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 90percent 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?

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.

Senator SPARKMAN. That is normal and taken care of under the depreciation part of the program. May I ask this question: As you bring in new equipment, is the productivity likewise increased? Mr. MOREELL. Oh yes.

Senator SPARKMAN. That is a part of the normal process?

Mr. MOREELL. Yes, sir. We have used every source of money available to us-sale of stock, borrowing, and reduction of our working capital to a dangerously low level. While it does not show in the above figures, we have also arranged with a group of banks to borrow another $20 million if required before the end of 1952. We are trying to avoid more debt if possible.

Now I would like to say a few things about accelerated amortization. I have been greatly surprised at some of the recent statements I have read about accelerated amortization. This is a subject very close to my heart, because without the aid of the accelerated amortization provision in the 1950 tax law, I do not see how the present enlargement of steel capacity, so important to this country, could have been achieved. I am certain our program could not have been-carried out. I did all I could to aid in the passage of this legislation by discussing it actively with Members of the Congress and with others whose opinions might carry weight with Members of the Congress. What is the truth concerning accelerated amortization? Here are the facts.

Senator FREAR. Mr. Chairman, may I ask the admiral a question? Senator FULBRIGHT. Yes.

Senator FREAR. What would your opinion be on the amortization of any industry of 1 to 50 years being made by the industry itself! In other words, if you as a separate part of an industry, you as a company, had the opportunity of selecting an amortization basis of between 1 to 50 years, but when you selected that basis you would have to carry it on through.

Mr. MOREELL. I think that is a very desirable procedure, Senator. We have given very serious consideration to what recommendations we would make with respect to amortization of plant, of capital facilities. We are very much inclined to believe that that procedure of establishing your amortization or depreciation program at the time the facility went into operation is a good one.

Senator FREAR. Thank you.

Mr. MOREELL. Our industry among others was asked by the Government to spend money for expansion far beyond anything it considered practical or advisable in its normal planning. This spending was asked in order to meet the great need for more production for the defense of the country in a new emergency. Where was the money to come from for the vast added projects? Some of it might come from retained earnings, but taxes were rising so rapidly that it was impossible to count on any substantial amount of funds from this source. We could never have met the Government's requirements that way.

To get the money fast enough to do the job it was necessary for us. and for other businesses similarly situated, to borrow. But that was equally impossible unless we could show how we could pay back the debt rather soon. Here again, high and rising tax rates would have made that impossible. In providing the accelerated amortization provision in the 1950 tax law, Congress properly recognized the very

practical problem that without it very little of the required expansion could have been accomplished by private capital.

Let me give you our own experience with the post-Korean expansion program at our Pittsburgh works. Before Korea we had just finished arranging to borrow $40,000,000 from a group of insurance companies in addition to the $60,000,000 we already owed.

We thought we had a full burden of debt. But the Government's request for expansion made it necessary to go farther. So we approached a group of banks to borrow $40,000,000 more to help do the job of bringing our new six-furnace open-hearth shop up to 11 furnaces; and to install a new blooming mill and a new bar mill.

The banks said fine-as long as we can see our money coming back rather soon; your debt is already high.. We, therefore, agreed to pay back any borrowed money over a 52-year period. But the loan was conditioned on our being able to obtain certificates of necessity for accelerated amortization totaling twice the amount of the loan$80,000,000.

Senator FREAR. May I ask a question?

The CHAIRMAN. Yes.

Senator FREAR. Do you think the privilege that you have had of accelerating your loan, that is, accelerating the plan, might place you in an embarrassing position that might not be wise after the expiration of amortization?

Mr. MOREELL. No; I do not think so.

The CHAIRMAN. Admiral, you will be here in the morning?
Mr. MOREELL. Yes, sir.

Senator SPARKMAN. Mr. Chairman, I would like to ask one question here that we might want to elaborate on tomorrow. I am just a half page further on the tax amortization. I notice that you say in there that the Government had not given you a dollar. I am one who was heartily in favor of the tax amortization program, and I am still in favor of it. I hope when we ever get to a normal period we may have a much more liberal amortization. I would like to see free amortization, let them depreciate as they want to. It does seem to me that when we have an excess-profits tax on, it does amount to a gift of something. I am not saying it is unfair. I think it is fair and right. It seems to me to be a gift of something, assuming that some time in the future we do take off the excess-profits tax.

Senator CAPEHART. Would you say the same thing if you reduced taxes?

Mr. MOREELL. That is right.

Senator SPARKMAN. I am assuming we will take off that excessprofits tax.

Senator BRICKER. That is your one chance of any benefit, a reduction of taxes over what they are in the future, after the 5-year period. Mr. MOREELL. That is right. I would like to point out this very important fact: We assume a very large risk, as Senator Capehart pointed out. We are in a risk economy. Ours is a risk economy. So that when we assume that risk we, I think, are entitled to gain if the tax rates move in that direction.

If you gentlemen increase the tax rates after the 5-year period, then we will lose money, and that is another risk.

Senator SPARKMAN. We have reached the point where we are not going to increase them, I am quite sure. I do not say that in criticism of your statement. I repeat, I think it is a good program.

Senator FREAR. You are not too unfavorable in your thoughts that taxes are going to be decreased in the future? Mr. MOREELL. I am still hoping.

Senator BRICKER. We can always do that.

Senator CAPEHART. I have introduced a bill two or three times to have a permanent 5-year amortization plan, even in peacetime, without emergencies.

Mr. MOREELL. I think it is proper to say that even in socialist England they have more liberal tax amortizations than we have.

Senator FULBRIGHT. What percentage of increase have you paid on borrowings in this period?

Mr. MOREELL. Three percent. Now we are paying 34.

Senator FREAR. That is a deductible item?

Mr. MOREELL. Yes, sir.

Senator FREAR. And your bond issue is a deductible item, your dividends, of course, are not a deductible item, all your wages are deductible items, including salaries for administration.

Mr. MOREELL. Yes. But we have to pay off the bonds out of earnings, Senator, out of net profit.

Senator FREAR. I realize that you have to pay the principal out of that. But the interest is deductible.

Mr. MOREELL. That is correct.

We obtained these certificates-in fact, we have obtained over $150,000,000 of certificates to date-and we borrowed the money. This made it possible for us to go ahead with the expansion program.

A number of people have tried to make it appear that by permitting this accelerated amortization the Government gave us a kind of gift. Actually, all it means is that we are now able to take depreciation in the amount of $150,000,000 over the first 5 years of operating life of the new properties instead of over their entire useful life.

The $150,000,000 is only 64 percent of the total cost of the properties covered by the certificates. The remainder of the cost, $83,000,000 we must finance without the benefit of any acceleration of depreciation.

Every dollar of depreciation taken as accelerated amortization in the next 5 years for the purpose of obtaining a $1 tax deduction means $1 less that can be taken as a tax deduction at a later time. The company has been given nothing. We always had the right to depreciate our property fully over its useful life. The total amount of depreciation to be taken over the life of the new property does not change. It does not increase.

I believe we should all be most thankful that the Congress of this Nation was wise enough to permit this arrangement in order to make possible the great strengthening of the productive capacity of this country with private capital.

As a matter of fact, once our facilities are in full production, permitting accelerated amortization will not reduce the taxes we pay to the Government at all. In 1951, our taxable net income was over $85,000,000, after deducting $5,000,000 of accelerated amortization. I have asked our controller to estimate what our annual taxable net income would be after our new facilities are completed and in operation, assuming that costs, selling prices, and demand for steel were the same as they were in 1951. His estimate shows that under these conditions, and after deducting accelerated amortization of almost $30,000,000, our taxable income would be about $90,000,000.