When it was learned that claims against the B&W division had increased last August, the drop in MDR began. B&W later filed for bankruptcy in February.
from SSB summary of what CEO reported at analyst meeting in February after Ch.11 filing:
Asbestos was effectively phased out 20 years ago, when the material was
determined to be hazardous. Since 1982, B&W has settled 340,000
asbestos-related claims for a total of $1.6 billion. The entire
settlement process occurred out-of-court, through a "gentlemen's
agreement" between McDermott and the various plaintiffs' lawyers
(approximately 50 control the great majority of claims). This agreement
set up guidelines governing which claims would be considered and the
amounts disbursed. Thus, due to actuarial projections and the long
settlement history, McDermott was able to reasonably forecast its future
liabilities, while minimizing administrative costs. Additionally, the
plaintiffs' lawyers (nearly all working on contingency), received reas
onably predictable settlements at little incremental cost.
However, with the "window of opportunity" closing due to aging of the
exposed population, it appears that the plaintiffs' lawyers have taken on
a decidedly more litigous strategy. Starting last August, claim requests
started to increase dramatically (in many cases by 50%-300%+), although
the underlying issues had not changed. It immediately became clear to
MDR management, as first disclosed on the November conference call, that
a Chapter 11 bankruptcy filing for B&W would being considered. After
analyzing all relevant facts, they quickly determined that this was the
proper course of action, rather than attempting to settle out of court at
dramatically higher sums.
08:04am EST 12-Nov-99 DLJ Securities (Arvind S. Sanger, CFA) MDR JRM MDR.CF
MCDERMOTT INTERNATIONAL: Lowering Rating For Unquantifiable Risk
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
November 12, 1999 Arvind S. Sanger, CFA US (212) 892-3817
Robert Maina US (212) 892-3450
Stuart T. Kagel US (212) 892-6239
MCDERMOTT INTERNATIONAL (MDR: $13.56)
Lowering Rating For Unquantifiable Risk In Asbestos Liability
Range: Earnings Per Share 2000 vs 1999 % Chg
32.50 - 13.56 Old New P/E Ratios F1QA $0.40 vs 0.55 -27%
(FY:Mar.) 2001CYE $ $2.25 6.0 F2QA 0.06 vs 0.85 -93%
2000CYE 1.67 8.1 F3Q 0.18 vs 0.66 -73%
2000FYE 1.40 0.98 13.8 F4Q 0.34 vs 0.56 -39%
1999A 2.71 5.0
Yield: 1.5% Market Cap.: $812 MM 5-Yr. Growth Rate: 15%
Dividend: $0.20 Avg. Trading Vol.(000): 355 Book Value: $13.51
RATING: Market Perf. Change: Down From Buy 12-Mo. Target: $24
VIEWPOINT
MDR reported FQ2 EPS of $0.06 versus $0.85, below our estimate of $0.18 and
Street consensus of $0.19. The shortfall was caused by unexpected losses from a
couple of international joint ventures in marine construction and power
generation. While the drag from weaker Mexican joint venture results will impact
December quarter earnings and a slower recovery in power generation will also
impact this quarter, continued increase in the backlog provides increased
visibility for 2000. Consequently, we are lowering our Dec. quarter estimate
from $0.33 to $0.18, introducing a calendar 2000 estimate of $1.67 (versus our
prior March '01 FY estimate of $2.05) and a calendar 2001 estimate of $2.25. Our
new target price is $24 based on a 6.0 multiple of calendar 2001 EBITDA.
More importantly, MDR dropped an unexpected surprise about its asbestos
liability growing at an alarming rate. Coupled with the company's unwillingness
to buy back stock until it understands the size of this liability, this caused
the stock to sell off dramatically. At this point our analysis indicates that on
a comparable basis to GLBL, MDR is discounting over $1 billion of liabilities
(asbestos, nuclear, price fixing, etc., see Table 1). We are lowering our rating
to Market Performance from Buy since at this point MDR has switched from being
an earnings recovery play to being an asbestos liability play, and while we
believe that the total liability is unlikely to exceed $1 billion, we do not
have enough data or expertise to have an informed opinion. We will wait for
better information, which the company hopes to have by Q1 2000, before we
revisit the story.
ú Asbestos liability - a long dormant monster awakens: MDR's B&W subsidiary
had an asbestos liability since the 1980's which has been a non-issue for a
while since most of this liability has been covered by insurance except for
1979, when B&W had no insurance, and the claims covered by some insurance
companies that went bankrupt. However, claim sizes have risen sharply lately
and
MDR is now concerned about the size of its unfunded liability. Based on
guesstimates, we believe this unfunded liability could amount to as much as $1
billion on an NPV basis.
ú Other liabilities - not a major factor: MDR has 2 other major liabilities
related to nuclear facilities and price fixing which together should not amount
to more than $100 MM based on current company estimates.
ú Management performance has been wanting: We believe that management at MDR
has recent fallen woefully short in terms of guiding expectations and
delivering on a multitude of issues including acquisitions, earnings
forecasts and now this liability scare. Treating shareholders as irritants
rather than as ultimate owners of the company is not going to build the
company much goodwill in this period of uncertainty.
ú Backlog is improving: Backlog grew 9.1%, with all of the rise happening in
the power generation business where MDR has become the low cost manufacturer
and recently won a number of OEM jobs. In marine construction, uncertainty
about the Natuna contract in Indonesia is receding and MDR should be starting
major work on that contract in Q1 2000.
ú Disappointing results in joint ventures and power generation temporary:
JRM's Mexican joint venture had a loss of $6.6 MM related to some unfavorable
contracts with Pemex and downtime on one of MDR's barges, while B&W incurred
$2.6 MM of non-recurring costs to exit a Turkish joint venture. The former is
likely to have a negative impact on results for at least one more quarter.
Additionally, although B&W's backlog has increased strongly this quarter, for
the next couple of quarters revenues and earnings are likely to stay weaker
than we had expected. |
