returns from capital spending

C&EN feature

RETURNS FROM CAPITAL SPENDING

JOHN M. WEISS, John M. Weiss and Co., New York, N.Y.

Inflation does more to an economy than just to increase prices. It tends also to reduce the return from capital investment. This is painfully evident for long term investment such as bonds and life insurance, but it may not be so evident that it is true for short term risk as well.

To illustrate this thesis I offer the experience of the six largest chemical firms and a few smaller ones, relating their capital spending to sales and cash flow for two seven-year periods since 1945.

The sources of all figures are the

annual reports of the companies studied. These reports contain statements of the cash outlays for new plants and the gross sales, net earnings, and depreciation for the year. These figures are reasonably accurate. The cash expenditures for new plants are usually given in the text of the report, and there is no reason to doubt their validity.

Gross sales, representing all sales of the company, are usually accurate, although a breakdown of sales, if given, may or may not be truly representative. In this article, I give no con

sideration to such breakdowns. Net earnings and stated depreciation may at times be juggled, but I am only considering here the sum of these two items, so that juggling does not distort the picture as it is presented.

In measuring sales increase, an average of the first year of the period and the previous year is compared with an average of the last year of the period and the next succeeding year; this minimizes the effect of special conditions in an individual year. It may be argued that this does not give enough lead time to allow the capital spend-

"Big Chemical Six" Don't Get As Much From Firs t P e r i o d (Thousands of Dollars)

Company

Allied Chemical American Cyanamid Dow Chemical· Du Pontb

Monsanto Chemical Union Carbide

Total

Capital Spending

1945-1951

$ 234,378 166,834 322,000 694,336 180,697 546,285

$2,144,530

Average Yearly Sales

$ 270,738 162,250 122,499 616,700 91,168

494,700


1944-1945 1951-1952

5 496,105 378,562 373,400

1,566,700 269,775 942,200

Increase

Increase in Sales per Dollar of Capital

Spending (Cents)

$ 225,367 216,312 250,901 950,000 178,607 447,500

$2,268,687

96 130 78 137 99 82

116-

Second P e r i o d (Thousands of Dollars)

1952-1957 1951-1952 1957-1958

Allied Chemical American Cyanamid Dow Chemical» Du Pont Monsanto Chemical Union Carbide

Total

$ 518,000 318,607 568,000 876,900 309,398 862,600

$3,453,505

$ 496,105 378,562 373,400

1,566,700 269,775 942,200

$ 659,305 528,778 632,010

1,896,950 367,536-

1,345,782

$ 163,200 150,216 258,610 330,250 97,761

403,582 $1,403,619

32 47 46 38 32 47 41d—a 65% d rop from first period's return

a Year ending May 31. b Operations only exclusive of General Motors. 0 Eliminating about $190 million sales per year estimated attributable to Lion Oil. d Weighted average.

98 C & E N F E B . 22, 1960

ing in the latter part of a period to exert its full effect, and this is probably true to some extent. However, the same factor exists, both at the beginning and end of each period, so there is a counterbalancing tendency. In periods of rising spending, the net effect would be to make the figures somewhat below the truth at the end of the period, but I feel certain that on a percentage basis, the error is a small one.

First Period More Productive The earlier period (1945 to 1951)

shows an increase of dollar sales per dollar capital expenditure from 78 cents to $1.37. Du Pont and American Cyanamid are at the high end of the range. This is undoubtedly partly due to the growth of textile fibers for Du Pont and antibiotics for American Cyanamid. Both these lines showed greater expansion than the average of the chemical industry, so that investments in these products were quite productive. Surprisingly, Dow and Union Carbide are at the low end of the range.

The second period (1952 to 1958) shows a very sharp drop to a range of 32 to 47 cents, or on the average considerably less than half that of the first period. The range is much closer in the second period, and the disparity among companies is not so great. A weighted average (obtained by relating total sales increase over the entire period to total spending for the period) for the six companies for the first period is $1.16 on total expenditures of $2.14 billion, while for the second period it is 41 cents for expenditures of $3.45 billion. Certainly the first period was far more productive for all.

Another aspect is the effect on cash flow; that is, earnings after taxes plus depreciation. The same general tendencies are shown as in the first table. Du Pont and American Cyanamid are at the top of the range in the first period, while in the second period the difference is not so marked, although here Du Pont is the leader.

In the first period, on a weighted average (figured similarly to the sales figure), the cash flow would balance

the investment in about 6.3 years, but the variations are quite great, from 12.6 years for Allied Chemical to 4.8 years for Du Pont. In the second period, the pay-out time for Du Pont increases to 6.5 years while Allied Chemical increases less markedly to 13.7 years. The figure for Monsanto Chemical for the second period may be in error since estimates had to be made for the effect of the Lion Oil acquisition in 1957 and 1958. This low rate of return may not represent an entirely true picture. In all the others, acquisitions represent only a small part of the picture, insufficient to affect the final results radically.

To get some idea of how smaller chemical companies were affected, five were selected where acquisitions over the periods studied were negligible. In sales increase, there are marked differences between the individual companies, and the range is considerably broader between individual companies in the first period of 1945 to 1951 than with the large chemical companies. The weighted

Text continues on page 102

Their Capital Outlays As They Used To First P e r i o d (Thousands of Dollars)

Company

Allied Chemical American Cyanamid Dow Chemicalb

Du Pontc

Monsanto Chemical Union Carbide

Total

Capital Spending

1945-1951

$ 234,378 166,834 322,000 694,336 180,697 546,285

$2,144,530

Average Cash Flow

1944-1945

$ 36,726 12,720 21,324 85,082 12,912 73,166

Average Cash Flowa

1951-1952

$ 55,471 46,754 65,750

230,177 35,455

149,710

Increase

$ 18,745 34,034 44,426

145,095 22,543 76,544

$341,387

Increase in Cash Flow per Dollar of Capital Spending (Cents)

7.9 20.4 13.8 20.9 12.4 14.0 15.9»


1952-1957 1951-1952 1957-1958 Allied Chemical American Cyanamid Dow Chemical" Du Pont* Monsanto Chemical Union Carbide

Total

$ 518,000 318,607 568,000 876,900 309,398 862,600

$3,453,505

$ 55,471 46,754 65,750

230,177 35,455

149,710

$ 93,506 82,181

131,200 365,469 52,645*

251,700

$ 38,035 35,427 65,450

135,292 17,190

101,990 $393,384

7.3 11.1 11.5 15.4 5.6

11.8 11.4-

a Average yearly net profit plus depreciation. b Year ending May 31. c Operations only exclusive of General Motors. d An estimate to eliminate effect of Lion Oil acquisition. β Weighted average.

—a 28% drop from first period's return

F E B . 22, 1960 C & E N 99

Small Chemical Firms Also See Smaller Returns From Capital

Company

Air Reduction Atlas Powder Hercules Powder Pennsalt Chemical Victor Chemical·

Capital Spending

1945-1951

$ 57,517 15,469 74,524 27,458 11,607

Fi rs t P e r i o d (Thousands of Dollars)


1944-1945

$ 89,319 44,702

103,117 25,179' 15,741


1951-1952

$121,378 52,321

199,183 52,519 34,172

Increase

$ 32,059 7,619

96,066 27,340 18,431

Increase in Sales per Dollar of Capital Spending (Cents)

56 49

129 99

159

Total $186,575 $181,515 97b


1952-1957 1951-1952 1957-1958


Total

$105,300 24,046

114,741 46,546 23,296

$313,929

» Year ending June 30. b Weighted average. 0 Now a division of Stauffer Chemical.

$121,378 52,321

199,183 52,519 34,172

$182,647 68,648

240,889 79,172 52,382

$ 61,269 16,327 41,706 26,653 18,210

$164,165

58 68 36 57 78

52b—a 46% drop from first period's return

Spending, But They Fare Better Than the "Big Six" First P e r i o d (Thousands of Dollars)

Company


Total

Capital Spending

1945-1951

$ 57,517 15,469 74,524 27,458 11,607

$186,575

Cash Flow»

1944-1945

$ 9,787 2,598

10,445 3,252b

1,687

Cash Flow

1951-1952

$11,823 3,398

20,335 6,288 4,664

Increase

$ 2,036 800

9,890 3,036 2,977

$18,739

Increase in Cash Flov per Dollar of Capital Spending (Cents)

3.5 5.2

13.3 11.1 25.6 10.0°


1952-1957 1951-1952 1957-1958


Total

$105,300 24,046

114,741 46,546 23,296

$313,929

$11,823 3,398

20,335 6,288 4,664

$24,906 6,400

32,554 9,717 6,776

$13,083 3,002

12,219 3,429 2,112

$33,845

12.4 12.5 10.7 7.4 9.1

10.8'—an 8% rise from first period's return

a Average yearly net profit plus depreciation. b Year ending June 30. 0 Weighted average. dNow a division of Stauffer Chemical.

100 C & E N F E B . 2 2, 196 0

New chemicals for improved pharmaceuticals New chemicals from CARBIDE are finding many uses in the pharmaceutical industry. New low-cost solvents have lowered operating costs, and new intermediates are available for drugs. Primary amyl acetate is an extraction solvent, its solubility in water is less than 0.2 per cent by weight; it has a narrow boiling range near 150°C; its vapor pressure at 20°C. is only3.8 mm.; and the CARBIDE product is nearly 100 per cent in amyl ester content. These properties mean lower volatility losses, reduced losses into the aqueous phase, more efficient extraction, improved solvent recovery, and higher yields. Equipment corrosion problems are lessened because CARBIDE'S primary amyl acetate contains no halides. It is used as a penicillin extractant; and shows promise for use with other antibiotics and steroids.

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Emery's new facility to increase pelargonic, azelaic acid supply

Emery's recently announced plant expansion for ozone-oxidation will increase several-fold total production of pelargonic and azelaic acids.

Volume demand has increased for these materials in such important products as synthetic jet-lubricants and high-quality vinyl plasticizers as research programs have matured to commercial status. Also, extensive research in many other products, such as alkyd resins and other polyesters and polymers, indicates rising demand for years to come.

This 6-million dollar expansion investment lends impetus to such end-product application research. With increased production assured, we suggest you prepare to exploit the unique properties of these 9-carbon acids — monobasic pelargonic and dibasic azelaic. Write now to Dept.C-2Bfor samples and literature.

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average of a 97-cent sales increase per dollar expendi ture is modera te ly below the average oi S 1.16 for the large ones. In the second period, the range is closer and the weighted average appre ciably above the figure for the large ones.

On casli flow, the same type oi variations exist be tween the individual companies , bu t the weigh ted average is about the same for the two periods. In the first period, the weigh ted average is about 10 cents as against 15.9 cents for the large ones, while in the second period, the weigh ted average of 10.8 cents is not much below the 11.4-cent figure for the large units . T h e weighted average pay-out t ime in both periods is about the same, around 9.5 to 10 years, bu t individual companies show wide dil ierences. For example, Victor Chemical shows a 3.9 year pay-out in the first period and 11 years in the second. Atlas Powder was around 19 years in the first per iod and eight years in the second.

Less Sales Returns From Capital Outlays

One general conclusion to be d rawn is that increases of sales per dollar capital expendi ture are m u c h less in the second period than in the first. In the first per iod they approximate the classical norm of S 1.00 sales per dollar investment, whereas in the second per iod they average only about half this figure. This is at least part ly due to increasing construction costs. H o w ever, of the capital expendi tures , there is no way of telling wha t proport ion represents new products or enlargement of old products as against modernization and changes which introduce economies bu t do not increase tonnages . It is very likely that , in many cases, sales would have sharp drops if p lant improvements had not been made . The figures shown for sales increases are therefore likely to be somewhat below7 those which would appear if capital for new product ion could be segregated and used as a base.

However , it seems certain tha t the ability of capital to p roduce sales has shown a marked decrease. This can part ly be an effect of inflation in raising the cost of a new plant wi thout increasing the selling price of the produc ts in proport ion. It has been characteris t ic of the chemical industry over long periods to reduce selling prices on bulk products as economies are effected and larger volume of sales obtained.

102 C&EN F E B . 22, 1 9 6 0

Labor is usually not the major item of cost that it is in many other industries so that the chemical industry has only slightly felt this aspect of inflation. Tin's question of inflation in the chemical industry, in my opinion, is mainly a question of construction costs.

The cash flow figures show that spending by large chemical companies had a much shorter pay-out time in the first period studied than did the smaller companies. In the second period, the pay-out time of the larger companies sharply increased while that of the smaller companies improved.

Rate of Return Encouraging The average figures for the second

period show a return from cash flow (net after taxes plus depreciation) of about 1 1 ' ; on new capital invested. This does not seem to be a high rate of return for an industry where scientific advances can make a plant or process obsolete in a relatively short time. It is, however, a rate of return which encourages the industry to continue expansion. And so far the growth of use of chemical products has justified the expansion. There are periods in all products where they are temporarily over-built, but in a few years the overcapacity disappears and a further expansion is inevitable. As long as the margin can be held at a point so as adequately to support the growth, the situation is a healthy one.

This study may be said merely to show a general trend in all industry. It is not believed that the figures should be used to compare individual chemical companies without taking into account depreciation policies, accelerated amortization, tax situation, and similar items. For more exact comparison of individual companies, some formula which eliminates effects of acquisitions, depreciation policies, and taxes appears to be necessary.

JOHN M. WEISS is a partner of J oil η M. Weiss and Co., a chemical engineering consulting firm in New York City. Mr. Weiss has served on the advisory hoards of Industrial and En

gineering Chemistry and C&EN, is a special writer for the Wall Street Journal. He is the holder and coliolder of about 60 U.S. patents.

Emery's ozone oxidation expansion creates job opportunities

Emery's new 6-million dollar ozone-oxidation plant now under construction, plus future expansion of this and other operations, provides excellent opportunities now for technically trained personnel in: · Sales · Research · Product Development · Technical Service · Production Supervision This has resulted from the continually increasing use of azelaic and pelargonic acids in plasticizers, jet engine lubricants, surface coatings, and exciting potential applications in resins, polymers, polyesters, polyamides and metallic salts. These positions require a college degree in Chemistry or Chemical Engineering, with or without practical experience in the Chemical Industry or related fields. All positions except Sales are in Cincinnati. If you are interested in these opportunities in a growth company, send your confidential resume to Mr. Paul W. Anson, Personnel Director.

Emery Industries, Inc., Carew Tower, Cincinnati 2, Ohio Vopcolene Division, Los Angeles, Emery Industries (Canada) Ltd., London, Ontario, Export Department, Cincinnati

FEB. 22, 1960 C & E N 103

This section includes: CHEMICALS EXCHANGE — Chemicals, Resins, Gums, Oils, Waxes, Pigments, etc.; EQUIPMENT MART—New Equipment, Instruments, and Facilities for Plant and Laboratory; and TECHNICAL SERVICES—Consultants, Engineering, Testing and Professional

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NEW BOOKS Continued from page 72

Advances in Clinical Chemistry. Vol 2. HARRY SOBOTKA, C. P. STEWART, editors, xiii 4- 387 pages. Academic Press Inc., I l l Fifth Ave., New York 3, N.Y. 1959. $12.

Presents growing points of clinical chemistry and ranges from review of hypercalcemia of infancy (understood only on basis of chemical situation ) to application of principles of automation in hospital laboratory.

Cemented Carbides. PAUL SCHWARZKOPF, RICHARD KIEFFER. vii -f 349 pages. Macmillan Co., 60 Fifth Ave., New York 11, N.Y. 1960. $15.

Growing technical importance of cemented carbides calls for comprehensive treatment of the subject. Includes background, mechanical and chemical properties, and many applications.

Developing a Product Strategy. ΑΜΑ Management Report Series No. 39. 352 pages. American Management Association, 1515 Broadway, Times Square, New York 36, N.Y. 1959. $7.50.

Defines contributions of all levels of management to successful new product development.

Einfiihrung in die Chemische Thermodynamic 3rd ed. GUSTAV KORTUM. 470 pages. Vandenhoeck & Ruprecht Verlagsbuchandlung, Postfach 77, (20b) Gottingen, Germany. 1960. DM 38.

Explosions, Detonations, Flammability and Ignition. Part I, S. S. PENNER; Part II, B. P. MULLINS. xi + 287 pages. Pergamon Press Inc., 122 East 55th St., New York 22, N.Y. 1959. $10.

Part I comprises selected analytical studies on explosions, detonations, flammability limits, and ignition of gases, plus heterogeneous burning. Part II: experimental and theoretical studies of flammability, ig-nitibility, and explosion prevention. Published for and on behalf of the advisory group for aeronautical research and development of NATO.

Gas Purification. ARTHUR L. KOHL, FRED C. RIESENFELD. Χ + 556 pages. McGraw-Hill Book Co., Inc., 330 West 42nd St., New York 36, N.Y. 1960. $15.

Covers most frequently used gas purification processes and techniques in modern industry. Intention is to help design and operating engineers solve gas purification problems, evaluate alternate routes, and operate existing plants.

Industrial Electronics and Control. 2nd ed. ROYCE GERALD KLOEKFLER. viii + 540 pages. John Wiley & Sons, 440 Fourth Ave., New York 16, N.Y. 1960. $10.

Revised edition will be of interest to chemical engineer as well as mechanical and electrical engineers; in fact, to anyone concerned with electronics and its commercial applications.

Lipide Chemistry. DONALD J. HANAHAN. ix + 330 pages. John Wiley & Sons, Inc., 440 Fourth Ave., New York 16, N.Y. 1960. $10.

Covers progress made in past 10 years in the field, evaluates present status, discusses each major class of lipides and the more complex lipoproteins.

Paperbound Gmelins Handbuch der Anorganischen

Chemie. 8th ed. Cadmium. No. 33. xciv -f 802 pages. Walter J. Johnson, Inc., I l l Fifth Ave., New York 3, N.Y. 1959. Kart. DM 508. Ganzl DM 513.

International Directory of Radioisotopes. Vol II. Compounds of Carbon-14, Hydrogen-3, Iodine-131, Phosphorus-32, and Sulfur-35. iii -f- 213 pages. International Atomic Energy Agency. Distributor: National Agency for International Publications, Inc., 801 Third Ave., New York 22, N.Y. 1959. $3.00.

Managing the Materials Function. ΑΜΑ Management Report No. 35. 131 pages. American Management Association, Inc., 1515 Broadway, Times Square, New York 36, N.Y. 1959. $3.75. ΑΜΑ members, $2.50.

Radioisotopes in Industry. JOHN J. Mc-MAHON, ARNOLD BERMAN. 136 pages. National Industrial Conference Board, 460 Park Ave., New York 22, N.Y. 1959. $2.75.

Toxic Aliphatic Fluorine Compounds. F. L. PATTISON. xi 4- 227 pages. D. Van Nostrand Co., Inc., 120 Alexander St., Princeton, N.J. 1959. $3.50.

CHEMICALS Continued from page 64

subst i tut ion reactions at its two a n d three posit ions wi th a n u m b e r of chemicals . T h e reaction p roduc t s can be used as vat and azo dyes , p igments , pharmaceut ica l s , pho tograph ic chemicals, and fungicides, t he c o m p a n y sa vs.

C 9

Three new intermediates—o-, m-, and p-chloroaniline—have been a d d e d to its line by Aceto Chemical , F lushing , N.Y. o-Chloroanil ine is used to m a k e o-chloroacetoacetanil ide, a coupl ing agen t for making yellow p igments . O the r uses: as a diazo componen t , as a fast base for textile makers . m-Chloroani l ine is also used in textiles as well as in some pharmaceut ica l s a n d insecticides. p-Chloroani l ine : p igments , pharmaceut ica l s , a n d agricultural chemicals . C 1 0

Four new C14-labeled radiochemicals are be ing furnished by Research Specialties, R ichmond, Calif. T h e comp o u n d s a re : 1-bu tene- l -C 1 4 a n d hexamethy l -C 1 4 b enzene for chemists working wi th hydrocarbons ; 4 - ( 2 , 4 -d ichlorophenoxy) bu tyr ic -1-C 1 4 acid for those s tudying p lan t g rowth regulators; t r ipalmit in (g lyce ry l - l , 3 -C 1 4 ) , useful in s tudying the chemis t ry of fatty acids. C 1 1

High density polyethylene extrusion coating compound is m a d e b y Union Carb ide Plastics, N e w York City. Cal led D G D D - 7 4 0 1 Natura l , it can b e ex t ruded onto p a p e r at good commercial speeds in coat ing weigh ts as low as 6 lb . pe r ream, the c o m p a n y says. Besides h igh mois ture and chemical resistance, it gives mult iwal l bags good scuff a n d abrasion resistance, good slip proper t ies , a n d h igh hea t resistance , the company says. C 12

r 1 } Further useful information on j

keyed Chemical items mentioned is readily available . . .

4 Use handy coupon on page 68 j 1 — _ — :

FEB. 22, 1960 C&EN 105

returns from capital spending

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