Johnstown America Industries, Inc. Business Information, Profile, and History

History of Johnstown America Industries, Inc.

A rising manufacturing force, Johnstown America Industries, Inc. makes a range of products serving the railcar, trucking, and shipping industries. Formed in 1991 through the acquisition of Bethlehem Steel Corporation's freight car division, Johnstown America entered the business world as a freight car manufacturer, registering encouraging success during its first several years of business. In 1995, the company made a bid to become a full-service manufacturer in the broadly-defined transportation industry. The company acquired manufacturers involved in a diverse collection of businesses, purchasing companies that made everything from brake drums to truck seating systems. With the addition of these acquisitions, Johnstown stood as a diversified manufacturer insulated from the frequent fluctuations of the railcar market. During the late 1990s, Johnstown America operated facilities in Oakland, California; Danville, Illinois; Rockford, Illinois; Brillion, Wisconsin; and Johnstown, Pennsylvania.

Background of 1991 Formation

Johnstown America was created from the railcar manufacturing division of Bethlehem Steel Corporation. When Johnstown America's founder Thomas M. Begel first heard that Bethlehem Steel was looking to divest its freight car division, he was decidedly nonplussed. When a colleague asked him if he was interested in acquiring the division, Begel responded, "not a chance. No way in the world." History had taught Begel a lesson he did not want to repeat.

As chief executive of Chicago-based Pullman Standard Co. prior to founding Johnstown America, Begel had experienced first-hand the potential problems involved in railcar manufacture. The idea of reliving that experience again prompted his unequivocal response in 1990. During the late 1970s, railcars were marketed as tax shelters, creating an inducement that artificially stimulated demand, or, as Begel put it, "every dentist had to own a couple freight cars." Railcar production the United States, which normally hovered around 60,000, increased recklessly, jumping to 85,000 by 1980, when capacity industrywide had mushroomed to 150,000. When the tax advantages were curbed in 1981, roughly 400,000 railcars were waiting for customers that did not exist, swamping the market.

Begel, in charge of Pullman at the time, found himself in a market glutted with what represented a six- or seven-year supply of railcars. He exited the business as quickly as he could, selling Pullman's railcar-production business in 1984. With what remained, Begel rebuilt Pullman by acquiring a broad range of manufacturing companies, purchasing businesses that steered Pullman into the manufacture of everything from truck trailers to airline seats. Once this was done, he sold his stock in the company and left its employ in 1987, ready to invest in a new business. When Bethlehem's freight car division was suggested, he immediately shot back with a firm "no." Reentering the railcar-production business was the last thing on his mind.

Begel, however, did reconsider the idea. After reacquainting himself with the railcar market, he discovered that the market had been cleared of the excess inventory that had plagued Pullman nearly a decade earlier. During the 1980s, the number of freight cars in use had declined from 1.8 million to 1.2 million. Concurrently, industry capacity had dropped, falling to 50,000 freight cars a year. Consequently, the railcars in use were getting older and, with fewer in use, the railroads were using them for a longer duration. Realizing this, Begel saw opportunity, envisioning a new, country-wide demand in the business first instinct told him to eschew.

Having made an about face in his thinking, Begel prepared to buy Bethlehem Steel's freight car division. In October 1991, he headed an investment group bearing his initials--TMB Industries--that acquired the Johnstown, Pennsylvania-based railcar business for approximately $50 million. He renamed the company Johnstown America Industries. Next, Begel set his priorities, resolving to improve quality and productivity at his newly-acquired manufacturing facility. At the time of the sale, Bethlehem Steel figured its division was capable of producing roughly 7,000 freight cars a year, but Begel was intent on exceeding expectations. First, he set up a quality improvement program that required each employee to undergo two days of training. Begel then invested more than $5 million on new machinery and reorganized production into smaller, team-oriented operations. With his new company taking shape, Begel readied himself for his second foray into railcar manufacture and the surge in demand he foresaw.

Johnstown America's Early Growth

Begel's projection turned to reality as Johnstown America began its corporate life as a railcar manufacturer. Industrywide, freight car deliveries climbed from 25,000 during Johnstown America's first full year of business to 35,000 in 1993 and upwards of 45,000 the following year. At Johnstown America the pattern repeated itself, as production output increased under the quality and productivity measures put in place by Begel. During the company's first full year of operation, production volume reached 4,500 freight cars, generating $205 million in sales. In 1993, production nearly doubled, rising to 8,300 railcars. Midway through 1993, Begel made a move to strengthen the company's financial position. In July, he sold 35 percent of the company to the public, selling shares in Johnstown America in an initial public offering (IPO) that put the company's stock on the NASDAQ exchange at $14 per share. With the proceeds from the IPO, Begel paid off the debt accrued from the Bethlehem Steel acquisition, leaving Johnstown America debt free as it continued its burgeoning rise in the railcar industry.

Sales at the end of 1993 reached $329 million, as the company's production operations began manufacturing railcars for 1994. Production output for the year, which consisted primarily of coal cars that sold for approximately $55,000 each, eclipsed 10,000. Annual sales for 1994 swelled to $468 million, reflecting the resurgence in rail car demand. For the original investors in the company, the end of 1994 brought earnings to a level that quintupled their investment three years earlier. Johnstown America, by all accounts, had developed into an unqualified success.

1995 Diversification

Having created a solid foundation for his company, Begel moved on to his next plan of attack, which represented a significant switch in strategy. He decided to transform Johnstown America into a billion-dollar transportation conglomerate. Instead of having one manufacturing segment of the transportation industry supporting the company, the future Johnstown America would be supported by a broad range of manufacturing interests. By pursuing this course of action, Begel could reduce the company's exposure to the cyclicality of the freight car market--a characteristic he was overly familiar with--and forge a more financially secure future. With this as his goal, Begel moved forward and completed two defining acquisitions in 1995, bringing in companies that diversified Johnstown America beyond railcar manufacture into niche markets serving the heavy-duty truck industry and, to a lesser degree, the iron castings industry.

The first acquisition was the smaller of the two companies that joined Johnstown America's fold in 1995. In January, the company completed the acquisition of Bostrom Seating, Inc., a maker of air suspension and seating systems for the trucks and buses with 1994 sales of $56.7 million. This initial foray into truck component manufacturing was followed by a headlong plunge in August, when Johnstown America acquired Truck Components Inc. (TCI) for $168 million. TCI, with $313 million in 1994 sales, comprised three operating subsidiaries: Gunite Corporation, Brillion Iron Works, and Fabco Automotive. Gunite, which operated a foundry in Rockford, Illinois, and a machining facility in Elkhart, Indiana, ranked as the leading manufacturer of Class 8 truck wheel-end components, such as brake drums, disc wheel hubs, and spoke wheels. Brillion, Wisconsin-based Brillion Iron Works operated a foundry that produced precision molded castings for the heavy-duty truck, agricultural, industrial machinery, automotive, and construction equipment markets. Fabco Automotive, whose addition extended Johnstown America's geographic reach to Oakland, California, manufactured steerable drive axles and gear boxes for the heavy duty and utility vehicle markets.

With the addition of Bostrom Seating and TCI, Johnstown America's sales volume nearly doubled, creating a diversified transportation conglomerate that nearly matched Begel's revenue goal of $1 billion. Off the acquisition front, Johnstown America also formed two new subsidiaries in 1995, Freight Car Services, Inc. and JAIX Leasing Company. Freight Car Services, organized as part of the company's original railcar manufacturing operations, opened a new facility in Danville, Illinois, in October 1995 to provide rebuild and repair services for the nation's freight car fleet. JAIX Leasing was formed to provide lease financing and fleet management services for new and rebuilt freight cars.

With the bustling activity of 1995 at an end, Johnstown America entered 1996 with its railcar business strengthened and its operating scope broadened considerably. Expectations for the coming year were justifiably high, as Begel and his management team anticipated reaping the rewards from their efforts in 1995. Their bright hopes, however, were dashed. The company's fifth full year of business proved to be full of disappointments.

Begel's corporate strategy was confounded by the same problem that had prompted him to abandon the railcar business roughly 15 years earlier. Johnstown America's mainstay market was glutted with a surfeit of railcars. From the 25,000 freight car deliveries recorded in 1992, production had increased to 61,000 by 1995, manifesting the upswing Begel had projected when he decided to enter the business again with Johnstown America. The years of encouraging growth in demand, however, quickly ended, and railcar manufacturers such as Begel found themselves looking at a market writhing from the affects of too many freight cars and not enough customers. Johnstown America's stock value dropped precipitously, as the company's customers scaled back their orders. Johnstown America's biggest customer, for instance, reduced its total orders from $500 million in 1995 to $50 million in 1996, epitomizing the actions of railcar customers across the nation. Consequently, the once-flourishing Johnstown America was suffering from financial ills, ills that its recent diversification could do little to alleviate.

As Johnstown America's freight car manufacturing operations were losing money, Bostrom Seating and TCI were generating enough income to cover the $8 million in quarterly interest payments resulting from their acquisition, but the two subsidiaries were not producing enough money to compensate for the losses being registered by Johnstown America Corporation, the company's freight car subsidiary. The company as a whole, accordingly, was headed for a loss. At the end of 1996, when the figures were tallied for the difficult months of the past year, Johnstown America registered a $5.37 million loss on $560 million in sales. As the company entered 1997, Begel hoped for and projected another upswing in railcar demand.

As Begel had hoped, the railcar market cleared in 1997 and demand returned after a nearly a two year hiatus. The company received its first order of intermodal freight cars--the other type of railcar produced by Johnstown America--for the first time in more than two years. By the end of the year, the company could point to an order backlog of more than 4,000 freight cars and assuage its anxiety further by an order for 1,000 intermodal freight cars received in early 1998. Meanwhile, the company's recent acquisitions were performing admirably after their first two years of operation under Johnstown America's corporate umbrella. For the year, Johnstown America's sales swelled to $668 million and its net income, after the disappointing $5.3 million loss in 1996, rebounded to a much-needed gain of $5.5 million.

As Johnstown America prepared for the beginning of the 21st century, the company was starting to realize the financial rewards of its diversification in 1995 and its commitment to railcar manufacture. The materialization of these rewards provided momentum for the future, fueling confidence that the strategy to become a diversified transportation company was a sound strategy to pursue. Whether or not the company's strategy would produce sustained, long-term growth remained to be determined by the future performance of its subsidiaries.

Principal Subsidiaries: Gunite Corporation; Bostrom Seating Inc.; Fabco Automotive Corporation; Brillion Iron Works, Inc.; Johnstown America Corporation; Freight Car Services, Inc.; JAIX Leasing Company.