Acquisition of Remaining Joint Venture Interest in LPC

9 Months Ended

Sep. 30, 2024

Acquisition of Remaining Joint Venture Interest in LPC

Acquisition of Remaining Joint Venture Interest in LPC

Note 19 – Acquisition of Remaining Joint Venture Interest in LPC:

As discussed in Note 1, Kronos acquired the 50% joint venture interest in LPC for consideration of $185 million less a working capital adjustment of $11.0 million. An additional earn-out payment of up to $15 million may be required if Kronos’ aggregate consolidated net income before interest expense, income taxes and depreciation and amortization expense, or EBITDA, during a two-year period comprising calendar years 2025 and 2026 exceed certain thresholds as described below. Prior to the acquisition, Kronos held a 50% joint venture interest in LPC and LPC was operated as a joint venture between Kronos and Venator. Kronos accounted for the acquisition of LPC’s interest as a business combination and, as a result of obtaining full control, LPC became a wholly-owned subsidiary of Kronos. Obtaining control of LPC and its estimated additional 78,000 metric tons annually of TiO₂ production volume allows Kronos to better serve the North American TiO₂ marketplace. The acquisition was financed through a borrowing of $132.1 million under Kronos’ Global Revolver and the remainder paid with cash on hand.

For financial reporting purposes, the assets acquired and liabilities assumed of LPC have been included in our Condensed Consolidated Balance Sheet as of September 30, 2024, and the results of operations and cash flows of LPC have been included in our Condensed Consolidated Statement of Operations and Cash flows beginning as of the Acquisition Date. Kronos incurred $2.2 million of transaction costs in connection with the acquisition. These costs were primarily associated with legal and professional services and were expensed in accordance with ASC 805 and are included in “Selling, general and administrative expense” in our Condensed Consolidated Statement of Operations.

The potential earn-out payment of up to $15 million is based on aggregate Kronos consolidated EBITDA tiers for 2025 and 2026 of $650 million and $730 million, with $5 million of the earn-out payable if Kronos achieves $650 million in aggregate consolidated EBITDA, and a maximum of $15 million payable if aggregate EBITDA is $730 million or greater for the period. If Kronos achieves aggregated consolidated EBITDA between $650 million and $730 million, the payment of the additional $10 million is prorated between the two targets. The earn-out is payable at the earliest in April 2027. The estimated fair value of the earn-out at the Acquisition Date is $4.2 million and was determined using a weighted probability of potential outcomes based on estimated future EBITDA and volatility factors, among other variables and estimates. The earn-out liability is included in “Other noncurrent liabilities” on the Condensed Consolidated Balance Sheet and is part of the line item captioned “Earn-out liability” in Note 9. The fair value measurement is based on significant inputs not observable in the market and therefore represents a Level 3 measurement as defined in ASC 820. The earn-out liability will be re-measured at fair value on a recurring basis and the change to the liability, if any, would be recorded in “Cost and other expense (income)” in our Condensed Consolidated Statements of Operations. See Note 17 to our Condensed Consolidated Financial Statements.  

Kronos remeasured its existing ownership interest in LPC to its estimated fair value at the Acquisition Date in accordance with ASC 805-10-25, for a business combination achieved in stages (because Kronos previously had an ownership interest in LPC). As a result of such remeasurement, we recognized a pre-tax gain of approximately $64.5 million in the third quarter of 2024, representing the difference between the $178.2 million estimated fair value of the existing ownership interest in LPC at the Acquisition Date and its aggregate $113.7 million carrying value at the Acquisition Date. Such pre-tax gain is disclosed as “Gain on remeasurement of investment in TiO₂ manufacturing joint venture” and is included in “Cost and other expense (income)” in our Condensed Consolidated Statement of Operations.

The following table summarizes the aggregate fair value of the consideration transferred to gain control of LPC, the current estimate for the fair value of Kronos’ existing ownership interest in LPC and the amounts assigned to the identifiable assets acquired and liabilities assumed at the Acquisition Date. The estimated purchase price allocation is based upon management’s estimate of the fair

value of the acquired assets and assumed liabilities using independent third-party appraiser valuation techniques including income, cost, and market approaches. The total consideration was allocated to the assets acquired and liabilities assumed, with the excess of the consideration over the estimated fair value of the net assets acquired recorded as goodwill.

Subject to final determination, which is expected to occur within 12 months of Acquisition Date, the provisional fair values of the assets acquired and liabilities assumed in the acquisition are as follows:

	Amount
	(In millions)
Consideration:
Cash consideration	$	185.0
Working capital adjustment		(11.0)
Earn-out liability		4.2
Total fair value of consideration		178.2
Fair value of investment in TiO2 manufacturing joint venture		178.2
Total	$	356.4
Allocation of purchase price to identifiable     assets acquired and liabilities assumed:
Cash and cash equivalents	$	21.3
Restricted cash		1.3
Accounts and other receivables, net		.2
Inventories, net		82.0
Prepaid expenses and other		.6
Other assets		10.7
Property and equipment		268.5
Accounts payable and accrued liabilities		(21.7)
Other noncurrent liabilities		(6.4)
Deferred tax liability		(2.7)
Total net identifiable assets acquired		353.8
Goodwill		2.6
Total	$	356.4

Property and equipment will be depreciated over useful lives of 5 years to 20 years. Goodwill is related to the benefits expected as a result of the acquisition, and of the $2.6 million recorded as goodwill, $.1 million is expected to be deductible for tax purposes.

As noted above, prior to the Acquisition Date Kronos and Venator operated LPC as a manufacturing joint venture on a break-even basis. Under the terms of the operating agreement, Kronos’ purchase price of TiO₂ produced by LPC equaled LPC’s production costs. Therefore, the pro forma impact of combining LPC’s results of operations assuming the LPC transaction had occurred as of January 1, 2023 would result in no net increase to earnings. The additional interest expense and depreciation expense that would have occurred during the comparable period is not material. The pro forma impact is not necessarily indicative of either future results of operations or results of operations that might have been achieved had the acquisition occurred as of January 1, 2023. The incremental finished goods offtake produced resulting from Kronos’ additional 50% interest acquired in LPC has not materially impacted revenue and earnings from Acquisition Date through the end of the third quarter.