STEEL Capital Ideas

Long burdened by unimaginative management, obsolete equipment and growing competition, U.S. Steel two years ago launched a massive reorganization program to bolster its lagging sales and earnings. The world's biggest steelmaker chopped its executive payroll, closed down or consolidated overlapping divisions and offices and sharply increased its research and capital expenditures. The effort is only now beginning to pay off. U.S. Steel's first-half earnings, while still substantially below those of the mid-50s, were 38% higher than in 1964. Sales were up 26%. Last week, determined to maintain the new momentum, Board Chairman Roger Blough announced plans for the most extensive financial reorganization and the greatest capital expenditure program in the company's 64-year history.

If stockholders approve, Big Steel will issue debentures -a form of promissory note -in exchange for the 3.6 million shares of its preferred stock now outstanding. Unlike the preferred stock, which represents equity in the company and guarantees a fixed annual dividend before any common stock dividends are distributed, a debenture is a company obligation that earns interest for its holder. To make the offer more palatable, U.S. Steel will pay debenture hold ers about $30 million annually in interest, instead of the $25 million they now receive in preferred stock dividends.

Enlightened Generosity. The seemingly generous gesture will actually benefit U.S. Steel. Debenture interest payments are deductible from federal corporate income taxes, thus will really cost the company only about $15 million annually -$10 million less than it is currently paying in preferred stock dividends, which are distributed out of after-tax earnings. The benefits to the preferred stockholders and to the company and its common stockholders were immediately recognized on Wall Street, where by week's end U.S. Steel's preferred stock jumped $26 and its common stock $2 per share. What puzzled many on Wall Street was why U.S. Steel had waited so long to follow the lead of National Lead, American Smelting & Refining and other firms that long ago exchanged their preferred stock for debentures.

To further improve its financial performance, U.S. Steel -which has operated under a New Jersey charter ever since it was put together by old J. P. Morgan -will merge with a subsidiary and incorporate in Delaware, whose corporate laws and taxes are among the most lenient in the U.S. The company will also increase the par, or nominal value, of its common stock from its current mathematically unwieldy $16 2/3 to a more tidy $30 per share, largely to facilitate bookkeeping.

Attacking Obsolescence. The capital expenditures announced by U.S. Steel will need a healthy financial structure to support them. Over the next three years the company will spend $1.8 billion -more than the entire industry's capital expenditures last year -to expand and modernize its facilities. Priority will be given to plants that will produce such products as flat-rolled sheet steel -used in great quantity by Detroit's automakers -and tin plate, highly profitable items that now account for too little a share of U.S. Steel's current production.

The company will also construct new oxygen furnaces and blast furnaces, at least two continuous casting lines, finishing facilities and light structural steel and bar plants. The ambitious program is intended to replace the last of U.S. Steel's collection of obsolete equipment, better enabling the company to withstand the assaults of more modernized U.S. and foreign competitors, the inroads of substitute materials such as aluminum and plastics and the ever-present specter of rising labor costs.

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