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, 2000
-------------
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-10126
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Tremont Corporation
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(Exact name of registrant as specified in its charter)
Delaware 76-0262791
-------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5652
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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
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Number of shares of common stock outstanding on July 31, 2000: 6,393,258
<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," "will," "looks," "should," "anticipates," "expected" or comparable
terminology or by discussions of strategy or trends. Although Tremont 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 affect expected results. Actual future
results could differ materially from those described in such forward-looking
statements, and Tremont 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, including those portions referenced above, and those described from time
to time in Tremont's other filings with the Securities and Exchange Commission,
such as the cyclicality of TIMET's and NL's businesses, TIMET's dependence on
the aerospace industry, the sensitivity of TIMET's and NL's businesses to global
industry capacity, global economic conditions, changes in product pricing, the
performance of The Boeing Company and other aerospace manufacturers under their
long-term purchase agreements with TIMET, the impact of long-term contracts with
vendors on TIMET's ability to reduce or increase supply or achieve lower costs,
the possibility of labor disruptions, the outcome of litigation, 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. Should one or more of
these risks materialize (or the consequences of such a development worsen), or
should the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected.
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999 and
June 30, 2000 2-3
Consolidated Statements of Income - Three and six months ended
June 30, 1999 and 2000 4
Consolidated Statements of Comprehensive Income (Loss) - Three
and six months ended June 30, 1999 and 2000 5
Consolidated Statements of Cash Flows - Six months ended
June 30, 1999 and 2000 6
Consolidated Statement of Stockholders' Equity - Six months
ended June 30, 2000 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30-31
Item 6. Exhibits and Reports on Form 8-K 31-32
</TABLE>
1
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<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
December 31, June 30,
1999 2000
----------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,002 $ 4,491
Accounts and notes receivable 2,614 2,622
Receivables from related parties 1,847 1,923
Prepaid expenses and other 1,788 64
----------------- ----------------
Total current assets 9,251 9,100
----------------- ----------------
Other assets:
Investment in TIMET 85,772 76,330
Investment in NL Industries 113,574 118,475
Investment in joint ventures 13,658 13,846
Receivables from related parties 1,161 1,087
Other 8,570 9,477
----------------- ----------------
Total other assets 222,735 219,215
----------------- ----------------
Net property and equipment 588 561
----------------- ----------------
$ 232,574 $ 228,876
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
December 31, June 30,
1999 2000
------------------ -----------------
<S> <C> <C>
Current liabilities:
Loan payable to related party $ 13,743 $ 15,272
Accounts payable and accrued liabilities 4,623 2,491
Other payables to related parties 426 305
------------------ -----------------
Total current liabilities 18,792 18,068
------------------ -----------------
Noncurrent liabilities:
Insurance claims and claim expenses 10,292 11,377
Accrued postretirement benefit cost 21,329 21,061
Accrued environmental cost 5,736 5,841
Deferred income taxes 8,598 10,036
------------------ -----------------
Total noncurrent liabilities 45,955 48,315
------------------ -----------------
Minority interest 4,159 4,244
------------------ -----------------
Stockholders' equity:
Preferred stock - -
Common stock 7,781 7,785
Additional paid-in capital 290,218 290,263
Accumulated deficit (60,898) (58,612)
Accumulated other comprehensive loss (14,075) (19,824)
------------------ -----------------
223,026 219,612
Less treasury stock, at cost 59,358 61,363
------------------ -----------------
Total stockholders' equity 163,668 158,249
------------------ -----------------
$ 232,574 $ 228,876
================== =================
</TABLE>
Commitments and contingencies (Notes 1 and 8).
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------------ -------------------------------
1999 2000 1999 2000
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Equity in earnings (loss) of:
TIMET $ (738) $ (2,177) $ (1,932) $ (6,169)
NL Industries 21,378 11,943 23,182 15,844
Other joint ventures (34) (7) 645 269
------------- ------------- -------------- -------------
20,606 9,759 21,895 9,944
Corporate expenses, net 619 679 1,308 1,212
Interest expense 236 304 401 589
------------- ------------- -------------- -------------
Income before income taxes
and minority interest 19,751 8,776 20,186 8,143
Income tax expense 7,295 3,702 7,227 4,536
Minority interest 1 7 182 85
------------- ------------- -------------- -------------
Income before extraordinary item 12,455 5,067 12,777 3,522
Equity in extraordinary loss of TIMET-
early extinguishment of debt - - - (342)
------------- ------------- -------------- -------------
Net income $12,455 $ 5,067 $12,777 $ 3,180
============= ============= ============== =============
Earnings per share:
Before extraordinary item:
Basic $ 1.95 $ .81 $2.00 $ .56
Diluted 1.93 .80 1.98 .55
Net income :
Basic $ 1.95 $ .81 $2.00 $ .50
Diluted 1.93 .80 1.98 .50
Weighted average shares outstanding:
Common shares 6,387 6,285 6,384 6,328
Diluted shares 6,448 6,340 6,460 6,381
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Three months ended Six months ended
June 30, June 30,
---------------------------- ------------------------------
1999 2000 1999 2000
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income $12,455 $ 5,067 $12,777 $ 3,180
Other comprehensive income (loss), net of
applicable taxes:
Currency translation adjustments (1,978) (2,597) (5,973) (5,759)
Unrealized gains (losses) on marketable
securities 138 (122) (62) 10
------------ ------------ ------------- -------------
Total other comprehensive loss, net (1,840) (2,719) (6,035) (5,749)
------------ ------------ ------------- -------------
Comprehensive income (loss) $10,615 $ 2,348 $ 6,742 $ (2,569)
============ ============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 2000
(In thousands)
1999 2000
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 12,777 $ 3,180
(Earnings) loss of affiliates:
Before extraordinary item (21,895) (9,944)
Extraordinary item - 342
Distributions 2,063 3,146
Deferred income taxes 7,639 4,534
Minority interest 182 85
Other, net (210) (73)
Change in assets and liabilities:
Accounts with related parties 156 (123)
Prepaid expenses 1,126 1,724
Accounts payable and accrued liabilities (1,120) (2,132)
Other, net (288) (34)
-------------- --------------
Net cash provided by operating activities 430 705
-------------- --------------
Cash flows from investing activities:
Purchase of TIMET common stock (15,988) -
Other, net (9) 100
-------------- --------------
Net cash provided (used) by investing activities (15,997) 100
-------------- --------------
Cash flows from financing activities:
Borrowings from related parties 6,638 2,329
Repayments to related parties - (800)
Letters of credit cash collateral 9,872 -
Dividends paid (894) (894)
Issuance of common stock 79 49
-------------- --------------
Net cash provided by financing activities 15,695 684
-------------- --------------
Net increase in cash and cash equivalents 128 1,489
Balance at beginning of period 3,132 3,002
-------------- --------------
Balance at end of period $ 3,260 $ 4,491
============== ==============
Supplemental disclosures - cash paid for:
Income taxes (refund), net $ (640) $ 4
Interest 401 589
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2000
(In thousands)
Accumulated other
Common stock comprehensive income (loss)
------------------ Additional ----------------------------------- Total
Shares Treasury Common paid-in Accumulated Currency Marketable Pension Treasury stockholders'
issued shares stock capital deficit translation securities liabilities stock equity
------ -------- ------- --------- ---------- ----------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 7,781 1,392 $ 7,781 $290,218 $ (60,898) $ (13,352) $ 286 $ $(59,358) $ 163,668
(1,009)
Net income - - - - 3,180 - - - - 3,180
Other comprehensive
income (loss) - - - - - (5,759) 10 - - (5,749)
Dividends ($.14 per share) - - - - (894) - - - - (894)
Common stock issued 4 - 4 45 - - - - - 49
Treasury stock - 108 - - - - - - (2,005) (2,005)
------ -------- ------- --------- ---------- ----------- ---------- --------- ---------- ------------
Balance at June 30, 2000 7,785 1,500 $ 7,785 $290,263 $ (58,612) $ (19,111) $ 296 $ (1,009) $(61,363) $ 158,249
====== ======== ======= ========= ========== =========== ========== ========= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
TREMONT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Tremont Corporation ("Tremont") is principally a holding company with
operations conducted through 39%-owned Titanium Metals Corporation ("TIMET"),
20%-owned NL Industries, Inc. ("NL") and other joint ventures of 75%-owned TRECO
L.L.C. At June 30, 2000, Valhi, Inc. and Tremont, each affiliates of Contran
Corporation, held approximately 60% and 20%, respectively, of NL's outstanding
common stock, and together they may be deemed to control NL. At June 30, 2000,
Contran and its subsidiaries held approximately 93% of Valhi's outstanding
common stock, and Valhi and other entities related to Harold C. Simmons held
approximately 73% of Tremont's outstanding common stock. At June 30, 2000, the
Combined Master Retirement Trust ("CMRT"), a trust formed by Valhi to permit the
collective investment by trusts that maintain assets of certain employee benefit
plans adopted by Valhi and related entities, owned an additional 8% of TIMET's
outstanding common stock. Substantially all of Contran's outstanding common
voting stock is held either by trusts established for the benefit of certain
children and grandchildren of Mr. Simmons, of which Mr. Simmons is the sole
trustee, or by Mr. Simmons directly. Mr. Simmons may be deemed to control each
of Contran, Valhi, Tremont, NL and TIMET. Mr. Simmons is sole trustee of the
CMRT and is a member of the trust investment committee of the CMRT.
The consolidated balance sheet of Tremont Corporation and subsidiaries
(collectively, the "Company") at December 31, 1999 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2000 and the consolidated statements of
income, cash flows, comprehensive income (loss) and stockholders' equity for the
interim periods ended June 30, 1999 and 2000 have been prepared by the Company
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring 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 prior year
amounts have been reclassified to conform to the current year presentation.
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 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, 1999 (the "1999 Annual Report").
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
1999 Annual Report, including certain information concerning TIMET's and NL's
legal proceedings incorporated therein by reference.
8
<PAGE>
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 Company,
NL and TIMET are currently studying this new accounting rule and the impact of
adopting SFAS No. 133, if any, will be dependent upon the extent to which the
companies are then parties to derivative contracts or engaged in hedging
activities. As permitted by the transition requirements of SFAS No. 133, as
amended, the companies will exempt all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
The Company, NL and TIMET will adopt the Securities and Exchange
Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," as amended, in the fourth quarter of 2000. SAB No. 101 provides
guidance on the recognition, presentation and disclosure of revenue, including
specifying basic criteria that must be met before revenue can be recognized. The
Company understands that TIMET expects that the adoption of SAB No. 101 will not
have a material impact on TIMET's consolidated financial position, liquidity or
results of operations. The impact on NL, and therefore the Company, of adopting
SAB No. 101, if any, has not yet been determined. If the impact of adopting SAB
No. 101 is material, the Company and NL will adopt SAB No. 101 retroactively to
the beginning of 2000, and previously-reported results of operations for the
first three quarters of 2000 would be restated.
Note 2 - Stockholders' equity:
In March 2000, NL purchased an additional 500,000 shares of Tremont
common stock in market transactions for $9.5 million, and at June 30, 2000, NL
held approximately 9% of the Company's outstanding common stock. For financial
reporting purposes, the Company has classified its proportional interest of
Tremont common stock held by NL as treasury stock. Under Delaware corporate law,
the Tremont shares held by NL are not considered treasury stock for voting or
quorum purposes. Accordingly, shares outstanding for financial reporting
purposes differ from those outstanding for such other purposes.
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. At June 30, 2000, Tremont held 12.3 million shares, or
approximately 39%, of TIMET's outstanding common stock. At June 30, 2000, the
net carrying amount of the Company's interest in TIMET was approximately $6.22
per share, while the market price of TIMET common stock at that date was $4.69
per share. In the second quarter of 2000, TIMET issued 467,500 shares of
restricted (nonvested) stock under its Long-Term Performance Incentive Plan,
which reduced the Company's ownership in TIMET from 39.1% to 38.5% as of June
30, 2000.
9
<PAGE>
NL Industries. At June 30, 2000, Tremont held 10.2 million shares of
NL's outstanding common stock. At June 30, 2000, the net carrying amount of the
Company's interest in NL was approximately $11.60 per share while the market
price of NL common stock at that date was $15.25 per share.
Joint Ventures. Investment in joint ventures represents holdings of
75%-owned TRECO, which is principally comprised of (i) a 12% direct interest in
The Landwell Company ("Landwell"), which is actively engaged in efforts 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 Landwell.
Note 4 - Income taxes:
The difference between the Company's income tax expense attributable to
pretax income and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35% is summarized below.
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------------------
1999 2000
------------------- --------------------
(In thousands)
<S> <C> <C>
Expected income tax expense, at 35% $7,065 $ 2,850
Adjustment of deferred tax valuation allowance - 2,336
Incremental tax and rate differences on equity
in income of companies not included in
the consolidated tax group 124 (660)
State income taxes and other, net 38 10
------------------- --------------------
$7,227 $ 4,536
=================== ====================
</TABLE>
The deferred tax valuation allowance adjustment in 2000 relates
primarily to the Company not recognizing a deferred income tax asset with
respect to its equity in losses of TIMET, which the Company believes such asset
would not meet the "more-likely-than-not" recognition criteria.
<TABLE>
<CAPTION>
Note 5 - Accounts payable and accrued liabilities:
December 31, June 30,
1999 2000
-------------------- ---------------------
(In thousands)
<S> <C> <C>
Postretirement benefits $ 1,535 $ 1,535
Other employee benefits 250 250
Environmental cost 385 204
Miscellaneous taxes 136 141
Other 2,317 361
-------------------- ---------------------
$ 4,623 $ 2,491
==================== =====================
</TABLE>
10
<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 TIMET under an intercorporate services
agreement.
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, 2000, the interest rate was 9%. Obligations under this
agreement are payable upon demand. At June 30, 2000, Tremont owed Contran $15.3
million pursuant to this agreement, which amount was borrowed primarily to
purchase shares of NL and TIMET common stock during 1998 and 1999.
Note 7 - Earnings per share:
Basic earnings per share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings 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 a net reduction of the Company's equity in earnings of TIMET. The
reduction results from dilution of the Company's ownership percentage offset in
part by increased TIMET net income resulting from elimination of dividends on
the Convertible Preferred Securities. Due to TIMET net losses in the 1999 and
2000 three and six-month periods, the effect of the assumed conversion of
TIMET's Convertible Preferred Securities would be antidilutive and is omitted
from the numerator of the calculation. Tremont stock options omitted from the
denominator because they were antidilutive were not material.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
------------- -------------- -------------- -------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 12,455 $ 5,067 $ 12,777 $ 3,180
Effect of dilutive securities
of equity investees - - - -
------------- -------------- -------------- -------------
Diluted net income $ 12,455 $ 5,067 $12,777 $ 3,180
============= ============== ============== =============
Denominator:
Average common shares outstanding 6,387 6,285 6,384 6,328
Average dilutive stock options 61 55 76 53
------------- -------------- -------------- -------------
Diluted shares 6,448 6,340 6,460 6,381
============= ============== ============== =============
</TABLE>
11
<PAGE>
Note 8 - Commitments and contingencies:
The Company entered into a voluntary settlement agreement effective as of
July 7, 2000 with the Arkansas Department of Environmental Quality and certain
other potentially responsible parties, pursuant to which the Company and the
other potentially responsible parties will undertake certain investigatory and
remediation activities at a former mining site located in Hot Spring County,
Arkansas. The Company currently believes it has accrued adequate amounts to
cover its share of the costs for such remediation activities. The Company
believes that to the extent it has any additional liability for remediation at
this site, it is only one of a number of apparently solvent potentially
responsible parties that would ultimately share in any such costs. As of June
30, 2000, the Company had accrued approximately $6 million related to these
matters.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites. The imposition of more stringent standards or requirements under
environmental laws or regulations, the results of future testing and analysis
undertaken by the Company at its non-operating facilities, or a determination
that the Company is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
12
<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 2000 net income of $5.1 million, or
$.80 per diluted share, compared to net income of $12.5 million, or $1.93 per
diluted share, for the same quarter in 1999. The Company's net income for the
six months ended June 30, 2000 and 1999 was $3.2 million and $12.8 million,
respectively, or $.50 and $1.98 per diluted share, respectively. Tremont's
second quarter 2000 results included the Company's equity in NL, whose results
included a $27.5 million net-of-tax gain from an insurance settlement,
representing income to the Company of $.54 per diluted share. Tremont's second
quarter 1999 results included the Company's equity in NL's $90 million non-cash
income tax benefit, representing income to the Company of $1.70 per diluted
share.
The Company's equity in earnings of 39%-owned TIMET was a loss of $2.2
million in the second quarter of 2000 compared to a loss of $.7 million in the
second quarter of 1999. TIMET reported a second quarter 2000 net loss of $9.5
million compared to a net loss of $2.5 million in the second quarter of 1999.
TIMET's sales of $108.8 million in the second quarter of 2000 were 15% lower
than the year-ago period. This resulted principally from a 10% decline in
average mill product selling prices offset by a 3% increase in sales volume.
Ingot and slab sales volume increased 34% from year-ago levels, while average
selling prices declined 4%. As compared to the first quarter of 2000, TIMET's
mill product sales volume in the second quarter of 2000 increased 7%, while
average selling prices decreased 6%. Ingot and slab sales volume in the second
quarter of 2000 increased 53% compared to the first quarter of 2000, while
average selling prices decreased 4%.
The Company's equity in earnings of 20%-owned NL was $11.9 million in
the second quarter of 2000 compared to $21.4 million for the same quarter of
1999. NL reported net income of $63.4 million in the second quarter of 2000
compared to net income of $111.8 million for the same quarter in 1999. Excluding
the 2000 settlement gain and 1999 income tax benefit, NL's net income in the
first half of 2000 was $59.6 million, up 66% from $35.8 million in the first
half of 1999. Operating income of NL's titanium dioxide pigments business
increased 42% to $62.7 million in the second quarter of 2000 compared to $44.1
million in the second quarter of 1999. NL's improved operating income is
primarily due to higher average selling prices in billing currencies and record
sales volume, partially offset by a second quarter 1999 $5.3 million currency
exchange transaction gain. Second-quarter operating income improved 36% over the
$46.2 million in the first quarter of 2000 on strong economic fundamentals
resulting in 3% higher average selling prices in billing currencies, 9% higher
sales volume and 4% higher production volume. NL's second quarter 2000 income
includes a $43 million pre-tax net gain from a June 2000 settlement with one of
NL's two principal former insurance carriers. The settlement ends a court
proceeding against the carrier that NL initiated to seek reimbursement for legal
defense expenditures and indemnity coverage for certain of its environmental
remediation expenditures.
13
<PAGE>
The Company's equity in earnings of other joint ventures principally
represents earnings from its real estate development partnership.
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 which would be accounted for
as a realized loss. At December 31, 1999, after considering what it believed to
be all relevant factors, including, among other things, TIMET's operating
results, financial position, estimated asset values and prospects, the Company
recorded a $61 million pre-tax non-cash charge to earnings to reduce the net
carrying value of its investment in TIMET for an other than temporary
impairment. In determining the amount of the impairment charge, the Company
considered, among other things, then-recent ranges of TIMET's NYSE market price
and estimates of TIMET's future operating losses which would further reduce the
Company's carrying value of its investment in TIMET as it records additional
equity in losses of TIMET. The Company's per share net carrying value of its
interest in TIMET at June 30, 2000 was $6.22 per share, compared to a per share
market price of $4.69 at that date. The Company's per share net carrying amount
of its interest in NL at June 30, 2000 was $11.60 per share, compared to a per
share market price of $15.25 at that date. 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 further 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.
The Company's income tax rate in the three and six-month periods ended
June 30, 2000 varied from the U.S. statutory rate principally because the
Company did not recognize a deferred tax asset with respect to its equity in
losses of TIMET, which the Company believes such asset would not meet the
"more-likely-than-not" recognition criteria.
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 ownership percentage to TIMET's separately
reported earnings because of the effect of amortization of basis differences
related to purchase accounting adjustments made by Tremont in conjunction with
the acquisitions of its interest in TIMET and amortization of the basis
difference related to the writedown of the Company's investment in TIMET
recorded in the fourth quarter of 1999 for an other than temporary decline in
the market value of its investment. Amortization of such basis differences
increases earnings, and reduces losses, attributable to TIMET as reported by
Tremont.
14
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -------------------------
1999 2000 Change 1999 2000 Change
-------- ----------- ----------- ---------- ----------- ----------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 127.6 $ 108.8 -15% $ 261.7 $ 213.6 -18%
======== =========== =========== ========== =========== ==========
Operating income (loss) $ 1.1 $ (9.5) $ (10.6) $ (.4) $ (27.9) $( 27.5)
Corporate income, net .8 1.1 1.7 3.6
Interest expense 1.7 2.0 3.0 4.2
-------- ----------- ---------- -----------
.2 (10.4) (1.7) (28.5)
Income tax expense (benefit) .1 (3.7) (.6) (10.0)
Minority interest 2.6 2.8 5.3 5.3
-------- ----------- ---------- -----------
Loss before extraordinary
item (2.5) (9.5) (6.4) (23.8)
Extraordinary item - early
extinguishment of debt,
net of tax - - - (.9)
-------- ----------- ---------- -----------
Net loss $ (2.5) $ (9.5) $ (7.0) $ (6.4) $ (24.7) $ (18.3)
======== =========== =========== ========== =========== ==========
Tremont's equity in TIMET's
losses before extraordinary
item, including amortization
of basis differences $ (.7) $ (2.2) $ (1.5) $ (1.9) $ (6.2) $ (4.6)
======== =========== =========== ========== =========== ==========
Mill product shipments:
Volume (metric tons) 2,800 2,890 +3% 5,800 5,590 -4%
Average price ($ per kilogram)
$ 35.00 $ 28.65 -18% $ 34.75 $ 29.70 -15%
</TABLE>
Sales and operating income (loss). TIMET's results of operations before
special items in the first half of 2000 decreased from the comparable period in
1999 due primarily to an 8% decline in average mill product selling prices
caused by lower demand in the aerospace market and competitive pricing pressures
in certain product lines. Mill product sales volume in the first half of 2000
decreased 4% from the comparable period in 1999. Ingot and slab sales volume in
the first half of 2000, which represents about 10% of TIMET's net sales,
decreased 2% compared to the first half of 1999, while average selling prices
decreased 4%. Net sales of $108.8 million in the second quarter of 2000 were 15%
lower than the second quarter of last year due principally to a 10% decline in
average mill product selling prices offset by a 3% increase in sales volume.
Ingot and slab volume for the second quarter of 2000 increased 34% from year-ago
levels, while average prices declined 4%. As compared to the first quarter of
2000, mill product sales volume in the second quarter of 2000 increased 7%,
while average selling prices decreased 6%. Ingot and slab sales volume in the
second quarter of 2000 increased 53% compared to the first quarter of 2000,
while average selling prices decreased 4%.
15
<PAGE>
TIMET's cost of sales (excluding special charges of $6.7 million in the
first quarter of 2000) as a percentage of net sales in the second quarter and
first half of 2000 (99% and 98%, respectively) increased from the comparable
periods in 1999 (89% and 90%, respectively) primarily due to the reduction in
selling prices more than offsetting the benefits received from various cost
reduction programs.
As previously reported, TIMET implemented a plan to address
then-current market and operating conditions, which resulted in the recognition
of a $3.7 million restructuring charge in the first quarter of 2000. During the
second quarter of 2000, the restructuring accrual was reduced by $.9 million
primarily related to a reduction in the previously-reported number of employee
terminations from 250 to 200 people due to near-term production levels that are
expected to be somewhat higher than previously anticipated. The $2.8 million net
restructuring charge is included in the operating loss of the "Titanium melted
and mill products" segment in 2000 and is principally related to personnel
severance and benefits for the approximately 200 employees terminated.
TIMET's selling, general, administrative and development expenses in
the second quarter and first half of 2000 decreased $1.4 million and $2.8
million, respectively, from the comparable periods in 1999 due to lower
information technology costs associated with the support of TIMET's
business-enterprise system and the partial realization of certain benefits from
the 2000 restructuring plan.
Net sales of the "Other" segment consisted of TIMET's nonintegrated
joint ventures, which investments have been either sold or charged off due to an
asset impairment. Equity losses in the "Other" segment were lower in 2000
principally as a result of TIMET's no longer recognizing its share of losses
associated with nonintegrated joint ventures that were charged off in the fourth
quarter of 1999.
TIMET's firm order backlog at the end of June 2000 was approximately
$160 million. Comparable backlogs at the end of March 2000 and June 1999 were
approximately $185 million and $240 million, respectively.
TIMET believes that its business in the second quarter of 2000
continued to be adversely impacted by an excess supply of titanium inventory
throughout the aerospace industry supply chain. Although there appear to be
signs that this situation is abating in selected products, the competitive
environment has continued to result in soft selling prices. Current indications
are that sales and operating margins, before special items, will be slightly
lower for the balance of 2000 compared to the first half of this year. TIMET is
continuing its efforts to increase sales and reduce costs wherever possible.
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.
16
<PAGE>
Approximately one-half of TIMET's European sales are denominated in
currencies other than the U.S. dollar, principally the British pound and
European currencies tied to the euro. 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 functional currency, including sales and costs denominated in
U.S. dollars, is subject to exchange rate fluctuations that 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 U.S. are denominated in
U.S. dollars and as such are not subject to currency exchange rate fluctuations.
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 losses of TIMET were $.7 million during the six months
ended June 30, 2000 and $1.5 million during the same period in 1999. At June 30,
2000, consolidated assets and liabilities of TIMET denominated in currencies
other than functional currencies were approximately $21 million and $17 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable,
accounts payable and borrowings.
Dividends and interest income. Dividends and interest income of TIMET
consists principally of dividends on $80 million of non-voting preferred
securities of Special Metals Corporation which accrue at an annual rate of
6.625%.
General corporate income (expense), net. General corporate income
(expense), net includes currency transaction losses described above. The
increase in general corporate income for the six months ended June 30, 2000 is
due to a $1.2 million gain on the sale of TIMET's interest in its castings joint
venture in the first quarter of 2000.
Interest expense. TIMET's interest expense in the second quarter and
first half of 2000 increased $.3 million and $1.3 million, respectively, from
the comparable periods in 1999 primarily due to increased interest rates related
to TIMET's credit facilities completed in February 2000. The effect of the
interest rate increases more than offset the benefit of lower average
outstanding borrowings. Interest expense in the first half of 2000 is also
higher due to a lower level of interest capitalized in the first quarter of 2000
as compared to the year-ago period.
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 (loss) can impact TIMET's effective tax rate.
Minority interest. Dividend expense related to TIMET's 6.625%
Convertible Preferred Securities approximated $6.6 million in both the 1999 and
2000 six month periods, and is reported as minority interest, net of allocable
income taxes.
17
<PAGE>
NL 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 ownership percentage to NL's separately-reported
earnings because of the effect of amortization of purchase accounting
adjustments made by Tremont in conjunction with the acquisitions of its interest
in NL and basis differences related to the writedown in the Company's investment
in NL recorded in 1993 for an other than temporary decline in the market value
of its investment. Amortization of such basis differences generally reduces
earnings, and increases losses, attributable to NL as reported by Tremont.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
1999 2000 Change 1999 2000 Change
--------- --------- ---------- ---------- ---------- ----------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales $232.6 $251.1 +8% $434.1 $482.1 +11%
========= ========= ========== ========== ========== ==========
Operating income $ 44.1 $ 62.7 +42% $ 75.1 $ 109.0 +45%
General corporate items:
Securities earnings, net 1.5 7.4 3.1 9.2
Litigation settlement gain, net
and other corporate income 1.2 44.1 2.3 45.2
Expenses, net (5.4) (10.0) (10.7) (16.3)
Interest expense (9.3) (7.9) (19.1) (15.8)
--------- --------- ---------- ----------
32.1 96.3 $64.2 50.7 131.3 $80.6
Income tax expense (benefit) (81.9) 32.8 (77.4) 44.0
--------- --------- ---------- ----------
Income before minority interest 114.0 63.5 $(50.5) 128.1 87.3 $(40.8)
Minority interest 2.2 .1 2.3 .2
--------- --------- ---------- ----------
Net income $111.8 $ 63.4 $(48.4) $125.8 $ 87.1 $(38.7)
========= ========= ========== ========== ========== ==========
Net income $ 21.4 $ 11.9 $ (9.5) $ 23.2 $ 15.8 $(7.4)
========= ========= ========== ========== ========== ==========
Percent changes in TiO2:
Sales volume +9% +16%
Average selling prices (in billing
currencies) +5% +3%
</TABLE>
Net sales and operating income. NL conducts its titanium dioxide
("TiO2") pigments operations through its wholly-owned subsidiary, Kronos, Inc.
Kronos' operating income in the second quarter of 2000 increased from the
comparable period in 1999 due to higher average selling prices in billing
currencies (which excludes the effects of foreign currency translation) and
record sales volume, partially offset by the previously reported second-quarter
1999 $5.3 million foreign currency transaction gain. Kronos' operating income in
the first half of 2000 increased from the comparable period in 1999 due to
record sales volume, higher average selling prices in billing currencies and
higher production volume, partially offset by the second-quarter 1999 $5.3
million foreign currency transaction gain.
18
<PAGE>
Average TiO2 selling prices in billing currencies for the second
quarter of 2000 were 5% higher than the second quarter of 1999 and were 3%
higher than the first quarter of 2000. Average selling prices in billing
currencies at the end of the second quarter were 1% higher than the average for
the quarter. Kronos' prices were up in all major regions from the second quarter
of 1999. Prices were higher in Europe and export markets from the first quarter
of 2000 and were flat in North America. Average selling prices in billing
currencies for the first half of 2000 were 3% higher than the first half of 1999
with increases in all major regions. During the second quarter of 2000, Kronos
announced price increases of 7% in Europe and 4% in North America, both of which
Kronos expects, depending on market conditions, to implement during the second
half of 2000.
Kronos' second-quarter sales volume represents the highest-quarter
sales in Kronos' history. Sales volume increased 9% from both the second quarter
of 1999 and the first quarter of 2000, reflecting sustained demand in all major
regions. Sales volume in the first half of 2000 was 16%, or 31,000 metric tons,
higher than the first half of 1999. Although Kronos believes its TiO2 sales
volume for the second half of 2000 will be lower than the record sales volume in
the second half of 1999, Kronos anticipates its TiO2 sales volume for full-year
2000 will be higher than that of 1999.
NL's second-quarter 2000 production volume was slightly higher than the
comparable 1999 period with operating rates in both periods near full capacity.
Kronos' production volume in the first half of 2000 was 8% higher than the
comparable 1999 period with operating rates near full capacity compared to 91%
capacity utilization in the first half of 1999. Kronos' chloride-process
production facility in Leverkusen, Germany suffered a small fire in one of its
production lines in the second quarter of 2000, resulting in approximately 5,000
metric tons of lost production. The production line has been fully repaired and
on stream since early June. NL has insurance coverage for the loss of production
and damaged property and, in the second quarter of 2000, NL accrued $4.1 million
of expected insurance reimbursements as a reduction of cost of sales to offset
unallocated period costs that were recorded as a result of the lost production.
NL's efforts to debottleneck Kronos' production facilities to meet long-term
demand continue to prove successful. NL expects Kronos' production capacity will
be increased by 25,000 metric tons primarily at its chloride facilities, with
only modest capital expenditures, bringing Kronos' capacity to approximately
465,000 metric tons by 2002. Kronos expects to produce more in 2000 than the
record 434,000 metric tons it produced in 1998.
Kronos expects its full-year 2000 operating income will be higher than
1999 primarily because of higher average selling prices in billing currencies,
higher production and sales volumes and its continued focus on controlling
costs. The extent of the improvement will be determined primarily by the
magnitude of realized price increases.
Compared to the year-earlier periods, Kronos' cost of sales as a
percentage of net sales decreased in both the second quarter and first half of
2000 primarily due to higher average selling prices in billing currencies,
higher production volume and $4.1 million of accrued insurance reimbursements.
Excluding the effects of foreign currency translation, which decreased NL's
expenses in the second quarter and first half of 2000 compared to the
year-earlier periods, Kronos' selling, general and administrative expenses
increased in the second quarter and first half of 2000 due to higher
distribution expenses associated with higher sales volumes in these periods.
19
<PAGE>
A significant amount of Kronos' sales and operating costs are
denominated in currencies other than the U.S. dollar. Fluctuations in the value
of the U.S. dollar relative to other currencies, primarily a stronger U.S.
dollar compared to the euro, decreased the dollar value of sales for the second
quarter and first half of 2000 by a net $17 million and $30 million,
respectively, when compared to the year-earlier periods. When translated from
billing currencies to U.S. dollars using currency exchange rates prevailing
during the respective periods, Kronos' average selling price in U.S. dollars for
the second quarter and first half of 2000 were lower by 1% and 3%, respectively,
than the comparable periods in 1999. Kronos' operating costs that are not
denominated in U.S. dollars were also lower when translated to U.S. dollars in
the second quarter and first half of 2000 compared to the year-earlier periods
and, accordingly, Kronos' unit costs in U.S. dollar terms were lower in the
second quarter and first half of 2000 compared to the same periods last year. In
addition, sales to export markets are typically denominated in U.S. dollars and
a stronger U.S. dollar improves margins at NL's non-U.S. subsidiaries on their
export sales. This helps to offset the unfavorable effect of translating local
currency profits to U.S. dollars when the dollar is stronger. As a result, the
net impact of currency exchange rate fluctuations on operating income in the
second quarter and first half of 2000, excluding the second-quarter 1999 $5.3
million gain described above, was not significant when compared to the
year-earlier periods.
General corporate. Securities earnings of NL in the second quarter of
2000 includes a $5.6 million securities gain related to common stock received
from the demutualization of MetLife, Inc., an insurance company from which NL
had purchased certain insurance policies.
Corporate income of NL in the second quarter of 2000 includes a $43
million net gain from a June 2000 settlement with one of NL's two principal
former insurance carriers. Corporate expenses were higher in the second quarter
of 2000 primarily due to higher environmental remediation accruals and legal
expenses.
Interest expense of NL in the second quarter and first half of 2000
decreased 15% and 17%, respectively, from the comparable periods in 1999
primarily due to reduced levels of outstanding debt and lower European borrowing
rates. At the end of the second quarter of 2000, NL repaid $16.7 million of its
euro-denominated short-term debt with excess cash flow from operations. NL
expects its full-year 2000 interest expense will be lower than 1999 primarily
due to reduced levels of outstanding debt and lower European borrowing rates.
Provision for income taxes. NL reduced its deferred income tax
valuation allowance by $7.5 million in the first half of 1999 and $1.3 million
in the first half of 2000 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.
NL recognized a $90 million noncash net income tax benefit in 1999 that
included (i) a $36 million reduction in deferred tax liabilities related to a
favorable resolution of a German tax contingency, (ii) a $78 million decrease in
the valuation allowance to recognize the benefit of certain deductible income
tax attributes which NL believes meet the recognition criteria as a result of,
among other things, a corporate restructuring of NL's German subsidiaries,
offset by (iii) a $24 million increase in the valuation allowance to reduce the
previously recognized benefit of certain other deductible income tax attributes
which NL believes do not meet the recognition criteria due to a change in German
tax law.
Other. Minority interest primarily relates to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services,
Inc. ("EMS").
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $4.5 million at June 30,
2000. Tremont's 12.3 million shares of TIMET common stock and 10.2 million
shares of NL common stock had a quoted market value of approximately $58 million
and $156 million, respectively, at June 30, 2000.
The Company's equity in earnings of affiliates are primarily noncash.
The Company received cash distributions from Landwell of $.4 million in the
first half of 1999 and $.1 million in the first half of 2000 primarily to cover
taxes associated with Landwell's income from land sales. In the first half of
1999, TIMET and NL paid cash dividends aggregating $1.7 million. In the first
half of 2000, NL paid a cash dividend of $.30 per share, aggregating $3 million.
TIMET suspended its quarterly dividend in the fourth quarter of 1999 and TIMET's
U.S. credit agreement now prohibits the payment of dividends on TIMET's common
stock. In July 2000, NL`s Board of Directors declared a third quarter dividend
of $.15 per share payable September 27, 2000 to shareholders of record as of
September 15, 2000. Payments and amounts of NL dividends in the future are at
the discretion of NL's Board of Directors.
Relative changes in the Company's assets and liabilities did not have a
material impact on its cash flow from operating activities for the 1999 and 2000
periods.
At June 30, 2000, the Company owed Contran $15.3 million including
accrued interest pursuant to an advance agreement with Contran, which amount was
borrowed primarily to purchase shares of NL and TIMET common stock in 1998 and
1999. In the second quarter of 2000, the Company repaid $.8 million of the
advances from Contran and in July 2000, the Company repaid an additional $.8
million.
The Contran advance agreement and dividends from NL are currently
Tremont's primary sources of liquidity. Unless the Company decides to purchase
additional shares of NL, TIMET or Tremont securities, the Company does not
currently believe it will need to borrow additional amounts from Contran.
Tremont's current quarterly dividend rate is $.07 per share. On July
18, 2000, the Company's Board of Directors declared a regular quarterly dividend
of $.07 per common share, payable on September 29, 2000 to stockholders of
record as of September 15, 2000.
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.
21
<PAGE>
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.
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.
22
<PAGE>
<TABLE>
<CAPTION>
TIMET - Summarized balance sheet and cash flow information.
December 31, June 30,
1999 2000
------------------- ---------------------
(In millions)
<S> <C> <C>
Cash and equivalents $ 20.7 $ 6.2
Other current assets 321.9 259.1
Goodwill and other intangible assets 71.1 66.4
Other noncurrent assets 136.0 139.9
Property and equipment, net 333.4 314.2
------------------- ---------------------
$ 883.1 $ 785.8
=================== =====================
Current liabilities $ 194.4 $ 123.2
Long-term debt and capital lease obligations 32.2 32.6
Accrued postretirement benefit cost 19.9 19.5
Other noncurrent liabilities 19.9 25.0
Minority interest - Convertible Preferred Securities 201.3 201.3
Other minority interest 7.3 8.2
Stockholders' equity 408.1 376.0
------------------- ---------------------
$ 883.1 $ 785.8
=================== =====================
Six months ended
June 30,
--------------------------------------------
1999 2000
------------------- ---------------------
(In millions)
Net cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ 16.1 $ (4.3)
Changes in assets and liabilities 7.9 33.6
------------------- ---------------------
24.0 29.3
Investing activities (11.3) 2.2
Financing activities (22.6) (46.2)
------------------- ---------------------
$ (9.9) $ (14.7)
=================== =====================
Cash paid for:
Interest, net of amounts capitalized $ 2.8 $ 3.9
Convertible Preferred Securities dividends 6.7 3.3
Income taxes (refund), net (5.7) (6.1)
</TABLE>
23
<PAGE>
At June 30, 2000, TIMET had net debt of $64 million ($70 million of
notes payable and long-term debt and $6 million of cash and equivalents). TIMET
also had approximately $112 million of borrowing availability under its U.S. and
European credit lines. TIMET believes its U.S. and European credit lines will
provide it with the liquidity necessary for current market and operating
conditions.
Operating activities. Cash provided by operating activities of TIMET
was $29 million for the six-month period ended June 30, 2000, up from $24
million for the same period in 1999, as summarized below.
TIMET's cash from operating activities, excluding changes in assets and
liabilities, generally followed the trend in its operating results. Results of
operations in 2000 included non-cash special charges of $6.7 million.
TIMET's changes in assets and liabilities reflect primarily the timing
of purchases, production and sales and can vary significantly from period to
period. TIMET's plan to address current market conditions includes more
effective working capital management, particularly inventories and receivables,
both of which were reduced in the first half of 2000. The significant reduction
in receivables in the first half of 2000 was also attributable to $16 million of
customer payments received in the first quarter of 2000 related to a
bill-and-hold shipment from 1999. TIMET received tax refunds of $6.7 million in
the second quarter of 2000. In July 2000, TIMET received an additional $.7
million in tax refunds.
Dividends on the $80 million of Special Metals Corporation 6.625%
convertible preferred securities held by TIMET had previously been deferred by
SMC due to limitations imposed by SMC's bank credit agreements. However, in
April and July 2000, TIMET received quarterly dividends of $1.3 million per
quarter. There can be no assurances that TIMET will continue to receive
additional dividends during the remainder of 2000.
Investing activities. TIMET's capital expenditures were $4.8 million
for the six months ended June 30, 2000 compared to $14.5 million for the same
period in 1999. Capital expenditures for 2000 are estimated to be less than $14
million and are planned to include those principally intended for capital
maintenance and environmental, health and safety purposes. Proceeds from the
sale of property and equipment in 1999 included the sale of an interest in a
corporate aircraft and assets sold as part of TIMET's restructuring activities.
In the first quarter of 2000, TIMET sold its interest in the castings
joint venture to Wyman-Gordon for $7 million and recorded a pretax gain of $1.2
million.
Financing activities. Net debt repayments in the 2000 period reflect
reductions of outstanding borrowings principally in the U.S. resulting from
collection of receivables, reduction in inventories and the sale of the castings
joint venture. Net debt repayments in 1999 reflect reductions of outstanding
borrowings in both the U.S. and U.K.
In November 1999, TIMET's Board of Directors voted to suspend the
regular quarterly dividend on TIMET's common stock in view of, among other
things, the continuing weakness in overall market demand for titanium metal
products. TIMET's U.S. credit agreement now prohibits the payment of dividends
on TIMET's common stock.
24
<PAGE>
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 for each period. As previously
reported, TIMET has exercised its right to defer future dividend payments on
these securities for a period of 10 quarters (subject to possible further
extension for up to an additional 10 quarters), although interest will continue
to accrue at the coupon rate on the principal and unpaid dividends. TIMET's goal
is to resume dividends on the Convertible Preferred Securities when the outlook
for TIMET's results from operations improves substantially. As of June 30, 2000,
accrued dividends on TIMET's Convertible Preferred Securities are reflected as
noncurrent liabilities in TIMET's consolidated balance sheet.
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 light of its current outlook, may in the future
seek to raise additional capital, modify its common and preferred dividend
policies, 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.
25
<PAGE>
<TABLE>
<CAPTION>
NL Industries - Summarized balance sheet and cash flow information.
December 31, June 30,
1999 2000
--------------------- ----------------------
(In millions)
<S> <C> <C>
Cash and cash equivalents $ 151.8 $ 154.7
Other current assets 354.6 386.1
Noncurrent securities 15.1 25.7
Investments in joint ventures 157.6 152.3
Other noncurrent assets 28.7 26.0
Property and equipment 348.4 325.5
--------------------- ----------------------
$ 1,056.2 $ 1,070.3
===================== ======================
Current liabilities $ 264.8 $ 249.9
Long-term debt 244.3 244.2
Deferred income taxes 108.2 128.8
Accrued OPEB cost 37.1 29.6
Environmental liabilities 64.5 52.5
Other noncurrent liabilities 62.3 53.4
Minority interest 3.9 4.1
Stockholders' equity 271.1 307.8
--------------------- ----------------------
$ 1,056.2 $ 1,070.3
===================== ======================
Six months ended
June 30,
-----------------------------------------------
1999 2000
--------------------- ----------------------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities $ 64.1 $ 80.1
Changes in assets and liabilities (47.9) (8.6)
--------------------- ----------------------
16.2 71.5
Investing activities (27.6) (21.6)
Financing activities (18.8) (45.4)
--------------------- ----------------------
$ (30.2) $ 4.5
===================== ======================
Cash paid for:
Interest, net of amounts capitalized $ 18.7 $ 15.7
Income taxes, net 5.2 10.8
</TABLE>
Operating activities. The TiO2 industry is cyclical and changes in
economic conditions within the industry significantly affect the earnings and
operating cash flows of NL. Cash flow from operations, before changes in assets
and liabilities, in the first half of 2000 increased from the comparable period
in 1999 primarily due to higher operating income, partially offset by lower cash
distributions from NL's TiO2 manufacturing joint venture. Changes in NL's
inventories, receivables and payables (excluding the effect of currency
translation) used $38.2 million and $14.5 million of cash in the first half of
1999 and 2000, respectively, primarily due to increases in receivables in each
period. The cash used in the first half of 2000 was significantly less than the
first half of 1999 due to a greater amount of cash being provided from
reductions in inventory levels.
26
<PAGE>
Investing activities. In the first quarter of 2000, NL purchased
500,000 shares of Tremont's common stock in market transactions for $9.5
million. In the first half of 1999, NL collateralized letters of credit with
$12.5 million of NL's cash, and classified such amounts as current restricted
cash equivalents.
Financing activities. At the end of the second quarter of 2000, NL
repaid euro 17.9 million ($16.7 million when paid) of its euro-denominated
short-term debt with excess cash flow from operations.
In the second quarter of 2000, NL paid a regular quarterly dividend of
$.15 per share to shareholders aggregating $7.6 million. Dividends paid during
the first half of 2000 totaled $15.2 million. In July 2000, NL's Board of
Directors declared a regular quarterly dividend of $.15 per share to
shareholders of record as of September 15, 2000 to be paid on September 27,
2000.
In 1999, NL's Board of Directors authorized a 1.5 million share
repurchase program. Pursuant to this program, NL purchased in the open market
(i) 552,000 shares of its common stock at an aggregate cost of $7.2 million in
1999, (ii) 927,000 shares at an aggregate cost of $14 million in the first half
of 2000 and (iii) 21,000 shares at an aggregate cost of $.3 million in July
2000. In July 2000, NL's Board of Directors authorized the purchase of up to an
additional 1.5 million shares and, pursuant to this authorization, NL purchased
271,000 shares of its common stock in the open market at an aggregate cost of $5
million through August 1, 2000.
Cash, cash equivalents, restricted cash equivalents and borrowing
availability. At June 30, 2000, NL had cash and cash equivalents aggregating
$138 million ($41 million held by non-U.S. subsidiaries) and an additional $17
million of restricted cash equivalents. NL's subsidiaries had $28 million
available for borrowing at June 30, 2000 under existing non-U.S. credit
facilities.
Income tax contingencies. 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.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at June 30,
2000) relating to 1994. NL appealed the 1994 assessment to the Fredrikstad City
Court, and, in February 2000, the court ruled in favor of the tax authorities on
the primary issue, but asserted that the tax authorities' assessment was
overstated by NOK 34 million ($4 million at June 30, 2000). In March 2000 the
tax authorities agreed with the court and reduced the 1994 assessment to NOK 17
million ($2 million at June 30, 2000). The tax authorities issued a NOK 13
million ($1 million at June 30, 2000) assessment for 1996 which has been
computed on a similar basis as the revised 1994 assessment. NL has appealed the
court's decision on the primary issue related to the 1994 assessment to a higher
court, and NL believes that the outcome of the 1996 case is dependent on the
eventual outcome of the 1994 case. NL has granted a lien for the 1994 and 1996
tax assessments on its Fredrikstad, Norway TiO2 plant in favor of the Norwegian
tax authorities.
27
<PAGE>
No assurance can be given that these or other 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.
Environmental matters and litigation. 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
($113 million at June 30, 2000) 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 $170 million. NL's
estimates of such liabilities have not been discounted to present value, and NL
has not recognized any potential insurance recoveries other than the June 2000
settlement discussed below. No assurance can be given that actual costs will not
exceed either 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.
The imposition of more stringent standards or requirements under environmental
laws or regulations, new developments or changes with respect to site cleanup
costs or allocation of such costs among PRPs, or a determination that NL is
potentially responsible for the release of hazardous substances at other sites
could result in expenditures in excess of amounts currently estimated by NL to
be required for such matters. Furthermore, there can be no assurance that
additional environmental matters will not arise in the future.
In June 2000, NL settled with one of its two principal former insurance
carriers a lawsuit that NL initiated to seek reimbursement from an insurance
carrier for legal defense expenditures and indemnity coverage for certain of its
environmental remediation expenditures. In July 2000, proceeds of $45 million
from the settlement were transferred by the carrier to a special purpose trust
established to pay future remediation and other environmental expenditures of
NL. NL is continuing to pursue similar claims with other insurance carriers and
expects to recover additional amounts, although there can be no assurance that
any such additional amounts will be received.
Lead pigment litigation. NL is also a defendant in a number of legal
proceedings seeking damages for personal injury and property damage arising out
of 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 reasonably be estimated.
In addition, various legislation and administrative regulations have, from time
to time, been enacted or proposed that seek to (i) 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
(ii) 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 and bills which would revive actions barred by
the statute of limitations. 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.
28
<PAGE>
Other. In the second quarter of 2000, a confederation of labor
organizations in Norway implemented a work stoppage directed at various
Norwegian employers, including NL's 30,000 metric ton TiO2 facility and ilmenite
mining operations. The work stoppage lasted only a few days and did not have a
material adverse effect on NL's consolidated financial position, results of
operations 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
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.
29
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
-----------------
Reference is made to the 1999 Annual Report on Form 10-K and the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 for the
Company, TIMET and NL for descriptions of certain legal proceedings.
TIMET
In March 2000, TIMET filed a lawsuit against The Boeing Company seeking
damages estimated in excess of $600 million in connection with TIMET's long-term
sales agreement with Boeing. Boeing recently filed its answer to TIMET's
complaint denying substantially all of TIMET's allegations and making certain
counterclaims against TIMET. TIMET believes such counterclaims are without merit
and intends to vigorously defend against such claims. Since April 2000, TIMET
and Boeing have been in discussions to determine if a settlement can be reached.
Those discussions are ongoing; however, no assurance can be given that a
settlement will be achieved.
NL Industries
City of St. Louis v. Lead Industries Association, et al.
(No. 002-245, Division 1). In May 2000, defendants moved to dismiss all claims.
Briefing is not yet complete.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In
June 2000, following remand of the appellate court's dismissal of market share
claims, the trial court dismissed all remaining claims. The time for
plaintiffs to appeal has not yet run.
Parker v. NL Industries, et al. (No. 97085060 CC915). In June
2000, following a two-week trial, the jury returned a verdict for NL.
Plaintiffs have appealed.
Thomas v. Lead Industries Association, et al. (No. 99-CV-6411).
In June 2000, the trial court granted defendants' motion to dismiss the
product defect and Wisconsin consumer protection statute claims.
Smith, et al. v. Lead Industries Association, et al.
(No. 24-C-99-004490). In June 2000, defendants moved to dismiss all claims for
lack of product identification. Briefing is not yet complete.
County of Santa Clara v. Atlantic Richfield Company, et al.
(No. CV788657). In June 2000, defendants filed demurrers to dismiss all
claims. Briefing is not yet complete.
In June 2000, two complaints were filed in Texas state court,
Spring Branch Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-31175), and Houston
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-33725). NL has not been served in either
case. The School Districts seek past and future damages and exemplary damages
for costs they have allegedly incurred due to the presence of lead-based paint
in their buildings from NL, the Lead Industries Association ("LIA") and seven
other companies sued as former manufacturers of lead-based paint. Plaintiffs
allege claims for design defect and marketing defect, negligent product design
and failure to warn, fraudulent misrepresentation, negligent misrepresentation,
concert of action, conspiracy, and indemnity. NL intends to deny all allegations
of wrongdoing and liability and to defend the cases vigorously.
30
<PAGE>
In June 2000, a complaint was filed in Illinois state court, Mary
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). NL
has not been served. Plaintiffs seek to represent two classes, one of all minors
between ages six months and six years who resided in housing in Illinois built
before 1978, and one of all individuals between ages six and twenty years who
lived between ages six months and six years in Illinois housing built before
1978 and had blood lead levels of 10 micrograms/deciliter or more. The complaint
seeks a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. The complaint seeks
to hold jointly and severally liable NL, the LIA, and seven other companies sued
as former manufacturers of lead pigment and/or lead paint. Plaintiffs allege
claims for negligent product design, negligent failure to warn, strict products
liability, violation of the Illinois Consumer Fraud Act, fraud by omission,
market share liability, civil conspiracy, concert of action, enterprise
liability and alternative liability. NL intends to deny all allegations of
wrongdoing and liability and to defend the case vigorously.
Cherokee County, Kansas Site. In June 2000, NL finalized the
previously reported agreement in principle allocating remediation costs among
the PRPs at the Baxter Springs subsite in Cherokee County.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits:
10.1 Intercorporate Services Agreement, effective as of
January 1, 2000, by and between the Registrant and
Titanium Metals Corporation, incorporated by
reference to Exhibit 10.1 of Titanium Metals
Corporation's Quarterly Report on Form 10-Q (File
No. 0-28538) for the quarter ended June 30, 2000.
10.2 Intercorporate Services Agreement, effective as
of January 1, 2000, by and between NL Industries,
Inc. and Titanium Metals Corporation, incorporated
by reference to Exhibit 10.4 of NL Industries,
Inc.'s Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended June 30, 2000.
10.3 Executive Severance Policy of Titanium Metals
Corporation, as amended and restated effective
May 17, 2000, incorporated by reference to Exhibit
10.3 of Titanium Metals Corporation's Quarterly
Report on Form 10-Q (File No. 0-28538) for the
quarter ended June 30, 2000.
31
<PAGE>
10.4 Titanium Metals Corporation Executive Stock
Ownership Loan Plan, effective as of February
19, 1998, incorporated by reference to Appendix A
of Titanium Metals Corporation's Proxy Statement
dated April 14, 2000 for its Annual Meeting of
Stockholders held on May 17, 2000.
10.5 Amendment to NL Industries, Inc. Retirement
Savings Plan effective as of January 1, 2000,
incorporated by reference to Exhibit 10.1 of NL
Industries, Inc.'s Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended June 30,
2000.
10.6 Intercorporate Service Agreement by and between
Valhi, Inc. and NL Industries, Inc. as of
January 1, 2000, incorporated by reference to
Exhibit 10.2 of NL Industries, Inc.'s Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended June 30, 2000.
10.7 Intercorporate Service Agreement by and between
Contran Corporation and NL Industries, Inc. as of
January 1, 2000, incorporated by reference to
Exhibit 10.3 of NL Industries, Inc.'s Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended June 30, 2000.
10.8 Intercorporate Service Agreement by and between
CompX International, Inc. and NL Industries,
Inc. as of January 1, 2000, incorporated by
reference to Exhibit 10.6 of NL Industries, Inc.'s
Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended June 30, 2000.
27.1 Financial Data Schedule for the quarter ended June
30, 2000.
(b) Reports on Form 8-K filed by the Registrant for the quarter ended
June 30, 2000 and for the month of July 2000:
Report Date Items Reported
------------------------------ -----------------------
April 27, 2000 5 and 7
May 10, 2000 5 and 7
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TREMONT CORPORATION
------------------------------------------
(Registrant)
Date: August 10, 2000 By /s/ Mark A. Wallace
-------------------------- ------------------------------------------
Mark A. Wallace
Vice President and Chief Financial Officer
(Principal Finance Officer)
Date: August 10, 2000 By /s/ David P. Burlage
-------------------------- ------------------------------------------
David P. Burlage
(Principal Accounting Officer)
33
