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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 finemas 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 51/2-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 Eng. land 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 344.
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.

In other words, the facilities which we are installing because we received these certificates would then be producing taxable income sufficient in itself to cover the amount of amortization we are allowed to write off. The Government will not have lost 1 cent in taxes.

Furthermore, and most important, the increased production of steel from these facilities will result in a much greater production in the industries which fabricate this steel into finished products. The increased profits from this higher level of production will mean more tax dollars to the Government in that period.

If we do not have earnings we will not obtain any help from accelerated amortization. In fact we will lose because we would be using up the equivalent of depreciation deductions to no purpose. The financial risk is still ours.

Actually, these new facilities help to fight inflation. I know of no way to strangle inflation more effectively than by increased production. Accelerated amortization has speeded up expansion everywhere in the steel industry. We have increased output now rather than at some indefinite time in the future.

To return to our financial situation for a moment, I think you can readily see from the budget figures I have shown you why our present low profits must not be further reduced. We have spent a great deal of time and study on all of our uncompleted construction jobs with the sole purpose of cutting back or canceling outright any project not absolutely essential at this time. For example, we must build a new battery of byproduct coke ovens at our Pittsburgh works.

Originally it was planned for 106 ovens with related coal-handling and byproduct facilities. We received a necessity certificate for å battery of this size estimated to cost over $20,000,000. We have since cut this project back to 79 ovens and eliminated a number of items in order to get the cost down to $11,000,000.

Other similar cut-backs have been made. I am not telling you this for dramatic effect. These are the hard, plain facts of our business, But it is discouraging, to say the least, when we are doing everything in our power to carry out our commitments for increasing steel capacity which have strained our financial condition to the utmost, for us to be told that we are making exorbitant profits.

There is also one other very important reason why we believe our income must not be further reduced. I have mentioned it before in connection with our 1952 budget. This is the very real prospect of declining operating rates. Today our budgets, which are revised quarterly, have been cut back to reflect reduced operations by the end

This is certainly not a pessimistic conclusion. The Government demanded we increase our steel output to a level we did not plan to attain for another 10 years. Unless there is all-out war, it should be no surprise if some of this expanded capacity is temporarily excess. Such a situation is not unusual in the history of the steel industry. Because steel requires such large investments, it is always necessary, when expanding, to anticipate future requirements. Later on the expanding economy catches up with steel-making capacity.

But because of those large investments there are many costs which continue even though output falls. Wage costs are among the most important of these. Certain facilities such as coke ovens must continue to operate so that they will not deteriorate. They must be kept

of the year.

going though little output will be derived. Even equipment which can be partly or totally shut down requires some maintenance to keep it in a stand-by condition so that it would be ready when needed.

Even at present prices and costs, our margin of safety is narrow. Any reduction in operating rates or in profit margin is a serious threat. We have extended ourselves financially to our limit in this emergency period. Our margin of safety, small as it is, must be maintained. Prices, even without Government controls, can hardly be raised on a falling market, and we certainly cannot anticipate the possibility of reducing wages.

To portray more concretely the seriousness of the situation that confronts us, I will show you what our net income was for the first quarter of 1952 and what we have budgeted for the succeeding four quarters. I will also show you how those figures would be affected by the WSB package and by various price increases to offset the cost of that package. This is what we are budgeting: Earnings forecast, 1952 and first quarter 1953

(In thousands)

[blocks in formation]

1 Actual.

Mr. MOREELL. The following is what would happen to our net income after giving effect to the WSB package: Earnings forecast, 1952 and first quarter 1953

(In thousands)

[graphic]

$2,714

$5, 681

$8,583

$10,093

$12, 133

Income from operations after deducting all

expenses incident thereto, except those

expenses shown separately below--Provisions for depreciation, depletion and amorti

zation
Interest changes.
Provision for Federal income taxes ?
Net income.

19, 933

18, 994

18, 190

17, 320

15, 280

13,017

13,523

9, 160

757 5, 908 4, 108

11, 017

827 3, 843 3, 307

12, 477

963 2,553 2,197

957 1, 798 1, 548

421 384

1 The cost of the WSB recommendations includes the indirect effect of increased wage costs on materials, supplies, etc. on the basis of a straight line curve resulting in a full doubling of the cost of the wage increases at the end of 6 months. The full effect of the WSB package would not be felt until July 1, 1953.

? The foregoing figures of Federal income taxes do not give effect to refunds of excess profits taxes accrued in prior or future periods resulting from carry-forwards or carry-backs of unused excess profits tax credits.

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