Why Morrison Knudsen Is Riding The Rails

In south Chicago's decaying industrial belt, amid abandoned buildings and three-foot-tall weeds, a long-idle 80-year-old factory is slowly coming back to life. Inside, a skeleton crew of 50 people is stripping down commuter railcars, rebuilding them, and planning an ambitious move into production of all-new transit cars. The reopened factory, once operated by Pullman Co.--that hallowed name of the rails--represents the first attempt by a U.S. company to jump back into rail passenger-car manufacturing, a business abandoned by American producers in 1987.

The manufacturer is an unlikely player: Morrison Knudsen Corp., a Boise (Idaho) company better known for construction and engineering services. But with its 77-year history of building more than 20,000 miles of rails, MK now wants to become a leader in making the locomotives and passenger cars that ride them. It has already won nearly $1 billion in passenger-car contracts (table), and it's planning to bid on an additional $1.3 billion by next January. In September, it delivered its first all-new railcar, to the Chicago Transit Authority.

It's a bold and risky strategy for William J. Agee, 54, MK's chairman and CEO. Morrison Knudsen has 10 years' experience rebuilding transit cars, including substantial overhauls of about half of New York's subway fleet. But it has no track record in manufacturing from scratch. After quickly amassing a $1 billion backlog of railcar orders, MK may find that delivering quality cars on time is a challenge. And with the low bids to win those orders, it could find making good money on them even harder.

MISSIONARY ZEAL. Still, Agee is convinced he's on track. He's betting that the U.S. has embarked on a rail renaissance, with cities investing heavily in transit to relieve road congestion and ease air pollution. Rather than the tired old industry of the past, Agee sees rail as a preferred transport mode for the future. It's a vision he promotes with missionary zeal: He foresees not only high-speed rail between cities but also commuter transit in every major U.S. metropolitan area. "We can't go on paving over America and calling it progress," he says.

The market could indeed be huge. Chicago, Los Angeles, and San Francisco have already levied new taxes or issued bonds to fund rail projects. A second tier of about a dozen cities, including Dallas, St. Louis, and Seattle, is actively planning for commuter rail operations. If a much-discussed high-speed-rail project proceeds in Texas, MK would be the prime contractor. There are overseas opportunities as well: Taipei is taking bids for its new subway cars, and other congested Asian cities may follow.

Agee badly needs a winner. Ever since he took the helm at MK in 1988, he has tried to rebuild his business reputation. As chairman and CEO of Bendix Corp. in 1980, he attracted criticism because of his relationship with a young protegee, Mary Cunningham, whom he later married. Then, in 1982, he launched a hostile bid to take over Martin Marietta Corp., which fought back by buying Bendix shares in a "Pac-Man defense." After Allied Corp. stepped in as a white knight and absorbed Bendix, Agee lost his job.

MK's board called Agee to his hometown of Boise in 1988 to rescue MK from deep debt and heavy losses. He cut the payroll, stopped bidding for small projects, and rebuilt the company's international business. He made MK's transportation-construction business No.1 in the U.S., although MK lags behind in its three other main lines: designing and building facilities for power, industrial processes, and hazardous waste. Agee also strengthened MK's balance sheet, cutting debt from $300 million to near zero and piling up $100 million in cash.

But the profit turnaround he promised proved elusive: Earnings in his first three years got stuck in the range of $33 million to $36 million. In 1991, the company earned just $35 million on sales of $1.98 billion. This year looked even weaker. Then, in late September, Agee dropped a bombshell: Write-offs of about $27 million for accounting changes, recall of some debt, and loss of a key rapid-transit project in Honolulu will likely mean a loss this year. On Oct. 20, MK announced a net loss of $11 million in the third quarter.

The write-off news hit hard on Wall Street, where analysts are leery of Agee's promises. "Just when it looks like their problems are behind them, ka-boom! Three more problems crop up, and it's off to the races," says Byron K. Callan, an analyst with Prudential Securities Inc. in New York.

With many of MK's other businesses mired in recession, Agee is leading the charge into railcar manufacturing. On the way from Honolulu to San Francisco for a Bay Area Rapid Transit (BART) bid last February, Agee spent five hours in MK's jet reviewing the bid with his top rail-systems executives. His last-minute decision to shave the price by more than $10 million brought MK in under its closest rival by $700,000.

BAD TIMING. Sometimes, though, Agee's involvement has backfired. In January, after MK lost out to Sumitomo Corp. for a $115 million railcar contract in Los Angeles County--even though MK's bid was lower--he flew down to protest. Because of the timing, just after President Bush's ill-fated visit to Japan, Agee ended up fanning the flames of anti-Japan, buy-American sentiments, which forced the county to rescind the contract.

That made Agee some enemies. "He seemed to be shooting from the hip, and I don't think he served his company well," says Jacki Bacharach, a member of the Los Angeles County Transportation Commission. "These are issues we had been discussing for years, and it all got lost in a political hailstorm." In early October, the city awarded an initial 15-car contract to Sumitomo. MK did not bid on the deal, saying it was too small. It will bid, though, on a $250 million, 87-car follow-on contract, but its chances of defeating Sumitomo seem slim.

Since losing out in Los Angeles, MK has won every major railcar contract it has bid on. But critics say the company is getting in over its head. After MK beat out Montreal's Bombardier Inc. for a huge $380 million Chicago Metra contract in January, the United Auto Workers protested. Bombardier was to have used a UAW facility, whereas MK had not committed to a union. "Not only do theyhave a lack of experienced production workers, they lack experienced management to build the new railcars," says Carole Travis, president of UAW Local 719. "They're up to their eyeballs in commitments that it remains to be seen whether they can deliver on."

MK says it can meet the challenge. It's delivering 16 cars a month to Chicago Transit Authority, supplied out of MK's factory in Hornell, N.Y. "The quality is first-rate," says John Hruby, CTA's general manager of rail engineering and technical services.

`A LOT SIMPLER.' MK is benefiting from a bit of lucky timing: With the aerospace industry downsizing, the company is picking up talented engineers to design rail vehicles with sophisticated guidance and control systems. Heading the team is Thomas J. Smith, 52, who boasts 28 years of factory management at Grumman Corp., where he worked on the Apollo program, as well as at Mooney Aircraft, Fairchild, and Fokker. "Welding a steel railcar is a lot simpler than making lunar modules," says Smith.

They may not be as complex as spacecraft, but MK's cars will be high-tech. Besides designing a new car for the California Transportation Dept., MK's engineers have created a microprocessor-controlled door-closing mechanism, now being tested in New York. And they've developed microprocessor controllers for locomotives. MK is also designing two new locomotives: One will run on natural gas; the other will have a high-horsepower diesel engine. MK has been overhauling locomotives for 20 years, but these will be its first built from scratch.

Even if MK does deliver on its promises, though, it's unclear whether Agee can succeed where so many other companies have failed: making money on railcar manufacturing. When remanufacturing orders dried up this year, MK's rail-systems group posted two quarters of losses before the Chicago Transit deliveries started in September. Agee says MK is already making money on those cars, but startup costs may be high at its two new plants. And once it has three factories up and running, MK will have to be even more aggressive in winning orders to keep them humming.

Agee has a lot riding on these rails. To silence critics and regain his reputation, he needs to show that MK's performance can match his promises. "Obviously, we need more time to prove it," says Agee. If he's right, he'll be able to please not only commuters but also investors. And an industry once abandoned as hopelessly unprofitable will return to America's heartland.

      How Morrison Knudsen built a $1 billion book of new railcar orders
      256 new cars, with option for 118 more.
      Price: $209 million.
      Won: September, 1990
      48 new cars with option for 18 more.
      Price $101 million.
      Won: October, 1990
      173 new cars, rehabilitation of 140, with option for 178 additional new cars.
      Price: $380 million.
      Won: January, 1992
      88 new cars, with potential for 300 more.
      Price: $155 million.
      Won: February, 1992
      50 to 80 new cars, with option for 250 total.
      Price: $140 million.
      Won: March, 1992