In 1946, we began a previously planned program of modernization and expansion, and our postwar capital expenditures at the end of 1952 had exceeded $6 million. We are now rather reluctantly making some substantial capital expenditures in our plant at Barberton, Ohio. This phase of our expansion had been tentatively planned but deferred to some indefinite future time. About a year ago a division chief of the National Production Authority asked us to consider expanding some of our facilities to increase the output of certain products which his office had determined would be necessary to meet the requirements of the electric power production program. Increased production of high voltage bushings was particularly needed, and we are the only manufacturers of these except Westinghouse and General Electric. We considered the matter, and after considerable discussion in our own organization and further consultation with the National Production Authority in Washington, we decided to go ahead. If our sales and cost estimates are correct, and at present tax rates, our forecasts indicate that we would net only up to 3 percent on our investment. As a means of comparison, we could have been sure of a greater return than that if we had invested our funds in Ohio Turnpike bonds, which went on the market at about the same time our decision was made. If the electric power program shrinks suddenly-and it has before our investment in buildings and equipment will net less than nothing, and the cash used for the expansion program will not be available to tide us over whatever emergencies may be ahead. On the basis of straight financial considerations, we would not have been justified in going ahead with the program. But, in our judgment, two other factors outweighed the financial considerations. First, we felt an obligation to meet our customers' requirements in connection with the electric power production program, which is closely tied in with the defense program. Second, we and our customers are still optimists enough to believe that somehow, someday, incentives to risk capital will be restored. In my opinion, the full effect of the excess-profits tax law in discouraging sound management and industrial expansion has not been felt. Vicious as it is, it has been looked upon as a temporary measure and has been ignored or given little weight in long-range planning. This faith in the future cannot persist forever. The excess-profits tax should be allowed to expire as scheduled on June 30, 1953. Reenactment will upset plans which managements have made in good faith and will, in my judgment, constitute a very effective brake on expansion programs, and will inevitably produce further inefficiency and loose methods in business. Thank you very much. Mr. JENKINS. Mr. Draffan, I want to compliment you on the very clear statement you made. You sum it up there on the last page, where you indicate clearly that if you felt that this law would be continued you would be very much inclined to go out of business. Mr. DRAFFAN. There is so little incentive left it is not worth the wear and tear. Mr. JENKINS. That is right. And you think you speak for a good many business concerns of your size in the country, do you? Mr. DRAFFAN. I am sure I do. I have discussed this with a great many other businessmen. I know how some of them have gone ahead 35078-53--39 with programs purely on faith. They did not feel it was possible for this situation to continue. But they are becoming more and more reluctant to undertake expansion. Mr. JENKINS. Your business is yet a small business, and I think from your statement here you indicate you have a sound business. You are engaged in a real, productive business, and you are located properly, and you have good customers. Also, your commodity is in demand. You have every encouragement to stay in the game if you can be protected against unfair taxation. Mr. DRAFFAN. That is right. Mr. JENKINS. Are there any other questions? That is all, Mr. Draffan, and thank you very much. STATEMENT OF JOHN S. DAWSON, VICE PRESIDENT AND SECRETARY, BRIDGEPORT BRASS CO., BRIDGEPORT, CONN. Mr. DAWSON. My name is John Dawson. I am vice president and Secretary of Bridgeport Brass Co., of Bridgeport, Conn. I would like to ask that the written statement that we are submitting be made part of the record. Mr. JENKINS. Are you going to follow the statement? Mr. DAWSON. Largely. Mr. JENKINS. In other words, you will read excerpts from it, but you would like to have it all in the record? Mr. DAWSON. Yes. Mr. JENKINS. If there is no objection, it will be so ordered. (The statement referred to is as follows:) Hon. DANIEL A. REED, BRIDGEPORT BRASS CO., Bridgeport, Conn., June 11, 1953. Chairman, Committee on Ways and Means, House of Representatives, Washington, D. C. DEAR MR. REED: We appreciate an opportunity to tell your committee about the impact of the excess-profits tax law and its extention on a growth company. How we have grown Bridgeport Brass Co. has grown into a vigorous, expanding company, the largest independent in the brass-mill industry. It has been built on the foundations of a fine 87-year-old regional company, which for many years did no business farther west than Buffalo and concentrated in New England and the Northeast. In 1928 under the leadership of Herman W. Steinkraus, now its president, the company began to expand its sales activities on a national basis, and in the early thirties changed over from a family company to one now owned by some 9,000 stockholders. Today, the company has four plants, the parent plants at Bridgeport, Conn., a large mill at Indianapolis, Ind., with basic capacity equal to that of the Bridgeport mills, and a foundry at Exeter, N. H. We also have 12 warehouses and 29 district offices located across the country so that we can give prompt service to the technical requirements of our customers. These locations are in practically all of the home States of the members of your committee. Our organization has grown to some 5,700 employees, who in our mind have always been the most important part of our company. We have never had a strike. The teamwork and cooperation of our organization is getting better all the time. Our current payrolls are now running at the rate of over $25 million annually. We make and sell a complete line of brass-mill products in the form of sheet, rod, wire, and tube which have a very wide range of use-wider even than that of steel. In addition, we make fabricated products such as plumbing goods, tire valves, and aerosol pressure-packaged products. Most of growth since 1938 The company's major growth has occurred since 1938 when it completed at Bridgeport the first continuous rolling mill in the brass industry. Since that year, our sales have increased some 10 times and our assets have increasedfourfold. Facilities doubled in 1946-48 Adjusted facilities in the base period more than doubled from the beginning of 1946 through 1948 (from $7,213,000 to $14,866,000), as shown by exhibit 1. Since the end of World War II, the company has had a vigorous growth. It modernized its older plants in New England. It developed the new Indianapolis plant acquired in July 1948. Consequently, sales grew from $57,236,000 in 1946 to $126,767,000 in 1952. Yet, in this same period, the brass-mill industry was doing poorly as compared with iron and steel, durable manufactures, and total manufactures, as shown by exhibit 2. These new postwar facilities, along with the requisite additional working capital, were financed through retained earnings supplemented by some $13 million of long-term debt. The company has had no public common stock financing since 1937. Profits in 1947, 1948, and 1949 retarded by two factors The company's growth in profits since 1946 did not parallel its sales growth, as is shown by exhibit 1, because profits were retarded by two factors: 1. A squeeze in brass mill margins took place during 1947, 1948, and 1949 because of an unusual discrepancy between the costs of copper and the prices of brass mill products. 2. Normal profits from the Indianapolis plant could not be attained during the base period since the plant was acquired late in the base period in July 1948. In our industry, training an organization is especially long and costly. At Indianapolis we had to train some 1,500 men at a cost generally estimated in our industry to exceed $1,500 per man. Profits doubled since 1950 Profits before taxes began early in 1950 to reflect a growth of over 100 percent in adjusted facilities during 1946, 1947, and 1948. Since 1950, with gradual realization upon increased capacity, profits have developed steadily to the point where they are currently running at better than twice 1950 levels. The fact that the company's earnings during the last 3 years came from its expansion during the years 1946-48 is clearly shown by the fact that the company spent less than the amount of its depreciation on capital expenditures for plants and equipment during the years 1949, 1950, and 1951. Since the end of World War II we have reduced break-even points significantly, and for the year 1953 a profit improvement program for our whole organization is advancing the profit levels of our business. Congress has tried to give us excess-profits-tax relief During the hearings in 1950 on the Excess Profits Tax Act, this company presented testimony before your committee and the Senate Finance Committee to the effect that base period earnings would be no fair measure of the company's normal earnings. In 1951, in the absence of hearings by your committee, a further statement was presented to the Senate Finance Committee, but no remedial action was taken at that session. In 1952, however, an amendment approved by the Senate Finance Committee was accepted by the members of this committee who were House conferees, and this amendment was enacted as section 459 (f) of the code. For the benefit of smaller independent companies in the brass mill industry, this section was designed to correct the squeeze in brass mill margins and to give recognition to a substantial increase in capacity during the base period. Section 459 (f) failed to give effective relief The intent of Congress in enacting section 459 (f) was nullified by inserting 1950 in the formula late in the last session of Congress. This quirk was impossible for anyone to assess accurately in the closing moments of the session. Several unforeseen and unintended results occurred as given in detail in appendix A. First, companies to which Congress sought to grant relief but which liquidated inventories in 1950 had to give up substantial refunds available to metal fabricators generally under other provisions of the code. As exhibit 4 shows, commercially available stocks of copper in 1950 reached the lowest levels in recent history. In the case of this company, the refund given up would have substantially reduced the relief under section 459 (f). Second, section 459 (f) failed to reflect the normal earnings from facilities acquired late in the base period. Thus, the normal earnings of our Indianapolis plant acquired in July 1948 were largely ignored. The failure of section 459 (f) to relieve this company is clearly shown by exhibit 3 which measures the tax bite in the case of (a) this company; (b) all corporations; and (c) four large, integrated copper corporations with which the company competes in the sale of brass mill products. This exhibit shows that the company's effective tax rate (62.7 percent) in 1951 was 6.2 percentage points higher than that of all corporations (56.5 percent), and almost 12 percentage points higher than that of its powerful integrated copper competitors (50.8 percent). Its rate rose to 66.8 percent in 1952 when it was almost 10 percentage points higher than that of all corporations (56.9 percent) and 17.5 percentage points higher than that of its copper competitors (49.3 percent). We need relief now It would be an easy matter to develop a simple amendment eliminating 1950 from the formula which would give full effect to the intent of Congress by providing a fair measure of normal earnings for the company's expanded facilities. The drain of excess profits taxes on our company's earnings and cash position has limited its credit and denied it reasonable access to equity capital. Weakened by the blows of maximum excess profits taxes, this company has been unable to accumulate sufficient earnings to finance the modernization and expansion required to meet the progress of powerful integrated competitors in the various markets of the country. The independents in the brass industry, of which this company is the largest. are of vital importance to the country in any national emergency, and the maintenance of vigorous independent brass mills during peacetime is of significant national importance. Since 1950 our company has sought repeatedly to obtain a fair measure of normal earnings. Despite the fact that your committee has been unable to have hearings on relief measures since 1950, many of the members of your committee showed an interest in our plight in the conference on the 1951 amendments and again in 1952. We believe that these members recognize that fairness justifies relief in our case. Your favorable action in adopting a fair measure of normal earnings in our case will be deeply appreciated. Your committee is earnestly requested to grant this relief, regardless of its decision on the extension of this confiscatory tax. Relief is urgently needed now. Respectfully submitted. Enclosures. APPENDIX A BRIDGEPORT BRASS CO., SECTION 459 (f) FAILS TO GIVE EFFECT TO THE INTENT OF CONGRESS 1. We received little net relief Under section 459 (f) 80 percent of 1950 operates as the measure of the company's normal earnings. Copper stockpiling on the part of the Government in 1950 arrested the company's growth in that year since it placed copper in very short supply. In the last half of 1950 after the war in Korea began, physical output of both the company and the brass-mill industry was below the rate attained in the second quarter of 1950-in marked contrast to the experience of other segments of industry. The extent of the copper scarcity may be shown by exhibit 4 which plots stocks of refined copper over a number of years. This shows that at the end of 1950 stocks of copper in the hands of smelters and refiners and of fabricators were at a record low. This shortage of copper forced our company, as well as other copper fabricators, to dip severely into their inventories in 1950 with two important tax results. First, certificates of necessity were denied generally for brass-mill facilities. We have received no certificates during the life of the present law. Second, the company had to abandon LIFO refund rights under section 22 (d) (6) (F) of the code, which in its case would have substantially reduced the relief to which it was entitled under section 459 (f). An election to replace the inventories liquidated in 1950 would have served to reduce 1950 earningsthe key to the company's excess-profits-tax credit under section 459 (f). 2. Section 459 (f) ignores normal earnings at Indianapolis The Indianapolis plant, acquired on July 1, 1948, late in the base period, had no chance to develop its normal earnings by 1950. The earning capacity of this plant, however, is at least as great as that of the company's Bridgeport mills; its physical capacity is basically as large and its efficiency is greater. In 1952, and to date in 1953, its earnings have exceeded those of the Bridgeport mills. Exhibit 5 dramatically shows the inadequacy of the “average base period net income" (ABPNI) developed for the company under section 459 (f). This ABPNI is only 56 percent of the company's minimum normal earnings. Using the test of the experience of all corporations in the second quarter of 1950, it is barely adequate to measure the company's minimum normal operations, exclusive of Indianapolis. The normal earning power of the Indianapolis plant could not be realized for some time after the acquisition of this plant on July 1, 1948. Many shifts of equipment and costly training of organization had to occur before the plant could operate profitably as a complete unit for making commercial sheet, rod, and tube for the Midwest market. It is only recently that this plant has approached its normal earning capacity. Its earnings in 1950 were only 15.9 percent of the company's net operating income for that year, but they rose to 27.2 percent in 1951 and to 46.3 percent in 1952. The profit growth at this plant was attributable not only to the increased sales, but to its improved efficiency. The 1952 performance of the Indianapolis plant justified our original confidence that it had an earning capacity at least equal to that of the Bridgeport mills. The dramatic growth of our Indianapolis plant is further illustrated in exhibit 6, which plots the net profits of the Indianapolis plant, those of the company without Indianapolis, and those of all corporations for each quarter of 1950 (at annual rates), and for the years 1951 and 1952. This exhibit shows that our company's non-Indianapolis operations stayed relatively close to the results obtained by all corporations. Indianapolis, on the other hand, pulled way up. Any formula using this company's 1950 earnings would fail to give a fair measure for the Indianapolis earning power. 1 These figures are Federal income tax return figures, adjusted to date, furnished to the technical staff, and will vary somewhat from published figures. 1 As reflected by rates of earnings reached in the second quarter of 1950. Actual rates of earnings are used for all operations outside of Indianapolis, and the earnings rate of Bridgeport mills is used for Indianapolis. The company's ABPNI under sec. 459 (f) was 96 percent of its earnings rate, exclusive of Indianapolis, in the second quarter of 1950. It is significant that this ratio is in line with the ratio of 90 percent between the ABPNI of all corporations (determined by the average of the 3 highest years of the base period) and their earnings rate in the pre-Korean quarter. |