SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the quarter ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-10126
Tremont Corporation
(Exact name of registrant as specified in its charter)
Delaware 76-0262791
(State or other (IRS Employer
jurisdiction of Identification
incorporation or No.)
organization)
<PAGE>
1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5652
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Number of shares of common stock outstanding on August 11, 1999: 6,387,358
<PAGE>
FORWARD-LOOKING INFORMATION
The statements contained in this Report on Form 10-Q ("Quarterly Report")
that are not historical facts, including, but not limited to, statements found
in the Notes to Consolidated Financial Statements and under the captions
"Results of Operations" and "Liquidity and Capital Resources" (both contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations), are forward-looking statements that represent management's beliefs
and assumptions based on currently available information. Forward-looking
statements can be identified by the use of words such as "believes," "intends,"
"may," "should," "anticipates," "expected" or comparable terminology or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
<PAGE>
including those portions referenced above and those described from time to time
in the Company's other filings with the Securities and Exchange Commission, such
as the cyclicality of NL's and TIMET's businesses, TIMET's dependence on the
aerospace industry, the sensitivity of NL's and TIMET's businesses to global
industry capacity, global economic conditions and changes in product pricing,
the impact of TIMET's long term contracts with customers on its ability to raise
prices and of its long term contracts with vendors on its ability to reduce or
increase supply or achieve lower costs, the possibility of labor disruptions,
control by certain stockholders and possible conflicts of interest, potential
difficulties in integrating acquisitions, uncertainties associated with new
product development and the supply of raw materials and services and the
possibility of disruptions of normal business activities from "Year 2000"
("Y2K") issues. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should one or more of the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected.
TREMONT CORPORATION
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998 and
June 30, 1999 2-3
<PAGE>
Consolidated Statements of Income - Three months and
six months ended June 30, 1998 and 1999 4
Consolidated Statements of Comprehensive Income (Loss) - Three
months and six months ended June 30, 1998 and 1999 5
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and 1999 6
Consolidated Statement of Stockholders' Equity - Six months
ended June 30, 1999 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11-27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 28
Item 6. Exhibits and Reports on Form 8-K. 28
<PAGE>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
December 31, JUNE 30,
ASSETS 1998 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,132 $ 3,260
Accounts and notes receivable 3,255 3,444
Refundable income taxes 1,087 856
Receivable from related parties 2,157 1,826
Prepaid expenses 1,203 77
Total current assets 10,834 9,463
Other assets:
Investment in TIMET 145,180 155,341
Investment in NL Industries 94,980 111,000
Investment in joint ventures 13,063 13,708
Receivable from related parties 2,212 2,144
Other 21,688 12,268
Total other assets 277,123 294,461
Net property and equipment 633 615
<PAGE>
$ 288,590 $ 304,539
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES, MINORITY INTEREST AND December 31, JUNE 30,
STOCKHOLDERS' EQUITY 1998 1999
<S> <C> <C>
Current liabilities:
Loan payable to related party $ 5,875 $ 12,513
Accrued liabilities 3,821 2,701
Other payables to related parties 167 319
Total current liabilities 9,863 15,533
Noncurrent liabilities:
Insurance claims and claim 15,812 15,782
expenses
Accrued OPEB cost 21,888 21,616
Deferred income taxes 30,995 35,385
Other 5,910 5,976
Total noncurrent liabilities 74,605 78,759
Minority interest 3,968 4,150
Stockholders' equity:
Common stock 7,769 7,780
Additional paid-in capital 290,118 290,202
Accumulated deficit (30,906) (19,023)
Accumulated other comprehensive (7,469) (13,504)
<PAGE>
income
259,512 265,455
Less treasury stock, at cost 59,358 59,358
Total stockholders' equity 200,154 206,097
$ 288,590 $ 304,539
</TABLE>
<PAGE>
[FN] Commitments and contingencies (Note 1).
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
<S> <C> <C>
Equity in earnings (loss) of:
NL Industries $3,443 $21,378 $50,260 $23,182
TIMET 4,195 (738) 9,742 (1,932)
Other joint ventures 158 (34) 1,991 645
7,796 20,606 61,993 21,895
Corporate income (expense):
Interest income 639 141 1,248 291
Other, net (902) (996) (1,593) (2,000)
Income before income 7,533 19,751 61,648 20,186
taxes
Income tax expense 1,564 7,295 4,108 7,227
Minority interest 49 1 512 182
Income before 5,920 12,455 57,028 12,777
extraordinary item
Equity in extraordinary loss
of NL-
early extinguishment of - - (415) -
<PAGE>
debt
Net income $5,920 $12,455 $56,613 $12,777
Earnings per share:
Before extraordinary item:
Basic $.88 $1.95 $ 8.47 $2.00
Diluted $.86 $1.93 $ 8.15 $1.98
Net income:
Basic $.88 $1.95 $ 8.41 $2.00
Diluted $.86 $1.93 $ 8.09 $1.98
Weighted average shares
outstanding:
Common shares 6,711 6,387 6,730 6,384
Diluted shares 6,855 6,448 6,889 6,460
</TABLE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
<S> <C> <C>
Net income $ 5,920 $12,455 $56,613 $12,777
Other comprehensive income (loss),
net of taxes:
Currency translation adjustments (530) (1,978) (770) (5,973)
Unrealized gains (losses) on
marketable
securities 57 138 153 (62)
Comprehensive income $ 5,447 $10,615 $55,996 $ 6,742
</TABLE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1998 and 1999
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $56,613 $ 12,777
Earnings of affiliates:
Before extraordinary item (61,993) (21,895)
Extraordinary item 415 -
Distributions 1,272 2,063
Deferred income taxes 3,827 7,639
Minority interest 512 182
Other, net 488 (210)
Change in assets and liabilities:
Accounts with related parties 547 156
Other, net (224) (282)
Net cash provided by operating 1,457 430
activities
Cash flows from investing activities:
Purchase of TIMET common stock - (15,988)
Other, net (6) (9)
Net cash used by investing activities (6) (15,997)
Cash flows from financing activities:
Borrowings from related parties - 6,638
<PAGE>
Letters of credit cash collateral (8,487) 9,872
Litigation settlement, net 18,976 -
Repurchases of common stock (23,636) -
Dividends paid (474) (894)
Other, net 1,019 79
Net cash provided (used) by financing (12,602) 15,695
activities
Net increase (decrease) in cash and cash (11,151) 128
equivalents
Balance at beginning of period 37,959 3,132
Balance at end of period $ 26,808 $ 3,260
Supplemental disclosures - cash paid for:
Income taxes (refund), net $ 424 $ (640)
Interest - 401
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 1999
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Additional
Shares Treasury Common Paid-in Accumulated
Issued Shares Stock Capital Deficit
<S> <C> <C> <C> <C> <C>
Balance at 7,769 1,392 $7,769 $290,118 $(30,906)
December 31, 1998
Comprehensive - - - - 12,777
income
Dividends - - - - (894)
Common stock 11 - 11 75 -
issued
Other - - - 9 -
Balance at June 7,780 1,392 $7,780 $290,202 $(19,023)
30, 1999
</TABLE>
<PAGE>
[FN] See accompanying notes to consolidated financial statements.
TREMONT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 1999
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
Total
Currency Marketable Pension Treasury Stockholders'
Translation Securities Liabilities Stock Equity
<S> <C> <C> <C> <C> <C>
Balance at $(6,742) $ 590 $(1,317) $(59,358) $200,154
December 31, 1998
Comprehensive (5,973) (62) - - 6,742
income
Dividends - - - - (894)
Common stock - - - - 86
issued
Other - - - - 9
Balance at June $(12,715) $ 528 $(1,317) $(59,358) $206,097
30, 1999
</TABLE>
<PAGE>
[FN] See accompanying notes to consolidated financial statements.
<PAGE>
TREMONT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Tremont Corporation is principally a holding company with operations
conducted through 39%-owned Titanium Metals Corporation ("TIMET"), 20%-owned NL
Industries, Inc. ("NL") and through joint ventures of 75%-owned TRECO L.L.C.
("TRECO"). Valhi, Inc. and Tremont, each affiliates of Contran Corporation,
hold approximately 58% and 20%, respectively, of NL's outstanding common stock.
At June 30, 1999, Contran and its subsidiaries held approximately 92% of Valhi's
outstanding common stock, and Valhi and other entities related to Harold C.
Simmons held approximately 55% of Tremont's outstanding common stock. Mr.
Simmons may be deemed to control each of Contran, Valhi, Tremont, NL and TIMET.
The consolidated balance sheet of Tremont Corporation and subsidiaries
(collectively, the "Company") at December 31, 1998 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1999 and the consolidated statements of
income, cash flows, comprehensive income and stockholders' equity for the
interim periods ended June 30, 1998 and 1999 have been prepared by the Company
without audit. In the opinion of management, all adjustments necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for interim periods are
not necessarily indicative of the operating results of a full year or of future
operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying consolidated financial
<PAGE>
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 Annual Report").
The Company, NL and TIMET will adopt Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, no later than the first quarter of 2001. SFAS No. 133
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, all derivatives will be recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair
value of derivatives will depend upon the intended use of the derivative. The
impact of adopting SFAS No. 133, if any, has not been determined but will be
dependent upon the extent to which the Company, NL and TIMET are then parties to
derivative contracts or engaged in hedging activities.
For information concerning certain legal proceedings, income tax and other
contingencies related to the Company, TIMET and NL, see (i) Part I, Item 2 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A"), (ii) Part II, Item 1 -- "Legal Proceedings," and (iii) the
1998 Annual Report, including certain information concerning TIMET's and NL's
legal proceedings incorporated therein by reference.
<PAGE>
Note 2 - Stockholders' equity:
In 1997, Tremont's Board of Directors authorized the repurchase of up to 2
million shares of Tremont common stock in the open market or privately
negotiated transactions. Such shares represented approximately 27% of the
Company's 7.5 million shares then outstanding. The Company has repurchased to
date 1,219,300 shares for $55.7 million (average price $45.68) pursuant to this
program. The most recent purchase was made in June 1998.
Note 3 - Unconsolidated affiliates and joint ventures:
Summarized information relating to the results of operations, financial
position and cash flows of TIMET and NL is included in MD&A, which information
is incorporated herein by reference.
~ TIMET.~~~In February 1999, Tremont exercised an option to acquire 2.0
million shares of TIMET common stock from IMI plc for approximately $16 million
($7.95 per TIMET share). At June 30, 1999, Tremont held approximately 12.3
million shares, or 39%, of TIMET's outstanding common stock. At June 30, 1999,
the net carrying amount of the Company's interest in TIMET was approximately
$12.65 per share, while the market price of TIMET common stock at that date was
$11.25 per share ($11.00 per share at August 11, 1999).
~ NL~Industries.~~~At June 30, 1999, Tremont held approximately 10.2 million
shares of NL's outstanding common stock. At June 30, 1999, the net carrying
amount of the Company's interest in NL was approximately $10.87 per share while
the market price of NL common stock at that date was $11.13 per share ($12.69
per share at August 11, 1999).
~Joint~Ventures.~~~Investment in joint ventures represents holdings of 75%-
owned TRECO, which is principally comprised of (i) a 12% direct interest in
Victory Valley Land Company, L.P. ("VVLC"), which is actively engaged in efforts
<PAGE>
to develop certain real estate, and (ii) a 32% equity interest in Basic
Management, Inc. ("BMI"), which, among other things, provides utility services
in the industrial park where one of TIMET's plants is located. BMI, through a
wholly owned subsidiary, owns an additional 50% interest in VVLC.~
~
Note 4 - Income taxes:
<PAGE>
<TABLE>
<CAPTION> Three months Six months
ended ended
June 30, June 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Expected income tax expense, at $2,637 $6,913 $21,577 $7,065
35%
Adjustment of deferred tax (988) - (17,452) -
valuation allowance
Rate differences on equity in (63) 402 (25) 124
earnings of affiliates
State income taxes and other, net (22) (20) 8 38
Provision for income taxes $1,564 $7,295 $4,108 $7,227
</TABLE>
<PAGE>
The deferred tax valuation allowance adjustment in 1998 relates primarily
to the Company's equity in NL.
Note 5 - Accrued liabilities:
<PAGE>
<TABLE>
<CAPTION> December JUNE
31, 30,
1998 1999
(In thousands)
<S> <C> <C>
OPEB cost $ 1,503 $ 1,503
Other employee benefits 324 301
Environmental cost 307 286
Miscellaneous taxes 135 150
Other 1,552 461
$ 3,821 $ 2,701
</TABLE>
<PAGE>
Note 6 - Related party transactions:
Receivables from related parties principally include amounts due from NL
and a former affiliate under insurance loss sharing arrangements and amounts due
from TIMET for exercises of Tremont stock options. Current payables to related
parties include amounts due to Contran, NL and TIMET under intercorporate
services arrangements.
During 1998, the Company entered into an advance agreement with Contran
under which each party may advance funds to the other, at the prime rate less
0.5%. At June 30, 1999, the interest rate applicable to funds advanced under
this agreement was 7.25%. Obligations under this agreement are payable upon
demand. At June 30, 1999, Tremont owed Contran $12.5 million pursuant to this
agreement, which amount was borrowed primarily to purchase shares of NL and
TIMET common stock.
Note 7 - Earnings per share:
Net income per share is based upon the weighted average number of common
shares and dilutive common stock options outstanding. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted earnings
per share is presented below. The effect of conversion of TIMET's Convertible
Preferred Securities would be antidilutive in the 1999 periods.
<PAGE>
<TABLE>
<CAPTION> Three months Six months
ended ended
June 30, June 30,
1998 1999 1998 1999
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Numerator:
Net income $5,920 $12,455 $56,613 $12,777
Effect of dilutive (49) - (906) -
securities of equity investees
Diluted net income $5,871 $12,455 $55,707 $12,777
Denominator:
Average common shares 6,711 6,387 6,730 6,384
outstanding
Average dilutive stock 144 61 159 76
options
Diluted shares 6,855 6,448 6,889 6,460
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Tremont's operations are conducted through TIMET, NL and TRECO. The
results of TIMET, NL, TRECO, and general corporate and other items are discussed
below. The information included below relating to the financial position,
results of operations and liquidity and capital resources of TIMET and NL has
been summarized from reports filed with the Securities and Exchange Commission
by TIMET (File No. 0-28538) and NL (File No. 1-640), which reports contain more
detailed information concerning TIMET and NL, respectively, including financial
statements.
The Company reported second quarter net income of $12.5 million, or $1.93
per diluted share, compared to $5.9 million, or $.86 per diluted share, for the
same quarter in 1998. The second quarter 1999 results included the Company's
equity in NL's $90 million non-cash income tax benefit, as discussed below,
which accounted for $1.70 of Tremont's second quarter 1999 earnings per share.
The Company's equity in earnings of 39%-owned TIMET was a loss of $.7
million in the second quarter of 1999 compared to income of $4.2 million in
1998. TIMET reported a second quarter net loss of $2.5 million on sales of $128
million compared to net income of $13.8 million on sales of $191 million for the
comparable 1998 period. TIMET's results were below those in 1998 principally
due to a 26% decline in mill product volume caused by reduced demand for both
aerospace and industrial products, as reported in prior periods.
The Company's equity in earnings of 20%-owned NL Industries, Inc. was $21.4
million in the second quarter of 1999 compared to $3.4 million for the same
<PAGE>
quarter of 1998. NL reported income from continuing operations for the second
quarter of 1999 of $111.8 million, which includes a $90 million non-cash income
tax benefit. The income tax benefit relates to a favorable resolution of a tax
contingency in Germany and a change in estimate of NL's ability to utilize
certain German income tax attributes for which the benefit had not been
previously recognized.
Excluding the tax benefit, NL's income from continuing operations in the
second quarter of 1999 would have been $21.8 million compared to $23.4 million
in the second quarter of 1998. NL reported 1999 second quarter titanium dioxide
pigments ("TiO2") sales volumes that were 1% lower than the record sales volumes
in the same quarter in 1998 and 24% higher than the first quarter of 1999. NL's
second quarter 1999 average selling prices for TiO2 were comparable to the
second quarter of 1998 and 2% lower than the first quarter of 1999. NL's
production rates continue to closely match sales volumes.
The Company's equity in earnings of other joint ventures principally
represents earnings from its real estate development partnerships.
As discussed above, the Company's major assets are its interests in NL
(TiO2) and TIMET (titanium metals). Tremont periodically evaluates the net
carrying value of its long-term assets, principally its interests in TIMET and
NL, to determine if there has been any decline in value that is other than
temporary and would, therefore, require a writedown that would be accounted for
as a realized loss. The Company's per share net carrying value of its interest
in TIMET at June 30, 1999 was $12.65 per share, compared to a per share market
price of $11.25 at that date. The Company's per share net carrying amount of
its interest in NL at June 30, 1999 was $10.87 per share, compared to a per
share market price of $11.13 at that date. At August 11, 1999, the market price
for TIMET common stock was $11.00 per share and for NL common stock was $12.69
per share. The Company believes stock market prices are not necessarily
indicative of a company's enterprise value or the value that could be realized
<PAGE>
if the company were sold. After considering what it believes to be all relevant
factors including, among other things, the relatively short period of time that
market prices have been less than the Company's per share interests, recent
ranges of market prices and TIMET's and NL's respective operating results,
financial position and prospects, the Company concluded that there has been no
other than temporary decline in value of the Company's interests in TIMET and NL
below their net carrying values at June 30, 1999. It is possible, should the
TiO2 or titanium metals industries in general, or NL or TIMET specifically,
encounter a prolonged downturn, or suffer other unforeseen adverse events, that
the value of the Company's interest in NL, TIMET or both could decline to a
level that could warrant a writedown. The Company will continue to monitor and
evaluate its interests in NL and TIMET based upon, among other things, their
respective results of operations, financial condition, liquidity and business
outlook. In the event Tremont determines that any decline in value of its
interests below their net carrying value has occurred which is other than
temporary, it would report an appropriate writedown at that time.
~TIMET
~
The Company's 39% interest in TIMET is reported by the equity method.
Tremont's equity in earnings of TIMET differs from the amount that would be
expected by applying Tremont's current ownership percentage to TIMET's
separately reported earnings due to increases in ownership and the effect of
amortization of purchase accounting adjustments made by Tremont in conjunction
with the acquisitions of its interest in TIMET. Amortization of such basis
differences generally increases earnings and reduces losses attributable to
TIMET as reported by Tremont.
<PAGE>
<TABLE>
<CAPTION> Three months Six months
ended ended
June 30, June 30,
1998 1999 Change 1998 1999 Change
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales $190.8 $127.6 -33.1% $377.9 $261.7 -30.7%
Operating income $ 23.9 $ 1.1 -$22.8 $ 55.5 $ (.4) -$55.9
(loss)
Corporate income, 1.8 .8 2.9 1.7
net
Interest expense .6 1.7 .9 3.0
25.1 .2 57.5 (1.7)
Income tax 8.6 .1 19.6 (.6)
expense (benefit)
Minority interest 2.7 2.6 5.8 5.3
Net income (loss) $ 13.8 $ (2.5) -$16.3 $ 32.1 $ (6.4) -$38.5
Tremont's equity
in TIMET's
<PAGE>
earnings
(losses), $ 4.2 $ (.7) -$ 4.9 $ 9.7 $ (1.9) -$11.6
including
amortization of
basis
differences
Mill product
shipments:
Volume (metric 3,900 2,800 -28% 7,800 5,800 -26%
tons)
Average price
($ per kilogram) $34.50 $35.00 +1% $34.50 $34.75 +1%
</TABLE>
<PAGE>
~Sales~and~Operating~Income.~~~TIMET's 1999 results were below those of the
same periods in 1998 principally due to a 26% decline in year-to-date mill
products volume caused by lower demand in both aerospace and industrial markets,
as reported in earlier periods.
Sales of $128 million in the second quarter of 1999 were 5% lower than the
first quarter of this year principally due to lower volume. The average mill
product selling price increased largely due to mix, as over 60% of the decline
in mill products volume from the first quarter level was in TIMET's lowest
priced industrial market product line.
Total cost of sales was 89% of sales in the second quarter of 1999 compared
to 91% in the first quarter of this year. TIMET's previously-reported cost
reduction efforts and the changes in product mix both contributed to the
improvement in second quarter gross profit margins over first quarter levels.
TIMET is focusing on improving its margins through cost reductions, including
shifting production to its more cost effective equipment acquired or refurbished
as part of its recently completed major capital expenditure program, and through
increased utilization of its business-enterprise system to help improve business
processes.
Operating income in 1998 includes a second quarter $6 million restructuring
charge. Additional restructuring charges of $18 million were recorded in the
fourth quarter of 1998, as previously reported.
TIMET believes that demand for titanium aerospace products continues to be
impacted by customer inventory levels as well as forecasted commercial aircraft
build rates. The time required for customers to consume excess inventories has
been longer than TIMET previously anticipated. TIMET also intends to
increasingly compete on price, particularly in industrial markets. TIMET
currently expects volumes during the last half of 1999 to be higher than in the
<PAGE>
first half of the year, and expects overall average mill product selling prices
to be lower, in part due to mix changes. Assuming demand remains at currently
expected levels during the remainder of 1999, TIMET currently expects to return
to modest profitability in the second half of 1999.
~ European~Operations.~~~TIMET has substantial operations and assets located
in Europe, principally the United Kingdom, with smaller operations in France,
Italy and Germany. Titanium is a worldwide market and the factors influencing
TIMET's U.S. and European operations are substantially the same.
Approximately one-half of TIMET's European sales are denominated in
currencies other than the U.S. dollar, principally major European currencies.
Certain purchases of raw materials, principally titanium sponge and alloys, for
TIMET's European operations are denominated in U.S. dollars, while labor and
other production costs are primarily denominated in local currencies. The
functional currencies of TIMET's European subsidiaries are those of their
respective countries; thus, the U.S. dollar value of these subsidiaries' sales
and costs denominated in currencies other than their respective functional
currency, including sales and costs denominated in U.S. dollars, are subject to
exchange rate fluctuations which may impact reported earnings and may affect the
comparability of period-to-period operating results. Borrowings of TIMET's
European operations may be in U.S. dollars or in functional currencies. TIMET's
export sales from the United States are denominated in U.S. dollars and as such
are not subject to currency exchange rate fluctuations.
<PAGE>
The U.S. dollar sales and purchases of TIMET's European operations
described above provide some natural hedge of non-functional currencies, and
TIMET does not use currency contracts to hedge its currency exposures. Net
currency transaction/translation losses were $1.5 million during the six months
ended June 30, 1999. Foreign currency gains were $.1 million during the
comparable 1998 period. At June 30, 1999, TIMET's consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $30 million and $27 million, respectively, consisting primarily of
U.S. dollar cash, accounts receivable, accounts payable and borrowings.
Exchange rates among 11 European currencies (including the French franc, Italian
lira and German mark but excluding the UK pound sterling) became fixed relative
to each other as a result of the new European currency unit ("euro") effective
in 1999. Costs associated with modifications of systems to handle euro-
denominated transactions have not been significant.
~Corporate~Income,~net.~TIMET's corporate income, net includes earnings on
corporate cash equivalents, which vary with cash levels and interest rates, and
accrued dividends on preferred securities.
~Interest~Expense.~~~Interest expense in the 1999 periods is higher than in
the comparable 1998 periods, reflecting both higher average borrowing levels and
lower levels of interest capitalization on capital projects in process.
~Minority~Interest.~Dividend expense related to TIMET's 6.625% Convertible
Preferred Securities approximated $3.3 million per quarter in both 1999 and 1998
and is reported as minority interest, net of allocable income taxes.
~Income~Taxes.~~~TIMET operates in several tax jurisdictions and is subject
to various income tax rates. As a result, the geographical mix of pretax income
can impact TIMET's effective tax rate.
<PAGE>
~Year~2000.~~~Y2K issues exist because many computer systems and
applications currently use two-digit fields to designate a year. Date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
treat the year 2000 properly could cause systems to process critical financial,
manufacturing and operational information incorrectly. TIMET has been actively
involved in addressing Y2K issues because of the need to ensure, to the greatest
extent possible, that its business operations continue without significant
disruption after the millennium. Most of TIMET's information systems have been
or are being replaced in connection with the implementation of TIMET's business-
enterprise system, the initial implementation of which was substantially
completed with the roll-out of the system to TIMET's U.K. subsidiary in
February 1999. The cost of the new system, including related equipment and
networks, aggregated approximately $50 million ($41 million capital and
$9 million expense).
TIMET, with the help of outside specialists and consultants (i) has
completed its assessment of potential Y2K issues in its non-information systems
(e.g., its manufacturing and communications systems), as well as in those
information systems that were not replaced by the new enterprise-wide system,
and (ii) has substantially completed the remediation and testing of all systems.
TIMET's Y2K readiness varies by location. Some locations had completed their
internal Y2K readiness plans by TIMET's June 1999 target date. Certain other
locations were delayed in completing their readiness plans in part due to vendor
release schedules. TIMET has contingency plans for certain applications in the
event Y2K readiness is delayed, and is currently developing contingency plans
for certain other applications. TIMET also intends to continue testing and
retesting during the remainder of 1999. TIMET has expended approximately $4
million through June 1999 ($2 million in the first half of 1999) on these
specific non-information system issues, principally embedded system technology,
and expects to incur approximately an additional $1 million on such issues in
the remainder of 1999. TIMET's evaluation of potential Y2K exposure related to
key suppliers and customers is also in process and will continue throughout
<PAGE>
1999. In this regard, TIMET is considering the temporary shutdown of certain
sensitive production operations for a few days around the turn of the millennium
as an additional safeguard against the unexpected loss of utilities service.
TIMET expects to schedule production to provide for such temporary shutdowns.
Although TIMET believes its key information and non-information systems
will be Y2K ready before the end of 1999, it cannot predict whether it will find
additional problems that would result in unplanned upgrades of applications
during the rest of 1999 or even after December 1999. As a result of these
uncertainties, TIMET cannot predict the impact on its financial condition,
results of operations or cash flows resulting from Y2K failures in systems that
TIMET directly or indirectly relies upon. Should TIMET's Y2K readiness plans
not be successful or be delayed beyond December 1999, the consequences to TIMET
could be far-reaching and material, including an inability to produce titanium
metal products at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include impeded communications or power supplies, slower transaction
processing and financial reporting, and potential liability to third parties.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by TIMET or its key suppliers or customers to become Y2K ready would be
a short-term slowdown or cessation of manufacturing operations at one or more of
TIMET's facilities and a short-term inability on the part of TIMET to process
orders and billings in a timely manner, and to deliver products to customers.
~Environmental~Matters~. In the early 1990s, TIMET and certain other
companies (the "Steering Committee Companies") that currently have or formerly
had operations within a Henderson, Nevada industrial complex (the "BMI Complex")
began environmental assessments of the BMI Complex and each of the individual
company sites located within the BMI Complex pursuant to a series of consent
agreements entered into with the Nevada Division of Environmental Protection
("NDEP"). Most of this assessment work has now been completed, although some of
the assessment work with respect to TIMET's property is continuing.
<PAGE>
In June 1999, TIMET entered into a series of agreements with BMI and, in
certain cases, other Steering Committee Companies, pursuant to which, among
other things:
. BMI, TIMET and the other Steering Committee Companies each agreed to
contribute to the cost of remediating any soils contamination within the
BMI Complex (excluding the individual active plant sites), certain lands
surrounding the BMI Complex, and certain lands owned by the Company
adjacent to its plant site (the "TIMET Pond Property"); TIMET contributed
$2.8 million to the cost of this remediation (which payment was charged
against accrued liabilities);
. BMI assumed responsibility for the conduct of soils remediation activities
on the properties described, including, subject to final NDEP approval, the
responsibility to complete all outstanding requirements under the consent
agreements with NDEP insofar as they relate to the investigation and
remediation of soils conditions on such properties;
. BMI indemnified TIMET and the other Steering Committee Companies against
certain future liabilities associated with any soils contamination on such
properties; and
. TIMET agreed to convey to BMI, at no additional cost, the TIMET Pond
Property upon payment by BMI of the cost to design, purchase, and install
the technology and equipment necessary to allow TIMET to stop discharging
liquid and solid effluents and co-products onto the TIMET Pond Property
(BMI will pay 100% of the first $15.9 million cost for this project, and
TIMET will contribute 50% of the cost in excess of $15.9 million, up to a
maximum payment by TIMET of $2 million; TIMET does not currently expect to
incur any cost in connection with this project).
<PAGE>
TIMET, BMI and the other Steering Committee Companies are continuing
investigation with respect to certain issues associated with the properties
described above. In addition, TIMET is continuing assessment work with respect
to its own active plant site.
~
~N~L~Industries~
The Company's 20% interest in NL is reported by the equity method.
Tremont's equity in earnings of NL differs from the amount that would be
expected by applying Tremont's current ownership percentage to NL's separately-
reported earnings due to increases in ownership and the effect of amortization
of purchase accounting adjustments made by Tremont in conjunction with the
acquisitions of its interest in NL. Amortization of such basis differences
generally reduces earnings and increases losses attributable to NL as reported
by Tremont.
<PAGE>
<TABLE>
<CAPTION> Three months Six months
ended ended
June 30, June 30,
1998 1999 Change 1998 1999 Change
(In (In
millions) millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales $241.6 $232.6 -3.7% $464.3 $434.1 -6.5%
Operating income $46.7 $44.1 -5.6% $86.1 $75.1 -12.8%
General corporate
items:
Securities 4.6 1.5 8.4 3.1
earnings, net
Expenses, net (3.3) (4.2) (7.5) (8.4)
Interest expense (15.5) (9.3) (31.9) (19.1)
32.5 32.1 -$0.4 55.1 50.7 -$4.4
Income tax expense 9.1 (81.9) 15.4 (77.4)
(benefit)
Income from 23.4 114.0 +$90.6 39.7 128.1 +$88.4
continuing
operations
Minority interest - 2.2 - 2.3
<PAGE>
Discontinued .3 - 287.4 -
operations
Extraordinary item -
early extinguishment - - (2.4) -
of debt
Net income $23.7 $111.8 +$88.1 $324.7 $125.8 -$198.9
Tremont's equity in
NL's net earnings,
including $3.4 $21.4 +$18.0 $50.3 $23.2 -$27.0
amortization of
basis differences
</TABLE>
<PAGE>
NL's TiO2 operations are conducted by its wholly-owned Kronos, Inc.
subsidiary. Kronos' operating income in the second quarter and first half of
1999 decreased from the comparable periods in 1998 due to lower production and
sales volumes, partially offset by a second quarter 1999 $5.3 million currency
exchange transaction gain related to certain of NL's short-term intercompany
cross-border financings. These intercompany financings were settled in July
1999. Kronos' second-quarter sales volume decreased 1% from the record sales
volume in the second quarter of 1998, but increased 24% from the first quarter
of 1999. Sales volume in the first six months of 1999 was 8% lower than the
first half of 1998. Kronos anticipates its TiO2 sales volume for full-year 1999
will approximate that of 1998.
Kronos' production volume closely matched sales volume in the second
quarter and first half of 1999, decreasing 2% and 7%, respectively, from the
year-earlier periods. Kronos' average capacity utilization rate was 98% in the
second quarter of 1999 and 91% for the first half of 1999.
Average TiO2 selling prices for the second quarter of 1999 were comparable
to the second quarter of 1998 and were 2% lower than the first quarter of 1999
reflecting weaker prices in European and export markets and, to a lesser degree,
North American markets. Average selling prices at the end of the second quarter
were 1% lower than the average for the quarter. Average selling prices in the
first six months of 1999 were 3% higher than the 1998 period, primarily due to
higher North American prices. Although Kronos expects average TiO2 prices
during the second half of 1999 will be below average prices in the first half of
1999, NL does not expect that the downward pressures on prices will be long-term
in nature due to the continuing recovery in Asia and NL's positive view of the
worldwide economy. Kronos recently announced a 7.5% price increase in Europe
that is expected to improve pricing trends in late 1999.
<PAGE>
Kronos expects its full-year 1999 operating income will be below that of
1998 primarily because of lower production volumes and lower average selling
prices.
Kronos' cost of sales as a percentage of net sales in the second quarter
and first half of 1999 (72.1% and 72.5%, respectively) increased from the
comparable periods in 1998 (69.2% and 69.8%, respectively) primarily due to
lower production volume. Kronos' selling, general and administrative expenses
decreased $1.4 million in the second quarter of 1999 compared to the second
quarter of 1998 due to lower employee benefit expenses, a German non-income tax
refund and the favorable effects of foreign currency translation. Selling,
general and administrative expenses decreased by $1.8 million in the first half
of 1999 due to lower distribution expenses associated with lower first-quarter
1999 sales volume.
A significant amount of sales are denominated in currencies other than the
U.S. dollar. Fluctuations in the value of the U.S. dollar relative to other
currencies decreased the dollar value of sales for the second quarter of 1999 by
$4 million compared to the second quarter of 1998 and increased the dollar value
of sales for the first half of 1999 by $1 million compared to the first half of
1998. Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted NL's operating expenses and the net impact of currency
exchange rate fluctuations on the operating income comparisons to 1998,
excluding the $5.3 million gain described above, were not significant in the
second quarter and first half of 1999.
Securities earnings decreased due to lower average balances available for
investment. Interest expense in the second quarter and first half of 1999 each
decreased 40% from the comparable periods in 1998 primarily due to lower
levels of outstanding debt. NL expects its full-year 1999 securities earnings
and interest expense will be lower than 1998, primarily due to lower average
<PAGE>
balances available for investment and lower levels of outstanding debt,
respectively.
The difference between the income tax benefit (expense)
attributable to income from continuing operations before income taxes and
minority interest and the amount that would be expected using the U.S. federal
statutory income tax rate of 35% is discussed below.
NL recognized a $90 million non-cash income tax benefit in the second
quarter of 1999 related to (i) a favorable resolution of NL's previously
reported tax contingency in Germany ($36 million) and (ii) a net reduction in
NL's deferred income tax valuation allowance due to a change in estimate of NL's
ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($54 million).
With respect to the German tax contingency, the German government has
conceded substantially all of its income tax claims against NL and has released
a DM 94 million ($50 million) lien on NL's Nordenham, Germany TiO2 plant that
secured the government's claim.
The $54 million net decrease in NL's deferred income tax valuation
allowance is comprised of (i) a $78 million decrease in the valuation allowance
to recognize the benefit of certain deductible income tax attributes which NL
now believes meets the recognition criteria as a result of, among other things,
a legal restructuring of NL's German subsidiaries offset by (ii) a $24 million
increase in the valuation allowance to reduce the previously recognized benefit
of certain other deductible income tax attributes which NL now believes do not
meet the recognition criteria due to a change in German tax law. The German
tax law change, enacted on April 1, 1999, was effective retroactive to January
1, 1999 and resulted in an additional $3.8 million of current tax expense
during the first six months of 1999.
During the first six months of 1999, NL also reduced its deferred income
tax valuation allowance by $7 million primarily as a result of utilization of
certain tax attributes for which the benefit had not been previously
recognized under the "more-likely-than-not" recognition criteria.
<PAGE>
Minority interest in the second quarter of 1999 relates to NL's majority-
owned environmental management subsidiary, NL Environmental Management Services,
Inc. ("EMS"). EMS was established in 1998, at which time EMS contractually
assumed certain of NL's environmental liabilities. EMS' earnings are based, in
part, upon its ability to favorably resolve these liabilities. The shareholders
of EMS, other than NL, actively manage the environmental liabilities and share
in 39% of EMS cumulative earnings. NL continues to consolidate EMS and provides
accruals for the reasonably estimable costs for the settlement of EMS'
environmental liabilities.
Discontinued operations in 1998 represent NL's former specialty chemicals
operations which were sold in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
~Tremont~
The Company had cash and cash equivalents of $3.3 million at June 30, 1999.
Tremont's approximately 12.3 million shares of TIMET common stock and
approximately 10.2 million shares of NL common stock had a quoted market value
of approximately $138 million and $114 million, respectively, at June 30, 1999.
The Company's equity in earnings of affiliates are primarily non-cash. The
Company received cash distributions from VVLC of $.6 million in the 1998 period
and $.4 million in the 1999 period primarily to cover taxes associated with
VVLC's income from land sales. TIMET instituted a regular quarterly dividend of
$.04 per share of common stock in the second quarter of 1998. NL instituted a
regular quarterly dividend of $.03 per share in the second quarter of 1998,
which was increased to $.035 per common share in the first quarter of 1999.
Based upon the Company's current holdings and the current NL and TIMET dividend
rates, the aggregate TIMET / NL dividends received are $.9 million per quarter.
<PAGE>
Payment and amount of dividends in the future are at the discretion of the Board
of Directors of NL and TIMET, respectively. Relative changes in assets and
liabilities generally do not materially impact the Company's cash flow from
operating activities.
During 1998, the Company entered into an advance agreement with Contran.
At June 30, 1999, the Company owed Contran $12.5 million pursuant to this
agreement, which amount was borrowed primarily to purchase shares of NL and
TIMET common stock. Absent additional purchases of NL and TIMET common stock,
the Company does not currently believe it will need to borrow significant
additional amounts from Contran.
During 1998, the Company collateralized with cash certain letters of credit
backing insurance policies at its captive insurance subsidiary. In February
1999, NL collateralized a portion of the letters of credit as they related to
its business with the captive, and the Company received $9.7 million in cash
previously pledged to collateralize the letters of credit, which funds were
primarily used in the purchase of TIMET common stock from IMI.
Repurchases of common stock and purchases of additional TIMET shares are
described in Notes 2 and 3, respectively, to the Consolidated Financial
Statements. Cash provided by litigation settlement is related to the 1998
settlement of the previously reported ~Kahn~litigation. Tremont's current
quarterly dividend rate is $.07 per share.
Tremont, as a holding company, does not itself have numerous applications
or systems where potential Y2K issues are a significant factor. The Company (i)
has completed the assessment of potential Y2K issues in its information systems,
and (ii) has implemented remedial actions, including testing. The cost for
Tremont Y2K readiness is not material to the Company. Although not anticipated,
the most reasonably likely worst-case scenario of failure by Tremont or its key
service providers to become Y2K ready would be a short-term inability on the
<PAGE>
part of Tremont to process banking transactions. Y2K issues related to NL and
TIMET are discussed elsewhere in MD&A.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past and may in the future seek to obtain
financing from related entities or third parties, raise additional capital,
modify its dividend policy, restructure ownership interests of subsidiaries and
affiliates, incur, refinance or restructure indebtedness, repurchase shares of
capital stock, consider the sale of interests in subsidiaries, affiliates,
marketable securities or other assets, or take a combination of such steps or
other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company may investigate, evaluate,
discuss and engage in acquisition, joint venture and other business combination
opportunities. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
<PAGE>
As previously reported, based upon the technical provisions of the
Investment Company Act of 1940 (the "1940 Act") and Tremont's ceasing to own a
majority of TIMET's common stock following the acquisition of IMI Titanium by
TIMET in February 1996, Tremont might arguably be deemed to have become an
"investment company" under the 1940 Act, despite the fact that Tremont does not
now engage, nor has it engaged or intended to engage in the business of
investing, reinvesting, owning, holding or trading of securities. Tremont has
taken the steps necessary to give itself the benefits of a temporary exemption
under the 1940 Act and has sought an order from the Commission that Tremont is
primarily engaged, through TIMET and NL, in a non-investment company business.
The Company believes another exemption may be available to it under the 1940 Act
should the Commission deny Tremont's application for an exemptive order.
~TIMET~-~~Summarized balance sheet and cash flow information.
<PAGE>
<TABLE>
<CAPTION>
December JUNE
31, 30,
1998 1999
(In millions)
<S> <C> <C>
Cash and equivalents $ 15.5 $ 5.0
Other current assets 380.3 338.2
Goodwill and other intangible assets 79.4 73.9
Other noncurrent assets 126.8 129.0
Property and equipment, net 351.2 340.2
$ 953.2 $ 886.3
Current liabilities $ 136.9 $ 108.4
Long-term debt and capital lease 110.0 87.5
obligations
Accrued OPEB cost 24.1 23.4
Other noncurrent liabilities 24.4 25.9
Minority interest - Convertible 201.2 201.2
Preferred Securities
Other minority interest 8.2 7.0
Stockholders' equity 448.4 432.9
$ 953.2 $ 886.3
<PAGE>
Six months ended
June 30,
1998 1999
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and $ 55.3 $ 16.1
liabilities
Changes in assets and liabilities (4.7) 7.9
50.6 24.0
Investing and financing activities:
Capital expenditures (47.3) (14.5)
Business acquisitions (19.3) -
Net borrowings (repayments) 27.5 (19.8)
Dividends - (2.5)
Other, net (1.2) 2.9
$ 10.3 $ (9.9)
Cash paid for:
Interest, net of capitalized $ .9 $ 2.8
interest
Convertible Preferred Securities 6.7 6.7
dividends
Income taxes (refunds), net 3.6 (5.7)
</TABLE>
<PAGE>
At June 30, 1999, TIMET had net debt of approximately $82 million
($87 million of notes payable and long-term debt and $5 million of cash and
equivalents). TIMET also had $135 million of unused borrowing availability
under its U.S. and European credit lines. Available borrowings in the future
could be further reduced due to the leverage and interest coverage ratios
contained in TIMET's U.S. credit agreement, as amended.
~Operating~Activities~. Cash provided by operating activities, excluding
changes in assets and liabilities generally followed the trend in operating
results. Depreciation and amortization of $21.3 million in 1999 was $5.8
million higher than in 1998 resulting from TIMET's major 1997-1998 capital
program, including the business-enterprise system. Results of operations in 1998
included a second quarter restructuring charge which was principally non-cash.
Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales. TIMET's plan of action to address current
market conditions includes reductions in working capital, particularly
inventories and receivables, both of which were reduced in the six-month period
ended June 30, 1999. Changes in accounts payable and accrued liabilities in
1999 include the effect of payments to suppliers of titanium sponge and other
raw materials for purchases made in late 1998 being higher than payables at the
end of June for 1999 purchases, as well as the effect of lower purchase and
headcount levels on accounts payable and accrued liabilities.
Dividends on the $80 million of Special Metals Corporation 6.675%
convertible preferred stock held by TIMET have been deferred by SMC for 1999 due
to limitations imposed by SMC's bank credit agreements. Management of SMC has
advised TIMET they currently expect SMC to meet the 1999 covenants that would
allow SMC to pay its 1999 dividends in arrears by the end of the first quarter
of 2000.
<PAGE>
~Investing~and~Financing~Activities.~TIMET's major capital expenditure
program, which aggregated $180 million in 1997 and 1998, is completed and TIMET
estimates that capital expenditures for all of 1999 will approximate
$35 million. Business acquisitions consist of the purchase of Loterios S.p.A.
in April 1998. Net borrowings in the 1998 period included amounts used to fund
the acquisition of Loterios. Net repayments in 1999 reflect reductions of
outstanding borrowings in both the U.S. and U.K. Other, net in 1999 includes
assets sold as part of TIMET's restructuring activities.
TIMET's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters each.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and, in the light of its current outlook, may in the future seek
to raise additional capital, modify its dividend policy, restructure ownership
interests, incur, refinance or restructure indebtedness, repurchase shares of
capital stock, sell assets, or take a combination of such steps or other steps
to increase or manage its liquidity and capital resources. In the normal course
of business, TIMET investigates, evaluates, discusses and engages in
acquisition, joint venture, strategic relationship and other business
combination opportunities in the titanium, specialty metal and related
industries. In the event of any future acquisition or joint venture
opportunities, TIMET may consider using then-available liquidity, issuing equity
securities or incurring additional indebtedness.
~
NL~Industries~-~~Summarized balance sheet and cash flow information.
<PAGE>
<TABLE>
<CAPTION>
December 31, JUNE 30,
1998 1999
(In millions)
<S> <C> <C>
Cash and cash equivalents $ 163.1 $ 147.1
Other current assets 383.0 388.9
Noncurrent securities 17.6 16.4
Investments in joint ventures 171.2 160.0
Other noncurrent assets 37.9 30.8
Property and equipment 382.2 354.4
$ 1,155.0 $ 1,097.6
Current liabilities $ 310.0 $ 256.0
Long-term debt 292.8 300.1
Deferred income taxes 196.2 106.1
Accrued OPEB cost 41.7 39.1
Environmental liabilities 81.5 67.6
Other noncurrent liabilities 79.9 72.5
Minority interest .6 2.8
Stockholders' equity:
Capital and retained earnings 284.4 406.7
Accumulated other comprehensive loss (132.1) (153.3)
$ 1,155.0 $ 1,097.6
<PAGE>
Six months ended
June 30,
1998 1999
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and $ 61.8 $ 64.1
liabilities
Changes in assets and liabilities (44.4) (47.9)
17.4 16.2
Investing and financing activities,
net:
Capital expenditures (8.2) (17.2)
Proceeds from sale of Rheox 435.1 -
Other investing activities, net 10.5 (10.4)
Net borrowings (repayments) (86.2) (15.3)
Other financing activities, net (107.0) (3.5)
$ 261.6 $ (30.2)
Cash paid for:
Interest, net of amounts capitalized $ 20.9 $ 18.7
Income taxes, net 39.0 5.2
</TABLE>
<PAGE>
The TiO2 industry is cyclical and changes in economic conditions
significantly impact the earnings and operating cash flows of NL. Cash flow
from operations, before changes in assets and liabilities, in the 1999 period
increased from the comparable period in 1998 primarily due to $11.2 million of
cash distributions from NL's TiO2 manufacturing joint venture, partially offset
by lower operating income. Changes in NL's inventories, receivables and
payables (excluding the effect of currency translation) used cash in the first
half of both 1998 and 1999, primarily due to increases in receivables in each
respective period. Cash provided by operations in 1998 also includes $20
million related to an agreement not to compete in the rheological products
business offset by $20 million of tax payments related to the gain on sale of
Rheox.
NL prepaid its DM 107 million ($60 million when paid) term loan in full in
the first quarter of 1999, principally by drawing DM 100 million ($56 million
when drawn) on its DM revolving credit facility. In the second quarter of 1999,
NL repaid DM 20 million ($11 million when paid) of the DM revolving credit
facility. The revolver's outstanding balance of DM 160 million ($85 million at
June 30, 1999) is scheduled to be reduced to DM 105 million ($56 million at June
30, 1999) in March 2000, with the remaining balance to be repaid in September
2000.
At June 30, 1999, NL had cash and cash equivalents aggregating $122 million
($16 million held by non-U.S. subsidiaries) and an additional $25 million of
restricted cash equivalents. NL's subsidiaries had $56 million available for
borrowing at June 30, 1999 under existing non-U.S. credit facilities, of which
$37 million relates to NL's DM revolving credit facility.
<PAGE>
In the second quarter of 1999, NL paid a regular quarterly dividend of
$.035 per share to shareholders aggregating $1.8 million. Dividends paid during
the first half of 1999 totaled $3.6 million.
Certain of NL's tax returns in various U.S. and non-U.S. jurisdictions are
being examined and tax authorities have proposed or may propose tax
deficiencies, including non-income tax related items and interest. In the
second quarter of 1999, certain significant German tax contingencies aggregating
an estimated DM 188 million ($100 million when resolved) through 1998 were
resolved in NL's favor, as discussed above.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at June 30,
1999) relating to 1994. NL has appealed this assessment and has begun
litigation proceedings. During 1998, NL was informed by the Norwegian tax
authorities that additional tax deficiencies of NOK 39 million ($5 million at
June 30, 1999) will likely be proposed for the year 1996. NL intends to
vigorously contest this issue and litigate, if necessary. Although NL believes
that it will ultimately prevail, NL has granted a lien for the 1994 tax
assessment on its Fredrikstad, Norway TiO2 plant in favor of the Norwegian tax
authorities and will be required to grant security on the 1996 assessment when
received.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has provided adequate accruals for additional taxes and related
interest expense which may ultimately result from all such examinations and
believes that the ultimate disposition of such examinations should not have a
material adverse effect on NL's consolidated financial position, results of
operations or liquidity.
<PAGE>
NL has been named as a defendant, potentially responsible party ("PRP"), or
both, in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S.
Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities
List or similar state lists. On a quarterly basis, NL evaluates the potential
range of its liability at sites where it has been named as a PRP or defendant
including sites for which EMS has contractually assumed NL's obligation. NL
believes it has adequate accruals ($119 million at June 30, 1999) for reasonably
estimable costs of such matters, but NL's ultimate liability may be affected by
a number of factors, including changes in remedial alternatives and costs and
the allocations of such costs among PRPs. It is not possible to estimate the
range of costs for certain sites. The upper end of the range of reasonably
possible costs to NL for sites for which it is possible to estimate costs is
approximately $160 million. NL's estimates of such liabilities have not been
discounted to present value, and NL has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made, and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. Further, there can be
no assurance that additional environmental matters will not arise in the future.
NL is also a defendant in a number of legal proceedings seeking damages for
personal injury and property damage arising from the sale of lead pigments and
lead-based paints. There is no assurance that NL will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, NL believes that the pending lead pigment and paint litigation is without
merit. NL has not accrued any amounts for such pending litigation. Liability
that may result, if any, cannot be reasonably estimated. In addition, various
legislation and administrative regulations have, from time to time, been enacted
<PAGE>
or proposed that seek to impose various obligations on present and former
manufacturers of lead pigment and lead-based paint with respect to asserted
health concerns associated with the use of such products and to effectively
overturn court decisions in which NL and other pigment manufacturers have been
successful. Examples of such proposed legislation include bills which would
permit civil liability for damages on the basis of market share, rather than
requiring plaintiffs to prove that the defendant's product caused the alleged
damage. NL currently believes the disposition of all claims and disputes,
individually and in the aggregate, should not have a material adverse effect on
NL's consolidated financial position, results of operations or liquidity. There
can be no assurance that additional matters of these types will not arise in the
future.
NL is in the process of evaluating and upgrading its computer systems (both
information technology ("IT") systems and non-IT systems involving embedded chip
technology) and software applications (collectively referred to as "systems") to
ensure that the systems function properly beginning January 1, 2000. To achieve
its Y2K compliance plan, NL is utilizing internal and external resources to
identify, correct or reprogram, and test its systems.
NL has conducted an inventory of its IT systems worldwide and is currently
testing, where practical, the systems and applications that have been corrected
or reprogrammed for Y2K compliance. NL has completed an inventory of its non-IT
systems and is in the process of correcting or replacing date-deficient systems.
The remediation effort is in progress on all critical IT and non-IT systems, and
NL anticipates that remediation of all such systems will be substantially
complete by September 1999. Once systems undergo remediation, they are tested
for Y2K compliance. For critical systems, the testing process usually involves
subjecting the remediated system to a simulated change of date from the year
1999 to the year 2000 using, in many cases, computer resources. NL uses a
number of packaged software products that have been upgraded to a Y2K compliant
version in the normal course of business. Excluding the cost of these software
<PAGE>
upgrades, NL's cost of becoming year 2000 compliant is expected to be
approximately $2 million, of which about 75% has been spent through June 30,
1999.
NL has identified approximately 30 major computer systems which have been
assessed for Y2K compliance. At June 30, 1999, NL believes approximately 90%
of such systems are Y2K compliant. Each operating unit has responsibility for
its own conversion, in line with overall guidance and oversight provided by a
corporate-level coordinator, and the status of each of the remaining systems
will be specifically tracked and monitored.
As part of its Y2K compliance plan, NL has requested confirmations from its
major domestic and foreign software vendors, hardware vendors, primary suppliers
and major customers, that they are developing and implementing plans to become,
or are, Y2K compliant. Confirmations received to date from NL's software
vendors, hardware vendors, primary suppliers and major customers, indicate that
generally they are in the process of implementing remediation plans to ensure
that their systems are compliant by December 31, 1999. The major software
vendors used by NL have already delivered Y2K compliant software.
Notwithstanding these efforts, the ability of NL to affect the Y2K preparedness
of such vendors, suppliers and customers is limited.
NL is in the process of developing a contingency plan to address potential
Y2K related business interruptions that may occur on January 1, 2000, or
thereafter. The contingency plan is expected to be completed in the third
quarter of 1999.
Although NL expects its systems to be Y2K compliant before December 31,
1999, it cannot predict the outcome or success of the Y2K compliance programs of
its vendors, suppliers, and customers. NL also cannot predict whether its major
software vendors, who continue to test for Y2K compliance, will find additional
problems that would result in unplanned upgrades of their applications after
<PAGE>
December 31, 1999. As a result of these uncertainties, NL cannot predict the
impact on its financial condition or results of operations from noncompliant Y2K
systems that NL directly or indirectly relies upon. Should NL's Y2K compliance
plan not be successful or be delayed beyond January 2000, or should one or more
vendors, suppliers or customers fail to adequately address their Y2K issues, the
consequences to NL could be far-reaching and material, including an inability to
produce TiO2 at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include plant malfunction, impeded communications or power supplies, or
slower transaction processing and financial reporting. Although not
anticipated, the most reasonably likely worst-case scenario of failure by NL or
its key suppliers or customers to become Y2K compliant would be a short-term
slowdown or cessation of manufacturing operations at one or more of NL's
facilities and a short-term inability on the part of NL to process orders and
billings in a timely manner, and to deliver products to customers.
NL conducts substantial operations in Europe, and has a significant amount
of outstanding DM-denominated indebtedness. The functional currency of NL's
German, Belgian, Dutch and French operations will convert to the euro from their
respective national currencies over a two-year period beginning in 1999. NL has
assessed and evaluated the impact of the euro conversion on its business and
made the necessary system conversions. The euro conversion may impact NL's
operations including, among other things, changes in product pricing decisions
necessitated by cross-border price transparencies. Such changes in product
pricing decisions could impact both selling prices and purchasing costs and,
consequently, favorably or unfavorably impact results of operations, financial
condition or liquidity.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL in the past has
<PAGE>
sought, and in the future may seek, to reduce, refinance, repurchase or
restructure indebtedness, raise additional capital, issue additional securities,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals or other industries. In
the event of any acquisition or joint venture transaction, NL may consider using
available cash, issuing equity securities or increasing its indebtedness to the
extent permitted by the agreements governing NL's existing debt.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to the 1998 Annual Report for descriptions of certain
legal proceedings.
Information called for by this item regarding NL's legal proceedings is
incorporated herein by reference to Part II, Item 1 - "Legal Proceedings" of
NL's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, attached
hereto as Exhibit 99.1.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Intercompany Services Agreement by and between CompX
International, Inc. and NL Industries, Inc.
effective as of January 1, 1999, incorporated by
reference to Exhibit 10.1 to NL's Quarterly Report
on Form 10-Q (File No. 1-640) for the quarter ended
<PAGE>
June 30, 1999.
10.2 Second Amendment to Credit Agreement among Titanium
Metals Corporation and various lending institutions
dated as of June 30, 1999, incorporated by reference
to Exhibit 10.3 to Titanium Metals Corporation's
Quarterly Report on Form 10-Q (File No. 0-28538) for
the quarter ended June 30, 1999.
27.1 Financial Data Schedule for the quarter ended June
30, 1999.
99.1 Part II, Item 1 of a Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 filed by NL
Industries, Inc. (File No. 1-640).
(b) Reports on Form 8-K filed by the Registrant for the quarter ended June
30, 1999 and through August 11, 1999:
Filing Date Items Reported
May 3, 1999 5 and 7
May 6, 1999 5 and 7
July 28, 1999 5 and 7
July 28, 1999 5 and 7
SIGNATURES
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREMONT CORPORATION
(Registrant)
Date: August 11, 1999 By /s/ J. Thomas Montgomery, Jr.
-------------------------------
J. Thomas Montgomery, Jr.
Vice President, Controller and Treasurer
(Principal Finance and Accounting Officer)
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tremont
Corporation's financial statements for the six months ended June 30, 1999 and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<CIK> 0000842718
<NAME> TREMONT CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,260
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,463
<PP&E> 1,423
<DEPRECIATION> 808
<TOTAL-ASSETS> 304,539
<CURRENT-LIABILITIES> 15,533
<BONDS> 0
0
0
<COMMON> 7,780
<OTHER-SE> 198,317
<TOTAL-LIABILITY-AND-EQUITY> 304,539
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 401
<INCOME-PRETAX> 20,186
<INCOME-TAX> 7,227
<INCOME-CONTINUING> 12,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,777
<EPS-BASIC> 2.00
<EPS-DILUTED> 1.98
</TABLE>
Exhibit 99.1
PART II, Item 1 - "Legal Proceedings" of a Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 filed by NL Industries, Inc. (File No. 1-640).
Reference is made to the 1998 Annual Report and the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 for descriptions of
certain previously-reported legal proceedings.
~The~City~of~New~York,~et~al.~v.~Lead~Industries~Association,~et~al.~In
July 1999 the court heard oral argument on plaintiffs' and defendants' motions
for partial summary judgment in this previously reported case.
~Sweet,~et~al.~v.~Sheahan,~et~al.~In July 1999 the defendants filed a
motion to dismiss this previously reported case for lack of jurisdiction.
~Cherokee~County,~Kansas~Site.~The Company and other PRPs have entered
into a consent decree agreeing to perform the remedy previously selected in the
Record of Decision at the Baxter Springs subsite and agreeing that the Company
is not responsible for performing the remedy at the Treece subsite.
<PAGE>
