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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

Common

stock
(number of
shares)

Preferred

stock
(number of

shares)

Funded debt

(amount)

1, 998, 212

453, 582

1 $28,000,000

478, 290

(159, 430)

$584

60,000,000 (28,000,000)

398,000

123, 825

1,020,000

10,000,000

Outstanding Jan. 1, 1946. 1946:

Conversion of preferred stock, series B, into common stock.

Preferred stock, series B, called for redemption. 1947:

Sale of series A bonds due Sept. 1, 1967.

Retirement of series C bonds due Jan. 1, 1961. 1949: Borrowed on conditional sales equipment obligations,

$547,000 less $149,000 repaid to Mar. 31, 1951 Payment of a 5-percent stock dividend on the common

stock.... 1950:

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.... 1951:

Common stock split 2 for 1.
Issued, in February, short-term serial notes
Arranged with General Motors Corp. for a loan of $28 mil-

lion to finance expansion and improvements at Otis

Works, borrowed to the end of March 1952, $22,698,000...Sale of common stock from which we received $23.8 million. Retirement of serial notes, principally from proceeds of sale

of stock Borrowed on ship mortgage loan in connection with the

acquisition of towboats and barges $1,886,000, less

$177,000 paid to the end of March 1952.

Sale of balance of series B bonds.. 1952:

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.

2, 600, 327

40,000,000

22, 698, 000

1,000,000

(40,000,000)

1, 709,000 30,000,000

6, 200, 654

293, 568 : 125, 825, 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

[In thousands)

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1 Before deducting debt due within 1 year.

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:

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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--

$137, 377, 000 -Fourth quarter-

138, 203, 000 1952—First quarter-

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.

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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

The CHAIRMAN. The wage increase has not come into the picture yet.

Mr. MOREELL. No, sir; but the cost of accelerated amortization, cost of depreciation on new facilities, the cost of starting up new facilities, the interferences with production which are occasioned by construction programs, have all contributed to a reduction of cost.

In addition there has been a marked reduction in what we call conversion tonnage, that is, semifinished steel which we do not make ourselves, but which we processed into finished products on behalf of our customers.

Senator BRICKER. You said reduction of cost. You mean reduction of capital?

Senator FREAR. Increased operating cost.

Mr. MOREELL. Increased operating costs on account of interferences by construction operations, I believe I said, Senator. I may have misstated that.

The CHAIRMAN. That is what I understood. Would that be true of the other steel companies ?

Mr. MOREELL. It will be true of them, perhaps to a lesser extent, Senator, because of the fact that we got started on our construction program somewhat earlier than the other companies did. Also our percentage of increased capacity is greater than that of any of the major companies in the industry.

One reason for the reduction of $10 million in the 1952 net income estimate is the fact that our sales forecasts show a 90-percent operating rate by the end of the year. I failed to mention that, Senator. We do estimate that there will be a reduction in operating rate by the end of the current year.

The CHAIRMAN. When you say by the end of the current year, you do not figure on any increases in rates?

Mr. MOREELL. No. sir. These are costs in effect before April 8.

The CHAIRMAN. Do you have any figures that this committee could have in the record to show how this operating income would be again affected by the increase in wages?

Mr. MORRELL. I have that later on, Senator. I have a table showing that.

Senator Moody. May I ask a clarifying question ?
The CHAIRMAN. Certainly.

Senator Moody. Admiral, when you say that you will be at a 90piercent operating rate by the end of the year, does this indicate that you are going to have a surplus and that you will have to slow down production by the end of the year?

Mr. MOREELL. In certain products we think we will have; yes, sir. That is our estimate.

Senator SPARKMAN. May I ask a question there?
Mr. MOREELL. Yes, sir.

Senator SPARKMAN. Going back to the sale of that stock, where you raised that $23.8 million, was that common stock?

Mr. MOREELL. Yes, sir.
Senator SPARKMAN. Sold for $23.80 a share?
Mr. MOREELL. $25.25.
Senator SPARKMAN. The other was worth $53 a share?
Mr. MOREELL. That is the book value, not the market value.
Senator SPARKMAN. What was the market value?

Mr. MOREELL. $25.25. We sold it at market.

Senator SPARKMAN. The thing that I am trying to get at, you say it diluted your stock. Did it bring down the market value of the stock?

Mr. MOREELL. It diluted the equity of the existing shareholders.

Senator SPARKMAN. I realize that. I am talking about the market, the market price, did it bring it down or was it selling at about $25.25.

Mr. MOREELL. It sold at about $25.25. We sold at the market.

Senator FREAR. What was the market price 7 days before the sale and 7 days after the sale ?

Mr. MOREELL. We sold on a declining market. We were trying to catch the best price we could. We caught this at $25.25. The next day it went down and shortly after that it went up again.

Mr. FREAR. What is the present market value ?
Mr. MOREELL. About 2234.

Senator Ives. Admiral, I would like to ask one question. How is the production of structural steel coming? Are you anywhere near meeting the demand for that?

Mr. MOREELL. We do not make heavy structural.
Senator Ives. I mean for the industry as a whole.
Mr. MOREELL. I am not informed on that.

Senator Ives. Never mind, if you do not know. Do not delay it. Can you get that information for us?

Mr. MOREELL. We can, and will put it in the record. (The information referred to follows:) I have been told that the demand for heavy structurals shows definite signs of easing by the third quarter of 1952. One type of structurals, known as wide-flange structurals, is and will continue to be in short supply for some time.

Senator FREAR. You anticipate at the end of the year running at 90 percent of capacity ?

Mr. MOREELL. Yes, sir.

Senator FREAR. But you have increased your capacity by a tremendous amount.

Mr. MOREELL. 32 percent.

Senator Frear. The over-all steel industry has increased its capacity by a tremendous amount. Have you overproduced capacity as an industry?

Mr. MOREELL. There is a difference of opinion about that, Senator. We feel that as for the immediate future—by that I mean the next several years—we will have an excess of capacity. Eventually the expanding economy will catch up with it.

Senator FREAR. Does that mean that the depletion and obsolescence of any of your old-what I am trying to get at is will any of your old steel plants go out of existence? That means that you will continue to manufacture just as many tons, over 100,000,000 tons over the next few years, but the only way that you are going to catch up with that capacity is by increased consumption ?

Mr. MOREELL. By increased demand, that is right. Mr. Elliot points out that there will be obvously an elimination of absolete and marginal equipment, as we go along.

Senator FREAR. That occurs year after year, does it not?
Mr. MOREELL. Yes, sir.
Senator FREAR. That is pretty static.
Mr. MOREELL. That is a regular procedure.

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