income	34,593		209,020
Net income attributable to noncontrolling interest	(1,364)		(934)
Net income attributable to Kraton	$	33,229	$	208,086
Earnings per common share:
Basic	$	1.04	$	6.55
Diluted	$	1.02	$	6.47
Weighted average common shares outstanding:
Basic	31,928		31,587
Diluted	32,458		31,949

See Notes to Condensed Consolidated Financial Statements

7

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2021		2020
Net income attributable to Kraton	$	33,229	$	208,086
Other comprehensive income:
Foreign currency translation adjustments, net of tax of $0	(20,112)		(15,557)
Reclassification of foreign currency translation adjustments from disposition and exit of business activities, net of tax of $0	—		66,533
Unrealized gain on cash flow hedges, net of tax expense of $458	—		1,387
Reclassification of loss on cash flow hedge, net of tax benefit of $293	—		1,002
Unrealized gain on net investment hedge, net of tax expense of $3,366 and $4,412, respectively	11,337		12,322
Reclassification of gain on net investment hedge, net of tax of $0	—		(899)
Other comprehensive income (loss), net of tax	(8,775)		64,788
Comprehensive income attributable to Kraton	24,454		272,874
Comprehensive income attributable to noncontrolling interest	712		527
Consolidated comprehensive income	$	25,166	$	273,401

See Notes to Condensed Consolidated Financial Statements

8

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)

(In thousands)

	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Kraton Stockholders' Equity		Noncontrolling Interest		Total Equity
Balance at December 31, 2019	$	318	$	392,208	$	464,712	$	(105,795)	$	751,443	$	37,985	$	789,428
Consolidated net income	—		—		208,086		—		208,086		934		209,020
Other comprehensive income (loss)	—		—		—		64,788		64,788		(407)		64,381
Retired treasury stock from employee tax withholdings	—		(1,927)		1,249		—		(678)		—		(678)
Non-cash compensation related to equity awards	1		2,847		—		—		2,848		—		2,848
Balance at March 31, 2020	$	319	$	393,128	$	674,047	$	(41,007)	$	1,026,487	$	38,512	$	1,064,999

	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, 2020	$	319	$	401,445	$	240,464	$	(37,865)	$	604,363	$	44,639	$	649,002
Consolidated net income	—		—		33,229		—		33,229		1,364		34,593
Other comprehensive income (loss)	—		—		—		(8,775)		(8,775)		(652)		(9,427)
Retired treasury stock from employee tax withholdings	1		(3,816)		(1,047)		—		(4,862)		—		(4,862)
Exercise of stock options	1		4,091		—		—		4,092		—		4,092
Non-cash compensation related to equity awards	—		2,924		—		—		2,924		—		2,924
Balance at March 31, 2021	$	321	$	404,644	$	272,646	$	(46,640)	$	630,971	$	45,351	$	676,322

See Notes to Condensed Consolidated Financial Statements

9

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	34,593	$	209,020
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization	31,557		31,173
Lease amortization	6,029		6,164
Amortization of debt original issue discount	—		148
Amortization of debt issuance costs	809		1,031
Amortization of deferred income	(7,653)		(3,497)
(Gain) loss on disposal of property, plant, and equipment	304		(64)
Loss on extinguishment of debt	—		13,954
Earnings from unconsolidated joint venture, net of dividends received	347		406
Deferred income tax (benefit) provision	3,542		(64,319)
Gain on disposition and exit of business activities	—		(175,214)
Share-based compensation	2,924		2,848
Decrease (increase) in:
Accounts receivable	(45,140)		(32,359)
Inventories of products, materials, and supplies	(28,163)		(18,914)
Other assets	(2,154)		2,808
Increase (decrease) in:
Accounts payable-trade	7,086		5,023
Other payables and accruals	(6,870)		24,561
Other long-term liabilities	(4,655)		(4,206)
Due to related party	351		2,619
Net cash provided by (used in) operating activities	(7,093)		1,182
CASH FLOWS FROM INVESTING ACTIVITIES
Kraton purchase of property, plant, and equipment	(22,425)		(17,446)
KFPC purchase of property, plant, and equipment	(217)		(52)
Purchase of software and other intangibles	(2,079)		(2,089)
Cash proceeds from disposition and exit of business activities	—		510,500
Net cash provided by (used in) investing activities	(24,721)		490,913
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt	21,000		76,000
Repayments of debt	(6,000)		(436,174)
KFPC proceeds from debt	16,065		34,873
KFPC repayments of debt	(20,819)		(40,990)
Finance lease payments	(578)		(44)
Purchase of treasury stock	(4,862)		(678)
Proceeds from the exercise of stock options	4,092		—
Settlement of interest rate swap	—		(1,295)
Net cash provided by (used in) financing activities	8,898		(368,308)
Effect of exchange rate differences on cash	(2,204)		(7,318)
Net increase (decrease) in cash and cash equivalents	(25,120)		116,469
Cash and cash equivalents, beginning of period	85,901		35,033
Cash and cash equivalents, end of period	$	60,781	$	151,502

See Notes to Condensed Consolidated Financial Statements

10

	Three Months Ended March 31,
	2021		2020
Supplemental disclosures during the period:
Cash paid for income taxes, net of refunds received	$	(217)	$	1,987
Cash paid for interest, net of capitalized interest	$	846	$	19,699
Capitalized interest	$	706	$	404
Supplemental non-cash disclosures: increase (decrease) during the period
Property, plant, and equipment accruals	$	(6,575)	$	(2,110)
Operating leases	$	3,694	$	6,870

See Notes to Condensed Consolidated Financial Statements

11

KRATON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Description of our Business. We are a leading global specialty chemicals company that manufactures styrenic block copolymers (“SBCs”), specialty polymers, and high-value performance products primarily derived from pine wood pulping co-products. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment.

SBCs are highly-engineered synthetic elastomers, which we originally invented and commercialized. Our SBCs enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability, and processability, and are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants, lubricants, medical, packaging, automotive, and paving and roofing products. We manufacture and sell isoprene rubber through a multi-year Isoprene Rubber Supply Agreement (“IRSA”) with Daelim Industrial Co, Ltd. (“Daelim”).

We refine and further upgrade crude tall oil and crude sulfate turpentine, into value-added specialty chemicals. These pine-based specialty products are sold into adhesive and tire markets, and we produce and sell a broad range of performance chemicals into markets that include fuel additives, oilfield chemicals, coatings, metalworking fluids and lubricants, inks, flavors and fragrances, and mining.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements presented in this report are for us and our consolidated subsidiaries, each of which is a wholly-owned subsidiary, except our 50% investment in our joint venture, Kraton Formosa Polymers Corporation (“KFPC”), located in Mailiao, Taiwan. KFPC is a variable interest entity for which we have determined that we are the primary beneficiary and, therefore, have consolidated into our financial statements. Our 50% investment in our joint venture located in Kashima, Japan, is accounted for under the equity method of accounting. All significant intercompany transactions have been eliminated. These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods or any other interim period, in particular due to the effect of seasonal changes and weather conditions that typically affect our sales into paving, roadmarking, roofing, and construction applications. In particular, sales volumes into these applications are generally higher in the second and third quarter of the calendar year as warm and dry weather is more conducive to paving and roofing activity.

Reclassifications. Certain amounts reported in the condensed consolidated financial statements and notes to the condensed consolidated financial statements for the prior periods may have been reclassified to conform to the current reporting presentation.

Significant Accounting Policies. Our significant accounting policies have been disclosed in Note 1 Description of Business, Basis of Presentation, and Significant Accounting Policies in our most recent Annual Report on Form 10-K.

There have been no changes to the accounting policies, which are disclosed in our most recent Annual Report on Form 10-K. The accompanying unaudited condensed consolidated financial statements we present in this report have been prepared in accordance with our policies.

Use of Estimates. The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant items subject to such estimates and assumptions include:

•the useful lives of long-lived assets;

•allowances for doubtful accounts and sales returns;

•valuation of goodwill;

•the valuation of derivatives, deferred taxes, property, plant and equipment, inventory, share-based compensation, and deferred income; and

•liabilities for employee benefit obligations, environmental matters, asset retirement obligations, income tax uncertainties, and other contingencies.

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Income Tax in Interim Periods. We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in these condensed consolidated financial statements for each of those jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. Overall effective tax rate may therefore vary considerably from quarter to quarter and from year to year based on the actual or projected location of operations, levels of income, intercompany gains or losses, and other factors.

In accordance with U.S. GAAP for interim reporting, we have historically estimated our full-year effective tax rate and applied this rate to ordinary income or loss for the reporting period. We have determined that since small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rate this historical method would not provide reliable results for the quarter ended March 31, 2021. Therefore, a discrete year-to-date method of reporting was used for the quarter ended March 31, 2021. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.

We have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits and other income tax credits. Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets to the amount that is deemed more likely than not to be recoverable. Our ability to realize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. If we fail to achieve our operating income targets, we may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. A change in our valuation allowance would impact our income tax benefit (expense) and our stockholders’ equity and could have a significant impact on our results of operations or financial condition in future periods.

2. New Accounting Pronouncements

Accounting Standards Adopted in the Current Period

We have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our financial statements.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is effective for fiscal years beginning after December 15, 2020. Adoption of this standard did not materially impact our financial position, results of operations, and cash flows. We adopted ASU 2019-12 effective January 1, 2021.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of

Reference Rate Reform on Financial Reporting. This standard provides practical expedients and exception for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

This standard is applicable to our contracts and hedging relationships that reference LIBOR. The amendments may be applied

through December 31, 2022. We will apply this guidance to transactions and modifications of these arrangements as

appropriate.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This standard is effective beginning on January 7, 2021. Our analysis of ASU 2021-01 was completed during 2021, and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2021-01 effective January 7, 2021.

New Accounting Standards to be Adopted in Future Periods

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This standard is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted for any interim period after issuance of the ASU. Our evaluation of this standard is currently ongoing, and we expect to adopt ASU 2020-06 effective on January 1, 2022.

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3. Revenue Recognition

Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs at a point in time when the risk of loss and title to the product transfers to the customer. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and invoices. As such, all revenue is considered revenue recognized from contracts with customers, and we do not have other sources of revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of sales tax, value-added taxes, and other taxes. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale. Certain customers may receive cash-based incentives (including rebates, price supports, and sales commission), which are accounted for as variable consideration. We estimate rebates and price supports based on the expected amount to be provided to customers and reduce revenues recognized once the performance obligation has been met. Sales commissions are recorded as an increase in cost of goods sold once the performance obligation has been met. We do not expect to have significant changes in our estimates for variable considerations.

We have deferred revenue of $167.5 million related to contractual commitments with customers for which the performance obligation will be satisfied over time, which currently ranges from one to nine years. The revenue associated with these performance obligations is recognized as the obligation is satisfied, which occurs as a volume based metric over time with the transfer of risk and title of finished products to the customer. The IRSA provided $16.0 million and $6.9 million of Isoprene Rubber sales revenue for the three months ended March 31, 2021 and 2020, respectively. Included within Isoprene Rubber sales revenue is $7.6 million and $3.4 million of amortization of deferred income, which represents non-cash revenue realized as the products are sold under the IRSA for the three months ended March 31, 2021 and 2020, respectively.

Occasionally, we enter into bill-and-hold contracts, where we invoice the customer for products even though we retain possession of the products until a point in time in the future when the products are shipped to the customer. In these contracts, the primary performance obligation is satisfied at a point in time when the product is segregated from our general inventory, it is ready for shipment to customer, and we do not have the ability to use the product or direct it to another customer. Additionally, we have a secondary performance obligation related to custodial costs, including storage and freight, which is satisfied over time once the product has been delivered to the customer. During the three months ended March 31, 2021 and 2020, we recognized $1.7 million and $4.1 million of revenue related to these bill-and-hold arrangements, respectively.

We disaggregate our revenue by segment product lines, which is how we market our products and review results of operations. The following tables disaggregate our segment revenue by major product lines:

	Three Months Ended March 31,
	2021		2020
Polymer Segment	(In thousands)
Performance Products	$	127,945	$	118,760
Specialty Polymers	96,739		77,917
Cariflex(1)	—		36,930
Isoprene Rubber	15,956		6,859
Other	510		(86)
Polymer Product Line Revenue	$	241,150	$	240,380

____________________________________________________ 

(1)     Cariflex is included in the results of operations through March 6, 2020. See Note 4 Disposition and Exit of Business Activities for further information on the divestiture of our Cariflex business.

	Three Months Ended March 31,
	2021		2020
Chemical Segment	(In thousands)
Adhesives	$	71,726	$	64,895
Performance Chemicals	111,175		110,742
Tires	13,220		11,252
Chemical Product Line Revenue	$	196,121	$	186,889

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	March 31, 2021		December 31, 2020
	(In thousands)
Contract receivables(1)	$	221,272	$	179,805
Contract liabilities(2)	$	167,515	$	175,511

____________________________________________________ 

(1)     Contract receivables are recorded within receivables, net of allowances on our Condensed Consolidated Balance Sheets.

(2)    Our contract liability consists of $154.9 million of non-cash deferred income related to the IRSA and $10.6 million of non-cash deferred income related to a supply agreement with a significant lubricant additive customer. The impact from currency exchange rates is $2.0 million.

4. Disposition and Exit of Business Activities

On March 6, 2020, we completed the sale of our Cariflex business to Daelim for gross proceeds of $530.0 million, adjusted for incremental working capital of $5.8 million, less contractual capital contributions of $25.3 million. The sale closed and is subject to a customary post-closing working capital adjustment and a contractual capital contribution post-closing adjustment. Upon closing, we recognized a gain of $175.2 million, and as part of the consideration received, entered into a multi-year IRSA with Daelim. As the IRSA product sales are at cost, we deferred approximately $180.6 million, of which $158.2 million and $22.4 million were recorded within deferred income and other payables and accruals, respectively, on the Condensed Consolidated Balance Sheet as of March 31, 2020. The deferred income will be amortized into revenue as a non-cash transaction when the products are sold. In accordance with the IRSA, we will supply Isoprene Rubber to Daelim for a period of five years from the sale closing date, with an optional extension for an additional five years.

We used the $510.5 million net proceeds from the sale of our Cariflex business principally for repayment of the full outstanding balance of $290.0 million under the U.S. dollar denominated tranche (the “USD Tranche”) of the Company’s senior secured term loan facility (the “Term Loan Facility”) and repayment in the amount of €145.0 million, or approximately $166.8 million, of borrowings under the Euro dollar denominated tranche (the “Euro Tranche”) of the Term Loan Facility. We used the remaining proceeds in accordance with the terms of the Term Loan Facility to make additional repayments of debt and invested in strategic assets of the Company.

For further discussion on assets held for sale, see Note 5 Assets Held for Sale to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.

5. Share-Based Compensation

We account for share-based awards under the provisions of ASC 718, Compensation—Stock Compensation. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award, and we expense these costs using the straight-line method over the requisite service period, generally three years. Share-based compensation expense was $2.9 million and $2.8 million for the three months ended March 31, 2021 and 2020, respectively. The Company’s annual grant of share-based awards generally occurs in the first quarter under our Kraton Corporation Amended and Restated 2016 Equity and Cash Incentive Plan (the “2016 Plan”).

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6. Detail of Certain Balance Sheet Accounts

	March 31, 2021		December 31, 2020
	(In thousands)
Inventories of products:
Finished products	$	261,496	$	240,021
Work in progress	4,203		3,074
Raw materials	82,875		84,039
Inventories of products, gross	348,574		327,134
Inventory reserves	(7,958)		(8,249)
Total inventories of products, net	$	340,616	$	318,885
Intangible assets:
Contractual agreements	$	263,682	$	265,375
Technology	146,350		147,011
Customer relationships	60,460		60,623
Tradenames/trademarks	83,614		83,519
Software	69,274		68,276
Intangible assets	623,380		624,804
Less accumulated amortization:
Contractual agreements	115,589		110,811
Technology	76,071		74,693
Customer relationships	40,525		40,205
Tradenames/trademarks	55,204		53,951
Software	51,847		50,410
Total accumulated amortization	339,236		330,070
Intangible assets, net of accumulated amortization	$	284,144	$	294,734
Other payables and accruals:
Employee related	$	34,387	$	52,145
Short-term operating lease liabilities	17,810		18,299
Interest payable	12,797		3,873
Capital project accruals	893		1,149
Customer related	9,654		10,484
Short-term deferred income	26,793		24,182
Income tax payable	30,734		26,367
Utilities payable	3,084		2,886
Property and other taxes	1,643		1,303
Other	25,858		26,676
Total other payables and accruals	$	163,653	$	167,364
Other long-term liabilities:
Pension and other post-retirement benefits	$	125,429	$	133,634
Long-term tax liability	19,369		19,530
Other	15,871		15,402
Total other long-term liabilities	$	160,669	$	168,566

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Changes in accumulated other comprehensive income (loss) by component were as follows:

	Cumulative Foreign Currency Translation		Cash Flow Hedges, Net of Tax		Net Investment Hedges, Net of Tax		Benefit Plans Liability, Net of Tax		Total
	(In thousands)
December 31, 2019	$	(29,389)	$	(2,389)	$	13,624	$	(87,641)	$	(105,795)
Other comprehensive income (loss) before reclassifications	(15,557)		1,387		12,322		—		(1,848)
Amounts reclassified to (income) expense from accumulated other comprehensive loss (1)	66,533		1,002		(899)		—		66,636
Net other comprehensive income (loss) for the year	50,976		2,389		11,423		—		64,788
March 31, 2020	$	21,587	$	—	$	25,047	$	(87,641)	$	(41,007)
December 31, 2020	$	73,575	$	—	$	(13,156)	$	(98,284)	$	(37,865)
Other comprehensive income (loss) before reclassifications	(20,112)		—		11,337		—		(8,775)
Net other comprehensive income (loss) for the year	(20,112)		—		11,337		—		(8,775)
March 31, 2021	$	53,463	$	—	$	(1,819)	$	(98,284)	$	(46,640)

____________________________________________________ 

(1)     Amounts reclassified to (income) expense from accumulated other comprehensive income (loss) are related to cumulative foreign currency translation and settlement of a net investment hedge, which are recorded in disposition and exit of business activities in the Condensed Consolidated Statement of Operations. Additionally, the settlement of interest rate swaps are recorded in loss on extinguishment of debt in the Condensed Consolidated Statement of Operations. All these costs are in connection with the divestiture of our Cariflex business and subsequent repayments of debt.

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7. Earnings Per Share (“EPS”)

Basic EPS is computed by dividing net income attributable to Kraton by the weighted-average number of shares outstanding, excluding non-vested restricted stock awards during the period. Diluted EPS is computed by dividing net income attributable to Kraton by the diluted weighted-average number of shares outstanding during the period and, accordingly, reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised, settled, or converted into common stock and were dilutive. The diluted weighted-average number of shares used in our diluted EPS calculation is determined using the treasury stock method.

The calculations of basic and diluted EPS are as follows:

	Three Months Ended March 31, 2021					Three Months Ended March 31, 2020
	Net Income Attributable to Kraton		Weighted Average Shares Outstanding	Earnings Per Share		Net Income Attributable to Kraton		Weighted Average Shares Outstanding	Earnings Per Share
	(In thousands, except per share data)
Basic:
As reported	$	33,229	31,970			$	208,086	31,783
Amounts allocated to unvested restricted shares	(44)		(42)			(1,283)		(196)
Amounts available to common stockholders	33,185		31,928	$	1.04	206,803		31,587	$	6.55
Diluted:
Amounts allocated to unvested restricted shares	44		42			1,283		196
Non participating share units	—		475			—		362
Stock options added under the treasury stock method	—		55			—		—
Amounts reallocated to unvested restricted shares	(43)		(42)			(1,269)		(196)
Amounts available to stockholders and assumed conversions	$	33,186	32,458	$	1.02	$	206,817	31,949	$	6.47

Share Repurchase Program. In February 2019, we announced a repurchase program for up to $50.0 million of the Company’s common stock by February 2021. Repurchases could have been made at management’s discretion from time to time through privately-negotiated transactions, in the open market, or through broker-negotiated purchases in compliance with applicable securities law, including through a 10b5-1 Plan. The repurchase program could have been suspended for periods or discontinued at any time, and the amount and timing of the repurchases were subject to a number of factors, including Kraton’s stock price. During the three months ended March 31, 2021, we did not repurchase any shares of our common stock under this program. From the inception of the program through March 31, 2021, we repurchased 311,152 shares of our common stock at an average price of $32.14 per share and a total cost of $10.0 million. The share repurchase program ended on February 7, 2021.

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8. Long-Term Debt

Long-term debt consists of the following:

	March 31, 2021						December 31, 2020
	Principal		Debt Issuance Costs		Total		Principal		Debt Issuance Costs		Total
	(In thousands)
Euro Tranche	$	99,850	$	(900)	$	98,950	$	104,159	$	(996)	$	103,163
4.25% Senior Notes	400,000		(6,531)		393,469		400,000		(6,995)		393,005
5.25% Senior Notes	340,663		(4,048)		336,615		355,366		(4,221)		351,145
ABL Facility	15,000		—		15,000		—		—		—
KFPC Loan Agreement	34,659		(13)		34,646		52,730		(18)		52,712
KFPC Revolving Facilities	49,112		—		49,112		37,003		—		37,003
Finance lease obligations	3,821		—		3,821		835		—		835
Total debt	943,105		(11,492)		931,613		950,093		(12,230)		937,863
Less current portion of total debt	84,488		—		84,488		72,347		—		72,347
Long-term debt	$	858,617	$	(11,492)	$	847,125	$	877,746	$	(12,230)	$	865,516

Senior Secured Term Loan Facility. The Euro Tranche interest rate applicable margin is 2.0%. Our Term Loan Facility will mature on March 8, 2025. For a summary of additional terms of the Term Loan Facility, see Note 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.

As of the date of this filing, the effective interest rate for the Euro Tranche is 2.79%. The Term Loan Facility contains a number of customary affirmative and negative covenants, and we were in compliance with those covenants as of the date of this filing.

4.25% Senior Notes due 2025. Kraton Polymers LLC and its wholly-owned financing subsidiary Kraton Polymers Capital Corporation issued $400.0 million aggregate principal amount of 4.25% Senior Notes due 2025 (the “4.25% Senior Notes”) in December 2020, which mature on December 15, 2025. The 4.25% Senior Notes are general unsecured, senior obligations, and are unconditionally guaranteed on a senior unsecured basis by each of Kraton Corporation and certain of our wholly-owned domestic subsidiaries. We pay interest on the Senior Notes at 4.25% per annum, semi-annually in arrears on June 15 and December 15 of each year.

5.25% Senior Notes due 2026. Kraton Polymers LLC and its wholly-owned financing subsidiary Kraton Polymers Capital Corporation issued €290.0 million (or approximately $340.7 million) aggregate principal amount of 5.25% Senior Notes due 2026 (the “5.25% Senior Notes”) in May 2018, which mature on May 15, 2026. The 5.25% Senior Notes are general unsecured, senior obligations, and are unconditionally guaranteed on a senior unsecured basis by each of Kraton Corporation and certain of our wholly-owned domestic subsidiaries. We pay interest on the senior notes at 5.25% per annum, semi-annually in arrears on May 15 and November 15 of each year.

ABL Facility. Our asset-based revolving credit facility provides financing of up to $300.0 million (the “ABL Facility”). The ABL Facility also provides that we have the right at any time to request up to $100.0 million of additional commitments, provided that we satisfy certain additional conditions. Our outstanding borrowings under the ABL Facility were $15.0 million as of March 31, 2021. The termination date of the ABL Facility is December 3, 2025 (subject to earlier termination if certain outstanding indebtedness under the Term Loan Facility or our senior unsecured notes is not previously refinanced).

Borrowing availability under the ABL Facility is subject to borrowing base limitations based on the level of receivables and inventory available for security. Revolver commitments under the ABL Facility consist of U.S. and Dutch revolving credit facility commitments, which may be reallocated subject to certain conditions, provided the Dutch revolver commitments may not exceed $100.0 million. The ABL Facility contains a number of customary affirmative and negative covenants, and we were in compliance with those covenants as of the date of this filing. For a summary of additional terms of the ABL Facility, see Note 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.

KFPC Loan Agreement. As of March 31, 2021, approximately NTD 1.0 billion (or approximately $34.7 million) was outstanding on KFPC's syndicated loan agreement (the “KFPC Loan Agreement”). For the three months ended March 31, 2021, the effective interest rate for borrowings on the KFPC Loan Agreement was 1.8%. The KFPC Loan Agreement contains certain financial covenants that change during the term of the KFPC Loan Agreement. KFPC was in compliance with those covenants as of the date of this filing. In each case, these covenants are calculated and tested on an annual basis at December 31st each year.

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The KFPC Loan Agreement will mature on January 17, 2022. For a summary of additional terms of the KFPC Loan Agreement, see Note 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K.

KFPC Revolving Facilities. KFPC also has four revolving credit facilities (the “KFPC Revolving Facilities”) to provide funding for working capital requirements and/or general corporate purposes, which allow for total borrowings of up to NTD 2.5 billion (or approximately $87.6 million). All of the KFPC Revolving Facilities are subject to variable interest rates. As of March 31, 2021, NTD 1.4 billion (or approximately $49.1 million) was drawn on the KFPC Revolving Facilities.

Debt Issuance Costs. We had debt issuance cost of $13.6 million as of March 31, 2021, of which $2.1 million related to the ABL Facility, which is recorded as an asset (of which $0.5 million was included in other current assets) and $11.5 million is recorded as a reduction to long-term debt. We amortized $0.8 million and $1.0 million during the three months ended March 31, 2021 and 2020, respectively.

Debt Maturities. The remaining principal payments on our outstanding total debt, including finance leases, as of March 31, 2021, are as follows:

	Principal Payments
	(In thousands)
April 1, 2021 through March 31, 2022	$	84,488
April 1, 2022 through March 31, 2023	878
April 1, 2023 through March 31, 2024	1,109
April 1, 2024 through March 31, 2025	1,102
April 1, 2025 through March 31, 2026	514,865
Thereafter	340,663
Total debt	$	943,105

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

9. 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; and

•Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

•Level 3—Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).

Recurring Fair Value Measurements. The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2021 and December 31, 2020. These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which judgment may affect the valuation of their fair value and placement within the fair value hierarchy levels. As

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of March 31, 2021 and December 31, 2020, the Company has no assets or liabilities utilizing significant unobservable inputs (or Level 3) to derive its estimated fair values.

				Fair Value Measurements at Reporting Date Using
	Balance Sheet Location	March 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
		(In thousands)
Retirement plan asset – noncurrent	Other long-term asset	$	2,691	$	2,691	$	—
Derivative liability – current	Other payables and accruals	(1,049)		—		(1,049)
Total		$	1,642	$	2,691	$	(1,049)

				Fair Value Measurements at Reporting Date Using
	Balance Sheet Location	December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
		(In thousands)
Retirement plan asset – noncurrent	Other long-term assets	$	2,454	$	2,454	$	—
Derivative liability – current	Other payables and accruals	(219)		—		(219)
Total		$	2,235	$	2,454	$	(219)

The following table presents the carrying values and approximate fair values of our long-term debt.

	March 31, 2021				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
Euro Tranche (significant other observable inputs – level 2)	$	99,850	$	99,913	$	104,159	$	103,574
4.25% Senior Notes (quoted prices in active market for identical assets – level 1)	$	400,000	$	401,532	$	400,000	$	409,880
5.25% Senior Notes (quoted prices in active market for identical assets – level 1)	$	340,663	$	352,113	$	355,366	$	367,886
ABL Facility	$	15,000	$	15,000	$	—	$	—
Finance lease obligations	$	3,821	$	3,821	$	835	$	835
KFPC Loan Agreement	$	34,659	$	34,659	$	52,730	$	52,730
KFPC Revolving Facilities	$	49,112	$	49,112	$	37,003	$	37,003

The ABL Facility, Finance lease obligations, KFPC Loan Agreement, and KFPC Revolving Facilities are variable rate instruments, and as such, the fair value approximates the carrying value.

Financial Instruments

Interest Rate Swap Agreements. Periodically, we enter into interest rate swap agreements to hedge or otherwise protect against interest rate fluctuation on a portion of our variable rate debt. These interest rate swap agreements are designated as cash flow hedges on our exposure to the variability of future cash flows.

In an effort to convert a substantial portion of our future interest payments pursuant to the USD Tranche to a fixed interest rate, in February and March 2016, we entered into a series of interest rate swap agreements with an aggregate notional value of $925.4 million, effective dates of January 3, 2017, and maturity dates of December 31, 2020. Based on debt repayments, we have exited all of the interest rate swap agreements originally entered into in 2017. We reclassified out of other comprehensive income (loss) the settlement of our interest rate swaps that amounted to a $1.3 million loss on extinguishment of debt for the three months ended March 31, 2020.

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

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period in which they are incurred. We settled these hedges and recorded a loss of $1.6 million and a gain of $0.2 million for the three months ended March 31, 2021 and 2020, respectively, which are recorded in cost of goods sold in the Condensed Consolidated Statements of Operations. These contracts are structured such that these gains/losses from the mark-to-market impact of the hedging instruments materially offset the underlying foreign currency exchange gains/losses to reduce the overall impact of foreign currency exchange movements throughout the period.

Net Investment Hedge. During the year ended December 31, 2018, we designated €290.0 million of euro-denominated borrowing as a hedge against a portion of our net investment in the Company's European operations. The mark to market of this instrument was a gain of $14.7 million and a gain of $6.5 million for the three months ended March 31, 2021 and 2020, respectively, which is recorded within accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets.

Credit Risk

The use of derivatives creates exposure to credit risk in the event that the counterparties to these instruments fail to perform their obligations under the contracts, which we seek to minimize by limiting our counterparties to major financial institutions with acceptable credit ratings and by monitoring the total value of positions with individual counterparties.

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.

10. Income Taxes

Our income tax provision was an expense of $8.8 million and a benefit of $36.6 million for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the change in valuation allowance, certain tax credits generated, and return to provision adjustments, partially offset by the mix of our pretax income or loss generated in various local and foreign jurisdictions.

During the three months ended March 31, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the intercompany transfer of certain intellectual property rights to our Dutch subsidiary, the tax impact of the sale of our Cariflex business, and the mix of our pretax income or loss generated in various foreign jurisdictions.

The provision for income taxes differs from the amount computed by applying the U.S. corporate statutory income tax rate to income (loss) before income taxes for the reasons set forth below.

	Three Months Ended March 31,
	2021		2020
	(In thousands)
Income taxes at the statutory rate	$	(9,104)	$	(36,218)
State taxes, net of federal benefit	(646)		(84)
Foreign tax rate differential	(190)		(7,592)
Permanent differences	(835)		(1,240)
Cariflex disposition	—		13,663
Dutch transfer of assets	—		62,785
Tax credits	800		—
Uncertain tax positions	(136)		2,682
Valuation allowance	892		136
Return to provision adjustments	458		2,420
Income tax benefit (expense)	$	(8,761)	$	36,552

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a deferred tax benefit will not be realized. We consider all available material evidence, both positive and negative, in assessing the appropriateness of a valuation allowance for our deferred tax assets. As of March 31, 2021 and December 31, 2020, we recorded a valuation allowance of $38.6 million and $39.5 million, respectively, against our net operating loss carryforwards and other deferred tax assets.

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We currently believe that certain unremitted foreign earnings of our subsidiaries will permanently reinvest for an infinite period of time. Accordingly, we have not provided deferred taxes for the differences between these subsidiaries' book basis and underlying tax basis or on related foreign currency translation adjustment amounts.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Our U.S. federal income tax returns, for 2005 remain open to examination, as a result of the utilization of net operating loss carryforwards from 2005. In addition, open tax years for state and foreign jurisdictions remain subject to examination. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying condensed consolidated financial statements for any adjustments that might be incurred due to federal, state, or foreign audits.

We recognize the effect of income tax positions only when it is more likely than not of being sustainable. The taxes are recorded in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

As of March 31, 2021 and December 31, 2020, we had total unrecognized tax benefits of $8.7 million and $8.8 million, respectively, if recognized, would impact our effective tax rate. During the three months ended March 31, 2021 and 2020, we had a decrease of $0.1 million and $2.9 million, respectively, primarily related to our uncertain tax positions in the U.S. and Europe. We recorded interest and penalties related to unrecognized tax benefits within the provision for income taxes.

It is reasonable that the existing liabilities for the unrecognized tax benefits may increase or decrease over the next 12 months as a result of audit closures and statute expirations; however, the ultimate timing of the resolution and/or closure of audits is highly uncertain.

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11. Commitments and Contingencies

(a) Lease Commitments - accounted for under ASC 842, Leases

All of our lease right-of-use (“ROU”) assets and lease liabilities are related to operating and finance leases, where the lease term exceeds one year. Our operating leases are generally for railcars, office space, and equipment and our finance leases are generally related to equipment and buildings used to conduct our operations. These operating and finance leases were discounted using a weighted-average rate of 3.66% and 4.59%, respectively, which is based on a weighted average borrowing rate of specific debt. Non-variable lease costs include the amortization of the asset recorded on a straight-line basis. Variable lease components are non-index based payments based on performance or usage of the underlying asset. We have no material lessor or sublease income.

Operating Leases

The components of lease cost for operating leases are as follows:

	Three Months Ended March 31,
	2021		2020
	(In thousands)
Lease cost	$	6,029	$	6,164
Variable lease cost	256		88
Operating lease expense	$	6,285	$	6,252

The operating lease liabilities on a discounted basis arising from obtaining ROU assets as of March 31, 2021 were comprised as follows:

Leased Asset Class	Polymer		Chemical		Percentage		Average Months Remaining on the Lease	Weighted Average in Months
	(In thousands)
Railcars	$	2,513	$	25,249	33.0	%	62	20.3
Buildings	25,861		10,378		43.0	%	30	13.0
Equipment	1,520		5,789		8.7	%	33	2.9
Land	6,946		41		8.3	%	353	29.3
Other	684		5,253		7.0	%	28	2.0
Total	$	37,524	$	46,710				67.5

The following tables show the undiscounted cash flows for the operating lease liabilities.

	March 31, 2021
	(In thousands)
April 1, 2021 through December 31, 2021	$	16,232
2022	17,259
2023	14,916
2024	11,069
2025	8,840
Thereafter	26,936
Total undiscounted operating lease liabilities	95,252
Present value discount	(11,010)
Foreign currency and other	(8)
Total discounted operating lease liabilities	$	84,234

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	December 31, 2020
	(In thousands)
2021	$	21,098
2022	15,992
2023	14,309
2024	10,668
2025	8,605
Thereafter	26,988
Total undiscounted operating lease liabilities	97,660
Present value discount	(11,474)
Foreign currency and other	11
Total discounted operating lease liabilities	$	86,197

Finance Leases

The components of lease cost for finance leases are as follows:

	Three Months Ended March 31,
	2021		2020
	(In thousands)
Lease amortization	$	311	$	178
Lease interest	42		14
Finance lease expense	$	353	$	192

The finance lease liabilities on a discounted basis arising from obtaining ROU assets as of March 31, 2021 were comprised as follows:

Leased Asset Class	Polymer		Chemical		Percentage		Average Months Remaining on the Lease	Weighted Average in Months
	(In thousands)
Buildings	$	—	$	2,952	77.3	%	46	35.5
Equipment	789		80		22.7	%	53	12.1
Total	$	789	$	3,032				47.6

The following tables show the undiscounted cash flows for the finance lease liabilities.

	March 31, 2021
	(In thousands)
April 1, 2021 through December 31, 2021	$	250
2022	820
2023	1,010
2024	1,200
2025	968
Thereafter	3
Total undiscounted finance lease liabilities	4,251
Present value discount	(429)
Foreign currency and other	(1)
Total discounted finance lease liabilities	$	3,821

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	December 31, 2020
	(In thousands)
2021	$	232
2022	232
2023	232
2024	232
2025	—
Thereafter	—
Total undiscounted finance lease liabilities	928
Present value discount	(92)
Foreign currency and other	(1)
Total discounted finance lease liabilities	$	835

These finance lease liabilities are included within current and long-term debt on the Condensed Consolidated Balance Sheets. See Note 8 Long-Term Debt for additional information.

(b) Legal Proceedings

We received an initial notice from the tax authorities in Brazil during the fourth quarter of 2012 in connection with tax credits that were generated from the purchase of certain goods that were subsequently applied by us against taxes owed. The tax authorities are currently assessing R$10.2 million, or approximately $1.8 million, including penalties and interest. We have appealed the assertion by the tax authorities in Brazil that the goods purchased were not eligible to earn the credits. While the outcome of this proceeding cannot be predicted with certainty, we do not expect this matter to have a material adverse effect upon our financial position, results of operations or cash flows.

We and certain of our subsidiaries, from time to time, are parties to various other legal proceedings, claims and disputes that have arisen in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance. A substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our financial position, results of operations or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not expect any of these existing matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations or cash flows.

(c) Asset Retirement Obligations

The changes in the aggregate carrying amount of our asset retirement obligations (“ARO”) are as follows:

	Three Months Ended March 31,
	2021		2020
	(In thousands)
Beginning balance	$	6,332	$	6,523
Additional accruals	316		—
Accretion expense	106		78
Obligations settled	(382)		(302)
Foreign currency translation	(232)		(102)
Ending balance	$	6,140	$	6,197

In the first quarter of 2021, the Company recorded an ARO of $0.3 million related to the office rebuild of our research facility in Europe.

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12. Employee Benefits

The components of net periodic benefit cost related to pension benefits are as follows: 

	Three Months Ended March 31,
	2021				2020
	U.S. Plans		Non-U.S. Plans		U.S. Plans		Non-U.S. Plans
	(In thousands)
Service cost	$	—	$	512	$	65	$	442
Interest cost	1,397		311		1,648		420
Expected return on plan assets	(2,485)		(851)		(2,328)		(682)
Amortization of prior service cost	—		5		—		4
Amortization of net actuarial loss	605		262		388		253
Net periodic benefit (income) cost	$	(483)	$	239	$	(227)	$	437

The components of net periodic benefit cost other than the service cost component are included in other income on our Condensed Consolidated Statements of Operations.

We made contributions of $6.9 million and $3.3 million to our pension plans in the three months ended March 31, 2021 and 2020, respectively.

The components of net periodic benefit cost related to other post-retirement benefits are as follows:

	Three Months Ended March 31,
	2021		2020
	U.S. Plans		U.S. Plans
	(In thousands)
Service cost	$	85	$	85
Interest cost	163		195
Amortization of prior service cost	(438)		(438)
Amortization of net actuarial loss	243		213
Net periodic benefit (income) cost	$	53	$	55

The components of net periodic benefit cost other than the service cost component are included in other income on our Condensed Consolidated Statements of Operations.

We made contributions of $0.4 million and $0.7 million to our other post-retirement plans in the three months ended March 31, 2021 and 2020, respectively.

13. Industry Segments and Foreign Operations

Our operations are managed through two operating segments: (i) Polymer segment; and (ii) Chemical segment. In accordance with the provisions of ASC 280, Segment Reporting, our chief operating decision maker has been identified as our President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company.

•Polymer Segment is comprised of our SBCs and other engineered polymers business.

•Chemical Segment is comprised of our pine-based specialty products business.

Our chief operating decision maker uses operating income (loss) as the primary measure of each segment's operating results in order to allocate resources and in assessing the company's performance. In accordance with ASC 280, Segment Reporting, we have presented operating income for each segment. The following table summarizes our operating results by segment. We do not have sales between segments.

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	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
	Polymer		Chemical		Total		Polymer		Chemical		Total
	(In thousands)
Revenue	$	241,150	$	196,121	$	437,271	$	240,380	$	186,889	$	427,269
Cost of goods sold	159,165		142,073		301,238		171,649		136,420		308,069
Gross profit	81,985		54,048		136,033		68,731		50,469		119,200
Operating expenses:
Research and development	6,912		2,608		9,520		7,725		3,067		10,792
Selling, general, and administrative	22,175		19,104		41,279		29,933		19,125		49,058
Depreciation and amortization	12,824		18,733		31,557		13,347		17,826		31,173
(Gain) loss on disposal of fixed assets	215		89		304		(199)		135		(64)
Operating income	$	39,859	$	13,514	53,373		$	17,925	$	10,316	28,241
Other income					808						327
Disposition and exit of business activities					—						175,214
Loss on extinguishment of debt					—						(13,954)
Earnings of unconsolidated joint venture					120						101
Interest expense, net					(10,947)						(17,461)
Income before income taxes					$	43,354					$	172,468

The following table presents long-lived assets including goodwill and total assets.

	March 31, 2021						December 31, 2020
	Polymer		Chemical		Total		Polymer		Chemical		Total
	(In thousands)
Property, plant, and equipment, net	$	518,410	$	409,671	$	928,081	$	523,067	$	419,636	$	942,703
Investment in unconsolidated joint venture	$	11,978	$	—	$	11,978	$	12,723	$	—	$	12,723
Goodwill	$	—	$	373,828	$	373,828	$	—	$	375,061	$	375,061
Total assets	$	1,129,458	$	1,336,619	$	2,466,077	$	1,104,954	$	1,356,003	$	2,460,957

(a) Goodwill

The Company conducts an annual impairment review of goodwill on October 1st of each year, unless events occur which trigger the need for an interim impairment review.

Changes in goodwill from January 1, 2021 through March 31, 2021 were as follows:

	Chemical
	(In thousands)
Balance at January 1, 2021	$	375,061
Foreign currency translation	(1,233)
Balance at March 31, 2021	$	373,828

(b) Revenue by Geography

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.

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Following is a summary of revenue by geographic region:

	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
	Polymer		Chemical		Total		Polymer		Chemical		Total
	(In thousands)						(In thousands)
Revenue:
United States	$	82,656	$	73,494	$	156,150	$	85,394	$	80,581	$	165,975
Germany	26,728		14,686		41,414		24,433		12,668		37,101
All other countries	131,766		107,941		239,707		130,553		93,640		224,193
	$	241,150	$	196,121	$	437,271	$	240,380	$	186,889	$	427,269

(c) Capital Expenditures

Our capital expenditures for the Polymer segment, excluding capital expenditures by the KFPC joint venture, were $15.5 million and $10.3 million during the three months ended March 31, 2021 and 2020, respectively, and capital expenditures for our Chemical segment were $6.9 million and $7.2 million during the three months ended March 31, 2021 and 2020, respectively.

14. Related Party Transactions

We own a 50% equity investment in an SBC manufacturing joint venture in Kashima, Japan. Our outstanding payables were $15.7 million and $14.8 million as of March 31, 2021 and December 31, 2020, respectively, which were recorded in due to related party on the Condensed Consolidated Balance Sheets. Our total purchases from the joint venture were $8.0 million and $9.1 million for the three months ended March 31, 2021 and 2020, respectively.

We own a 50% variable interest in KFPC, an HSBC manufacturing joint venture in Mailiao, Taiwan. The KFPC joint venture is fully consolidated in our financial statements, and our joint venture partner, Formosa Petrochemical Corporation (“FPCC”), is a related party affiliate. Under the terms of the joint venture agreement, FPCC is to provide certain site services and raw materials to KFPC. Additionally, we purchase certain raw materials from FPCC for our other manufacturing locations. Our outstanding payables were $0.6 million and $2.3 million as of March 31, 2021 and December 31, 2020, respectively, which were recorded in due to related party on the Condensed Consolidated Balance Sheets. Our total purchases from this joint venture were $11.3 million and $14.0 million for the three months ended March 31, 2021 and 2020, respectively. See Note 15 Variable Interest Entity, for further discussion related to the KFPC joint venture.

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15. Variable Interest Entity

We hold a variable interest in a joint venture with FPCC to own and operate a 30 kiloton HSBC plant at FPCC’s petrochemical site in Mailiao, Taiwan. Included in the below assets and liabilities is a land lease with FPCC to support our operations at the HSBC plant. Kraton and FPCC are each 50% owners of the joint venture company, KFPC. Under the provisions of an offtake agreement with KFPC, we have exclusive rights to purchase all production from KFPC. Additionally, following a ramp-up period, the agreement requires us to purchase a minimum of 80% of the plant production capacity each year at a defined fixed margin. This offtake agreement represents a variable interest that provides us the power to direct the most significant activities of KFPC and exposes us to the economic variability of the joint venture. As such, we have determined that we are the primary beneficiary of this variable interest entity. As a result, we have consolidated KFPC in our financial statements and reflected FPCC’s 50% ownership as a noncontrolling interest.

The following table summarizes the carrying amounts of assets and liabilities as of March 31, 2021 and December 31, 2020 for KFPC before intercompany eliminations.

	March 31, 2021		December 31, 2020
	(In thousands)
Cash and cash equivalents	$	1,561	$	3,097
Other current assets	20,345		17,304
Property, plant, and equipment, net	146,325		150,838
Intangible assets	7,670		7,959
Long-term operating lease assets, net	6,994		7,178
Other long-term assets	5,647		5,187
Total assets	$	188,542	$	191,563
Current portion of long-term debt	$	83,758	$	72,156
Current liabilities	6,825		5,209
Long-term debt	—		17,559
Deferred income taxes	652		661
Long-term operating lease liabilities	6,606		6,700
Total liabilities	$	97,841	$	102,285

16. Subsequent Events

We have evaluated events and transactions that occurred after the balance sheet date and determined that there were no other significant events or transactions that would require recognition or disclosure in our condensed consolidated financial statements for the period ended March 31, 2021.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. This discussion contains forward-looking statements and involves numerous risks, uncertainties, assumptions and other important factors that could cause the actual results, performance, or industry results, to differ materially from historical results, any future results, or performance, or industry results expressed or implied by such forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Information.”

OVERVIEW

We are a leading global sustainable specialty chemicals company that manufactures styrenic block copolymers (“SBCs”), specialty polymers, and high-value performance products primarily derived from pine wood pulping co-products. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment.

Polymer Segment

SBCs are highly-engineered synthetic elastomers, which we invented and commercialized over 50 years ago. We developed the first unhydrogenated styrenic block copolymers (“USBC”) in 1964 and the first hydrogenated styrenic block copolymers (“HSBC”) in the late 1960s. Our SBCs enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability, and processability, and are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants, lubricants, medical, packaging, automotive, paving, roofing, and footwear products.

Our polymers are typically formulated or compounded with other products to achieve improved, customer-specific performance characteristics in a variety of applications. We seek to maximize the value of our product portfolio by emphasizing complex or specialized polymers and innovations that yield higher margins than more commoditized products. We sometimes refer to these complex or specialized polymers or innovations as being more “differentiated.” We believe our SBC products offer many characteristics that help our customers drive towards their sustainability goals. Among others, our SBCs may offer features such as greater recyclability, increased durability that reduces the costly need for maintenance and replacement, and alternatives to less environmentally friendly materials, such as PVCs.

Our USBC paving and roofing applications provide a sustainable alternative by increasing durability, which extend road and roof life. Our products are also found in medical applications, personal care products such as disposable diapers, oil additives, gels, and various other consumer goods. Our products are also used to impart tack and shear properties in a wide variety of adhesive products and to impart characteristics such as flexibility and durability in sealants and corrosion resistance in coatings.

Our HSBC offerings are often the more sustainable choice when compared to alternatives. Among other features, our HSBCs can offer improved recyclability of polyethylene-terephthalate and polypropylene streams, and function as replacements for less sustainable alternatives such as PVC, mainly in medical applications.

Prior to the sale of our CariflexTM business, we produced Cariflex 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. Cariflex is included in the results of operations through March 6, 2020.

On March 6, 2020, we completed the sale of our Cariflex business to Daelim Industrial Co, Ltd. (“Daelim”). As part of the sale, we entered into a multi-year Isoprene Rubber Supply Agreement (“IRSA”) with Daelim. In accordance with the IRSA, we will supply Isoprene Rubber to Daelim for a period of five years, with an optional extension for an additional five years. See Note 4 Disposition and Exit of Business Activities for further discussion of the IRSA.

Chemical Segment

We manufacture and sell high value sustainable products primarily derived from pine wood pulping co-products. We refine and further upgrade two primary feedstocks, crude tall oil (“CTO”) and crude sulfate turpentine (“CST”), both of which are co-products of the wood pulping process, into value-added biobased specialty chemicals. We refine CTO through a distillation process into four primary constituent fractions: tall oil fatty acids (“TOFA”); tall oil rosin (“TOR”); distilled tall oil (“DTO”); and tall oil pitch. We further upgrade TOFA and TOR into derivatives such as dimer acids, polyamide resins, rosin resins, dispersions, and disproportionated resins. We refine CST into terpene fractions, which can be further upgraded into specialty terpene resins. The various fractions and derivatives resulting from our CTO and CST refining process provide for

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distinct functionalities and properties, determining their respective applications and end markets. Our products derived from CTO and CST offer sustainable, non-GMO bio-based alternatives to hydrocarbons.

We focus our resources on three product groups: Adhesives, Performance Chemicals, and Tires. Within our product groups, our products are sold into a diverse range of submarkets, including packaging, tapes and labels, pavement marking, high performance tires, fuel additives, oilfield and mining, coatings, metalworking fluids and lubricants, inks, and flavor and fragrances, among others.

While this business is based predominantly on the refining and upgrading of CTO and CST, we have the capacity to use both hydrocarbon-based raw materials, such as alpha-methyl-styrene, rosins, and gum rosins where appropriate and, accordingly, are able to offer tailored solutions for our customers.

Factors Affecting Our Results of Operations

International Operations and Currency Fluctuations. We operate a geographically diverse business, serving customers in numerous countries from thirteen manufacturing facilities on three continents. Our sales and production costs are mainly denominated in U.S. dollars, Brazilian Real, Euro, Japanese Yen, Swedish Krona, and Taiwanese Dollar. From time to time, we use hedging strategies to reduce our exposure to currency fluctuations.

We generated our revenue from customers located in the following regions:

	Three Months Ended March 31,
	2021		2020
Revenue by Geography:	(In thousands)
Americas	$	190,297	$	186,158
Europe, Middle East, and Africa	156,848		138,032
Asia Pacific	90,126		103,079
Total revenue	$	437,271	$	427,269

Raw Materials. We use butadiene, styrene, and isoprene (collectively referred to as “monomers”) as our primary raw materials in our Polymer segment and CTO and CST in our Chemical segment. The cost of these raw materials has generally correlated with changes in energy prices and is also generally influenced by supply and demand factors, and for our isoprene monomers, the prices of natural and synthetic rubber. Average purchase prices of our raw materials increased for the Polymer and Chemical segments during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Seasonality. Seasonal changes and weather conditions typically affect our sales of products in our paving, pavement marking, roofing, and construction applications, which generally results in higher sales volumes in the second and third quarters of the calendar year compared to the first and fourth quarters of the calendar year. Sales for our other product applications tend to show relatively little seasonality.

Recent Developments and Certain Known Trends

Our business is subject to a number of known risks and uncertainties, some of which are a result of recent developments.

COVID-19 Pandemic. The continued global impact of COVID-19 has resulted in various emergency measures to combat the spread of the virus. With the development of variants and increased vaccinations rates, the status of ongoing measures varies widely depending on the country and locality. We continue to monitor the progression of the COVID-19 pandemic on a daily basis, and we have a dedicated COVID-19 crisis management team that meets regularly. The safety and well-being of our employees, our stakeholders, and the communities in which we operate remain our primary concern. While our essential plant and laboratory personnel remain on-site, many of our other employees around the world are working remotely. We are continuing to follow the orders and guidance of federal, regional, and local governmental agencies, as we maintain our own stringent protocols in an effort to mitigate the spread of the virus and protect the health of our employees, customers, and suppliers as well as the communities in which we operate.

To date, our plants have continued to operate at normal capacities. Importantly, under the U.S. Department of Homeland Security guidance issued on April 17, 2020, and supplemented on August 18, 2020, as well as many related regional and local governmental orders, chemical manufacturing sites are considered essential critical infrastructure, and as such, are not currently subject to closure in the locations where we operate. While the members of the European Union issue critical infrastructure orders on a country-by-country basis, thus far they have taken a similar approach to the U.S. Department of Homeland Security guidance.

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However, our supply chain has encountered significant constraints as described below, including sourcing key raw materials and demand constraints. Although there has been some disruption in global supply chain and logistics environment, we believe our geographic and end market diversification partially mitigate our exposure, as we serve many customers whose products remain vital in the current environment.

In our Chemical segment, during the second half of 2020, we saw improvement in demand trends within the tires, automotive, oilfield, and lubricants/fuel additives applications, compared to the second quarter of 2020. While COVID-19 continues to be a risk, during the first quarter of 2021 we also noted continued improvement in global demand trends, particularly in adhesives, flavors and fragrances, as well as road markings.

In our Polymer segment, during the second half of 2020, we saw improved global demand in most end market applications, compared to the first half of 2020. This recovery was aided by enhanced sales into medical applications and the global recovery of demand for consumer durables and automotive applications. During the first quarter of 2021, we saw improved demand in Performance Polymers within our paving and roofing applications as well as strong demand for Specialty Polymers across regions, in particular China and broader Asia, for consumer durables and automotive applications.

We are unable to accurately predict the impact that the pandemic will have on our business and results of operations for the remainder of 2021 and beyond (including how the impact of the pandemic on our business and results of operations may change from quarter to quarter) due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, additional actions that may be taken by governmental authorities, and other unintended consequences. Furthermore, the pandemic has adversely impacted, and may further adversely impact, the national and global economy, particularly in less essential end markets. There can also be no assurance that demand for our products generally (regardless of end market) will not be adversely affected by the continued impact of the COVID-19 pandemic on the national and global economy. Moreover, we are unable to predict actions that may be taken by our competitors, some of which may be less diversified, that could negatively impact pricing or demand for our products.

In spite of the uncertainty of the potential future impact of the COVID-19 pandemic, we expect that our geographic and end market diversification, such as medical, adhesives, food packaging, automotive, and consumer durables may partially mitigate our financial exposure to the pandemic. We will continue to monitor the impacts of COVID-19 and implement operational cost rigors and initiatives as needed. While the impacts of COVID-19 contributed to the goodwill impairment in our Chemical segment in the third quarter of 2020, as discussed further in Note 14 Industry Segments and Foreign Operations to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K, we do not currently anticipate any material impairments, with respect to intangible assets, long-lived assets, or right of use assets, increases in allowances for credit losses from our customers, restructuring charges, other expenses, or changes in accounting judgments to have a material impact on our financial statements. However, we are continuing to assess the impact from the pandemic, if any.

Market Conditions. Certain fundamental market conditions that affected our business and financial results prior to 2020, coupled with the impacts of the COVID-19 pandemic, have improved, however, we remain cognizant of the continued risks associated with the COVID-19 pandemic.

In particular, our Chemical segment has seen positive improvement across most geographies and in various market applications such as adhesives, tires, and industrial markets. We also see a modest recovery in certain end uses such as oilfield and mining applications. Despite the continued excess availability of low-cost C5 hydrocarbon tackifiers, the current rosin market fundamentals have improved, especially as compared to the end of 2020. We expect the positive momentum in the rosin adhesive and road marking markets to continue in the near term. Prices for upgraded products within our CST chain have improved, but remain below 2019 peak levels. However, market fundamentals are expected to remain stable in the near term.

Global supply chain and logistics environment. The global supply chain and logistics environment has been constrained in the first quarter of 2021 as a result of the global dislocation of logistical resources resulting from the COVID-19 pandemic. The Company experienced some supply side constraints in our ability to source key raw materials, as well as demand side constraints in shipping to our customers. Additionally, these constraints resulted in higher logistics cost per ton compared to historical trends. We implemented a number of mitigation efforts, including cross regional optimization, planning contingencies, and utilizing alternative carriers. Although we implemented mitigation efforts, the global logistics environment and supply chain constraints resulted in modest earnings pressure during the first quarter 2021. Given the current global logistics environment outlook, we expect these trends to continue into the near future.

BiaXamTM Granted Section 18 Emergency Exemption by the U.S. Environmental Protection Agency (the “EPA”). On April 21, 2021, the EPA approved a public health emergency exemption under Section 18 of the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) submitted by the Georgia, Utah, and Minnesota Departments of Agriculture for the deployment of BiaXam in specific applications. The EPA exemption will allow Delta Air Lines to use BiaXam in specific applications in these states to protect against the SARS-CoV-2 virus. We do not expect the approval of this emergency exemption to have a material impact to the Company’s near term results of operations.

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Berre, France, Turnaround. During the first half of 2021, we are undergoing a significant statutory turnaround at our Berre, France, location, which occurs approximately every six years. We expect costs of this turnaround to be approximately $15.0 million. We incurred approximately $3.0 million of costs associated with the turnaround in the first quarter of 2021, and expect the majority of the remaining costs to be realized in the second quarter of 2021.

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RESULTS OF OPERATIONS

KRATON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended March 31,
	2021		2020
Revenue	$	437,271	$	427,269
Cost of goods sold	301,238		308,069
Gross profit	136,033		119,200
Operating expenses:
Research and development	9,520		10,792
Selling, general, and administrative	41,279		49,058
Depreciation and amortization	31,557		31,173
(Gain) loss on disposal of fixed assets	304		(64)
Operating income	53,373		28,241
Other income	808		327
Disposition and exit of business activities	—		175,214
Loss on extinguishment of debt	—		(13,954)
Earnings of unconsolidated joint venture	120		101
Interest expense, net	(10,947)		(17,461)
Income before income taxes	43,354		172,468
Income tax benefit (expense)	(8,761)		36,552
Consolidated net income	34,593		209,020
Net income attributable to noncontrolling interest	(1,364)		(934)
Net income attributable to Kraton	$	33,229	$	208,086
Earnings per common share:
Basic	$	1.04	$	6.55
Diluted	$	1.02	$	6.47
Weighted average common shares outstanding:
Basic	31,928		31,587
Diluted	32,458		31,949

Consolidated Results

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Revenue was $437.3 million for the three months ended March 31, 2021 compared to $427.3 million for the three months ended March 31, 2020, an increase of $10.0 million, or 2.3%. Revenue increased $0.8 million and $9.2 million for the Polymer and Chemical segments, respectively. For additional information regarding the changes in revenue, see our segment disclosures below.

Cost of goods sold was $301.2 million for the three months ended March 31, 2021 compared to $308.1 million for the three months ended March 31, 2020, a decrease of $6.8 million, or 2.2%. Cost of goods sold decreased $12.5 million for the Polymer segment and increased $5.7 million for the Chemical segment. For additional information regarding the changes in cost of goods sold, see our segment disclosures below.

Selling, general, and administrative expenses were $41.3 million for the three months ended March 31, 2021 compared to $49.1 million for the three months ended March 31, 2020. The $7.8 million decrease is primarily attributable to non-recurring transaction, acquisition, and restructuring costs related to the divestiture of our Cariflex business in 2020 and the benefit of costs reduction initiatives.

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Depreciation and amortization was $31.6 million for the three months ended March 31, 2021 compared to $31.2 million for the three months ended March 31, 2020.

Other income was $0.8 million for the three months ended March 31, 2021 compared to other income of $0.3 million for the three months ended March 31, 2020. The benefit to other income is partially related to a reduction in net periodic pension expense.

Disposition and exit of business activities was $175.2 million for the three months ended March 31, 2020 related to the gain on sale of our Cariflex business. See Note 4 Disposition and Exit of Business Activities for further discussion on the sale of our Cariflex business.

We recorded a $14.0 million loss on extinguishment of debt during the three months ended March 31, 2020, which

includes the write off of previously capitalized deferred financing costs, the write off of original issue discount, and a loss on

the settlement of the ineffective portion of interest rate swaps due to the repayment in full of our USD Tranche and a partial

repayment of our Euro Tranche with the net cash proceeds from the sale of our Cariflex business. See Note 8 Long-Term Debt for further discussion.

Interest expense, net, was $10.9 million for the three months ended March 31, 2021 compared to $17.5 million for the three months ended March 31, 2020, a decrease of $6.5 million. The decrease is due to lower overall indebtedness and an improvement in borrowing rates.

Our income tax provision was an expense of $8.8 million and a benefit of $36.6 million for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to the change in valuation allowance, certain tax credits generated, and return to provision adjustments, partially offset by the mix of our pretax income or loss generated in various local and foreign jurisdictions.

During the three months ended March 31, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0% primarily due to our uncertain tax positions, the tax impact of the sale of our Cariflex business, and the intercompany transfer of certain intellectual property rights to our Dutch subsidiary. See Note 10 Income Taxes for further discussion on the reconciliation from the U.S. corporate statutory tax rate to the effective tax rate.

Net income attributable to Kraton was $33.2 million, or $1.02 per diluted share, for the three months ended March 31, 2021, a decrease of $174.9 million compared to net income attributable to Kraton of $208.1 million, or $6.47 per diluted share, for the three months ended March 31, 2020. Adjusted Diluted Earnings Per Share (non-GAAP) was $0.53 for the three months ended March 31, 2021 compared to Adjusted Diluted Earnings Per Share (non-GAAP) of $0.27 for the three months ended March 31, 2020. See a reconciliation of GAAP Diluted Earnings Per Share to non-GAAP Adjusted Diluted Earnings Per Share below.

Polymer Segment

	Three Months Ended March 31,
	2021			2020
	(In thousands)
Performance Products	$	127,945		$	118,760
Specialty Polymers	96,739			77,917
Cariflex(1)	—			36,930
Isoprene Rubber(1)	15,956			6,859
Other	510			(86)
Polymer Segment Revenue	$	241,150		$	240,380
Operating income	$	39,859		$	17,925
Adjusted EBITDA (non-GAAP)(1)(2)	$	37,466		$	51,169
Adjusted EBITDA margin (non-GAAP)(3)	15.5		%	21.3		%

 ____________________________________________________

(1)Our Cariflex revenue includes sales through March 6, 2020. We continue to sell Isoprene Rubber to Daelim under an IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $7.6 million and $3.4 million for the three months ended March 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.

(2)See non-GAAP reconciliations included below for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.

(3)Defined as Adjusted EBITDA as a percentage of revenue.

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Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Revenue for the Polymer segment was $241.2 million for the three months ended March 31, 2021 compared to $240.4 million for the three months ended March 31, 2020. The increase was due to higher sales volumes in our core Specialty Polymers and Performance Products businesses resulting in revenue increases of $18.8 million and $9.2 million, respectively. These increases were partially offset by the divestiture of our Cariflex business in March 2020, which contributed $36.9 million of revenue in the comparative quarter of 2020. The positive impact from changes in currency exchange rates between the periods was $10.9 million.

Polymer Segment Sales Volume % Change	Three Months Ended March 31, 2021
Performance Products	6.5	%
Specialty Polymers	24.5	%
Isoprene Rubber	129.5	%
Subtotal	13.1	%
Cariflex	(100.0)	%
Total	5.6	%

Sales volumes of 74.8 kilotons for the three months ended March 31, 2021 increased 5.6% compared to the three months ended March 31, 2020. Volume for our Specialty Polymers increased 24.5% driven by strong demand across all regions, particularly in consumer durable applications in China and broader Asia, and automotive applications in North America and Europe. Volume for our Performance Products business increased 6.5%, primarily driven by improved paving and roofing demand in Europe.

Cost of goods sold was $159.2 million for the three months ended March 31, 2021 compared to $171.6 million for the three months ended March 31, 2020, a decrease of $12.5 million, or 7.3%. The decrease in cost of goods sold reflects the cost of consumed raw materials, which has lower average costs on a FIFO measurement basis of accounting, and the divestiture of our Cariflex business. These impacts were partially offset by higher sales volumes in our core business. The negative effect from changes in currency exchange rates between the periods was $8.8 million.

For the three months ended March 31, 2021, the Polymer segment operating income was $39.9 million compared to $17.9 million for the three months ended March 31, 2020, an increase of $21.9 million, or 122.4%. This increase is largely attributable to lower raw material costs on a FIFO basis, partially offset by the divestiture of our Cariflex business.

For the three months ended March 31, 2021, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $37.5 million compared to $51.2 million for the three months ended March 31, 2020. The 26.8% decrease in Adjusted EBITDA (non-GAAP) is primarily due to the divestiture of our Cariflex business in March 2020. Excluding the net impact of $10.3 million attributable to the disposition of our Cariflex business, Adjusted EBITDA excluding Cariflex would have been down 8.2%. The lower comparative Adjusted EBITDA is a result of higher fixed costs associated with a statutory turnaround at our Berre, France, location, and the impact to fixed costs associated with inventory liquidation. The higher costs were partially offset by the contribution from higher Specialty Polymers and Performance Products sales volumes. The positive effect from changes in currency exchange rates between the periods was $0.8 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA(5) below.

Chemical Segment

	Three Months Ended March 31,
	2021			2020
	(In thousands)
Adhesives	$	71,726		$	64,895
Performance Chemicals	111,175			110,742
Tires	13,220			11,252
Chemical Segment Revenue	$	196,121		$	186,889
Operating income	$	13,514		$	10,316
Adjusted EBITDA (non-GAAP)(1)	$	30,254		$	26,710
Adjusted EBITDA margin (non-GAAP)(2)	15.4		%	14.3		%

 ____________________________________________________

(1)See non-GAAP reconciliations included below for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.

(2)Defined as Adjusted EBITDA as a percentage of revenue.

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Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Revenue for the Chemical segment was $196.1 million for the three months ended March 31, 2021 compared to $186.9 million for the three months ended March 31, 2020. The increase in Chemical segment revenue was primarily attributable to the positive effect from changes in currency exchange rates of $8.9 million and higher sales volumes, discussed in the subsequent paragraph.

Chemical Segment Sales Volume % Change	Three Months Ended March 31, 2021
Adhesives	10.8	%
Performance Chemical	(3.5)	%
Tires(1)	14.9	%
Total	1.3	%

 ____________________________________________________

(1)Tires volumes are less than 5% of total Chemical segment volumes.

Sales volumes were 111.6 kilotons for the three months ended March 31, 2021, an increase of 1.5 kilotons, or 1.3%, due to increased rosin esters and TOFA and TOFA derivatives, partially offset by lower sales of CST upgrades and decreased raw material sales, the impact of Winter Storm Uri, and logistical challenges.

Cost of goods sold was $142.1 million for the three months ended March 31, 2021 compared to $136.4 million for the three months ended March 31, 2020, an increase of $5.7 million, or 4.1%. The increase was driven by higher average raw material and energy costs, combined with higher sales volumes. The negative effect from changes in currency exchange rates between the periods was $7.9 million.

For the three months ended March 31, 2021, the Chemical segment operating income was $13.5 million compared to an income of $10.3 million for the three months ended March 31, 2020, an increase of $3.2 million, or 31.0%.

For the three months ended March 31, 2021, the Chemical segment generated $30.3 million of Adjusted EBITDA (non-GAAP) compared to $26.7 million for the three months ended March 31, 2020. The 13.3% increase in Adjusted EBITDA (non-GAAP) was primarily driven by higher core volumes associated with improved market fundamentals, specifically in rosin esters and TOFA and TOFA derivatives and lower overall fixed costs, resulting from improved refining operating rates, partially offset by higher raw material and energy costs. The negative effect from changes in currency exchange rates between the periods was $0.1 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

NON-GAAP FINANCIAL MEASURES

EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share

We consider EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share to be important supplemental measures of our performance and believe they are frequently used by investors, securities analysts, and other interested parties in the evaluation of our performance and/or that of other companies in our industry, including period-to-period comparisons. Further, management uses these measures to evaluate operating performance, and our incentive compensation plan bases incentive compensation payments on our Adjusted EBITDA performance and attainment of net debt reduction, along with other factors. EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share have limitations as analytical tools and in some cases can vary substantially from other measures of our performance. You should not consider any of them in isolation, or as substitutes for analysis of our results under GAAP.

	Three Months Ended March 31,
	2021		2020
	(In thousands, except per share amounts)
EBITDA(2)(4)	$	85,858	$	221,102
Adjusted EBITDA(1)(3)(4)	$	67,720	$	77,879
Adjusted Diluted Earnings Per Share(1)(4)	$	0.53	$	0.27

____________________________________________________ 

(1)The majority of our consolidated inventory is measured using the FIFO basis of accounting. As part of our pricing strategy, we measure our business performance using the estimated current replacement cost (“ECRC”) of our inventory and cost of goods sold. Our ECRC is based on our current expectation of the current cost of our significant raw material inputs. ECRC is developed monthly based on actual market-based contracted rates and spot market purchase rates that are expected to occur in the period. We then adjust the value of the significant raw material inputs and their associated impact to finished goods to the current replacement cost to arrive at an ECRC value for inventory and cost of goods sold. The result of this revaluation from the GAAP carrying value creates the spread between GAAP and ECRC. We maintain our perpetual inventory in our global enterprise resource planning

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system, where the carrying value of our inventory is determined. With inventory valued under GAAP and ECRC, we then have the ability to report cost of goods sold and therefore Adjusted EBITDA and Adjusted Diluted Earnings Per Share under both our GAAP convention and ECRC.

(2)On a consolidated basis, EBITDA represents net income before interest, taxes, depreciation, and amortization. On a reporting segment basis, EBITDA represents segment operating income before depreciation and amortization, disposition and exit of business activities, other income (expense), gain (loss) on extinguishment of debt, and earnings of unconsolidated joint venture. Limitations for EBITDA as an analytical tool include the following:

•EBITDA does not reflect the significant interest expense on our debt;

•EBITDA does not reflect the significant depreciation and amortization expense associated with our long-lived assets;

•EBITDA included herein should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements. The calculation of EBITDA in the debt agreements includes adjustments, such as extraordinary, non-recurring or one-time charges, proforma cost savings, certain non-cash items, turnaround costs, and other items included in the definition of EBITDA in the debt agreements; and

•other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

(3)Adjusted EBITDA is EBITDA net of the impact of the spread between the FIFO basis of accounting and ECRC and net of the impact of items we do not consider indicative of our ongoing operating performance. We explain how each adjustment is derived and why we believe it is helpful and appropriate in the reconciliation below. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to the limitations applicable to EBITDA described above, as well as the following limitations:

•due to volatility in raw material prices, Adjusted EBITDA may, and often does, vary substantially from EBITDA, net income, and other performance measures, including net income calculated in accordance with GAAP; and

•Adjusted EBITDA may, and often will, vary significantly from EBITDA calculations under the terms of our debt agreements and should not be used for assessing compliance or non-compliance with financial covenants under our debt agreements.

(4)Included in EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. The IRSA sales include amortization of non-cash deferred income of $7.6 million and $3.4 million for the three months ended March 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.

(5)We prepare Adjusted EBITDA excluding Cariflex by eliminating from Adjusted EBITDA Cariflex sales, cost of sales, and direct specific fixed costs incurred from January 1, 2020 through March 6, 2020.

Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business.  

Our presentation of non-GAAP financial measures and the adjustments made therein should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, and in the future we may incur expenses or charges similar to the adjustments made in the presentation of our non-GAAP financial measures.

We compensate for the above limitations by relying primarily on our GAAP results and using EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share only as supplemental measures. See our condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.

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We reconcile consolidated net income and operating income to EBITDA and Adjusted EBITDA as follows:

	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
	Polymer		Chemical		Total		Polymer		Chemical		Total
	(In thousands)
Net income attributable to Kraton					$	33,229					$	208,086
Net income attributable to noncontrolling interest					1,364						934
Consolidated net income					34,593						209,020
Add (deduct):
Income tax (benefit) expense					8,761						(36,552)
Interest expense, net					10,947						17,461
Earnings of unconsolidated joint venture					(120)						(101)
Loss on extinguishment of debt					—						13,954
Other income					(808)						(327)
Disposition and exit of business activities					—						(175,214)
Operating income	$	39,859	$	13,514	53,373		$	17,925	$	10,316	28,241
Add (deduct):
Depreciation and amortization	12,824		18,733		31,557		13,347		17,826		31,173
Disposition and exit of business activities	—		—		—		175,214		—		175,214
Other income	282		526		808		55		272		327
Loss on extinguishment of debt	—		—		—		(13,954)		—		(13,954)
Earnings of unconsolidated joint venture	120		—		120		101		—		101
EBITDA (a)	53,085		32,773		85,858		192,688		28,414		221,102
Add (deduct):
Transaction, acquisition related costs, restructuring, and other costs (b)	2,332		1,972		4,304		10,148		762		10,910
Disposition and exit of business activities	—		—		—		(175,214)		—		(175,214)
Loss on extinguishment of debt	—		—		—		13,954		—		13,954
Non-cash compensation expense	2,924		—		2,924		2,848		—		2,848
Spread between FIFO and ECRC	(20,875)		(4,491)		(25,366)		6,745		(2,466)		4,279
Adjusted EBITDA	$	37,466	$	30,254	$	67,720	$	51,169	$	26,710	$	77,879

_____________________________________________________

(a)Included in EBITDA are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $7.6 million and $3.4 million for the three months ended March 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.

(b)Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.

We reconcile GAAP Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share (non-GAAP) as follows:

	Three Months Ended March 31,
	2021		2020
Diluted Earnings Per Share	$	1.02	$	6.47
Transaction, acquisition related costs, restructuring, and other costs (a)	0.10		0.26
Disposition and exit of business activities	—		(4.96)
Loss on extinguishment of debt	—		0.34
Tax restructuring	—		(1.95)
Spread between FIFO and ECRC	(0.59)		0.11
Adjusted Diluted Earnings Per Share (non-GAAP)	$	0.53	$	0.27

_____________________________________________________

(a)Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.

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Critical Accounting Policies

For a discussion of our critical accounting policies and estimates that require the use of significant estimates and judgments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

LIQUIDITY AND CAPITAL RESOURCES

Kraton Corporation is a holding company without any operations or assets other than the operations of its subsidiaries. Cash flows from operations of our subsidiaries, cash on hand, and available borrowings under the ABL Facility, and other debt offerings we may conduct from time to time, are our principal sources of liquidity.

COVID-19 Pandemic Governmental Liquidity Programs

We also continue to monitor government economic stabilization efforts in response to the COVID-19 pandemic and are participating, and may in the future participate, in certain legislative provisions to enhance our liquidity, including certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the American Rescue Plan Act of 2021 (the “ARP Act”), and similar federal or foreign governmental programs. For example, we elected certain cash deferral options under the CARES Act.

Elections made under the CARES Act did not have a material impact on our cash flows and results of operations. We will continue to evaluate our options under the CARES Act, ARP Act, and similar federal or foreign programs as legislative provisions occur.

Changes in Debt and Net Debt

Our changes in debt and net debt were driven by increases in working capital and higher raw material costs. We reduced our consolidated debt by $7.0 million and increased our consolidated net debt by $18.1 million during the first quarter of 2021. Excluding the effect of foreign currency, consolidated net debt increased by $38.3 million. Further, we had approximately $261.6 million of available liquidity, comprised of $60.8 million of cash on hand and a remaining available borrowing base of $200.8 million on our ABL Facility as of March 31, 2021. As of the date of this filing, our available borrowing capacity under the ABL Facility was $222.0 million, with no outstanding borrowings and $6.3 million of letters of credit outstanding under the ABL Facility.

Management uses consolidated net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using consolidated net debt is useful to investors in determining our leverage because we could choose to use cash and cash equivalents to retire debt. We also present consolidated net debt as adjusted for foreign exchange impact accounts for the foreign exchange effect on our foreign currency denominated debt agreements.

A summary of principal amounts for indebtedness and a reconciliation of Kraton debt to consolidated net debt (non-GAAP) and consolidated net debt excluding the effect of foreign currency (non-GAAP) are provided below:

	March 31, 2021		December 31, 2020
	(In thousands)
Kraton debt	$	859,334	$	860,360
KFPC loans(1)(2)	83,771		89,733
Consolidated debt	943,105		950,093
Kraton cash	59,220		82,804
KFPC cash(1)(3)	1,561		3,097
Consolidated cash	60,781		85,901
Consolidated net debt	$	882,324	$	864,192
Effect of foreign currency on consolidated net debt	20,186
Consolidated net debt, excluding effect of foreign currency	$	902,510

__________________________________________________

(1)Kraton Formosa Polymers Corporation (“KFPC”) joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and consolidate within our financial statements.

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(2)KFPC executed the KFPC Revolving Facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the 5.5 billion NTD KFPC Loan Agreement.

(3)Cash at our KFPC joint venture.

Principal Balances of Debt and Liquidity Considerations

As of March 31, 2021, our outstanding borrowings included (i) €85.0 million (or approximately $99.9 million) under the Euro Tranche of the Term Loan Facility, and (ii) $400.0 million and €290.0 million (or approximately $340.7 million) under the 4.25% Senior Notes and 5.25% Senior Notes, respectively, and (iii) $15.0 million under our ABL Facility.

In addition, as of March 31, 2021, KFPC had NTD 1.0 billion (or approximately $34.7 million) and NTD 1.4 billion (or approximately $49.1 million) of borrowings under the KFPC Loan Agreement and KFPC Revolving Facilities, respectively. The KFPC Loan Agreement will mature on January 17, 2022.

See Note 8 Long-Term Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 9 Long-Term Debt to the consolidated financial statements set forth in our most recently filed Annual Report on Form 10-K for additional information.

Based upon current and anticipated levels of operations, we believe that cash flows from operations of our subsidiaries, cash on hand, and borrowings available to us will be sufficient to fund our expected financial obligations, planned capital expenditures, and anticipated liquidity requirements, including working capital requirements, our investment in the KFPC joint venture, debt payments, interest payments, benefit plan contributions, and income tax obligations.

Our cash flows are subject to a number of risks and uncertainties, including, but not limited to, earnings, sensitivities to the cost of raw materials, seasonality, market conditions (including the impact of COVID-19), and fluctuations in foreign currency exchange rates. Because feedstock costs generally represent a substantial portion of our cost of goods sold, in periods of rising feedstock costs, we generally consume cash in operating activities due to increases in accounts receivable and inventory costs, partially offset by increased value of accounts payable. Conversely, during periods in which feedstock costs are declining, we generate cash flow from decreases in working capital.

Going forward there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under the Term Loan Facility and the ABL Facility or any new credit facilities or financing arrangements to fund liquidity needs and enable us to service our indebtedness. As of the date of this filing, we had no outstanding borrowings under the ABL Facility with a remaining available borrowing capacity of $222.0 million. Subject to compliance with certain covenants and other conditions, we have the option to borrow up to $350.0 million of incremental term loans plus an additional amount subject to a senior secured net leverage ratio. Our available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of cash invested in interest bearing funds and operating accounts. To date, we have not experienced any losses or lack of access to our invested cash or cash equivalents; however, we cannot provide any assurance that adverse conditions in the financial markets will not impact access to our invested cash and cash equivalents.

Pension and Other Retirement Benefit Plan Contributions

We made contributions of $7.3 million and $4.0 million to our Pension Plans and Retiree Medical Plan during the three months ended March 31, 2021 and 2020, respectively. We expect our total Pension Plans and Retiree Medical Plan contributions for the year ended December 31, 2021 to be approximately $16.6 million, subject to any future elections made under the ARP Act. Our Pension Plans and Retiree Medical Plan obligations are predicated on a number of factors, the primary ones being the return on our Pension Plans’ assets and the discount rates used in deriving our Pension Plans and Retiree Medical Plan obligations. If the investment returns on our Pension Plans' assets do not meet or exceed expectations during 2021, and the discount rates decrease on our Pension Plans and Retiree Medical Plan from the prior year, higher levels of contributions could be required in 2022 and beyond.

Additional Liquidity Considerations

As of March 31, 2021, we had $43.5 million of cash and short-term investments related to foreign operations that management asserts are permanently reinvested.

In December 2017, the Tax Act was enacted and resulted in a one-time transition tax on accumulated foreign subsidiary earnings. As of March 31, 2021, the remaining long-term tax payable related to the Tax Act of $10.7 million is presented within income tax payable, on our Condensed Consolidated Balance Sheets. We will pay the transition tax in annual interest-free installments through 2025, as permitted by the Tax Act.

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Turbulence in U.S. and international markets and economies (including the impact of COVID-19) may adversely affect our liquidity and financial condition, the liquidity and financial condition of our customers, and our ability to timely replace maturing liabilities and access the capital markets to meet liquidity needs, resulting in adverse effects on our financial condition and results of operations. However, to date, we have been able to access borrowings available to us in amounts sufficient to fund liquidity needs.

Our ability to pay principal and interest on our indebtedness, fund working capital, to make anticipated capital expenditures, and to fund our investment in the KFPC joint venture depends on our future performance, which is subject to general economic conditions and other factors, some of which are beyond our control. See Part I, Item 1A. Risk Factors for further discussion set forth in our most recently filed Annual Report on Form 10-K.

Operating Cash Flows

Net cash used in operating activities totaled $7.1 million during the three months ended March 31, 2021 compared to net cash provided by operating activities of $1.2 million during the three months ended March 31, 2020. This represents a net decrease in operating cash flows of $8.3 million, which was primarily driven by an increase in working capital, partially offset by an increase in operating income. The period-over-period changes in working capital are as follows:

•$31.4 million decrease in cash associated with other payables and accruals due to timing of payments for income taxes, partially offset by timing of interest payments;

•$12.8 million decrease in cash flows associated with accounts receivables due to higher sales volumes and higher average selling prices;

•$9.2 million decrease in cash flows associated with inventories of products, materials, and supplies due to higher raw material costs and higher inventory volumes; and

•$5.6 million decrease in cash flows associated with other items, including due to related parties, other assets and liabilities, and accounts payable, primarily due to timing of payments.

Investing Cash Flows

Net cash used in investing activities totaled $24.7 million for the three months ended March 31, 2021 and net cash provided by investing activities totaled $490.9 million for the three months ended March 31, 2020.

On March 6, 2020, we completed the sale of our Cariflex business to Daelim for gross proceeds of $530.0 million, adjusted for incremental working capital of $5.8 million, less contractual capital contributions of $25.3 million, for net proceeds of $510.5 million. The sale closed and is subject to a customary post-closing working capital adjustment and a contractual capital contribution post-closing adjustment.

Expected Capital Expenditures

We currently expect 2021 capital expenditures, excluding expenditures by the KFPC joint venture, will be approximately $100.0 million, which includes approximately $4.0 million of capitalized interest. Included in projected capital expenditures is approximately $70.0 million for infrastructure and maintenance, and health, safety, environmental, and security projects. The remaining anticipated 2021 capital expenditures are primarily associated with projects to optimize the production capabilities of our manufacturing assets, to support our innovation platform, and to upgrade our information technology systems.

Financing Cash Flows

Our consolidated capital structure as of March 31, 2021 was approximately 39.0% equity, 58.2% debt, and 2.8% noncontrolling interest compared to approximately 37.8% equity, 59.4% debt, and 2.8% noncontrolling interest as of December 31, 2020.

During the three months ended March 31, 2021, we decreased indebtedness by $7.0 million (or increased by $13.2 million excluding impacts on foreign currency), while decreasing cash on hand by approximately $25.1 million.

Share Repurchase Program.

In February 2019, we announced a repurchase program for up to $50.0 million of the Company’s common stock by February 2021. Repurchases could have been made at management’s discretion from time to time through privately-negotiated transactions, in the open market, or through broker-negotiated purchases in compliance with applicable securities law, including through a 10b5-1 Plan. The repurchase program could have been suspended for periods or discontinued at any time, and the amount and timing of the repurchases were subject to a number of factors, including Kraton's stock price. During the three months ended March 31, 2021, we did not repurchase any shares of our common stock. The share repurchase program ended on February 7, 2021.

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Contractual Obligations

Our contractual obligations are summarized in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. See Note 8 Long-Term Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for changes to our debt maturity schedule. There have been no other material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

We are not involved in any material off-balance sheet arrangements as of March 31, 2021.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk.

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes to the quantitative and qualitative disclosures about market risk disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. See Note 9 Fair Value Measurements, Financial Instruments, and Credit Risk to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further discussion.

Item 4.     Controls and Procedures.

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As of March 31, 2021, based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.     Legal Proceedings.

We and certain of our subsidiaries, from time to time, are parties to various other legal proceedings, claims, and disputes that have arisen in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance. A substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our financial position, results of operations, or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not expect any of these existing matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations, or cash flows.

For more information regarding legal proceedings, including environmental matters, see Note 11 Commitments and Contingencies to the condensed consolidated financial statements.

Item 1A.     Risk Factors.

Readers of this Quarterly Report on Form 10-Q should carefully consider the risks described in our other reports and filings filed with or furnished to the SEC, including our prior and subsequent reports on Forms 10-K, 10-Q and 8-K, in connection with any evaluation of our financial position, results of operations and cash flows.

The risks and uncertainties in our most recent Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not presently known or those that are currently deemed immaterial may also affect our operations. Any of the risks, uncertainties, events or circumstances described therein could cause our future financial condition, results of operations or cash flows to be adversely affected. There have been no material changes from the risk factors disclosed in our most recent Annual Report on Form 10-K.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

Share Repurchase Program. In February 2019, we announced a repurchase program for up to $50.0 million of the Company's common stock by February 2021. Repurchases could have been made at management's discretion from time to time through privately-negotiated transactions, in the open market, or through broker-negotiated purchases in compliance with applicable securities law, including through a 10b5-1 Plan. The repurchase program could have been suspended for periods or discontinued at any time, and the amount and timing of the repurchases were subject to a number of factors, including Kraton's stock price. During the three months ended March 31, 2021, we did not repurchase any shares of our common stock under this program. The share repurchase program ended on February 7, 2021.

The Company repurchases treasury stock that is withheld to satisfy the tax obligation of holders of restricted stock awards when they vest. Our equity incentive plans provide that the value of shares delivered to us to pay the withholding tax obligations is calculated based on the average of the high and low sales price per share of our common stock on the day of vest.

	Issuer Purchases of Equity Securities
	(a) Total Number of Shares (or Units) Purchased(1)	(b) Average Price Paid Per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(2)
January 1, 2021 through January 31, 2021	511	$	28.43	—	$	40,000,036
February 1, 2021 through February 28, 2021	22,147	42.38		—	40,000,036
March 1, 2021 through March 31, 2021	—	—		—	40,000,036
Total	22,658	$	42.06	—	$	40,000,036

_____________________________________________________

(1)The total number of shares disclosed in this column includes 22,658 shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted stock awards which vested.

(2)This column contains repurchases under the Share Repurchase Program, which ended on February 7, 2021. As of February 8, 2021, there are no shares available for purchase under any plans or programs.

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Item 3.     Default Upon Senior Securities.

None.

Item 4.     Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information.

None.

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Item 6.     Exhibits.

Exhibit Number
15.1*	Letter re: Unaudited Interim Financial Information
31.1*	Certification of Chief Executive Officer under Section 302 of Sarbanes—Oxley Act of 2002
31.2*	Certification of Chief Financial Officer under Section 302 of Sarbanes—Oxley Act of 2002
32.1*	Certification Pursuant to Section 906 of Sarbanes—Oxley Act of 2002
101*	The following materials from Kraton Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (Unaudited), (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (Unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020 (Unaudited), (iv) Condensed Consolidated Statement of Changes in Equity for the three months ended March 31, 2021 and 2020 (Unaudited), (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited)
104*	The cover page from Kraton Corporation Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language)

_________________________________________________

*    Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		KRATON CORPORATION
Date:	April 29, 2021	/s/ Kevin M. Fogarty
		Kevin M. Fogarty
		President and Chief Executive Officer
Date:	April 29, 2021	/s/ Atanas H. Atanasov
		Atanas H. Atanasov
		Executive Vice President, Chief Financial Officer, and Treasurer

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