TABLE 6.-Earnings and cash dividends on net worth of selected manufacturing 1 At beginning of year. Source: Moody's Industrials. (Discussion off the record.) Mr. MOREELL. We all realize that had we paid out a larger portion of our earnings in dividends the shareholder's return would have been a little more in line with that of other industries. However, I am sure that you gentlemen are fully aware of the needs for huge amounts of money which have faced us since the end of World War II. I want to go into some detail about this since its importance cannot be overemphasized. At the end of World War II a great deal of J. & L.'s equipment was worn out and obsolete. All during the war there had been no chance to keep pace with this wear and tear. Our rehabilitation program began in 1946. The bulk of it was completed by the end of 1950. At this point I want to invite your attention to a lesson we learned in this period. We found the amounts the tax laws permitted us to set aside for depreciation were not nearly enough to pay for replacements. New facilities cost far more than the original equipment on which the depreciation allowance was based. Year by year this condition has become further aggravated. Let me give you some examples: Included in our present program is a new bar mill which is costing almost $18 million. This is nearly four times the cost of a similar bar mill built in 1930 for $412 million. We have also built a new rod mill which cost $11 million as compared to a similar mill built in 1931 which cost $22 million. In 1939 a 90,000-cubic-feet-per-minute turbo blower for a blast furnace was installed complete for $401,000. In 1949 the same item cost $798,000. Now, the cost is $900,000. I cannot stress too strongly what this means. One of the most important costs of a going business is the cost of maintaining itself. During the 1946-50 period, our reported profits were over $126 million. But I submit that these so-called profits were grossly overstated. In those 5 years we spent $190 million-all on rehabilitation. The $77 million which we were permitted to set aside for depreciation and depletion was far short of the amount we needed. In addition, we had to use 90 million of retained earnings and $23 million of borrowed money. 1 With the development of hostilities in Korea the military security program was greatly increased. More steel-making capacity was needed quickly. In my statement to the Presidential Steel Board in 1949 I said, "Our first responsibility to our employees and shareholders-and to the Nation in these times-is to keep in business on a healthy and efficient basis." Little did we realize that we would be called upon so soon to prove that statement. The 1946-50 program is now behind us. But without the rehabilitation accomplished in that period J. & L. could have done little in meeting the Nation's urgent call for more steel in 1950. That program furnished the base on which our expansion is being built. At the urgent request of the Government we started a program to expand our capacity by about one-third. The new open-hearth shop at Pittsburgh works, originally planned for 6 furnaces, has now been expanded to 11 furnaces. Along with the new shop we are installing a new blooming mill and a new 10-inch bar mill. At Aliquippa works a new rod mill and a new electrolytic tinning line have been installed. At our Cleveland works the second blast furnace is being enlarged, two new open-hearth furnaces have been added, and substantial changes are being made in the blooming mill and strip mill departments to handle the larger tonnages. Our raw materials operations are being expanded to keep pace. The production from our New York State iron ore mine is being increased by 30 percent and a 1-million-ton-per-year underground iron ore mine in Michigan is being developed for production in 1954. This program was originally estimated to cost $200 million. Large increases in construction costs, plus some necessary additions to the program have raised the total to $234 million. We faced the difficult problem of securing the needed cash. We estimated that $72 million would come from amounts set aside for depreciation, depletion, and amortization during 1951 and 1952 and that $18 million could be taken from working capital. We arranged to borrow an additional $110 million. It has frequently been suggested that instead of using large amounts of retained earnings, or even borrowing, we should sell stock. Where the expenditures are entirely for the purpose of replacing worn-out or obsolete equipment, such as our 1946-50 program, in my opinion the sale of stock is inappropriate. A going business should be able to earn enough to keep its equipment in good order. Otherwise, it is consuming its capital. Where substantial additional capacity is involved, as in our postKorean expansion program, the sale of stock is proper when it can be accomplished on reasonable terms. We felt that the very heavy burden of debt arranged for in our program should be reduced as quickly as possible. Therefore, we turned to the sale of common stock. One million shares were sold in 1951 at a price of $25.25. We received $23.8 million from this sale. Short-term debt of $40 million was repaid when the stock was sold. This sale of stock seemed to us to be advisable as a safeguard to our financial position. We decided to proceed even though it diluted the equity of the existing shareholders. The asset value of the outstanding common stock was over $53 per share-more than double the selling price of the new stock. The reason this stock was sold for less than half of the current asset value is found primarily in the poor earnings and dividend record of the steel industry in general and J. & L. in particular. After the debt financing and the stock financing our total debt will be $132 million. TABLE 7.-Jones & Laughlin Steel Corp. and subsidiary companies-History of financing, 1946–51 1952: Issuance of non-interest-bearing notes in connection with the acquisition of certain plants and equipment of American Can Co., $1,700,000 less $680,000 paid to date. Arranged with a group of insurance companies for the sale of $40 million of series B bonds, of which $10 million were sold in 1950. Arranged with a group of banks for a short-term bank loan of $40 million in connection with the expansion program, all borrowed in 1951.. Common stock split 2 for 1 Issued, in February, short-term serial notes Borrowed on ship mortgage loan in connection with the Arranged with a group of banks for a short-term bank loan of $20 million to complete expansion program, nothing borrowed to Mar. 31, 1952. Arranged a credit with a bank for a loan of $1,196,000 to finance the purchase of 3 towboats, nothing borrowed to Mar. 31, 1952.. Outstanding, Mar. 31, 1952. 1,020,000 10, 000, 000 1 Excluding $243,000 of purchase money mortgage non-interest-bearing notes retired in the period. 2 In addition to the $125,825,000 shown above, we will borrow $5,302,000 from General Motors Corp. Mr. MOREELL. The funds from all the sources I have mentioneddebt financing, stock financing, amounts set aside for depreciation and amortization, amounts to be spared from working capital-all these funds add up to $184 million. The balance of the $234 million required or $50 million must come from retained earnings or from further increases in our already heavy burden of debt. By the end of 1951 we had spent $141 million, and during the first quarter of 1952 we spent an additional $31 million. This leaves $62 million which must be spent in the remaining 9 months of 1952 if our scheduled production increases are to be combined on time. We operate under a budget at J. & L. I would like to show you what our actual budget looks like for the balance of this year. The tabulation also shows the actual figures for 1951 and the first quarter of 1952. Funds available for plant improvements, dividends, and sinking fund requirements, 1951-52 Mr. MOREELL. I would like to call your attention, gentlemen, to the last line in the budget figures which indicates a reduction in working capital from $95,716,000 at the beginning of the year 1952, to $73,252,000 at the end of this year. We calculate that we need an absolute minimum of $95,000,000 for working capital. There are several things about these figures which I should explain. The first of these is our net income. In 1951 it was $30,998,000. For the first quarter of 1952 it was $4,711,000. We estimate $16,663,000 for the last 9 months or $21,374,000 for the year 1952. Senator DOUGLAS. Admiral, are these figures of Jones & Laughlin showing the decline of net earnings in the first quarter of 1952 as compared to 1951 typical of the industry as a whole or is it a condition peculiar to Jones & Laughlin? Mr. MOREELL. I think that a sizable reduction for the industry as a whole will be shown, Senator, for the first quarter. Senator DOUGLAS. Have the first quarter figures been tabulated! Mr. MOREELL. Not for the whole industry; no, sir. But those that I have seen, all indicate a very substantial reduction. Senator DOUGLAS. I wonder if your statisticians would be willing to submit tabulations of that for the record because this is the first time that I have seen first quarter earnings for 1952 in the record. Previously it has been 1951. Mr. MOREELL. Yes, sir. The CHAIRMAN. Without objection, we will put those tabulations in the record. How long will it take? Mr. MOREELL. I think it will take just a day or two. (The information referred to follows:) Industry figures for the first quarter 1952 are not yet available. The six companies which were negotiating jointly-United States Steel, Bethlehem, Republic, Jones & Laughlin, Youngstown Sheet & Tube, and Inland--have published their first-quarter earnings. I have had them totaled as shown below: I believe the above figures are fairly representative for the industry. The National City Bank of New York, in its May monthly bank letter shows reported net income of 28 iron and steel companies for the same period as follows: 1951-First quarter_. -Fourth quarter_ 1952-First quarter_-- $137, 377, 000 138, 203, 000 108, 050, 000 The American Iron and Steel Institute has tabulated the earnings of 18 companies representing 88 percent of the industry's ingot capacity. These figures, shown below, show the same decline in earnings in the first quarter of 1952. Mr. MOREELL. All of these figures are based on sales prices and costs in effect prior to April 8, 1952. Since they were developed early in April, they do not include the recent rail freight boost which, on in-bound materials, will increase our costs another 40 cents a ton of finished steel products. The CHAIRMAN. Why is the income going down in the first quarter compared with the other quarters? Will you cover that later? Mr. MOREELL. Yes, sir. 96315-52-pt. 4- -16 |