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had more than 25 years' financial experience. Prior to the war I was an officer of Provident Trust Company of Philadelphia. During the war, I served as Acting Head of the Lend-Lease Mission to Australia, and later as Deputy Head of the Mission of Economic Affairs, London. Subsequently, I became treasurer of the New York Life Insurance Co., fourth largest. In 1951, I came to the Pennsylvania Railroad as financial vice president and director. I am also director and chairman of the finance committee of the Norfolk & Western Railway Co.

The Pennsylvania Railroad accounts for almost 10 percent of the total revenues of the industry. Our assets exceed $3 billion, our debt amounts to just under $1 billion. We have over 100,000 employees with a total annual payroll of about $540 million. In 1956 we paid over $33 million in railroad retirement and unemployment insurance taxes, or about 10 percent of the total of such taxes paid by class I railroads.

I have prepared and ask the privilege of filing with the committee a statement and exhibits relating to the financial position of the railroad industry and the Pennsylvania Railroad. Because of the time allotted to me I will be able to give you only the highlights of that statement this morning.

The transportation industry is vital to the American economy, both in times of peace and war, and for a great many years the railroad industry has represented the backbone of the transportation industry. With the motor and air carriers either reaching or approaching maturity in the postwar era, competitive forces exist in the transportation industry to a greater degree than ever before in our history.

During World War II the railroads performed a truly Herculean task. Their absolute essentiality in such periods was clearly indicated by what transpired during this war. The railroads carried more than 90 percent of all military freight and 97 percent of all organized military traffic. In 1944 they carried about 70 percent of all intercity freight traffic moved.

In the same year they handled over 95 billion passenger miles, more than twice the total for any year in history prior to the war.

Unfortunately the industry as a whole faced the postwar period with a very badly worn-down plant as a result of the all-out effort during the war. This fact, coupled with estimated total expenditures by the Federal Government for domestic inland transport facilities in the 10 years following the war of over $5 billion, consisting of $3,600,000,000 for highways, $700 million for airports and air navigation aids and $800 million for inland waterways, has made the postwar period a difficult one for the railroads.

In addition, outmoded restrictive regulatory procedures and the inability of the industry to earn its fair share in the inflationary economy in which we have been living have placed the railroad industry in a most serious position.

Furthermore, ironically it appears that despite an optimistic outlook for business prosperity over the next 10 years, it is going to be very difficult for the railroads to participate in the expanding economy because of the many problems which face them.

The earnings of the railroad industry for many years have been totally inadequate to assure a strong, sound, and stable industry, which we consider to be absolutely necessary to a prosperous economy. Be

cause of inadequate earnings, the railroad industry has been materially weakened, both from a competitive and financial standpoint, and today is in a serious condition.

To illustrate the inadequacy of past earnings, let us examine for a moment chart A entitled “Comparison of Rate of Return on Net Assets With Yield on Long-Term United States Treasury Bonds." By net assets we mean the book value of outstanding preferred and common stocks and surplus accounts at the beginning of each year. In this chart we compare the rate of return realized over the period 1940 through 1955 on long-term Government bonds with the return realized by manufacturing corporations, public utilities, class I railroads, and the Pennsylvania Railroad. You will note that in the case of the manufacturing corporations, the rate of return in 1940 amounted to a little over 10 percent, declined to about 9 percent in 1945, skyrocketed in the postwar period to a peak of almost 19 percent, and then declined somewhat, but amounted to 15 percent in 1955. Throughout, the highest return realized by the railroads was always below the lowest return realized by the manufacturing companies.

During the same period the return realized by public utilities ranged between 6 percent and approximately 10 percent. On the other hand, the class I railroads as a whole, with the exception of the 2 war years 1942 and 1943, during this entire period never equalled the return of the public utilities. As a matter of fact, in only the 2 years mentioned, 1942 and 1943, were they able to exceed the 6 percent return which was the lowest realized by the utilities over the 16-year period.

In the case of the Pennsylvania Railroad the same relationship, so far as 1942 and 1943 are concerned, holds true, but for most of the time it is clearly evident that the rate realized was not only far below that for class I railroads generally, but in the years 1946, 1947, 1949, 1951, 1953, and 1954 the return was actually below that obtainable on long-term governments, so called riskless investments. As shown by the figures contained in table 3, in the statement I am filing, even this meager return was not actually realized by the Pennsylvania Railroad stockholders since more than half the earnings were plowed back into the property. This is in spite of the fact that we have paid as dividends to our stockholders a greater percentage of available net income than the average for all class I railroads.

In other words, our stockholders receive far less than if they had held Government bonds during this period.

Perhaps the complete inadequacy of the rate of return obtained by the railroad industry can be realized more clearly by looking at chart B, which contains I do not know whether that chart is close enough so that you can read those figures—that contains a list of 73 industrial groupings with the rate of return shown on net assets for the calendar year 1955. The rate of return realized ranges between a high of 29.1 percent and a low of 4.6 percent. In this listing the class I railroads stand 68th in a list of 73, and the Pennsylvania Railroad's rate of return of 2.9 percent was substantially below the bottom-rated industry, traction and bus, which realized a return of 4.6 percent. And the prime importance from the standpoint of the relative position of each, as I said, is that the railroad industry is down there, 68th, as to rate of return, out of a list of 73 different groupings, and the Pennsylvania Railroad is below the last one, which is bus and traction. We are still below that.

It should be borne in mind in this connection that the Pennsylvania Railroad accounts for almost 10 percent of the industry, and since there were other railroad companies whose return was equally or even more inadequate, it can be readily observed that a substantial portion of the railroad industry's earnings are highly marginal.

Among the various causes behind the meager earnings of the railroad industry, one of the most basic has been the fact that its rates have been held down artificially, as indicated by the figures in table 4 of the exhibits. In this table a comparison is made between the years 1929 and 1955. These 2 years have been selected because I believe every one will agree that in 1929 the transportation industry was generally considered to be in a healthy and prosperous condition in this country and maintaining its relative economic position in our free enterprise system; and 1955 represents the latest figures available. During this period the physical production, as measured by gross national product in constant dollars, has increased 116 percent. Intercity ton-miles handled by all transport agencies during the same period have increased 113 percent, so that in terms of physical volume the transportation industry has just about held its own during the last 26 years. However, if we examine corporate sales or revenues for industries other than transportation, we find that during this period they increased 314 percent as compared to an increase of only 142 percent in the revenues of the transportation industry. This clearly indicates how the price level in the transportation industry has been artificially held down. As a consequence, naturally enough, this has seriously affected profits. During this 26-year period corporate profits of the transportation industry showed an actual decrease of 27 percent as compared to an increase of 178 percent for industry other than transportation. If transportation sales had gone up to the same extent as other corporate sales, in the year 1955 alone the transportation industry would have received an additional $16 billion of revenues. And if it had been able to maintain its relative position with other industries with respect to profits, it would have realized an additional $1,850,000,000. If these additional profits are divided on the basis of traffic volume, approximately half, or $900 million, would have flowed to the railroads, as a part of the transportation industry. Needless to say, such a substantial addition to net income would have materially aided the railroads to strengthen their existing weak position.

Whatever the causes back of the situation, it appears perfectly obvious that the railroads have not received an adequate return. Because of this failure several important changes have taken place which would indicate that the railroads' position has been severely damaged, possibly irreparably.

In 1940, the total debt of class I railroads amounted to $11.3 billion, and since that time this debt has decreased to $9.7 billion, which is all to the good. However, there has been a very substantial change in the composition of this indebtedness which has serious import to railroad managements.

Illustrative of this latter point is chart D dealing with funded debt outstanding due within 20 years of class I railroads. In 1940 we find that of the total debt outstanding as of that date, 43 percent would mature within 20 years. This figure is little changed in 1955, and as of the end of 1955, 44.5 percent of the debt was scheduled to


mature in 20 years. However, the important change is with respect to equipments. Less than 10 percent of the debt maturing in 20 years in 1940, or 9.8 percent to be exact, was in the form of equipments, whereas in 1955 of the debt maturing in 20 years 58.5 percent was in the form of equipment obligations.

To clarify this, it means that at the end of 1955 almost half the debt outstanding would mature in 20 years.

With respect to bonded debt this is not too serious provided the credit of the industry and of the individual companies is such that it can be refinanced. It is significant, however, that of this debt maturing in 20 years, as I said, 58.5 percent is in the form of equipments, because these are nonrefundable and therefore must come out of the industry's cash. For reasons which I will explain later, unfortunately we believe that the amount of equipment obligations outstanding is going to continue to rise markedly to the extent that the market will absorb them, and we estimate, assuming this premise, that by 1965 the amount of equipments outstanding will increase by 20 percent or $500 million. This in turn will increase the year-to-year cash drain on the companies involved, will make their debt service larger and more rigid, and will make each company more susceptible to receivership or bankruptcy in the event of a decline in business.

It now seems appropriate to turn to the working capital position of the railroads to see whether or not they are in a position to stand an additional drain of the type described in this respect. In Chart G the working capital is compared on an absolute basis with operating revenues, since, after all, the volume of business does dictate to a large extent how much working capital you need. Working capital is the figure which represents the difference between current assets and current liabilities.

In every other industry with which I am familiar, current assets include all those items which can be liquidated or converted into cash within 12 months, and current liabilities include all items which must be paid within 12 months. In the case of the railroads, debt due within one year is not included in current liabilities, although debt due in six months is reported as a footnote in ICC reports. This is contrary to standard accounting procedure and the practice in other industries, and in my judgment gives a completely false picture, since obviously there is no difference between one type of liability and another if both have to be paid in the same period of time. Therefore, we have included debt due within a year in current liabilities. Working capital as thus defined is represented by the solid red line. The broken line represents working capital reduced by materials and supplies. This is shown because there is a real question in the minds of most informed people whether or not materials and supplies should be included as a current asset. These are entirely different from the inventory of a manufacturing company which is generally converted into a finished product and disposed of in the course of 12 months. In other words, materials and supplies are not, with certain exceptions, liquid assets. However, whether or not they are included, the results in the comparisons are not too different.

Comparing working capital with gross operating revenues, it is noted that there is a fairly parallel trend between working capital and gross revenues from 1940 to 1946. From there on, gross revenues have

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increased somewhat, primarily as a result of rate increases. Working capital, however, has tended to decline.

In chart I, with working capital expressed as a percentage of gross revenues, a comparison is made as between Class I railroads as a whole and the Pennsylvania Railroad. It shows that in the generally prosperous period following the war an increasing dollar volume of business has had to be handled with a decreasing amount of working capital.

The improvement in our working capital from its low point in 1947 was achieved principally through the liquidation of capital assets. In the past ten years, and principally since 1948, the Pennsylvania Railroad has raised over $92 million in cash by this method. Included in the sale of assets were such properties as the Hotel Pennsylvania in New York, valuable property in downtown Pittsburgh and Philadelphia, together with other miscellaneous real estate holdings, our stock in Pennsylvania Greyhound Lines, nine water companies, and this past year the Virginia Ferry Corp., in which we had a 50 percent interest, was sold to the State of Virginia. In addition, over $38 million was raised in 1948 through the sale of bonds of our leased lines held in our treasury. This procedure is obviously cannibalistic, and can only be justified on the basis of our stringent need for money to carry on our railroad operations.

While the railroads have been handling an increased dollar volume of business with a decreasing amount of working capital, the question may rightly be posed as to whether or not this in itself is serious because there is always the possibility that any individual company, or any individual industry may have an excess of working capital.

In chart J, a comparison is made of the percentage of working capital to the volume of business done by the Pennsylvania Railroad, class I railroads, and other typical industries. It will be noted that Pennsylvania Railroad working capital amounted to only 9 percent and class I railroads 12 percent of the volume of business transacted ; working capital of the oil and food products industries was almost twice that of the railroads; steel was twice that of the railroads; and building materials, tires and rubber, chemical, metals and mining, and the agricultural machinery industries were substantially beyond even these figures, ranging all the way up to 48.7 percent in the case of agricultural machinery.

It might be argued that these other industries need more working capital since they have to carry large inventories.

Mr. SPRINGER. Mr. Bevan, would you mind explaining what working capital is?

Mr. BEVAN. I will be very glad to.
Mr. SPRINGER. You certainly are taking a lot of time on this subject.

Mr. BEVAN. Working capital is the difference between your current assets and current liabilities. In your current assets you put in all items which you will turn into cash within 12 months, such as accounts receivable; and in case of inventories that are going to be processed.

On current liabilities, everything that you have to pay out within 12 months is included. That is, your taxes, accounts payable, debt, and things of that sort. The difference between those two is what we call working capital. In other words, that is the amount of liquid

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