International Technology gets ready to fight Monsanto over cleanup costs.

International Technology Corp. is set to go to trial this week in a case in which the Torrance-based environmental contractor could win as much as $56 million - or lose $27 million and suffer a major bottom-line hit.

The case, which is scheduled to begin March 7 in U.S. District Court in Houston, involves a fixed-price contract which IT entered into with St. Louis-based chemical manufacturer Monsanto Co. to clean up one of the most contaminated Superfund sites in Texas.

IT contends it encountered more contaminated sludge than expected and after spending four years and about $30 million of its own funds on the clean-up, IT stopped work and filed suit against Monsanto alleging breach of contract. IT is claiming damages of $56 million, which includes its own costs, plus profits it says it should have earned.

Monsanto and the Motco Trust, a trust set up by Monsanto to clean up the Superfund site south of La Marque, Texas, are suing IT for $27 million. That includes money that Motco claims must be spent to finish the clean-up, plus Superfund funds Motco lost because of IT's actions.

Thomas Bistline, assistant general counsel for Monsanto, said, "We are confident that we will prevail. We believe they breached the contract."

Anthony J. DeLuca, IT's chief financial officer, declined to discuss the case but provided the Business Journal with public documents concerning it. The company believes its position is stated in the public documents, DeLuca said.

In its latest financial statements, IT states that it counts the $31 million in direct costs it incurred on the Monsanto job as a contract claim receivable and that is part of its assets on its balance sheet as of Dec. 31.

The company states in its latest financial report that IT "more than likely than not will recover the contract claim receivable ... and prevail on Motco's counterclaim."

But, IT states in its financial statement, "if this matter is resolved in a manner significantly lower than the contract claim receivable recorded by IT or if Motco Trust prevails in its counterclaim ... a material adverse effect to the consolidated financial condition of the company would result."

De Luca said that if IT received less than $31 million and/or had to pay Monsanto "it would result in a charge to earnings, which would result in a charge to shareholders' equity." If, on the other hand, IT received a judgment of $56 million from Monsanto, "it would result in a substantial gain to earnings, and that would be wonderful."

De Luca declined to project what sort of earnings hit could result from an adverse judgment, but a $27 million judgment for Monsanto would represent more than eight times IT's earnings for the last nine months of 1993.

IT posted net earnings of $3.3 million, or 10 cents a share, on revenues of $295.7 million for the nine months ended Dec. 31, 1993. For the third quarter, IT posted a net loss of $324,000, or 1 cent a share, on revenues of $92.5 million.

In addition to its financial condition, IT is risking its reputation in the case, say environmental industry experts. The case has stirred up a lot of publicity in the environmental clean-up industry.

"Obviously, people don't want to be suing their clients," said an industry source who asked not to be identified. The case is unusual and in the environmental industry "a fairly visible case because of the dollars involved," the source said.

Another industry source noted that IT has a lot to lose and "they wouldn't be pursuing this unless they felt they had a legitimate case."

The case began in 1988 when Monsanto selected IT as the low bidder to clean up the Superfund site, a toxic waste dump which was the 27th priority on the U.S. Environmental Protection Agency's list of 1,200 Superfund sites.

Bistline of Monsanto said IT's bid of $31 million was "quite a bit below" the other bids. In fact, it was so far below the others that "we asked them before they signed the contract, 'Can you still make money?' and we were assured they could," Bistline said.

IT told Monsanto it could make a profit with the low bid because it had a new, proprietary "cutting edge" incinerator which could burn contaminated soils and sludge more efficiently than could rivals' incinerators, Bistline said.

But "there were numerous problems" with the IT incinerators, Bistline said. For instance, he said, they did not meet U.S. Environmental Protection Agency requirements.

"They did clean out two" of eight pits of hazardous waste at the site, Bistline said. "They came to us in 1991 and said the (original request for proposal) was inadequate and the cost for the job was beyond what they could finance." Monsanto's perspective was it wanted the site cleaned up and "how they (IT) did the job was up to them," Bistline said.

On Dec. 4, 1991, IT announced its lawsuit. Then-IT chief executive Murray Hutchison stated at that time that the "chemical makeup, quantities and mixture of the waste at the site were dramatically different than that portrayed by data provided to us by Motco Trust."

In addition, Hutchison charged the project "suffered another setback" when Motco Trust pumped more than 1.4 million additional gallons of water and waste on the site.

Before filing suit, IT tried to negotiate with Motco, and Motco originally agreed to pay IT $95 million to complete the job, IT stated in the 1991 news release. But then Motco backed down from that tentative agreement, IT stated in the release.

One industry source noted that IT tries to keep a low profile. "I find it hard to believe that it hasn't been settled before this."