ABC Rail Products Corporation

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ABC Rail Products Corporation

200 South Michigan Avenue, Suite 1300
Chicago, Illinois 60604
U.S.A.
(312) 322-0360
Fax: (312) 322-0377

Public Company
Incorporated: 1987 as ABC Rail Corporation
Employees: 1,449
Sales: $240.6 million (1996)
Stock Exchanges: NASDAQ
SICs: 3312 Blast Furnaces & Steel Mills; 3531 Construction Machinery; 3743 Railroad Equipment

A leader in the engineering, manufacturing, and marketing of original and replacement products for the freight railroad, public transit, and intercity high-speed passenger rail industries, ABC Rail Products Corporation manufactures specialty trackwork, such as switches, turnouts, and rail crossings, metal brake shoes, and wheels for locomotives and rail cars. During the mid-1990s, ABC Rail operated ten manufacturing facilities in the United States and ranked as the largest manufacturer of specialty trackwork in North America, the second-largest manufacturer of freight railcar and locomotive wheels in North America, and the only manufacturer of metal brake shoes in the United States. Through a series of strategic alliances and joint ventures, the company ascended to market leadership during the 1990s, experiencing promising growth domestically and abroad.

Although ABC Rail originated in 1902 with the American Brake Shoe and Foundry Company, the modern version of the company began business during what industry pundits hailed as the decade of the railroad industry’s resurgence. After decades of losing ground to the trucking industry and exhibiting signs of stagnation and decay, the U.S. railroad industry began to show signs of life during the 1980s, beginning in 1980 when deregulation sparked growth in the rail transportation business. In the wake of deregulation, rail carriers throughout the country began recording consistent growth as they trimmed their payrolls and invested in new technologies that enabled them to operate with fewer employees. Employment in the industry shrank from 458,000 in 1980 to 190,000 by 1994, yet the industry’s aggregate revenue ton-miles rose from 919 million to 1.2 billion during the same span, resulting in a 200 percent increase in productivity for carriers nationwide. Invigorated by the benefits realized from the adoption of new technologies, the railroad industry at last began to take market share away from the trucking industry in 1995 for the first time since 1920. Integral to this rejuvenation of the railroad industry were the companies who designed and manufactured the equipment that bolstered railroad companies’ profitability. One such company was ABC Rail, a late comer to the trend sweeping through the industry during the 1980s, but a company that reigned as a market leader during the mid-1990s.

Formation of ABC Rail in 1987

ABC Rail entered into the business world in 1987 when the company was formed to acquire the assets of the Rail Products Group operating within Abex Corporation, which was one of the units composing the conglomerate IC Industries. Through a leveraged buyout completed in July 1987, the rail products assets belonging to Abex were organized into an independent company christened ABC Rail Corporation. Organized to serve the railroad industry during its decade of resurgence, ABC Rail entered into business on its own at the right time, but for several years the company floundered, as it struggled with financial problems exacerbated by a 1989 leveraged recapitalization and a $20 million equity distribution.

Entering the 1990s, the company continued to struggle, unable to establish a solid foundation from which to grow in the new decade. Financially weak, ABC was further crippled by declining prices in 1990 and 1991 for the trackwork it produced and by anemic market conditions. By 1991, after four years of attempting to carve a lasting niche for itself, ABC appeared to be headed nowhere, at least in light of the optimistic expectations that marked its creation. Better times were ahead, however, beginning in 1991 when the company received the financial backing of Kohlberg & Co., an investment firm that funnelled $5 million of equity into the company. The infusion of capital represented a turning point in the company’s history, marking the true beginning of its rise as a market leader. Shortly after Kohlberg & Co. entered the scene, ABC Rail’s management endeavored to eradicate the ills that had afflicted the company since its inception in 1987. The company instituted a program aimed at slashing marketing and administrative expenses, restructuring the company’s trackwork operations, and adjusting its product mix to favor more expensive, higher profit-margin equipment. The changes worked. From the company’s fiscal 1992 forward, consistent growth became a common occurrence, lifting ABC Rail’s stature within the industry and refueling management’s focus on serving the blossoming railroad industry.

ABC Rail and Cogifer in the 1990s

ABC Rail’s growth from 1992 forward was largely achieved through a series of affiliations and joint ventures that significantly expanded its operations and extended its geographic presence to foreign shores. By entering into joint ventures and alliances, ABC Rail pursued a less risky path toward expansion, yet realized substantial gains in its technology base and marketing and distribution capabilities. One of the first and longest-lasting of these pivotal collaborative agreements was struck in February 1992, when ABC Rail and France-based Cogifer, S.A. formed a business relationship that promised to introduce ABC Rail to a lucrative segment of the rail industry. Historically, specialty trackwork manufacturers like ABC Rail directed the bulk of their marketing and production energies toward freight carriers rather than dividing their efforts equally between freight and rail transit system operators. As a result, equipment sold to rail transit system operators generally was freight specialty trackwork modified for rail transit system operators. By the early 1990s, however, the demand for European-style high speed and light rail technology was growing; recognizing this trend, ABC Rail’s management began looking for an experienced partner. Cogifer, a European specialty trackwork producer, represented a perfect match for ABC Rail. The company was the leading supplier of European-style high-speed and light rail specialty trackwork to customers across the globe and specifically a supplier of trackwork for the high-speed Train à Grande Vitesse (TGV) trains in France and other parts of Europe. As rail transit customers in North America were increasingly seeking equipment to provide smooth, quiet service on high-speed and light rail systems, ABC Rail was intent on capturing a share of the burgeoning market.

The relationship with Cogifer was manifested by the formation of two 50-50 joint venture companies in February 1992 and December 1993, both of which were called ABC Rail-Cogifer Technologies. Through these partnership agreements, and a joint marketing agreement that named Cogifer as ABC Rail’s exclusive worldwide representative for the sale of its products, ABC Rail gained access to Cogifer’s design concepts and expertise in high-speed and light rail technology. With this technology, ABC Rail hoped to penetrate the intercity, “Amtrak-type” rail passenger market and the growing market for high-speed freight railroad switches.

Strengthened by its affiliation with Cogifer, ABC Rail next took steps to facilitate the development of further business alliances. In December 1993, during the same month it formed its second joint venture company with Cogifer, ABC Rail completed its initial public offering of stock, thereby gaining the financial resources to aggressively pursue growth. Shortly thereafter, the company began fleshing out its operations. In February 1994, ABC Rail acquired two specialty trackwork manufacturing facilities, giving it a total of ten plants scattered across the country. The first of the two new plants was Santa Fe Railway’s manufacturing, warehousing, and distribution operations, located in Newton, Kansas. For the second facility, ABC teamed up with Cogifer to form a new manufacturing joint venture to acquire a 110,000-square-foot plant in Cincinnati, Ohio. Originally owned exclusively by Cogifer, the facility had the capability to manufacture a broad line of trackwork products. Next, the company entered into a five-year strategic alliance with Burlington Northern in July 1994 to provide the railroad company with an uninterrupted supply of track materials. Buoyed by this added business, ABC Rail recorded the first appreciable gain in annual sales since the 1990s had begun. In 1991, the company generated $150 million in sales and proceeded to post stagnant results for the next two years, collecting $143 million in 1992 and $148 million in 1993. In 1994, however, sales rose encouragingly, reaching $187 million while the company’s net income swelled to more than $5 million after consecutive losses in 1991 and 1992.

Company Perspectives:

ABC Rail Products Corporation will strive to grow its shareholder value by supporting tomorrow’s railroad industry with engineered products and customized services that enhance railroad performance, productivity, and profitability. The key to ABC’s growth will be its collaborative approach to identifying and meeting customer needs. By listening carefully to customers’ problems, and by involving customers in the search for solutions, ABC will produce cost-effective engineered products and custom-designed services that add documented value to the tasks that railroads perform. ABC products and services will be acknowledged by customers and competitors alike as the worldwide standard. ABC will be known in America and the Far East as the preferred source for engineering excellence, responsiveness, and long-term relationships.

Mid-1990s Expansion

Demonstrating an unprecedented vitality in the mid-1990s, ABC Rail at last was able to tackle projects that promised to add to its revenue volume and profit levels in meaningful amounts. In May 1995, the company acquired five wheel assembly plants from General Electric Railcar Wheel and Parts Services Corporation, gaining facilities in Lewistown, Pennsylvania, Calera, Alabama, Chicago Heights, Illinois, Corsicana, Texas, Riverside, California, and Kansas City, Kansas. Construction of a wheel machining plant was begun during the company’s 1995 fiscal year and by the following year the plant was ready to operate. As construction of this plant was underway, the company entered into another joint venture, teaming up with Standard Car Truck in September 1995 to form a company named Anchor Brake Shoe. The joint venture company, which was formed to execute the composition brake shoe business of both ABC and Standard Car Truck, represented one of only two brake shoe suppliers in the United States.

By the end of 1995, sales had risen strongly to $243 million, and the company occupied enviable positions in several key markets. ABC Rail ranked as the largest manufacturer of specialty trackwork in North America, its dominance strengthened by the departure of the second-largest manufacturer in 1992. Specialty trackwork, which accounted for roughly half of the company’s business during the mid-1990s, consisted of replacement track for freight railroads and track switches or turnouts, which direct trains from one track to another, as well as crossings, which allow one set of railroad tracks to cross through another. ABC Rail also ranked as the second-largest manufacturer of freight railcar and locomotive wheels in North America, producing 28-, 33-, 36-, and 38-inch diameter wheels for freight railcars and 40-inch diameter wheels for diesel locomotives. The production of railcar and locomotive wheels represented ABC Rail’s second-largest product category, accounting for approximately 45 percent of the company’s business during the mid-1990s. The balance of ABC Rail’s business was derived from the manufacture of composition and metal brake shoes, which exert friction directly on the railroad wheel to generate braking power. Operating as the only manufacturer of metal brake shoes in the United States, ABC Rail derived roughly five percent of its business from the manufacture of brake shoes.

Firmly established as one of the strongest companies in its various markets during the mid-1990s, ABC Rail moved resolutely forward in 1996, continuing to seek the benefits of pursuing growth through joint ventures and strategic alliances. In May 1996, the company deepened its involvement in one of the world’s largest markets by establishing additional business in China. Previously, ABC Rail had completed several projects in China, providing in one instance technical expertise for the manufacture of composition brake shoes. ABC Rail had also sold railroad wheels produced at the company’s Calera, Alabama, foundry to China and supplied trackwork manganese castings, forming what promised to be a lucrative business relationship with China. As the late-1990s neared, China was expected to invest more than $30 billion in upgrading and expanding its massive rail system, creating a wealth of business for companies like ABC Rail. In May 1996, ABC Rail took strides toward capturing a share of the rail business in China when the company entered into a joint venture with China’s Ministry of Railroads to manufacture 160,000 railroad wheels at a plant west of Beijing in Datong, Shanxi Province. With a 40 percent interest in the joint venture company (which operated as Datong ABC Castings Company Ltd.), ABC Rail was expected to expand its wheel manufacturing business with China into neighboring Asian countries.

On the domestic front, ABC Rail completed a pivotal acquisition in June 1996 when it purchased Deco Industries, Inc., a manufacturer of electric, pneumatic, and hydraulic retarder equipment, radar, and other components at its production facility in Milwaukee, Wisconsin. In addition to the Milwaukee facility, ABC Rail also obtained control of Norristown, Pennsylvania-based Deco Automation, which designed computerized railroad yard systems and produced the hardware, software, and electrical-mechanical interface equipment for yard control systems. As a result of the Deco acquisition, ABC Rail could add another feather to its cap, becoming the largest operator in the rail classification yard market.

Plans for the Future

Later in the year, ABC Rail broadened its business scope further by reaching an agreement in principle to acquire American Systems Technologies, Inc. Based in Verona, Wisconsin, American Systems Technologies ranked as the leading private company in the railway signal system installation and maintenance field, giving ABC Rail yet another facet to its rapidly expanding business. As the company prepared for the late 1990s and the completion of its first decade of business, plans for future growth called for the formation of additional strategic alliances and joint ventures. Although there was much to be achieved in the United States, ABC Rail was also formulating its future plans around expanding its foreign business, particularly in South America where the deregulation and privatization of railroad industries offered strong growth opportunities. Encouraged by these opportunities, ABC Rail’s management scanned the horizons of the late 1990s, intent on shoring up the company’s leading market positions both domestically and abroad.