Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.05pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.11pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.21pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adverse+26
adversely+8
failure+8
termination+7
delay+5
Positive rising
able+2
greater+2
despite+2
profitability+1
innovation+1
Risk Factors (Item 1A)
14,877 words
Item 1A. Risk Factors.
Summary
• Failure of the Merger to be consummated, the termination of the Merger Agreement or a significant delay in the consummation of the Merger could have a material adverse impact on our business, financial condition, and results of operations.
• We are subject to business uncertainties and contractual restrictions while the Merger is pending.
• Litigationagainst us, or the members of our board of directors, could prevent or delay the completion of the Merger.
• The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire the Company for greater consideration than what Parent has agreed to pay pursuant to the Merger Agreement.
• Conditions in the global economy and capital markets, and in the petrochemical industry in particular, may have an adverse effect on our results of operations, financial condition, and cash flow .
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+21
limitations+6
restructuring+5
negative+1
against+1
Positive rising
gain+12
favorable+5
benefit+3
improvement+2
improve+1
MD&A (Item 7)
12,908 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 8. Financial Statements and Supplementary Data. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Item 1A. Risk Factors and below under the caption “Factors Affecting Our Results of Operations.” Actual results may differ materially from those contained in any forward-looking statements. Our Annual Report on Form 10-K for the year ended December 31, 2020 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
OVERVIEW
We are a leading global sustainable specialty chemicals company that manufactures styrenic block copolymers (“SBCs”), specialty polymers, and high-value performance products primarily derived from pine wood pulping co-products. Our operations are managed through two operating segments: (i) Polymer segment and (ii) Chemical segment. On September 27, 2021, we entered into the Merger Agreement pursuant to which DL Chemical, a subsidiary of DL Holdings Co., Ltd. (formerly Daelim Industrial Co., Ltd.), agreed to acquire 100.0% of us in an all-cash transaction.
Polymer Segment
SBCs are highly-engineered synthetic elastomers, which we 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 1960s. Our SBCs the performance of numerous products by imparting flexibility, resilience, , 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.
• The failure of our raw material suppliers to perform their obligations under long-term supply agreements, or our inability to replace or renew these agreements when they expire, could increase our cost for these materials, interrupt production or otherwise adversely affect our results of operations.
• If the availability of our raw materials, including butadiene, styrene, isoprene, CST, and CTO is limited, we may be unable to produce some of our products in quantities sufficient to meet customer demand or on favorable economic terms, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Increases in the costs of our raw materials may occur, which may have an adverse effect on our results of operations, financial condition, and cash flow if those costs cannot be passed through to our customers.
• Significant fluctuations in raw material costs may result in volatility in our quarterly operating results and impact the market price of our common stock.
• Maintenance, expansion and refurbishment of our facilities, the construction of new facilities and the development and implementation of new manufacturing processes involve significant risks, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Third parties provide significant operating and other services under agreements that are important to our business. The failure of these third parties to perform their obligations, or the termination of these agreements could occur, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Our industry is highly competitive, and we may lose market share to other producers of SBCs, pine-based specialty chemicals or other products that can be substituted for our products, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Our business is subject to seasonality that may affect our quarterly operating results and impact the market price of our common stock.
• Chemical manufacturing is inherently hazardous, which could result in accidents that disrupt our operations or expose us to significant losses or liabilities.
• Our relationship with our employees could deteriorate, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
• We generally do not have long-term contracts with our customers, and the loss of customers could adversely affect our sales and profitability.
• Domestic or international natural disasters, health epidemics or pandemics, or terrorist attacks may disrupt our operations, decrease the demand for our products or otherwise have an adverse impact on our business.
• The COVID-19 pandemic is adversely impacting our business.
• Climate change and sustainability initiatives may result in significant operational changes and expenditures and adversely affect our business.
• Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the terms of our indebtedness, including our senior notes and our senior secured credit facilities.
• Despite current indebtedness levels and restrictive covenants, we and our subsidiaries may incur additional indebtedness, or we may pay dividends in the future. This could further exacerbate the risks associated with our financial leverage.
• Our current and future debt instruments may impose significant operating and financial restrictions on us and affect our ability to access liquidity.
• To service our current, and any future, indebtedness, we will require a significant amount of cash, which may have an adverse effect on our results of operations, financial condition, and cash flow.
• Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
• Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.
• We may have additional tax liabilities, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• We may be unable to realize the benefits of our net operating loss carry-forwards (“NOLs”).
• A decrease in the fair value of pension and other post-retirement assets could materially increase future funding requirements of the pension and other post-retirement plans.
• The European Union’s Renewable Energy Directive 2009/28 on the promotion of the use of energy from renewable resources (“RED”), was repealed on July 1, 2021 (the “RED”) and replaced by Directive 2018/2001, which had to be transposed by the Member States by June 30, 2021 (the “RED II”) and similar legislation in the U.S. and elsewhere may incentivize the use of CTO as a feedstock for production of alternative fuels, which may have an adverse effect on our results of operations, financial condition, and cash flow.
• We may be liable for damages based on product liability claims brought against our customers, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Failure to comply with the Foreign Corrupt Practices Act and other similar worldwide anti-bribery, anti-corruption, and anti-fraud laws or sanction laws may subject us to penalties, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• As a global business, we are exposed to local business risks in different countries, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Compliance with extensive environmental, health, and safety laws and regulations (including changes to such laws and regulations) could require material expenditures, changes in our operations or site remediation.
• Regulation of our employees’ exposure to certain chemicals could require material expenditures or changes in our operations, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• We may be subject to losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical manufacturing, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• We are subject to customs, international trade, export control, data privacy, antitrust, zoning and occupancy and labor and employment laws that could require us to modify our current business practices and incur increased costs.
• Delaware law and certain provisions of our organizational documents may make a takeover of our company more difficult.
• We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.
• Investor sentiment towards climate change and sustainability could adversely affect our business and our stock price.
• If we are not able to continue the technological innovation and successful commercial introduction of new products, our customers may turn to other producers to meet their requirements.
• Our business relies on intellectual property and other proprietary information, and our failure to protect our rights could harm our competitive advantages with respect to the manufacturing of some of our products, which may have an adverse effect on our results of operations, financial condition, and cash flow .
• Our products may infringe on the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
• Increased information systems security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, and services.
Risks Related to Our Industry and Operations
Failure of the Merger to be consummated, the termination of the Merger Agreement or a significant delay in the consummation of the Merger could have a material adverse impact on our business, financial condition, and results of operations.
The Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the Merger, including remaining regulatory approvals. Our stockholders approved the Merger on December 9, 2021. These conditions to the consummation of the Merger may not be fulfilled and, accordingly, the Merger may not be completed or may be significantly delayed. In addition, if the Merger is not completed by September 26, 2022, either Parent or we may choose to terminate the Merger Agreement at any time after that date if the failure to consummate the transactions contemplated by the Merger Agreement is not primarily caused by any failure to fulfill any obligation under the Merger Agreement by the party electing to terminate the Merger Agreement.
If the Merger is not consummated or is significantly delayed, our ongoing business, financial condition and results of operations may be materially adversely affected. We have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed or is significantly delayed, we would have to recognize these expenses without realizing the expected benefits of the Merger.
Additionally, our business may have been and may in the future be adversely impacted by the failure to pursue other beneficialopportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. If the Merger Agreement is terminated, our stockholders cannot be certain that we will be able to find a party willing to engage in a transaction on more attractive terms than the Merger Agreement, or at all, and our results of operations may be adversely impacted by the costs incurred, and by the diversion of management attention, in connection with the Merger. Moreover, the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the Merger, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to attract, retain and motivate key personnel and maintain relationships with third parties pending the consummation of the Merger. Additionally, these uncertainties could cause third parties with whom we deal to seek to change, or fail to extend, existing business relationships with us.
The pursuit of the Merger and preparation for a potential closing thereof places a burden on our management and internal resources. Significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the closing process could have a material adverse effect on the Company’s business, financial condition and results of operations.
In addition, the Merger Agreement restricts us from taking certain actions without Parent’s consent while the Merger is pending. If the Merger is not completed, our inability to take such actions while the Merger is pending could have a material adverse effect on our business, financial condition and results of operations.
Litigationagainst us, or the members of our board of directors, could prevent or delay the completion of the Merger.
While we believe that claims made to date and any claims which may be asserted by purported shareholder plaintiffs related to the Merger would be without merit, the results of any such potential legal proceedings are difficult to predict and could delay or prevent the Merger from being competed in a timely manner. Moreover, any litigation could be time consuming and expensive, could divert our management’s attention away from our regular business and, any lawsuit adversely resolved against us or members of our board of directors, could have a material adverse effect on our business, financial condition and results of operations.
One of the conditions to the consummation of the Merger is the absence of any law enacted, issued or promulgated by a governmental authority or any issuance or granting of any decree, ruling injunction or other order (whether temporary, preliminary or permanent) by a governmental authority that has the effect of restraining, enjoining or otherwise prohibiting the consummation of the Merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a regulatory authority issues an order or other directive having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger, then such injunctive or other relief may prevent the Merger from becoming effective in a timely manner or at all, which could have the adverse consequences set forth above.
The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire the Company for greater consideration than what Parent has agreed to pay pursuant to the Merger Agreement.
The Merger Agreement contains provisions that make it virtually impossible for us to sell our business to a party other than Parent. The Merger Agreement provides that the Company must comply with customary non-solicitation restrictions, including certain restrictions on its ability to solicit alternative acquisition proposals from third parties, to provide non-public information to third parties and to engage in negotiations with third parties regarding alternative acquisition proposals.
The Merger Agreement also allows either the Company or Parent to terminate the Merger Agreement in certain circumstances. Upon termination of the Merger Agreement (other than a termination as a result of the failure of the debt financing being available to Parent), we will be required to pay a termination fee of $63.0 million to Parent. While both the Company and Parent believe these provisions and agreements are reasonable and customary and are not preclusive of other offers, the restrictions, including the added expense of the $63.0 million termination fee that may become payable by the Company to Parent in certain circumstances, discourage a third party that has an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per share value than the consideration payable in the Merger pursuant to the Merger Agreement.
Conditions in the global economy and capital markets, and in the petrochemical industry in particular, may have an adverse effect on our results of operations, financial condition, and cash flow .
Our products are sold in markets that are sensitive to changes in general economic conditions, such as automotive, construction and consumer products. Moreover, the petrochemical industry in general has historically been subject to volatility and cyclical downturns. Downturns in general economic conditions, or in the petrochemical industry in particular, can cause fluctuations in demand for our products, product prices, sales volumes and margins. A decline in the demand for our products or a shift to lower-margin products due to deteriorating economic conditions could adversely affect sales of our products and our profitability and could also result in impairments of certain of our assets.
Our business and operating results have been affected by fluctuating commodity prices, volatile exchange rates and other challenges currently affecting the global economy and our customers. Uncertainty regarding global economic conditions, especially as a result of the continued COVID-19 pandemic, poses a continuing risk to our business, as consumers and businesses may postpone spending in response to tighter credit, negative financial news or declines in income or asset values, which may reduce demand for our products. If global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, our results of operations, financial condition and cash flows could be materially adversely affected.
The failure of our raw material suppliers to perform their obligations under long-term supply agreements, or our inability to replace or renew these agreements when they expire, could increase our cost for these materials, interrupt production or otherwise adversely affect our results of operations.
Our manufacturing processes use the following primary raw materials: butadiene, styrene, isoprene, CTO, including black liquor soap that we refine into CTO, and CST. We have long-term supply agreements with LyondellBasell Industries (“LyondellBasell”), International Paper, and others to supply our raw material needs in the U.S. and Europe.
However, most of our long-term contracts contain provisions that allow our suppliers to limit, or allocate, the amount of raw materials shipped to us below the contracted amount in certain circumstances. If we are required to obtain alternate sources for raw materials because a supplier is unwilling or unable to perform under raw material supply agreements, if a supplier terminates its agreements with us, if we are unable to renew our existing contract, or if we are unable to obtain new long-term supply agreements to meet changing demand, we may not be able to obtain these raw materials in sufficient quantities, on economic terms, or in a timely manner, and we may not be able to enter into long-term supply agreements on terms as favorable to us, if at all. A lack of availability of raw materials could have a material adverse effect on our results of operations, financial condition and cash flows.
If the availability of our raw materials, including butadiene, styrene, isoprene, CST, and CTO is limited, we may be unable to produce some of our products in quantities sufficient to meet customer demand or on favorable economic terms, which may have an adverse effect on our results of operations, financial condition, and cash flow .
We use butadiene, styrene, and isoprene as our primary raw materials in our Polymer segment and CTO and CST in our Chemical segment and use additional non-primary raw materials in the production of our products. The global supply chain and logistics environment has been constrained for the year ended December 31, 2021 as a result of the global congestion of supply chains and logistic equipment rebalance resulting from the COVID-19 pandemic and severe weather events. Suppliers may not be able to meet our raw material requirements, and we may not be able to obtain substitute supplies from alternative suppliers in sufficient quantities, on economic terms, or in a timely manner. A lack of availability of our raw materials in the quantities we require to produce our products could result in our inability to meet customer demand and could have a material adverse effect on our results of operations, financial condition and cash flows.We implemented a number of mitigation measures, including cross-regional optimization, planning contingencies, and utilization of alternative carriers. Given the current global supply chain and logistics environment outlook, we expect these trends to continue into fiscal year 2022.
Increases in the costs of our raw materials may occur, which may have an adverse effect on our results of operations, financial condition, and cash flow if those costs cannot be passed through to our customers.
The price of raw materials may be impacted by external factors, including uncertainties associated with war, terrorist attacks, weather and natural disasters, health epidemics or pandemics, civil unrest, the effects of climate change or political instability, plant or production disruptions, strikes or other labor unrest, breakdown or degradation of transportation infrastructure used in the delivery of raw materials, changes in laws or regulations in any of the countries in which we have significant suppliers, or general economic conditions.
We use butadiene, styrene, and isoprene in our Polymer segment and CTO and CST in our Chemical segment as our primary raw materials. The cost of these raw materials has generally correlated with changes in energy prices and is generally influenced by supply and demand factors, and for our isoprene monomers, the prices for natural and synthetic rubber.
Our results of operations are directly affected by the cost of raw materials. Since the cost of these primary raw materials comprises a significant amount of our total cost of goods sold, the selling prices for our products and therefore our total revenue is impacted by movements in these raw material costs, as well as by the cost of other inputs. In the past we have experienced erratic and significant changes in the costs of these raw materials, butadiene in particular. In addition, product mix can have an impact on our overall unit selling prices, since we provide an extensive product offering and therefore experience a wide range of unit selling prices. Because of the significant portion of our cost of goods sold represented by these raw materials, our gross profit margins could be adversely affected by changes in the cost of these raw materials if we are unable to pass the increases on to our customers.
Due to inflationary pressures, our Polymer and Chemical segments experienced significant increases in all primary raw materials, including monomers in the Polymer segment and CTO and CST in the Chemical segment. Additionally, we continue to experience inflationary pressures within our utilities and secondary costs, which have added to the increase in our conversion costs.
While we have implemented price right strategies to minimize the inflationary impacts, due to volatile raw material prices, there can be no assurance that we can continue to recover raw material costs or retain customers in the future. As a result of our pricing actions, customers may become more likely to consider competitors’ products, some of which may be available at a lower cost. Significant loss of customers could result in a material adverse effect on our results of operations, financial condition and cash flows.
Significant fluctuations in raw material costs may result in volatility in our quarterly operating results and impact the market price of our common stock.
We use the FIFO basis of accounting for inventory and cost of goods sold, and therefore gross profit. In periods of raw material price volatility, reported results under U.S. generally accepted accounting principles (“U.S. GAAP”) will differ from what the results would have been if cost of goods sold were based on estimated current replacement cost (“ECRC”). Specifically, in periods of declining raw material costs, reported gross profit will be lower under U.S. GAAP than under ECRC, and in periods of rising raw material costs, gross profit will be higher under U.S. GAAP than under ECRC. However, because raw material costs are difficult to predict, we cannot accurately anticipate fluctuations in raw material costs with precision, or effectively or economically hedge against the effects of any such change. If raw material costs fluctuate in a quarter, our results of operations and cash flows will be affected, the magnitude of which could be significant, which could cause our earnings and cash flows to depart from the periodic expectations of financial analysts or investors, and therefore, the market price of our common stock may be volatile as a result.
Maintenance, expansion and refurbishment of our facilities, the construction of new facilities and the development and implementation of new manufacturing processes involve significant risks, which may have an adverse effect on our results of operations, financial condition, and cash flow .
Our facilities may require regulatory or periodic maintenance, upgrading, expansion, refurbishment or improvement. Any unexpected operational or mechanical failure, including failure associated with breakdowns and forcedoutages, could reduce our facilities’ production capacity below expected levels, which would reduce our revenues. Unanticipated capital expenditures associated with maintaining, upgrading, expanding, repairing, refurbishing, or improving our facilities may also reduce profitability. Our facilities may also be subject to unanticipateddamage as a result of natural disasters or terrorist attacks, as was the case for our Panama City, Florida, manufacturing facility during Hurricane Michael in October 2018.
If we make any major modifications to our facilities, such modifications likely would result in substantial additional capital expenditures and could prolong the time necessary to bring the facility on line. We may also choose to refurbish or upgrade our facilities based on our assessment that such activity will provide adequate financial returns. However, such activities require time for development and capital expenditures before commencement of commercial operations, and key assumptions underpinning a decision to make such an investment may prove incorrect, including assumptions regarding construction costs and timing, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The construction of new manufacturing facilities entails a number of risks, including the ability to begin production within the cost and timeframe estimated and to attract a sufficient number of skilled workers to meet the needs of the new facility. Additionally, our assessment of the projected benefits associated with the construction of new manufacturing facilities is subject to a number of estimates and assumptions, which in turn are subject to significant economic, competitive and other uncertainties that are beyond our control. If we experience delays or increased costs, our estimates and assumptions are incorrect, or other unforeseen events occur, our business, ability to supply customers, financial condition, results of operations and cash flows could be adversely impacted.
Finally, we may not be successful or efficient in developing or implementing new production processes. Innovation in production processes involves significant expense and carries inherent risks, including difficulties in designing and developing
new process technologies, development and production timing delays, lower than anticipated manufacturing yields, and product defects. Disruptions in the production process can also result from errors, defects in materials, delays in obtaining or revising operating permits and licenses, returns of product from customers, interruption in our supply of materials or resources, and disruptions at our facilities due to accidents, maintenance issues, or unsafe working conditions, all of which could affect the timing of production ramps and yields. Production issues can lead to increased costs and may affect our ability to meet product demand, which could adversely impact our business and the results from operations.
Third parties provide significant operating and other services under agreements that are important to our business. The failure of these third parties to perform their obligations, or the termination of these agreements could occur, which may have an adverse effect on our results of operations, financial condition, and cash flow .
We are party to agreements with third parties who provide site services, utilities, materials and facilities. Additionally, our Berre, France, and Wesseling, Germany, plants are operated and maintained by a third party who also employs and provides substantially all of the staff for those facilities. If relationships with these third parties were to deteriorate or if the agreements for these services were to terminate, we would be forced to obtain these services from other parties or provide them ourselves. Additionally, at Berre and Wesseling, a termination of the third party agreement would require us to relocate our manufacturing facilities at those locations. The failure of our third party service providers and partners at our manufacturing facilities to perform their obligations under, or the termination of, any of these agreements could materially adversely affect our operations and, depending on market conditions at the time of any such termination, we might not be able to enter into substitute arrangements in a timely manner, if at all, and if we are able to enter into a substitute arrangement, it may not be on terms as favorable to us.
Our industry is highly competitive, and we may lose market share to other producers of SBCs, pine-based specialty chemicals or other products that can be substituted for our products, which may have an adverse effect on our results of operations, financial condition, and cash flow .
Our industry is highly competitive, and we face significant competition from both large international producers and from smaller regional competitors. Our competitors may improve their competitive position in our core markets by successfully introducing new products, improving their manufacturing processes, or expanding their capacity or manufacturing facilities. Further, some of our competitors benefit from advantageous cost positions that could make it increasingly difficult for us to compete in markets for less-differentiated applications. If we are unable to keep pace with our competitors’ product and manufacturing process innovations or cost position, it could have a material adverse effect on our results of operations, financial condition, and cash flows.
In addition, competition in the various product applications in which we compete is intense. Increased competition from existing or newly developed SBCs, pine-based specialty chemicals or other products may reduce demand for our products in the future, and our customers may decide on alternate sources to meet their requirements. If we are unable to successfully compete with other producers of SBCs or refiners of CTO, or if other products can be successfully substituted for our products, our sales may decline. Our tall oil-based resins compete against hydrocarbon and gum-based resins in the adhesives and inks submarkets, and our TOFA competes against animal and vegetable-based fatty acids. We could be subject to pricing pressure from Chinese manufacturers of gum rosins, and hydrocarbon competitors have introduced metallocene-based products that compete directly with many of our adhesive tackifiers.
Our business is subject to seasonality that may affect our quarterly operating results and impact the market price of our common stock.
Seasonal changes and weather conditions typically affect our sales in our paving (including pavement markings), roofing, and construction applications. In particular, sales volumes generally rise in the warmer months and generally decline during the colder months of fall and winter, or during abnormally wet seasons. In addition, sales into the ink submarket are typically highest in the third quarter of the year due to increased demand for holiday catalog printing. However, because seasonal weather patterns are difficult to predict, we cannot accurately estimate quarterly fluctuations in sales into our paving, roofing, construction, and ink submarkets in any given year.
Seasonality also affects the availability of CTO and CST, two of our primary raw materials. Yields of CTO and CST are higher during the first half of the year, generally peaking during the early summer months, due to the natural growth and associated chemical yield cycles of trees, in addition to higher yields from kraft pulping during the cooler months.
Chemical manufacturing is inherently hazardous, which could result in accidents that disrupt our operations or expose us to significant losses or liabilities.
Hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes exist in our operations and the operations of other occupants with whom we share manufacturing sites. These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on our business as a whole. These potential risks include, but are not necessarily limited to:
• pipeline and storage tank leaks and ruptures;
• explosions and fires;
• inclement weather and natural disasters;
• terrorist attacks;
• mechanical failure; and
• chemical spills and other discharges or releases of toxic or hazardous substances or gases.
These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminalpenalties, including governmental fines, expenses for remediation and claims brought by governmental entities or third parties. The loss or shutdown of operations over an extended period at any of our major operating facilities could have a material adverse effect on our industry, reputation, or our financial condition and results of operations. Our property, business interruption and casualty insurance may not fully insure us against all potential hazards incidental to our business.
Our relationship with our employees could deteriorate, which may have an adverse effect on our results of operations, financial condition, and cash flow .
As a manufacturing company, we rely on our employees and good relations with our employees to produce our products and maintain our production processes and productivity. A significant number of our non-U.S. employees are subject to collective bargaining arrangements or works counsel representation. Approximately 23.4% of our combined U.S. employees are represented by unions. We may not be able to negotiate existing or future arrangements on satisfactory terms or at all, the earliest of which expires in 2021, which may adversely affect our business. If these workers were to engage in a strike, work stoppage or other slowdown, our operations could be disrupted or we could experience higher labor costs, which could adversely affect our business, results of operations, financial condition, and cash flow.
In addition, if our other employees were to become unionized, in particular our employees at our Belpre, Ohio, facility, we could experience significant operating disruptions and higher ongoing labor costs, which could adversely affect our results of operations, financial condition, and cash flow. Because many of the personnel who operate our European facilities are employees of a third party, relations between the third party and its employees may also adversely affect our business, results of operations, financial condition, and cash flow.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
Our success in the highly competitive markets in which we operate will continue to depend to a significant extent on our key employees. We are dependent on the expertise of our executive officers and other key employees. Loss of the services of any of our executive officers or other key employees could have an adverse effect on our prospects. We may not be able to retain our key employees or to recruit qualified individuals to join our company. The loss of key employees could result in high transition costs and could disrupt our operations.
We generally do not have long-term contracts with our customers, and the loss of customers could adversely affect our sales and profitability.
With some exceptions, our business is based primarily upon individual sales orders by our customers. As such, our customers could cease buying products from us at any time, for any reason, with little or no notice or recourse. If multiple customers elected not to purchase products from us, our business prospects, results of operations, financial condition, and cash flow could be adversely affected.
Domestic or international natural disasters, health epidemics or pandemics, or terrorist attacks may disrupt our operations, decrease the demand for our products or otherwise have an adverse impact on our business.
Chemical-related assets, and U.S. corporations such as ours, may be at a greater risk of future terrorist attacks (including both physical attacks and cyber-attacks) than other possible targets in the U.S. and throughout the world. Moreover, extraordinary events such as natural disasters or global or local health epidemics or pandemics could result in significant damage to our facilities and/or disruption of our operations and may negatively affect local economies, including those of our customers or suppliers. The occurrence of such events cannot be predicted, although their occurrence can be expected to continue to adversely impact the economy in general and our specific markets.
The resulting damage from a natural disaster or terrorist attack could include loss of life, property damage or site closure. Several of our facilities are located in regions where natural disasters have previously disrupted, and may in the future disrupt, our ability to manufacture and deliver products from certain facilities and require us to temporarily declare an excused performance, or force majeure , on certain products under our existing agreements with customers. Any damage resulting in stoppage or reduction of our facilities’ production capacity could reduce our revenues, and any unanticipated capital expenditures to repair such damage (to the extent not covered by our insurance policies) may reduce profitability. Any, or a combination, of these factors could also adversely impact our results of operations, financial position and cash flows.
The COVID-19 pandemic is adversely impacting our business.
We are monitoring and continue to assess the ongoing effects of the COVID-19 pandemic on our business and operations. The scope of the effects of the COVID-19 pandemic and its related economic impact on our business depends on many factors beyond our control, and the effects are difficult to assess or predict with meaningful precision both generally and specifically. Despite recent progress in the administration of vaccines, both the outbreak of recent variants, including Delta and Omicron, and the related containment and mitigation measures that have been put into place across the globe, have had and are likely to continue to have a seriousadverse impact on the global economy and our business, the severity and duration of which are uncertain.
The COVID-19 pandemic has resulted in a decrease in the availability of, and an increase in the cost of, contractors and subcontractors, including as a result of infections, recommended self-quarantining or governmental mandates to direct production activities to support public health efforts. We have taken actions to help ensure the continuity of business through the COVID-19 pandemic, including activating our business continuity plans, implementing other steps to enable employees to work remotely, and safety protocols established within our innovation centers and manufacturing facilities. The impact of these steps on our workforce has presented new challenges for our employees as they balance the demands of the pandemic with their daily operating responsibilities.
Importantly, the COVID-19 pandemic may have a material adverse effect on other third parties upon which we rely, and our ability to assess those effects in any meaningful manner are difficult at this time. In addition, a number of third parties upon which we depend may experience financial difficulties or file for bankruptcy protection. Such third parties may not be able to perform their obligations or may be relieved of their obligations to us as part of the bankruptcy process, which in either case could adversely affect our business.
Lastly, going forward, this and other global or local heath epidemics and pandemics could have a material adverse effect on our results of operations, financial position, and cash flows.
Climate change and sustainability initiatives may result in significant operational changes and expenditures and adversely affect our business.
Continuing political and social attention to the issue of climate change and sustainability has resulted in both existing and pending international agreements and national, regional or local legislation and regulatory measures to limit greenhouse gas emissions. These agreements and measures may require, or could result in future legislation and regulatory measures that require, significant equipment modifications, operational changes, taxes, or purchase of emission credits to reduce emission of greenhouse gases from our operations, which may result in substantial capital expenditures and compliance, operating, maintenance and remediation costs.
Risks Related to Financing and Tax
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the terms of our indebtedness, including our senior notes and our senior secured credit facilities.
As of December 31, 2021, we had €85.0 million, or approximately $96.7 million, in outstanding borrowings under the Euro dollar denominated tranche (the “Euro Tranche”) of our senior secured term loan facility (the “Term Loan Facility”). In addition, we had $400.0 million of 4.25% Senior Notes due 2025 (the “4.25% Senior Notes”) and €290.0 million (or approximately $329.8 million) of 5.25% Senior Notes due 2026 (the “5.25% Senior Notes” and, together with the 4.25% Senior Notes, the “Senior Notes”) outstanding as of December 31, 2021 . We also have a $300.0 million asset-based revolving credit
facility (the “ABL Facility”), under which we had no outstanding borrowings as of December 31, 2021. Pursuant to the terms of our Term Loan Facility and ABL Facility, we may request up to an aggregate of $350.0 million and $100.0 million, respectively, of additional facility commitments subject to compliance with certain covenants and other conditions.
In addition, our KFPC joint venture has a syndicated loan agreement due in full by January 2022 (“KFPC Loan Agreement”) in the amount of 5.5 billion new Taiwanese dollars (“NTD”) (or approximately $198.7 million) which provided additional funding to construct the HSBC facility in Taiwan and provided funding for working capital requirements and/or general corporate purposes. FPCC and Kraton Polymers LLC are guarantors of the KFPC Loan Agreement with each guaranteeing fifty percent (50%) of the indebtedness, of which NTD 494.0 million (or approximately $17.9 million) of indebtedness was outstanding as of December 31, 2021. KFPC also has 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 $90.4 million). As of December 31, 2021, NTD 1.4 billion (or approximately $49.9 million) was drawn on the KFPC Revolving Facilities. Kraton Polymers LLC does not guarantee any of the KFPC Revolving Facilities.
Our current, or any future, indebtedness could:
• make it more difficult for us to satisfy our financial obligations;
• increase our vulnerability to adverse economic, industry, and market conditions;
• increase the risk that we breach financial covenants and other restrictions in our debt agreements, which can be exacerbated by volatility in the cost of our raw materials and the resulting impact on our earnings;
• require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in the business and industry in which we operate;
• restrict us from exploiting business opportunities;
• place us at a disadvantage compared to our competitors that have less debt and lease obligations; or
• limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy and other general corporate purposes or to refinance our existing debt.
In addition, our ability to pay principal of and interest on indebtedness, fund working capital and make anticipated capital expenditures depends on our future performance, which is subject to general economic conditions and other factors, some of which are beyond our control. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our indebtedness to fund liquidity needs, including debt service. Furthermore, if we decide to undertake additional investments in existing or new facilities, this will likely require additional capital, and there can be no assurance that this capital will be available.
Despite current indebtedness levels and restrictive covenants, we and our subsidiaries may incur additional indebtedness, or we may pay dividends in the future. This could further exacerbate the risks associated with our financial leverage.
We and our subsidiaries may incur significant additional indebtedness in the future under the agreements governing our indebtedness. Although the terms of the Term Loan Facility, the ABL Facility and the Senior Notes contain restrictions on the incurrence of additional indebtedness and the payment of distributions to our equity holders, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the additional indebtedness incurred, and distributions paid, in compliance with these restrictions could be substantial. Additionally, these restrictions also permit us to incur obligations that, although preferential to our common stock in terms of payment, do not constitute indebtedness. As of the date of this filing, we had no outstanding borrowings under the ABL Facility with a remaining available borrowing capacity of $262.7 million. In addition, if we and/or our subsidiaries incur new debt, the related risks that we now face as a result of our leverage would intensify.
Our current and future debt instruments may impose significant operating and financial restrictions on us and affect our ability to access liquidity.
Our current debt instruments do, and any future debt instruments may, contain a number of restrictive covenants that impose significant operating and financial restrictions on us. Under the terms of our ABL Facility, we are subject to a financial covenant requiring us to maintain a fixed charge coverage ratio of 1.0 to 1.0 if availability under the facility is below specified amounts. In addition, our debt instruments may include restrictions on our ability to, among other things:
• place liens on our or our restricted subsidiaries’ assets;
• make investments other than permitted investments;
• incur additional indebtedness;
• merge, consolidate or dissolve;
• sell assets;
• engage in transactions with affiliates;
• change the nature of our business;
• change our or our subsidiaries’ fiscal year or organizational documents; or
• make restricted payments (including certain equity issuances).
A failure by us or our subsidiaries to comply with the covenants and restrictions contained in the agreements governing our indebtedness could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default under any of the agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. Further, an event of default or acceleration of indebtedness under one instrument may constitute an event of default under another instrument. If any of our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern.
To service our current, and any future, indebtedness, we will require a significant amount of cash, which may have an adverse effect on our results of operations, financial condition, and cash flow.
Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations. Our ability to make payments on and to refinance our indebtedness, and to fund working capital needs and planned capital expenditures, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control, including, among other things, the costs of raw materials used in the production of our products.
If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. We might not generate sufficient cash flow to repay indebtedness as currently anticipated. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms, or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and could require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms, or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Term Loan Facility, the ABL Facility, KFPC Loan Agreement, and KFPC Revolving Facilities are, and additional borrowings in the future may be, at variable rates of interest that expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed will remain the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. At December 31, 2021, approximately $164.4 million, or 18.3%, of our $897.3 million total debt was at a variable rate. Additionally, any interest rate swaps we enter may not fully mitigate our interest rate risk.
Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.
Our operations are conducted by our subsidiaries in many countries. The results of the operations and the financial position of these subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The main currencies to which we are exposed, besides the U.S. dollar, are the Euro, Japanese Yen, British Pound, Brazilian Real, Swedish Krona, Chinese Yuan Renminbi, Taiwanese Dollar, and Mexican Peso. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar, including as a result of differentials in inflation and interest rates, will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our consolidated financial statements and an appreciation of these currencies will result in a corresponding increase in such amounts. Because many of our raw material costs are determined with respect to the U.S. dollar rather than these currencies, depreciation of these currencies may have an adverse effect on our profit margins or our reported results of operations. Conversely, to the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our results of operations. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.
We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. From time to time, we use hedging strategies to reduce our exposure to currency fluctuations. Given the volatility of exchange rates, exacerbated by increasing and varying levels of inflation globally, there can be no assurance that we will be able to effectively manage our currency transaction risks, that our hedging activities will be effective or that any volatility in currency exchange rates will not have a material adverse effect on our financial condition or results of operations.
We may have additional tax liabilities, which may have an adverse effect on our results of operations, financial condition, and cash flow .
We are subject to taxes in the U.S., as well as numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. Tax laws, regulations and administrative practices may be subject to change due to economic or political conditions including fundamental changes to the tax laws applicable to corporate multinationals. The U.S., countries in the European Union and a number of other countries are actively considering changes in this regard.
In addition, our tax returns are subject to examination by the U.S. and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of the examinations. Changes in tax laws, increase of tax rates, or adverse outcomes resulting from examinations of our tax returns could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
We may be unable to realize the benefits of our net operating loss carry-forwards (“NOLs”).
NOLs may be carried forward to offset taxable income in future years and eliminate income taxes otherwise payable on such taxable income, subject to certain requirements and limitations. Based on various corporate income tax rates in various jurisdictions, our NOLs and other tax attributes carried forward could provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon the amount of our otherwise taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOLs permanently.
The amount of NOLs that we have claimed has not been audited or otherwise validated by each tax jurisdiction. The various tax authorities could challenge our tax positions that could impact the amount of our NOLs. The tax law provisions for the various tax jurisdiction may limit our ability to utilize the NOLs carried forward to offset taxable income in future years. If the various tax authorities were successful with respect to any such challenge, the potential tax benefit of the NOLs to us could be substantially reduced that may have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
A decrease in the fair value of pension and other post-retirement assets could materially increase future funding requirements of the pension and other post-retirement plans.
We sponsor defined benefit pension and other post-retirement plans. The total projected benefit obligation of our defined benefit pension and other post-retirement plans exceeded the fair value of the plan assets by approximately $96.3 million at December 31, 2021. We contributed $17.1 million to the pension and other post-retirement plans in 2021. Among the key assumptions inherent in the actuarially calculated pension and other post-retirement plan obligations and pension and other post-retirement plan expenses are the discount rate and the expected rate of return on plan assets. If discount rates or actual rates
of return on invested plan assets were to decrease, the pension and other post-retirement plan obligations could increase materially. The size of future required pension contributions could result in our dedicating a substantial portion of our cash flow from operations to making the contributions, which could materially adversely affect our business, financial condition and results of operations.
Risks Related to Legal and Regulatory Matters
The European Union’s Renewable Energy Directive 2009/28 on the promotion of the use of energy from renewable resources (the “RED”), was repealed on July 1, 2021 and replaced by Directive 2018/2001, which had to be transposed by the Member States by June 30, 2021 (the “RED II”) and similar legislation in the U.S. and elsewhere may incentivize the use of CTO as a feedstock for production of alternative fuels, which may have an adverse effect on our results of operations, financial condition, and cash flow.
In December 2008, the European Union (“EU”) adopted the RED, which established a 20% EU-wide target for the overall share of energy from renewable sources in the EU’s gross final consumption of energy in 2020, as well as a 10% target for energy consumed from renewable sources in the transport sector by 2020. To facilitate the achievement of these EU wide targets, the RED established mandatory targets for each Member State requiring each Member State to adopt a national renewable energy action plan setting forth measures to achieve its national targets.
The RED also established sustainability criteria for biofuels, which must be satisfied in order for the consumption of a fuel to count toward a Member State’s national targets. CTO-based biofuel fulfilled the RED’s biofuel sustainability criteria.
In spring 2015, Directive (EU) 2015/1513 amending inter alia the RED was adopted. It introduced a cap for food-based biofuels in transport and put more emphasis on advanced biofuels from waste feedstocks. It also added a new Annex IX expressly listing CTO under Part A as a residue-type feedstock, the use of which in biofuel would make that biofuel eligible for double counting towards the 10% 2020 target for renewable fuels in transport under the RED.
In December 2018, the RED II entered into force, covering the period 2021-2030, which includes slightly modified sustainability criteria. Compared to the RED, the RED II sets out stricter obligations and higher goals; an EU-wide binding target of at least a 32% share of energy from renewable sources in the EU’s gross final consumption of energy by 2030; as well as minimum share of 14 % of renewable energy in the transport sector in each Member State by 2030. According to the RED II, Member States set out national indicative trajectories for their contributions to the EU-wide target. In the absence of revised national targets, the national renewables targets for 2020 should constitute the minimum contribution of each Member State for 2030.
As for the transport sector target, the RED II provides that by 2030, Member States shall require fuel suppliers to supply a share of at least 14% of fuels from renewable sources, including a share of 3.5% of advanced biofuels. CTO based biofuels shall, according to Annex IX, Part A, of the RED II, be counted as advanced biofuels, and Member States may still double count the contribution of such fuels. The RED II had to be transposed by Member States by June 30, 2021 at the latest and repealed the RED as of July 1, 2021.
In July 2021, two weeks after the end of the transposition period for the RED II, the EU Commission published a proposal for amendments to the RED II to align its renewable energy targets with EU’s higher climate ambitions set out in the European Green Deal, which establishes the objective of a climate neutral EU by 2050. As an intermediate target, the EU shall reduce its greenhouse gas emissions by 55% by 2030. These objectives were made legally binding in the European Climate Law (EU Regulation 2021/1119) which entered into force on July 29, 2021. Since the current EU-wide target of at least 32% renewable energy by 2030, set out in the RED II, is not deemed sufficient to achieve such a reduction. the European Commission has proposed to increase the binding target of renewable sources in the EU’s energy mix to 40% by 2030.
Moreover, the European Commission’s proposal promotes an increase of the ambition level of the targets relevant for the transport sector: instead of a minimum share of 14 % of renewable energy in the transport sector in each Member State by 2030, it has proposed to focus on the greenhouse gas intensity reduction target according to which fuel suppliers shall ensure that the amount of renewable fuels and renewable electricity supplied to the transport sector leads to a greenhouse gas intensity reduction of at least 13% by 2030, compared to a baseline provided in the Directive and in accordance with indicative trajectories set by each Member State. Further, the advanced biofuel sub-targets are proposed to take the form of minimum shares of the total energy supplied to the transport sector (at least 0.2% in 2022, 0.5% in 2025 and 2.2% in 2030). In the proposal CTO remains listed in proposal Annex IX, Part A, as a residue eligible as feedstock for advanced biofuels. As such, CTO based biofuels would continue to contribute to the renewable energy targets. However, according to the proposal, it will no longer be possible to double count feedstocks listed in Annex IX.
The European Commission’s proposal is currently subject to the legislative procedure before the European Parliament and the Council of the European Union. The Commission has proposed that amendments to the RED II should be transposed by the Member States by December 31, 2024 at the latest. Should the proposed amendments be adopted, it is likely to affect the demand for CTO.
In addition to these developments in the EU, various pieces of legislation regarding the use of alternative fuels have been introduced in the U.S.
Because the supply of CTO is inherently constrained by the volume of kraft pulp processing, any diversion of CTO for production of alternative fuels would reduce the available supply of CTO as the principal raw material of the pine chemicals industry. A reduced ability to procure an adequate supply of CTO due to competing new uses such as for biofuel production could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be liable for damages based on product liability claims brought against our customers, which may have an adverse effect on our results of operations, financial condition, and cash flow .
Many of our products provide critical performance attributes to our customers’ products, which are sold to consumers who could potentially bring product liability suits in which we could be named as a defendant. For example, certain of the chemicals or substances that are used in our businesses, including alkyl phenols such as bisphenol A and nonylphenol, flammable solvents such as toluene, xylene and alcohols, and rosin, formaldehyde and resin dust, have been identified as having potentially harmful health effects. The sale of these products entails the risk of product liability claims. If a person were to bring a product liability suit against one of our customers, the customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claimsagainst us in excess of our insurance coverage, for which we are not otherwise indemnified, could have a material adverse effect on our industry, our reputation, or on our financial condition or results of operations. There can be no assurance that our efforts to protect ourselves from product liability claims in this regard will ultimately protect us from any such claims.
Failure to comply with the Foreign Corrupt Practices Act (“FCPA”) and other similar worldwide anti-bribery, anti-corruption, and anti-fraud laws or sanction laws may subject us to penalties, which may have an adverse effect on our results of operations, financial condition, and cash flow .
Our international operations require us to comply with a number of U.S. and international laws and regulations, including those involving anti-bribery, anti-corruption and anti-fraud. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, including the regulations imposed by the FCPA, which generally prohibits issuers and their strategic or local partners, agents or representatives, which we refer to as our intermediaries (even if those intermediaries are not themselves subject to the FCPA or other similar laws), from making improper payments to foreign officials for the purpose of obtaining or keeping business or obtaining an improper business benefit, and the United Kingdom Bribery Act 2010 (the “Bribery Act”) as well as anti-bribery and anti-corruption laws of the various jurisdictions in which we operate. Sanction laws prohibit sales to certain persons or locations and impose other restrictions on our operations.
We currently take precautions to comply with these laws. However, these precautions may not protect us against liability, particularly as a result of actions by our intermediaries through whom we have exposure under these anti-bribery, anti-corruption and anti-fraud laws, as well as sanction laws, even though we may have limited or no ability to control such intermediaries. Additionally, we have operations in certain countries where strict compliance with anti-bribery and anti-corruption laws may conflict with local customs and practices.
In order to effectively operate in certain foreign jurisdictions, circumstances may require that we establish joint ventures with local operators or use third-party agents, distributors and marketing representatives. The establishment of joint ventures with local operators and the use of third-party intermediaries may expose us to the risk of violating, or being accused of violating, the foregoing or other anti-bribery, anti-corruption laws or anti-fraud. Such violations could be punishable by criminalfines, imprisonment, civil penalties, disgorgement of profits, injunctions and exclusion from government contracts, as well as other remedial measures. Investigations of allegedviolations can be very expensive, disruptive and damaging to our reputation and could negatively impact our stock price. Failure by us or our intermediaries to comply with the foregoing or other anti-bribery, anti-corruption and anti-fraud laws, as well as sanction laws, could adversely impact our results of operations, financial position, and cash flows, damage our reputation and negatively impact our stock price.
As a global business, we are exposed to local business risks in different countries, which may have an adverse effect on our results of operations, financial condition, and cash flow .
We procure raw materials from foreign countries and have significant operations in foreign countries, including manufacturing facilities, research and development facilities, offices, sales personnel and customer support operations. Currently, we operate, or others operate on our behalf, manufacturing facilities in Finland, France, Germany, Japan and Sweden, in addition to our operations in the U.S. Furthermore, we are a 50/50 joint venture partner with FPCC to own and operate a 30 kiloton HSBC plant at FPCC’s petrochemical site in Mailiao, Taiwan.
Our foreign operations are subject to risks inherent in doing business in foreign countries, including, but not necessarily limited to:
• new and different legal and regulatory requirements in local jurisdictions;
• data privacy regulations;
• export duties or import quotas;
• domestic and foreign customs and tariffs or other trade barriers;
• potential staffing difficulties and labor disputes;
• risk of non-compliance with the FCPA, the Bribery Act, or similar anti-bribery legislation in other countries by agents or other third-party representatives;
• managing and obtaining support and distribution for local operations;
• increased costs of transportation or shipping;
• credit risk and financial conditions of local customers and distributors;
• potential difficulties in protecting intellectual property;
• risk of nationalization of private enterprises by foreign governments;
• potential imposition of restrictions on investments;
• varying permitting and approval requirements;
• potentially adverse tax consequences, including imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries;
• foreign currency exchange restrictions and fluctuations;
• local political and social conditions, including the possibility of hyperinflationary conditions and political instability in certain countries;
• the outbreak of global or regional health epidemics or pandemics; and
• civil unrest, including labor unrest, in response to local political conditions.
We may not be successful in developing and implementing policies and strategies to address the foregoing risks in a timely and effective manner at each location where we do business or from where we procure raw materials. Consequently, the occurrence of one or more of the foregoing risks could have a material adverse effect on our international operations or upon our financial condition, results of operations, and cash flows.
Compliance with extensive environmental, health, and safety laws and regulations (including changes to such laws and regulations) could require material expenditures, changes in our operations or site remediation.
The manufacture and sale of our products can present potentially significant health and safety concerns and are also under increased public and governmental scrutiny. Our products are also used in a variety of applications that have specific regulatory requirements, such as those relating to products that have contact with food or are used for medical applications.
We use large quantities of hazardous substances and generate hazardous wastes in our manufacturing operations. Consequently, our operations are subject to extensive environmental, health and safety laws and regulations at the international, national, state and local level in multiple jurisdictions. These laws and regulations govern, among other things, air emissions, wastewater discharges, solid and hazardous waste management and disposal, occupational health and safety, including dust and noise control, site remediation programs and chemical use and management. Many of these laws and regulations have become more stringent over time, and the costs of compliance with these requirements may increase, including costs associated with any necessary capital investments. In addition, our production facilities require operating permits that are subject to renewal and, in some circumstances, revocation. The necessary permits may not be issued or continue in effect, and renewals of any issued permits may contain significant new requirements or restrictions. The nature of the chemical industry exposes us to risks of liability due to the use, production, management, storage, transportation and sale of materials that are heavily regulated or hazardous and can cause contamination or personal injury or damage if released into the environment.
Because of the nature of our operations, we could be subject to legislation and regulation affecting the emission of greenhouse gases. The U.S. Environmental Protection Agency (“EPA”) has promulgated regulations applicable to projects involving greenhouse gas emissions above a certain threshold, and the U.S. and certain states within the U.S. have enacted, or are considering, limitations on greenhouse gas emissions.
Jurisdictions outside the U.S. are also addressing greenhouse gases by legislation or regulation. In addition, efforts have been made and continue to be made at the international level toward the adoption of international treaties or protocols that would address global greenhouse gas emissions. These requirements to limit greenhouse gas emissions may require us to incur capital investments to upgrade our operations to comply with any future greenhouse gas emissions controls. While the impact
of any such legislation, regulation, treaties or protocols is currently unknown, any such legislation, regulation, treaties or protocols, if enacted, may have an adverse effect on our operations or financial condition.
In addition to the above, various petrochemical products, including plastics, have faced increased public scrutiny due to negative coverage of plastic waste in the environment, which has resulted in local, state, federal and foreign governments proposing and, in some cases, approving, restrictions on the manufacture, consumption and disposal of certain petrochemical products. Increased regulation on the use of our products or other products in our industry, whatever their scope or form, could increase our costs of production, impact overall consumption of our products or result in negative publicity.
Compliance with environmental laws and regulations generally increases the costs of transportation and storage of raw materials and finished products, as well as the costs of storage and disposal of wastes. We may incur substantial costs, including fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our operations for violations arising under environmental laws, regulations or permit requirements.
Regulation of our employees’ exposure to certain chemicals could require material expenditures or changes in our operations, which may have an adverse effect on our results of operations, financial condition, and cash flow .
The Occupational Safety and Health Act in the U.S. and the REACH, directive in Europe, prescribe limitations restricting exposure to a number of chemicals used in our operations, including butadiene, formaldehyde and nonylphenol, a raw material used in the manufacture of phenolic ink resins. Butadiene is a known carcinogen in laboratory animals at high doses and is being studied for its potential adverse health effects. Future studies on the health effects of these, and other, chemicals may result in additional regulations or new regulations that further restrict or prohibit the use of, and exposure to, such chemicals. Additional regulation of or requirements for these chemicals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.
We may be subject to losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical manufacturing, which may have an adverse effect on our results of operations, financial condition, and cash flow .
We face the risk that individuals could, in the future, seek damages for personal injury due to exposure to chemicals at our facilities or to chemicals otherwise owned or controlled by us. We may be subject to future claims with respect to workplace exposure, workers’ compensation, and other matters. Additionally, under certain of the lease and operating agreements for our sites, we are required to indemnify the third party in certain circumstances, including in certain circumstances for loss and damages resulting from their negligence in performing their obligations.
Some environmental laws could impose on us the entire cost of clean-up of contamination present at a facility even though we did not cause the contamination, and we may be required to undertake and pay for remediation of on-site contamination resulting from past operations at our current sites.
In general, there is always the possibility that a third-party plaintiff or claimant, or governmental or regulatory authority, could seek to include us in an action or claim for damages, clean-up, or remediation pertaining to events or circumstances occurring or existing at one or more of our sites prior to the time of our ownership or occupation of the applicable site. In the event that any of these actions or claims were asserted against us, our results of operations could be adversely affected.
We are subject to customs, international trade, export control, data privacy, antitrust, zoning and occupancy and labor and employment laws that could require us to modify our current business practices and incur increased costs.
We are subject to numerous regulations, including customs and international trade laws, export control, data privacy, antitrust laws and zoning and occupancy laws that regulate manufacturers generally and/or govern the importation, promotion and sale of our products, the operation of factories and warehouse facilities and our relationship with our customers, suppliers and competitors. Particularly, data privacy and protection laws in the U.S., Europe, including but not limited to the General Data Protection Regulation, and elsewhere are evolving and may be interpreted and applied inconsistently from jurisdiction to jurisdiction. In addition, we face risk associated with trade protection laws, policies and measures and other regulatory requirements affecting trade and investment, including loss or modification of exemptions for taxes and tariffs, imposition of new tariffs and duties and import and export licensing requirements, including the ongoing tariffs imposed by the U.S. on imports from China and Chinese tariffs on imports from the U.S.
If these laws or regulations were to change or were violated by our management, employees, suppliers, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our products and hurt our business and negatively impact our results of operations. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefits costs, which could negatively impact our profitability.
Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effects on our operations. We may be required to make significant expenditures or modify our business practices to comply with existing or future laws and regulations, which may increase our costs and materially limit our ability to operate our business.
Risks Related to Stock Ownership
Delaware law and certain provisions of our organizational documents may make a takeover of our company more difficult.
Provisions of our charter and bylaws may have the effect of delaying, deferring or preventing a change in control of our company. A change of control could be proposed in the form of a tender offer or takeover proposal that might result in a premium over the market price for our common stock. In addition, these provisions could make it more difficult to bring about a change in the composition of our board of directors, which could result in the entrenchment of current management. For example, our charter and bylaws:
• establish a classified board of directors so that not all members of our board of directors are elected at one time;
• require that the number of directors be determined, and provide that any vacancy or new board seat may be filled only by the board;
• do not permit stockholders to act by written consent;
• do not permit stockholders to call a special meeting;
• permit the bylaws to be amended by a majority of the board without shareholder approval, and require that a bylaw amendment proposed by stockholders be approved by two-thirds of all outstanding shares;
• establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
• authorize the issuance of undesignated preferred stock, or “blank check” preferred stock, by our board of directors without shareholder approval.
Our Kraton Corporation Executive Severance Program and the equity arrangements with our executive officers also contain change in control provisions. Under the terms of these arrangements, the executive officers are entitled to receive significant cash payments, immediate vesting of options, restricted shares and notional shares, and continued medical benefits in the event their employment is terminated under certain circumstances within twenty four months following a change in control, and with respect to certain equity awards, within two years following a change in control.
Any amounts accrued under the Kraton Polymers LLC Executive Deferred Compensation Plan are immediately payable upon a change of control. We disclose in proxy statements filed with the SEC potential payments to our named executive officers in connection with a change of control. Further, the terms of each of the indentures governing our Senior Notes require us, upon certain change of control transactions, to repurchase our outstanding Senior Notes at a price equal to 101.0% of their principal amount, plus any accrued and unpaid interest. Certain change of control transactions would also constitute an event of default under our Term Loan Facility and ABL Facility.
These arrangements and provisions of our organizational documents and Delaware law may have the effect of delaying, deferring or preventing changes of control or changes in management of our company, even if such transactions or changes would have significant benefits for our stockholders. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.
We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.
Kraton Corporation is a holding company with nominal net worth. We do not have any assets or conduct any business operations other than our investments in our subsidiaries, including Kraton Polymers LLC. As a result, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. In addition, our subsidiaries are separate and distinct legal entities and have no obligation to make any funds available to us.
Investor sentiment towards climate change and sustainability could adversely affect our business and our stock price.
Investor sentiment towards climate change and sustainability could adversely affect our business and our stock price. Members of the investment community are increasing their focus on sustainability practices, including practices related to
GHGs and climate change. As a result, we may face increasing pressure regarding our sustainability disclosures and practices. Additionally, members of the investment community may screen companies such as ours for sustainability performance before investing in our stock. If we are unable to meet the sustainability standards set by these investors, we may lose investors, our stock price may be negatively impacted, and our reputation may be negatively affected.
Risks Related to Technology and Intellectual Property
If we are not able to continue the technological innovation and successful commercial introduction of new products, our customers may turn to other producers to meet their requirements.
Our industry and the markets into which we sell our products experience periodic technological change and ongoing product improvements. In addition, our customers may introduce new generations of their own products or require new technological and increased performance specifications that would require us to develop customized products. Innovation or other changes in our customers’ product performance requirements may also adversely affect the demand for our products. Our future growth and profitability will depend on our ability to gauge the direction of the commercial and technological progress in all key markets, and upon our ability to successfully develop, manufacture and sell products in such changing markets. In order to maintain our profit margins and our competitive position, we must continue to identify, develop and market innovative products on a timely basis to replace existing products. We may not be successful in developing new products and technology that successfully compete with newly introduced products and materials, and our customers may not accept, or may have lower demand for, any of our new products. Further, an important part of our strategy is the creation of demand for innovations that we develop and introduce to the markets. If we fail to keep pace with evolving technological innovations, fail to modify our products in response to our customers’ needs or fail to develop innovations that generate additional demand, then our business, financial condition and results of operations could be adversely affected as a result of reduced sales of our products or diminished return on investment in innovations.
Our business relies on intellectual property and other proprietary information, and our failure to protect our rights could harm our competitive advantages with respect to the manufacturing of some of our products, which may have an adverse effect on our results of operations, financial condition, and cash flow .
Our success depends, to a significant degree, upon our ability to protect and preserve our intellectual property and other proprietary information relating to our business. However, we may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, particularly in those countries where the laws do not protect our proprietary rights to the same degree as in the U.S. The use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantage we have developed, potentially causing us to lose sales or otherwise harming our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.
Our patent applications and issued patents may not provide us with any competitive advantage and may be challenged by third parties. Our competitors may also attempt to design around our patents or copy or otherwise obtain and use our intellectual property and other proprietary information. Moreover, our competitors may already hold or have applied for patents in the U.S. or abroad that, if enforced or issued, could possibly prevail over our patent rights or otherwise limit our ability to manufacture or sell one or more of our products in the U.S. or abroad. With respect to our pending patent applications, we may not be successful in securing patents for these claims. Our failure to secure these patents may limit our ability to protect inventions that these applications were intended to cover. In addition, the expiration of a patent can result in increased competition with consequent erosion of profit margins.
Our confidentiality agreements could be breached or may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. In addition, others may obtain knowledge of our trade secrets through independent development or other access by legal means.
The applicable governmental authorities may not approve our pending service mark and trademark applications. A failure to obtain trademark registrations in the U.S. and in other countries could limit our ability to obtain and retain our trademarks and impede our marketing efforts in those jurisdictions. Moreover, third parties may seek to oppose our applications or otherwise challenge the resulting registrations. In the event that our trademarks are successfullychallenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands.
The failure of our patents, trademarks, or confidentiality agreements to protect our intellectual property and other proprietary information, including our processes, apparatuses, technology, trade secrets, trade names and proprietary
manufacturing expertise, methods and compounds, could have a material adverse effect on our competitive advantages over other producers.
Our products may infringe on the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
Many of our competitors have a substantial amount of intellectual property. We cannot guarantee that our processes and products do not and will not infringe issued patents (whether present or future) or other intellectual property rights belonging to others, including, without limitation, situations in which our products, processes or technologies may be covered by patent applications filed by other parties in the U.S. or abroad.
From time to time, we oppose patent applications that we consider overbroad or otherwise invalid in order to maintain the necessary freedom to operate fully in our various business lines without the risk of being sued for patent infringement. If, however, patents are subsequently issued on any such applications by other parties, or if patents belonging to others already exist that cover our products, processes or technologies, we could be liable for infringement or have to take other remedial or curative actions to continue our manufacturing and sales activities with respect to one or more products.
We may also be subject to legal proceedings and claims in the ordinary course of our business, including claims of allegedinfringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business.
If we were to discover that our processes, technologies or products infringe the valid intellectual property rights of others, we might need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Moreover, if we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. If we incur significant costs to litigate our intellectual property rights or to obtain licenses, or if our inability to obtain required licenses for our processes, technologies or products prevents us from selling our products, it could have a material adverse effect on our business and results of operations.
Increased information systems security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, and services.
We depend on integrated information systems to conduct our business. Increased global information systems security threats and more sophisticated, targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability, and integrity of our data, operations, and communications. While we attempt to mitigate these risks by employing a number of measures, including security measures, upgrading our equipment or software, employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems, if these measures prove inadequate, we could be adversely affected by, among other things, loss or damage of intellectual property, proprietary and confidential information, and communications or customer data, having our business operations interrupted, our supply chain interrupted, and increased costs to prevent, respond to, or mitigate these cyber security threats. Any significant disruption or slowdown of our systems could cause customers to cancel orders, resulting in us being unable to manufacture or deliver products (or create delays), harm our reputation, or cause standard business processes to become inefficient or ineffective, which could adversely affect our results of operations, financial position, or cash flows.
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Our polymers are typically formulated or compounded with other products to achieveimproved, customer-specific performance characteristics in a variety of applications. We seek to maximize the value of our product portfolio by emphasizing complex or specialized polymers and innovations that yield higher margins than more commoditized products. We sometimes refer to these complex or specialized polymers or innovations as being more “differentiated.” We believe our SBC products offer many characteristics that help our customers drive towards their sustainability goals. Among others, our SBCs may offer features such as greater recyclability, increased durability that reduces the costly need for maintenance and replacement, and alternatives to less environmentally friendly materials, such as PVCs.
Our USBC paving and roofing applications provide a sustainable alternative by increasing durability, which extend road and roof life. Our products are also found in medical applications, personal care products such as disposable diapers, oil additives, gels, and various other consumer goods. Our products are also used to impart tack and shear properties in a wide variety of adhesive products and to impart characteristics such as flexibility and durability in sealants and corrosion resistance in coatings.
Our HSBC offerings are often the more sustainable choice when compared to alternatives. Among other features, our HSBCs can offer improved recyclability of polyethylene-terephthalate and polypropylene streams, and function as replacements for less sustainable alternatives such as PVC, mainly in medical applications.
Prior to the sale of our Cariflex business, we produced Cariflex IR and IRL. Our Cariflex products are based on synthetic polyisoprene polymer and do not contain natural rubber latex or other natural rubber products making them an ideal substitute for natural rubber latex, particularly in applications with high purity requirements such as medical, healthcare, personal care, and food contact. Cariflex is included in the results of operations through March 6, 2020.
On March 6, 2020, we completed the sale of our Cariflex business to Daelim Industrial Co, Ltd. (subsequently renamed “DL Holdings Co., Ltd.”). As part of the sale, we entered into a multi-year IRSA with DL Chemical. In accordance with the IRSA, we will supply IR to DL Chemical for a period of five years, with an optional extension for an additional five years. As the IRSA product sales are at cost, we deferred approximately $180.6 million of the aggregate purchase price for our Cariflex business. The deferred income will be amortized into revenue as a non-cash transaction when the products are sold. See Note 4 Disposition and Exit of Business Activities for further discussion of the IRSA.
Chemical Segment
We manufacture and sell high value sustainable products primarily derived from pine wood pulping co-products. We refine and further upgrade two primary feedstocks, crude tall oil (“CTO”) and crude sulfate turpentine (“CST”) , both of which are co-products of the wood pulping process, into value-added biobased specialty chemicals. We refine CTO through a distillation process into four primary constituent fractions: tall oil fatty acids ( “ TOFA ”) ; tall oil rosin (“ TOR ”) ; distilled tall oil
( “ DTO ”); and tall oil pitch. We further upgrade TOFA and TOR into derivatives such as dimer acids, polyamide resins, rosin resins, dispersions, and disproportionated resins. We refine CST into terpene fractions, which can be further upgraded into specialty terpene resins. The various fractions and derivatives resulting from our CTO and CST refining process provide for distinct functionalities and properties, determining their respective applications and end markets.
We focus our resources on three product groups: Adhesives, Performance Chemicals, and Tires. Within our product groups, our products are sold into a diverse range of submarkets, including packaging, tapes and labels, pavement marking, high performance tires, fuel additives, oilfield and mining, coatings, metalworking fluids and lubricants, inks, and flavor and fragrances, among others.
While this business is based predominantly on the refining and upgrading of CTO and CST, we have the capacity to use both hydrocarbon-based raw materials, such as alpha-methyl-styrene, rosins, and gum rosins where appropriate and, accordingly, are able to offer tailored solutions for our customers.
Recent Developments and Known Trends
Our business is subject to a number of known risks and uncertainties, some of which are a result of recent developments.
COVID-19 Pandemic. The continued global impact of COVID-19 has resulted in various emergency measures to combat the spread of the virus. With the development of variants and increased vaccination rates, the status of ongoing measures varies widely depending on the country and locality. We continue to monitor the progression of the COVID-19 pandemic on a daily basis, and we have a dedicated COVID-19 crisis management team that meets regularly. The safety and well-being of our employees, our stakeholders, and the communities in which we operate remain our primary concern. While our essential plant and laboratory personnel remain on-site, many of our other employees around the world are working remotely. We are continuing to follow the orders and guidance of federal, regional, and local governmental agencies, as we maintain our own stringent protocols in an effort to mitigate the spread of the virus and protect the health of our employees, customers, and suppliers as well as the communities in which we operate.
To date, our plants have continued to operate at normal capacities. Importantly, under 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 Europe, Asia, and South America 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. We recently opened up some of our offices to flex schedule staffing for select employees, but have since reverted to remote work due to a spike in Omicron cases. We anticipate returning all employees when current infection rates subside.
Our supply chain has encountered significant constraints as described below, including the sourcing of key raw materials and logistical market constraints. Although there has been significant disruption in global supply chain and logistics environment, we have been able to continue to leverage available logistics sources to serve our customers without meaningful disruption.
In our Chemical segment, during the second half of 2020, we saw improvement in demand trends within the tires, automotive, oilfield, and lubricants/fuel additives applications, compared to the first half of 2020. While COVID-19 continues to be a risk, during the year ended December 31, 2021 we have seen demand growth and margin expansion in the majority of our product groups and end applications relative to the pre-COVID-19 environment.
In our Polymer segment, we continue to see improved global demand in most end market applications, compared to the first half of 2020. During the year ended December 31, 2021, the Polymer segment continues to see demand growth across most geographies and in various market applications such as consumer, automotive, adhesives, paving and roofing markets.
We are unable to accurately predict the impact that the pandemic will have on our business and results of operations for 2022 and beyond (including how the impact of the pandemic on our business and results of operations may change from quarter to quarter) due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, additional actions that may be taken by governmental authorities, and other unintended consequences. Furthermore, the pandemic has adversely impacted, and may further adversely impact, the national and global economy, particularly in less essential end markets. There can also be no assurance that demand for our products will not be adversely affected by the continued impact of the COVID-19 pandemic on the national and global economy. Moreover, we are unable to predict actions that may be taken by our competitors that could negatively impact pricing or demand for our products.
In spite of the uncertainty of the potential future impact of the COVID-19 pandemic, we expect that our geographic and end market diversification, such as medical, adhesives, food packaging, automotive, and consumer durables may partially mitigate our financial exposure to the pandemic. We will continue to monitor the impacts of COVID-19 and implement
operational efficiencies and cost initiatives as needed. We do not currently anticipate any material impairments, with respect to intangible assets, long-lived assets, or right of use assets, increases in allowances for credit losses from our customers, restructuring charges, other expenses, or changes in accounting judgments to have a material impact on our financial statements. However, we are continuing to assess the impact from the pandemic, if any.
Market Conditions . Certain fundamental market conditions that affected our business and financial results prior to 2020, coupled with the impacts of the COVID-19 pandemic, have improved, however, we remain cognizant of the continued risks associated with the COVID-19 pandemic.
Our Chemical segment has seen significant improvement mainly in North America and Europe and in various market applications such as adhesives, tires, and industrial markets. Additionally, we have seen a recovery in certain end uses such as fuel/energy and mining applications. Despite the continued excess availability of competitive hydrocarbon tackifiers and in all hydrocarbon resins, the current rosin market fundamentals continue to improve, especially as compared to fiscal year 2020. We expect the positive momentum in the adhesives, tires, and industrial markets to continue in the near term. Furthermore, prices for upgraded products within our CST chain continue to improve compared to the fiscal year 2020 pricing levels. We expect the Chemical segment’s favorable performance to continue in the near term.
Global supply chain and logistics environment . The global supply chain and logistics environment has been constrained for the year ended December 31, 2021 as a result of the global congestion of supply chains and logistic equipment rebalance resulting from the COVID-19 pandemic and severe weather events. As a result, the Company experienced some supply-side constraints in our ability to source key raw materials, as well as constraints in shipping to our customers. Additionally, these constraints resulted in higher logistics cost per ton compared to historical trends. We implemented a number of mitigation measures, including cross-regional optimization, planning contingencies, and utilization of alternative carriers. Although we implemented mitigation measures, the global supply chain and logistics constraints resulted in earnings pressure during the year ended December 31, 2021. Given the current global supply chain and logistics environment outlook, we expect these trends to continue into fiscal year 2022.
BiaXam TM 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 TM 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. We continue efforts to obtain Section 3 approval from the EPA which we expect to allow for broader commercial application.
Agreement and Plan of Merger. On September 27, 2021, the Company entered into the Merger Agreement with DL Chemical, Intermediate Merger Subsidiary, and Merger Subsidiary. Parent is a subsidiary of DL Holdings Co., Ltd. (formerly Daelim Industrial Co., Ltd.). Pursuant to the Merger Agreement, and subject to the terms and conditions thereof, the Merger Subsidiary will merge with and into the Company, with the Company surviving the Merger as an indirect and wholly-owned subsidiary of Parent. Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time, each share of common stock of the Company then outstanding will be converted into the right to receive $46.50 in cash, without interest, other than (1) those shares owned by Parent or any subsidiary of Parent or the Company (which will be cancelled without any consideration) and (2) any shares as to which appraisal rights have been properly exercised, and not withdrawn, in accordance with the Delaware General Corporation Law.
On December 9, 2021, the Company held a special meeting of the stockholders of the Company, at which stockholders of Kraton overwhelmingly approved and adopted the Merger Agreement. The acquisition is subject to certain customary closing conditions, including the receipt of regulatory approvals, and is expected to close by the end of the first quarter of 2022.
For additional information related to the Merger Agreement and related transactions, please refer to our Current Report on Form 8-K filed with the SEC on September 27, 2021, our Proxy Statement filed with the SEC on November 4, 2021 and Note 1 General .
RESULTS OF OPERATIONS
Factors Affecting Our Results of Operations
Raw Materials. We use butadiene, styrene, and isoprene in our Polymer segment and CTO and CST in our Chemical segment as our primary raw materials. The cost of these raw materials has generally correlated with changes in energy prices and is generally influenced by supply and demand factors, and for our isoprene monomers, the prices for natural and synthetic rubber. Average purchase prices of our raw materials increased during 2021 compared to 2020 for the Polymer and Chemical segments.
In our Polymer segment, during the year ended December 31, 2021, butadiene increased 31.9%, isoprene increased 81.0%, and styrene increased 54.6% compared to the year ended December 31, 2020.
In our Chemical segment, during the year ended December 31, 2021, CTO increased 29.0% and CST increased 5.4% compared to the year ended December 31, 2020.
Additionally, as discussed within Results of Operations, we continue to experience inflationary pressures within our utilities and secondary costs, which have added to the increase in our conversion costs during the year ended December 31, 2021 compared to the year ended December 31, 2020.
We use the FIFO basis of accounting for inventory and cost of goods sold, and therefore gross profit. In periods of raw material price volatility, reported results under FIFO will differ from what the results would have been if cost of goods sold were based on estimated current replacement cost (“ECRC”). Specifically, in periods of rising raw material costs, reported gross profit will be higher under FIFO than under ECRC. Conversely, in periods of declining raw material costs, reported gross profit will be lower under FIFO than under ECRC. In recognition of the fact that the cost of raw materials affects our results of operations and the comparability of our results of operations, we provide the difference, or spread, between FIFO and ECRC to arrive at our Adjusted EBITDA.
International Operations and Currency Fluctuations . We operate a geographically diverse business, serving customers in numerous countries from thirteen manufacturing facilities on three continents. Our sales and production costs are mainly denominated in U.S. dollars, Brazilian Real, Euro, Japanese Yen, Swedish Krona, and NTD. From time to time, we use hedging strategies to reduce our exposure to currency fluctuations.
We generated our revenue from customers located in the following regions:
Years Ended December 31,
Revenue by Geography
Americas
Europe, Middle East, and Africa
Asia Pacific
Seasonality. Seasonal changes and weather conditions typically affect our sales of products in our paving, pavement markings, roofing, and construction applications, which generally results in higher sales volumes in the second and third quarters of the calendar year compared to the first and fourth quarters of the calendar year. Sales for our other product applications tend to show relatively little seasonality.
KRATON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling, general, and administrative
Depreciation and amortization
Gain on insurance proceeds
Loss on disposal of fixed assets
Impairment of goodwill
Operating income (loss)
Other income (expense)
Gain (loss) on disposition and exit of business activities
Loss on extinguishment of debt
Earnings of unconsolidated joint venture
Interest expense, net
Income (loss) before income taxes
Income tax benefit (expense)
Consolidated net income (loss)
Net income attributable to noncontrolling interest
Net income (loss) attributable to Kraton
Earnings (loss) per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Consolidated Results
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue was $1,970.1 million for the year ended December 31, 2021 compared to $1,563.2 million for the year ended December 31, 2020, an increase of $407.0 million, or 26.0%. Revenue increased $241.2 million and $165.8 million for the Polymer and Chemical segments, respectively. For additional information regarding the changes in revenue, see our segment disclosures below.
Cost of goods sold was $1,381.4 million for the year ended December 31, 2021 compared to $1,165.3 million for the year ended December 31, 2020, an increase of $216.1 million, or 18.5%. Cost of goods sold increased $148.5 million and $67.6 million for the Polymer and Chemical segments, respectively. For additional information regarding the changes in cost of goods sold, see our segment disclosures below.
Selling, general, and administrative expenses were $164.2 million for the year ended December 31, 2021 compared to $161.9 million for the year ended December 31, 2020. The $2.2 million increase is primarily attributable to higher employee related costs, partially offset by lower transaction, acquisition, and restructuring costs and the benefit of cost reduction initiatives.
Depreciation and amortization was $126.5 million for the year ended December 31, 2021 compared to $126.0 million for the year ended December 31, 2020.
During the third quarter of 2020, we recorded a non-cash impairment charge of $400.0 million within the Chemical segment. For more information regarding the goodwill impairment charge, see Note 13 Industry Segments and Foreign Operations .
Other expense was $0.2 million for the year ended December 31, 2021 compared to other income of $1.0 million for the year ended December 31, 2020. The decrease of $1.2 million is due to the legal settlement of a supplier dispute in the second quarter of 2021, partially offset by the benefit to other income related to a reduction in net periodic pension expense.
Disposition and exit of business activities was a loss of $0.1 million and a gain of $175.2 million for the year ended December 31, 2021 and 2020, respectively, related to the sale of our Cariflex business. See Note 4 Disposition and Exit of Business Activities for further discussion on the sale of our Cariflex business.
We recorded a $40.8 million loss on extinguishment of debt during the year ended December 31, 2020. This includes $14.0 million in the first quarter of 2020 for the write off of previously capitalized deferred financing costs, the write off of original issue discount, and a loss on the settlement of the ineffective portion of interest rate swaps due to the repayment in full of our U.S. dollar denominated tranche (the “USD Tranche”) and a partial repayment of our Euro Tranche with the net cash proceeds from the sale of our Cariflex business. During the fourth quarter of 2020, we called for redemption and satisfied and discharged our 7.0% Senior Notes due 2025 (the “7.0% Senior Notes”) and issued our 4.25% Senior Notes, for which we incurred $25.7 million for the write off of previously capitalized deferred financing costs and the call premium on our 7.0% Senior Notes. See Note 8 Long-Term Debt for further discussion.
Interest expense, net, was $41.8 million for the year ended December 31, 2021 compared to $57.9 million for the year ended December 31, 2020, a decrease of $16.1 million. The decrease is due to the refinancing activities discussed above and lower overall indebtedness and an improvement in borrowing rates.
Our income tax provision was a $39.5 million expense and a $32.0 million benefit for the years ended December 31, 2021 and 2020, respectively. Our effective tax rates for the years ended December 31, 2021 and 2020 were a 18.4% expense and 12.6% benefit, respectively. During the year ended December 31, 2021, our effective tax rate differed from the U.S. corporate statutory tax rate of 21%, primarily related to reassessment of prior year tax accruals and minimum tax of foreign entities offset by the mix of our pre-tax income or loss generated in various foreign jurisdictions. During the year ended December 31, 2020, our effective tax rate differed from the U.S. corporate statutory tax rate of 21.0%, primarily due to the non-deductible goodwill impairmentloss and reorganization income, offset by a tax benefit related to Dutch intellectual property rights and the tax impact of the sale of our Cariflex business.
As of December 31, 2021 and December 31, 2020, a valuation allowance of $33.9 million and $39.5 million, respectively, has been provided for NOL carryforwards and other deferred tax assets. We decreased our valuation allowance by $5.6 million during the year ended December 31, 2021, which includes a $3.8 million decrease due to changes in the deferred tax asset related to employee benefits and $1.8 million primarily related to deferred tax rate changes and the utilization of NOL carryforwards in France and the United Kingdom. We consider the reversal of deferred tax liabilities within the NOL carryforward period, projected future taxable income, and tax planning strategies in making this assessment.
Net income attributable to Kraton was $170.2 million, or $5.21 per diluted share, for the year ended December 31, 2021, an increase of $395.8 million compared to a net loss of $225.6 million, or $7.08 per diluted share, for the year ended December 31, 2020. Adjusted Diluted Earnings per Share (non-GAAP) was $2.87 for the year ended December 31, 2021 compared to $1.29 for the year ended December 31, 2020. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of U.S. generally accepted accounting principles (“U.S. GAAP”) diluted earnings (loss) per share to Adjusted Diluted Earnings per Share.
EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share
We consider EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share to be important supplemental measures of our performance and believe they are frequently used by investors, securities analysts, and other interested parties in the evaluation of our performance and/or that of other companies in our industry, including period-to-period comparisons. In addition, management uses these measures, as well as ECRC of our inventory and cost of goods sold to evaluate operating performance, and our incentive compensation plan bases incentive compensation payments on our Adjusted EBITDA performance, along with other factors. EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share have limitations as analytical tools and in some cases can vary substantially from other measures of our performance. You should not consider any of them in isolation, or as substitutes for analysis of our results under U.S. GAAP.
Years Ended December 31,
(In thousands, except per share data)
EBITDA (1)(4)
Adjusted EBITDA (2)(3)(4)
Adjusted Diluted Earnings Per Share (2)(4)
(1) On a consolidated basis, EBITDA represents net income before interest, taxes, depreciation and amortization. On a reporting segment basis, EBITDA represents segment operating income before depreciation and amortization, other income (expense), loss on extinguishment of debt, and earnings of unconsolidated joint venture. Limitations for EBITDA as an analytical tool include the following:
• EBITDA does not reflect the significant interest expense on our debt;
• EBITDA does not reflect the significant depreciation and amortization expense associated with our long-lived assets;
• EBITDA included herein should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements. The calculation of EBITDA in the debt agreements includes adjustments, such as extraordinary, non-recurring or one-time charges, proforma cost savings, certain non-cash items, turnaround costs, and other items included in the definition of EBITDA in the debt agreements; and
• other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
(2) The majority of our consolidated inventory is measured using the FIFO basis of accounting. As part of our pricing strategy, we measure our business performance using the ECRC of our inventory and cost of goods sold. Our ECRC is based on our current expectation of the current cost of our significant raw material inputs. ECRC is developed monthly based on actual market-based contracted rates and spot market purchase rates that are expected to occur in the period. We then adjust the value of the significant raw material inputs and their associated impact to finished goods to the current replacement cost to arrive at an ECRC value for inventory and cost of goods sold. The result of this revaluation from the U.S. GAAP carrying value creates the spread between U.S. GAAP and ECRC. We maintain our perpetual inventory in our global enterprise resource planning system, where the carrying value of our inventory is determined. With inventory valued under U.S. GAAP and ECRC, we then have the ability to report cost of goods sold and therefore Adjusted EBITDA and Adjusted Diluted Earnings Per Share under both our U.S. GAAP convention and ECRC.
(3) Adjusted EBITDA is EBITDA net of the impact of the spread between the FIFO basis of accounting and ECRC and net of the impact of items we do not consider indicative of our ongoing operating performance. We explain how each adjustment is derived and why we believe it is helpful and appropriate in the reconciliation below. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to the limitations applicable to EBITDA described above, as well as the following limitations:
• due to volatility in raw material prices, Adjusted EBITDA may, and often does, vary substantially from EBITDA, net income and other performance measures, including net income calculated in accordance with U.S. GAAP; and
• Adjusted EBITDA may, and often will, vary significantly from EBITDA calculations under the terms of our debt agreements and should not be used for assessing compliance or non-compliance with financial covenants under our debt agreements.
(4) Included in EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share:
• $32.9 million, which was recognized as a gain on insurance proceeds, reimbursing us for the lost margin, direct costs, and capital expenditures known to date for the year ended December 31, 2019;
• $10.3 million and $54.6 million for the years ended December 31, 2020 and 2019, respectively, related to divestiture of our Cariflex business in March 2020; and
• IR 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 $25.7 million and $18.5 million for the year ended December 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.
Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business.
Our presentation of non-GAAP financial measures and the adjustments made therein should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, and in the future we may incur expenses or charges similar to the adjustments made in the presentation of our non-GAAP financial measures.
We compensate for the above limitations by relying primarily on our U.S. GAAP results and using EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings Per Share only as supplemental measures. See our financial statements included under Item 8 of this Form 10-K.
We reconcile each of consolidated net income (loss) and reporting segment operating income to EBITDA, and then to Adjusted EBITDA as follows:
Year Ended December 31, 2021
Year Ended December 31, 2020
Year Ended December 31, 2019
Polymer
Chemical
Total
Polymer
Chemical
Total
Polymer
Chemical
Total
(In thousands)
Net income (loss) attributable to Kraton
Net income attributable to noncontrolling interest
Consolidated net income (loss)
Add (deduct):
Income tax (benefit) expense
Interest expense, net
Earnings of unconsolidated joint venture
Loss on extinguishment of debt
Other (income) expense
(Gain) loss on disposition and exit of business activities
Operating income (loss)
Add (deduct):
Depreciation and amortization
Gain (loss) on disposition and exit of business activities
Other income (expense)
Loss on extinguishment of debt
Earnings of unconsolidated joint venture
EBITDA (non-GAAP) (a)
Add (deduct):
Transaction, acquisition related costs, restructuring, and other costs (b)
(Gain) loss on disposition and exit of business activities
(Gain) loss on disposal of fixed assets
Loss on extinguishment of debt
Impairment of goodwill
Hurricane related costs (c)
Hurricane reimbursements (d)
KFPC startup costs (e)
Gain on contractual settlement (f)
(Sale) loss of emissions credits (g)
Non-cash compensation expense
Spread between FIFO and ECRC
Adjusted EBITDA (non-GAAP)
(a) Included in EBITDA is a $32.9 million gain on insurance, fully offsetting the lost margin in the first quarter of 2019, and reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.
Also included in EBITDA are IR 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 $25.7 million and $18.5 million for the year ended December 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.
(b) Charges related to the evaluation of acquisition and disposition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses.
(c) Incremental costs related to Hurricane Michael and Hurricane Dorian, which are recorded in cost of goods sold.
(d) Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.
(e) Startup costs related to the joint venture company, KFPC, which are recorded in cost of goods sold.
(f) Relates to the historical period gain of a settlement of a raw material supply agreement in the fourth quarter of 2021.
(g) We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity in 2019. We recorded a loss of $0.6 million related to historical third party emission credit adjustments in 2021.
We reconcile U.S. GAAP Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share as follows:
Years Ended December 31,
Diluted Earnings (Loss) Per Share
Transaction, acquisition related costs, restructuring, and other costs (a)
(Gain) loss on disposition and exit of business activities
(Gain) loss on disposal of fixed assets
Loss on extinguishment of debt
Impairment of goodwill
Tax restructuring
Hurricane related costs (b)
Hurricane reimbursements (c)
Gain on contractual settlement (d)
KFPC startup costs (e)
(Sale) loss of emissions credits (f)
Spread between FIFO and ECRC
Adjusted Diluted Earnings Per Share (non-GAAP)
(a) Charges related to the evaluation of acquisition and disposition transactions, severance expenses, and other restructuring related charges, which are recorded primarily in selling, general, and administrative expenses.
(b) Incremental costs related to Hurricane Michael and Hurricane Dorian, which are recorded in cost of goods sold.
(c) Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.
(d) Relates to the historical period gain of a settlement of a raw material supply agreement in the fourth quarter of 2021.
(e) Startup costs related to the joint venture company, KFPC, which are recorded in cost of goods sold.
(f) We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity in 2019. We recorded a loss of $0.6 million related to historical third party emission credit adjustments in 2021.
Segment Results
• Polymer Segment . Our Polymer segment is comprised of our SBCs and other engineered polymers business.
• Chemical Segment . Our Chemical segment is comprised of our pine-based specialty products business.
Polymer Segment
Years Ended December 31,
Revenue
($ In thousands)
Performance Products
Specialty Polymers
Cariflex (1)
Isoprene Rubber (1)
Other
Operating income
Adjusted EBITDA (non-GAAP) (2)(4)
Adjusted EBITDA margin (non-GAAP) (3)
(1) Our Cariflex revenue includes sales through March 6, 2020. We continue to sell IR to DL Chemical under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $25.7 million and $18.5 million for the year ended December 31, 2021 and 2020, respectively, which represents revenue deferred until the products are sold under the IRSA.
(2) See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA.
(3) Defined as Adjusted EBITDA as a percentage of revenue.
(4) Included are $10.3 million and $54.6 million for the years ended December 31, 2020 and 2019, respectively, related to divestiture of our Cariflex business in March 2020.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue for the Polymer segment was $1,098.8 million for the year ended December 31, 2021 compared to $857.6 million for the year ended December 31, 2020. The increase was driven by demand improvements driving higher sales volumes in our Specialty Polymers and Performance Products product lines, as well as higher average sales prices implemented in response to significantly higher raw material, logistics, utilities, and secondary costs as part of our Price Right strategy. These increases were partially offset by the divestiture of our Cariflex business in March 2020, which contributed $36.9 million of revenue in the first quarter of 2020. The positive effect from changes in currency exchange rates between the periods was $24.4 million.
Polymer Segment Sales Volume % Change
Year Ended December 31, 2021
Performance Products
Specialty Polymers
Isoprene Rubber
Subtotal
Cariflex
Total
Sales volumes were 309.4 kilotons for the year ended December 31, 2021, an increase of 17.6 kilotons, or 6.0%, compared to the year ended December 31, 2020. Volume for our Specialty Polymers volumes increased 12.3% driven by strong demand across all regions, particularly in automotive applications, and consumer durable applications. The 5.9% increase in Performance Products sales volumes was primarily driven by improved sales into paving and roofing applications and higher sales into adhesive applications associated with continued demand strength across all regions. IR sales volumes are 16.5% higher due to a full year of sales under the IRSA.
Cost of goods sold was $775.8 million for the year ended December 31, 2021 compared to $627.3 million for the year ended December 31, 2020, an increase of $148.5 million, or 23.7%. The increase in cost of goods sold reflects the impact of higher sales volumes, approximately $20.0 million of costs related to the significant statutory turnaround at our Berre, France, location, and inflationary pressures resulting in higher raw material, logistics, utilities, and secondary costs, which we continue
to address through increases in selling prices consistent with our Price Right strategy. These higher costs were partially offset by lower cost of consumed raw materials, which has lower average costs on a FIFO measurement basis of accounting, and the divestiture of our Cariflex business. Additionally, changes in currency exchange rates between the periods resulted in a negative impact of $20.6 million.
For the year ended December 31, 2021, the Polymer segment operating income was $150.4 million compared to $56.8 million for the year ended December 31, 2020. The $93.6 million increase is largely related to lower cost of consumed raw materials, which has lower average costs on a FIFO measurement basis of accounting, partially offset by the divestiture of our Cariflex business.
For the year ended December 31, 2021, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $138.1 million compared to $167.5 million for the year ended December 31, 2020. The decrease in Adjusted EBITDA (non-GAAP) is partially 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 (non-GAAP) would have been down $19.0 million driven largely by approximately $20.0 million of costs associated with a significant statutory turnaround at our Berre, France, location. Additionally, the contribution from higher sales volumes is largely offset by inflation in raw material, logistics, utilities, and secondary costs, which we continue to address through increases in selling prices, consistent with our Price Right strategy. The positive effect from changes in currency exchange rates between the periods was $0.8 million. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of U.S. GAAP operating income to Adjusted EBITDA (non-GAAP).
Chemical Segment
Years Ended December 31,
Revenue
($ In thousands)
Adhesives
Performance Chemicals
Tires
Operating income (loss) (1)
Adjusted EBITDA (non-GAAP) (2)
Adjusted EBITDA margin (non-GAAP) (3)
(1) For the year ended December 31, 2020, includes the $400.0 million non-cash goodwill impairment charge in the Chemical segment.
(2) See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA.
(3) Defined as Adjusted EBITDA as a percentage of revenue.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue for the Chemical segment was $871.3 million for the year ended December 31, 2021 compared to $705.6 million for the year ended December 31, 2020. The increase was primarily attributable to successful price increase implementations globally and across all product chains driven by favorable market fundamentals and inflationary pressures. The increase was also due to stronger sales volumes of TOFA and TOR chains associated with demand recovery post COVID-19. The positive effect from changes in currency exchange rates between the periods was $14.4 million.
Chemical Segment Sales Volume % Change
Year Ended December 31, 2021
Adhesives
Performance Chemicals
Tires (1)
Total
(1) Tires volumes are less than 5% of total Chemical segment volumes.
Sales volumes were 441.7 kilotons for the year ended December 31, 2021, an increase of 16.1 kilotons, or 3.8%, related to higher TOFA and TOR and related derivatives sales, due to a significant recovery of demand across most end use
markets compared to the year ended December 31, 2020. This increase was partially offset by lower sales of CST upgrades from supply chain challenges and the impact of Winter Storm Uri.
Cost of goods sold was $605.6 million for the year ended December 31, 2021 compared to $538.0 million for the year ended December 31, 2020, an increase of $67.6 million, or 12.6%. The increase was driven by higher average raw material, logistics, utilities, and secondary costs and higher sales volumes. Additionally, the changes in currency exchange rates between the periods resulted in a negative impact of $10.5 million.
For the year ended December 31, 2021, the Chemical segment operating income was $106.4 million compared to operating loss of $388.4 million for the year ended December 31, 2020, an increase of $494.8 million, largely due to a non-cash impairment charge of $400.0 million during the year ended December 31, 2020.
For the year ended December 31, 2021, the Chemical segment generated $156.6 million of Adjusted EBITDA (non-GAAP) compared to $94.6 million for the year ended December 31, 2020. The 65.5% increase in Adjusted EBITDA (non-GAAP) was primarily driven by the significant demand recovery, favorable market fundamentals, and portfolio diversification resulting in higher sales volumes and expanded unit margins across all product groups, including continued favorability in the rosin chain. These increases were partially offset by higher average raw material, logistics, utilities, and secondary costs. The positive effect from changes in currency exchange rates between the periods was $2.2 million. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of U.S. GAAP operating income to non-GAAP Adjusted EBITDA.
Critical Accounting Policies and Estimates
The preparation of these financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statements. Certain critical accounting policies and estimates requiring significant judgments, estimates, and assumptions are described in this section. We consider an accounting estimate to be critical if it requires assumptions to be made that are uncertain at the time the estimate is made and changes to the estimate or different estimates that could have reasonably been used would materially change our consolidated financial statements.
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, should our actual experience differ from these assumptions and other considerations used in estimating these amounts, the impact of these differences could have a material impact on our consolidated financial statements.
Inventories. Inventory values include all costs directly associated with manufacturing products and are stated at the lower of cost or net realizable value, primarily determined on a first-in, first-out basis. We evaluate the carrying cost of our inventory on a quarterly basis for this purpose. If the cost of the inventories exceeds their net realizable value, provisions are made for the difference between the cost and the net realizable value.
Impairment of Long-Lived Assets . In accordance with the Impairment or Disposal of Long-Lived Assets Subsections of Financial Accounting Standards Board (“FASB”) ASC Subtopic 360-10, Property, Plant, and Equipment—Overall , long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
Goodwill. We record goodwill when the purchase price of an acquired business exceeds the fair value of the net identifiable assets acquired. Goodwill is allocated to the reporting unit level based on the estimated fair value at the date of acquisition. Goodwill was recorded as a result of the Arizona Chemical Acquisition and is recorded in the Chemical operating segment.
Goodwill is tested for impairment at the reporting unit level annually or more frequently as deemed necessary. Our annual measurement date for testing impairment is October 1st. First, we have the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is more likely than not that an impairment indicator exists utilizing the qualitative method, we then test for impairment via estimating the fair value of our reporting units utilizing a combination of market and income approaches. This provides a fair value to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill. The estimated fair value of our reporting units are subject to a number of estimates which include, but are not limited to, discount rates, revenue growth rates, cash flow assumptions, and market information. If the carrying amount of the reporting unit exceeds its fair value, an impairmentloss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. For further discussion on goodwill, see Note 13 Industry Segment and Foreign Operations .
Share-Based Compensation . Share-based compensation cost is measured at the grant date based on the fair value of the award. We recognize these costs using the straight-line method over the requisite service period. We recognize actual forfeitures by reducing the employee share-based compensation expense in the same period as the forfeitures occur.
We estimate the fair value of performance-based restricted share units using a combination of Monte Carlo simulations and internal metrics. The expected term represents the period of time that performance share units granted are expected to be outstanding. Our expected volatilities are based on historical volatilities for Kraton and the members of the peer group. The risk free interest rate for the periods within the contractual life of the performance-based restricted share units is equal to the yield, as of the valuation date, of the zero coupon U.S. Treasury STRIPS that have a remaining term equal to the length of the remaining performance period. The expected dividend yield is assumed to be zero, which is the equivalent of reinvesting dividends in the underlying company's stock. Forfeitures are recognized when they occur. See Note 5 Share-Based Compensation to the consolidated financial statements.
Income Taxes . We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are reflected in our consolidated financial statements for each of those jurisdictions.
Income taxes are recorded utilizing an asset and liability approach. This method gives consideration to the future tax consequences associated with the differences between the financial accounting and tax basis of the assets and liabilities as well as the ultimate realization of any deferred tax asset resulting from such differences.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
In assessing the realizability of deferred tax assets, we consider all available evidence both positive and negative, to determine whether a valuation allowance is necessary relative to net deferred tax assets. In making this determination, we consider the current year and two preceding years for potential cumulative losses, and sources of income for sufficient taxable income. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances.
Benefit Plans Valuations . We sponsor defined benefit pension plans in both the U.S. and non-U.S. entities (“Pension Plans”), as well as a post-retirement benefit plan in the U.S. (“Retiree Medical Plan”). We annually evaluate significant assumptions related to the benefits and obligations of these plans. Our estimation of the projected benefit obligations and related benefit expense requires that certain assumptions be made regarding such variables such as expected return on plan assets, discount rates, rates of future compensation increases, estimated future employee turnover rates and retirement dates, distribution election rates, mortality rates, retiree utilization rates for health care services, and health care cost trend rates. The determination of the appropriate assumptions requires considerable judgment concerning future events and has a significant impact on the amount of the obligations and expense recorded. We rely in part on actuarial studies when determining the appropriateness of certain of the assumptions used in determining the benefit obligations and the annual expenses for these plans.
The discount rates are determined annually and are based on rates of return of high-quality long-term fixed income securities currently available with maturities consistent with the projected benefit payout period. The expected long-term rate of return on assets is derived from a review of anticipated future long-term performance of individual asset classes and consideration of an appropriate asset allocation strategy, given the anticipated requirements of the Pension Plans, to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. We also consider recent fund performance and historical returns in establishing the expected rate of return. We estimated a range of returns on the plan assets using a historical stochastic simulation model that determines the compound average annual return (assuming these asset classes—stocks, bonds and cash) over a 20-year historical period (the approximate duration of our liabilities under the Pension Plans). The distribution of results from these simulations is then used to determine a median expected asset return.
Movements in the capital markets impact the market value of the investment assets used to fund our Pension Plans. Future changes in plan asset returns, assumed discount rates, and various other factors related to our pension and post-retirement plans will impact future pension expenses and liabilities.
The information below summarizes the results of sensitivities to significant estimates in our Pension Plans and Retiree Medical Plan, which would result in additional expense for fiscal year 2022. For additional information about our benefit plans, see Note 12 Employee Benefits to the consolidated financial statements.
Change from Baseline
(In thousands)
U.S. Pension Plans
Discount rate
1% Increase
Expected return on assets
1% Decrease
Non-U.S. Pension Plans
Discount rate
1% Decrease
Expected return on assets
1% Decrease
Expected salary rate
1% Increase
Retiree Medical Plan
Discount rate
1% Decrease
Health care trend
1% Increase
Revenue Recognition. Revenue is recognized in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs at a point in time when the transfer of risk and title to the product transfers to the customer. Our products are generally sold free on board shipping point or, with respect to countries other than the U.S., an equivalent basis. Our standard terms of delivery are included in our contracts of sale, order confirmation documents, and invoices. As such, all revenue is considered revenue recognized from contracts with customers and we do not have other sources of revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of sales tax, value-added taxes, and other taxes. Shipping and other transportation costs charged to customers are recorded in both revenue and cost of goods sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale. Certain customers may receive cash-based incentives (including rebates and price supports), which are accounted for as variable consideration. We estimate rebates and price supports based on the expected amount to be provided to customers and reduce revenues recognized once the performance obligation has been met. Sales commissions are recorded as an increase in cost of goods sold once the performance obligation with the associated sale has been met. We do not expect to have significant changes in our estimates for variable considerations.
LIQUIDITY AND CAPITAL RESOURCES
Kraton Corporation is a holding company without any operations or assets other than the operations of its subsidiaries. Cash flows from operations of our subsidiaries, cash on hand, and available borrowings under the ABL Facility, and other debt offerings we may conduct from time to time, are our principal sources of liquidity.
COVID-19 Pandemic Governmental Liquidity Programs
We also continue to monitor government economic stabilization efforts in response to the COVID-19 pandemic and are participating, and may in the future participate, in certain legislative provisions to enhance our liquidity, including certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the American Rescue Plan Act of 2021 (the “ARP Act”), and similar federal or foreign governmental programs. For example, we elected certain cash deferral options under the CARES Act and ARP Act.
Elections made under the CARES Act and ARP Act did not have a material impact on our cash flows and results of operations. We will continue to evaluate our options under the CARES Act, ARP Act, and similar federal or foreign programs as legislative provisions occur.
Changes in Debt and Net Debt
We reduced our consolidated debt by $52.8 million and our consolidated net debt by $97.4 million, in cluding the effect of foreign currency of $31.8 million, for the year ended December 31, 2021. The decrease in our consolidated net debt was driven primarily by favorable operating income, partially offset by increases in working capital, including the impacts of higher raw material costs due to the current inflationary environment and associated increases in accounts receivable as a result of higher sales prices. Further, we had approximately $389.7 million of available liquidity, comprised of $130.5 million of cash on hand and a borrowing base of $259.2 million on our ABL Facility as of December 31, 2021. As of the date of this filing, our available borrowing capacity under the ABL Facility was $262.7 million , with no outstanding borrowings and $3.6 million of letters of credit outstanding under the facility.
Management uses consolidated net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using consolidated net debt is useful to investors in determining our leverage because we could choose to use cash and cash equivalents to retire debt. We also present consolidated net debt as adjusted for foreign exchange impact accounts for the foreign exchange effect on our foreign currency denominated debt agreements.
Summary of principal amounts for indebtedness and a reconciliation of Kraton debt to consolidated net debt (non-GAAP) and consolidated net debt excluding the effect of foreign currency (non-GAAP):
December 31, 2021
December 31, 2020
(In thousands)
Kraton debt
KFPC loans (1)
Consolidated debt
Kraton cash
KFPC cash (2)
Consolidated cash
Consolidated net debt
Effect of foreign currency on consolidated net debt
Consolidated net debt excluding effect of foreign currency
(1) KFPC executed the KFPC Revolving Facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the KFPC Loan Agreement.
(2) Cash at our KFPC joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and consolidate within our financial statements.
Principal Balances of Debt and Liquidity Considerations
As of December 31, 2021 , our outstanding borrowings included (i) €85.0 million , or approximately $96.7 million, under the Euro Tranche of the Term Loan Facility, (ii) $400.0 million and €290.0 million, or approximately $329.8 million, under the 4.25% Senior Notes and 5.25% Senior Notes, respectively, and (iii) $3.2 million in finance lease obligations. As of December 31, 2021 , we had no outstanding borrowings under our ABL Facility.
In addition, as of December 31, 2021 , KFPC had NTD 494.0 million, or approximately $17.9 million, and NTD 1.4 billion, or approximately $49.9 million, of borrowings under the KFPC Loan Agreement and KFPC Revolving Facilities, respectively. The KFPC Loan Agreement matured and was paid off on January 17, 2022.
Based upon current and anticipated levels of operations, we believe that cash flows from operations of our subsidiaries, cash on hand, and borrowings available to us will be sufficient to fund operations and meet our short-term and long-term cash requirements, including our expected financial obligations, planned capital expenditures, anticipated liquidity requirements, working capital requirements, our investment in the KFPC joint venture, debt payments, interest payments, benefit plan contributions, and income tax obligations.
Our cash flows are subject to a number of risks and uncertainties, including, but not limited to, earnings, sensitivities to the cost of raw materials, seasonality, market conditions (including the impact of COVID-19), and fluctuations in foreign currency exchange rates. Because feedstock costs generally represent a substantial portion of our cost of goods sold, in periods of rising feedstock costs, we generally consume cash in operating activities due to increases in accounts receivable and inventory costs, partially offset by increased value of accounts payable. Conversely, during periods in which feedstock costs are declining, we generate cash flow from decreases in working capital.
Excluding the impact of the proposed Merger with DL Chemical, going forward there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under the Term Loan Facility and the ABL Facility or any new credit facilities or financing arrangements to fund liquidity needs and enable us to service our indebtedness. As of the date of this filing, we had no outstanding borrowings under the ABL Facility with a remaining available borrowing capacity of $262.7 million. Subject to compliance with certain covenants and other conditions, we have the option to borrow up to $350.0 million of incremental term loans plus an additional amount subject to a senior secured net leverage ratio. Our available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of cash invested in interest bearing funds and operating accounts. To date, we have not experienced any losses or lack of access to our invested cash or cash equivalents; however, we cannot provide any assurance that adverse conditions in the financial markets will not impact access to our invested cash and cash equivalents.
Pension and Other Retirement Benefit Plan Contributions
We made contributions of $17.1 million to our Pension Plans and Retiree Medical Plan for the year ended December 31, 2021 and $10.3 million for the year ended December 31, 2020. We expect our total Pension Plans and Retiree Medical Plan contributions for the year ended December 31, 2022 to be approximately $6.2 million. Our Pension Plans and Retiree Medical Plan obligations are predicated on a number of factors, the primary ones being the return on our Pension Plans' assets and the discount rates used in deriving our Pension Plans and Retiree Medical Plan obligations. If the investment returns on our Pension Plans' assets do not meet or exceed expectations during 2022, and the discount rates decrease on our Pension Plans and Retiree Medical Plan from the prior year, higher levels of contributions could be required in 2023 and beyond.
Additional Liquidity Considerations
As of December 31, 2021, we had $65.3 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. After 2017, our foreign earnings held by foreign subsidiaries are no longer subject to U.S. tax upon repatriation to the U.S. As of December 31, 2021, the remaining long-term tax payable related to the Tax Act of $9.4 million is presented within income tax payable, non-current on our Consolidated Balance Sheets. As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025.
Turbulence 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.
Operating Cash Flows
Net cash provided by operating activities totaled $171.2 million for the year ended December 31, 2021 and $151.3 million for the year ended December 31, 2020. This represents a net increase of $19.9 million, which was primarily driven by increases in operating income, partially offset by increases in working capital. The period-over-period changes in working capital are as follows:
• $151.7 million decrease in cash flows associated with inventories of products, materials, and supplies due to higher raw material costs, partially offset by lower inventory volumes;
• $57.2 million decrease in cash flows for accounts receivable due to higher average selling prices;
• $13.3 million decrease in cash flows associated with other long term liabilities due to higher pension contributions;
• $8.9 million decrease in cash flows associated with timing of other items, including, value added taxes and related party transactions; and
• $4.4 million decrease in cash flows for other payables and accruals due to timing of employee related and income tax accruals and payments; partially offset by
• $76.4 million increase in cash flows associated with trade accounts payable due to higher raw material costs and timing of payments.
Net cash provided by operating activities totaled $151.3 million for the year ended December 31, 2020 and $234.9 million for the year ended December 31, 2019. This represents a net decrease of $83.6 million, which was primarily driven by decreases in operating income, partially offset by decreases in working capital. The period-over-period changes in working capital are as follows:
• $28.3 million decrease in cash flows associated with inventories of products, materials, and supplies due to higher inventory volumes;
• $6.4 million decrease in cash flows for accounts receivable, primarily related to lower selling prices; and
• $7.9 million decrease in cash flows due to the timing of payments of other items, including, pension costs, value added taxes, and related party transactions; partially offset by
• $25.6 million increase in cash flows for other payables and accruals due to employee related and income taxes;
• $10.5 million increase in cash flows associated with other long term liabilities due to lower pension contributions; and
• $3.8 million increase in cash flows associated with trade accounts payable due to timing of payments.
Investing Cash Flows
On March 6, 2020, we completed the sale of our Cariflex business to Daelim for gross proceeds of $530.0 million and net proceeds of $510.5 million. During the year ended December 31, 2021, we completed final customary post-closing working capital adjustments, reducing cash proceeds received to date by an additional $5.8 million.
Net cash used in investing activities totaled $107.0 million for December 31, 2021 compared to net cash provided by investing activities totaling $424.5 million and used in investing activities totaling $108.7 million for the years ended December 31, 2020 and 2019, respectively.
Capital projects in 2021 included the following:
• $63.0 million related to infrastructure and maintenance, and health, safety, environmental, and security projects to improve operating reliability and safety performance;
• $21.0 million related to projects to optimize the production capabilities of our manufacturing assets, including projects to deliver strategic cost savings or additional capacity; and
• $14.0 million of capital expenditures related to information technology and research and development.
Capital projects in 2020 included the following:
• $53.8 million related to infrastructure and maintenance, and health, safety, environmental, and security projects to improve operating reliability and safety performance;
• $15.9 million related to projects to optimize the production capabilities of our manufacturing assets, including projects to deliver strategic cost savings or additional capacity; and
• $7.8 million of capital expenditures related to information technology and research and development.
Expected Capital Expenditures
We currently expect 2022 capital expenditures, excluding expenditures by the KFPC joint venture, will be approximately $100.0 million, which includes approximately $4.0 million of capitalized interest. Also included is approximately $75.0 million for infrastructure and maintenance, and health, safety, environmental, and security projects. The remaining anticipated 2022 capital expenditures are primarily associated with projects to optimize the production capabilities of our manufacturing assets, to support our innovation platform, and to upgrade our information technology systems.
Financing Cash Flows and Liquidity
Our consolidated capital structure as of December 31, 2021 was approximately 45.7% equity, 51.4% debt, and 2.9% noncontrolling interest, compared to approximately 37.8% equity, 59.4% debt, and 2.8% noncontrolling interest as of December 31, 2020.
Net cash used in financing activities totaled $22.9 million for the year ended December 31, 2021 compared to $520.9 million and $176.1 million for the years ended December 31, 2020 and 2019, respectively.
During the year ended December 31, 2021, we decreased indebtedness, excluding impacts on foreign currency, by $20.9 million. In addition, cash on hand increased by approximately $44.6 million due to cash from operations, partially offset by our reinvestment in the business for capital expenditures and increased working capital.
We evaluate ongoing opportunities to refinance our debt, if available, on terms, rates, or time periods more favorable to us. As a result of the divestiture of our Cariflex business, we fully repaid $290.0 million of outstanding borrowings under the USD Tranche and repaid €160.0 million (or approximately $184.8 million) of outstanding borrowings under the Euro Tranche of our Term Loan Facility. Additionally, in an effort to improve our debt portfolio, during the fourth quarter of 2020, we called for redemption and satisfied and discharged our 7.0% Senior Notes and issued our 4.25% Senior Notes.
In connection with the debt reductions associated with the divestiture of our Cariflex business and our fourth quarter of 2020 refinancing, we recorded a $40.8 million loss on extinguishment of debt during the year ended December 31, 2020. This includes a write off of $20.7 million related to the call premium on the redemption of our outstanding 7.0% Senior Notes, a write off of $13.9 million related to previously capitalized deferred financing costs on our Term Loan Facility and 7.0% Senior Notes, a write off of $4.9 million related to original issue discount on our USD Tranche, and a $1.3 million loss on the settlement of the ineffective portion of interest rate swaps. See Note 8 Long-Term Debt for further discussion.
Share Repurchase Program
In February 2019, we announced a repurchase program for up to $50.0 million of the Company’s common stock. Repurchases were made at management’s discretion from time to time through privately-negotiated transactions, in the open market, or through broker-negotiated purchases in compliance with applicable securities law, including through a 10b5-1 Plan. From inception of the program, we repurchased 311,152 shares of our common stock at an average price of $32.14 per share and a total cost of $10.0 million. The program ended on February 7, 2021.
On December 6, 2018, we commenced a repurchase program for up to $20.0 million of our 7.0% Senior Notes. During the year ended December 31, 2019, we repurchased $4.3 million of our 7.0% Senior Notes.
Other Contingencies
As a chemicals manufacturer, our operations in the U.S. and abroad are subject to a wide range of environmental laws and regulations at the international, national, state, and local levels. These laws and regulations govern, among other things, air emissions, wastewater discharges, the use, handling, and disposal of hazardous materials and wastes, occupational health and safety, including dust and noise control, site remediation programs, and chemical registration, use, and management.
Pursuant to these laws and regulations, our facilities are required to obtain and comply with a wide variety of environmental permits and authorizations for different aspects of their operations. Generally, many of these environmental laws and regulations are becoming increasingly stringent, and the cost of compliance with these various requirements can be expected to increase over time.
In connection with our separation from Shell Chemicals in February 2001, Shell Chemicals agreed to indemnify us for specific categories of environmental claims brought with respect to matters occurring before the separation. However, the indemnity from Shell Chemicals is subject to dollar and time limitations. Coverage under the indemnity also varies depending upon the nature of the environmental claim, the location giving rise to the claim and the manner in which the claim is triggered. Therefore, if claims arise in the future related to past operations, we cannot give assurances that those claims will be covered by the Shell Chemicals’ indemnity and also cannot be certain that any amounts recoverable will be sufficient to satisfyclaimsagainst us.
In connection with International Paper’s divestiture of Arizona Chemical in February 2007, International Paper provided an indemnity to the buyer for specific known environmental liabilities and other environmental liabilities pertaining to former properties. At the closing of the Arizona Chemical Acquisition, Kraton was assigned the right to International Paper’s indemnity for such environmental liabilities and assumed certain related obligations. Certain liabilities may fall outside the scope of the indemnity and therefore we cannot be certain that the indemnity will be sufficient to satisfy all environmental liabilities of Arizona Chemical.
In addition, we may in the future be subject to claims that arise solely from events or circumstances occurring after February 2001 for legacy Kraton manufacturing sites or after February 2007 for legacy Arizona Chemical manufacturing sites, which would not, in any event, be covered by the Shell Chemicals or International Paper indemnities, respectively. While we recognize that we may in the future be held liable for remediation activities beyond those identified to date, at present we are not aware of any circumstances that are reasonably expected to give rise to remediation claims that would have a material adverse effect on our results of operations or cause us to exceed our projected level of anticipated capital expenditures.
Except for the foregoing, we currently estimate that any expenses incurred in maintaining compliance with environmental laws and regulations will not materially affect our results of operations or cause us to exceed our level of anticipated capital expenditures. However, we cannot give assurances that unknown contingencies may not arise or that regulatory requirements or permit conditions will not change, and we cannot predict the aggregate costs of additional measures that may be required to maintain compliance as a result of such changes or expenses.
We had no material operating expenditures for environmental fines, penalties, government imposed remedial, or corrective actions during the years ended December 31, 2021, 2020, or 2019.
Contractual Obligations
Our principal outstanding contractual obligations relate to the Term Loan Facility, Senior Notes, KFPC Loan Agreement, interest payments, the operating leases of some of our facilities, the minimum purchase obligations required under our KFPC joint venture agreement and other agreements, and the feedstock contracts with LyondellBasell and others to provide us with raw materials. The following table summarizes our contractual cash obligations as of December 31, 2021 for the periods indicated.
Payments Due by Period
Total
2027 and thereafter
(In millions)
Long-term debt obligations (1)
Estimated interest payments on debt
Operating lease obligations
Purchase obligations (2)(3)
Uncertain tax positions, including interest and penalties (4)
Estimated pension obligations
Total contractual cash obligations
(1) Includes finance lease obligations.
(2) Included in this line are our estimated minimum purchases required under our KFPC joint venture agreement. Due to the indefinite term of this joint venture, we have based our minimum purchases on an assumed 20 year useful life of the facility.
(3) Pursuant to operating agreements with LyondellBasell, we are currently paying the costs incurred by them in connection with the operation and maintenance of, and other services related to, our Berre, France, and Wesseling, Germany, facilities. These obligations are not included in this table.
(4) Due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities, we are unable to determine the timing of payments related to uncertain tax positions, including interest and penalties. Amounts beyond the current year are therefore reflected in “2027 and thereafter.”
Impact of Inflation. Our results of operations and financial condition are presented based on historical cost. In the fiscal year 2021, we continued to experience inflationary pressures with increasing raw material, logistics, utilities and secondary costs in both segments. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, including our actions to pass these costs onto our customers through higher sales prices, consistent with our price-right strategy. We did experience these inflationary impacts, in particular within our Polymer segment, as we experienced margin compression versus fiscal year 2020. Within our Chemical segment, due to favorable market dynamics, we were able to expand margins in excess of the aforementioned inflationary pressures.
