Harmon Industries, Inc.

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Harmon Industries, Inc.

1300 Jefferson Court
Blue Springs, Missouri 64015
U.S.A.
(816) 229-3345
Fax: (816) 229-0556
Web site: http://www.harmonind.com

Public Company
Incorporated: 1961 as Harmon Electronics, Inc.
Employees: 1,700
Sales: $213.5 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: HRMN
SICs: 3669 Communications Equipment, Not Elsewhere Classified; 3679 Electronic Components, Not Elsewhere Classified

Harmon Industries, Inc. since World War II has played an instrumental part in supplying the nation’s railroads with advanced systems for signaling, inspection, and train control and safety. The company designs and manufactures rail/highway grade crossing hardware and related services, such as packaging, installation, and maintenance. Using advanced radio, computer, and infrared technologies, Harmon also provides sophisticated equipment that gives engineers and others the ability to better control today’s powerful trains and monitor internal train operations for improved mechanical and electrical reliability. Harmon electronic devices can automatically control train speed and braking if human operators fail. Its contract engineering and asset management services help railroads concentrate on their core functions. Harmon also manufactures circuit boards for its own use and 300 other firms. Harmon serves three markets: domestic freight trains, its core business that accounts for about 85 percent of its annual sales; domestic light rail or mass transit systems; and international freight and rail transit systems. Based in the Kansas City suburb of Blue Springs, Missouri, Harmon Industries operates from several facilities in the United States, Canada, Switzerland, Australia, and England to bring high technology into the rapidly changing railroad industry.

Company Origins

Robert C. “Bob” Harmon, the founder of Harmon Industries, first learned about radio in the 1930s while serving in the Marine Corps. Later he worked as an engineer for the Aireon Manufacturing Company in Kansas City, Kansas, that served the military during World War II. After the war ended, Aireon failed in its attempt to sell two-way radios to the civilian train market, having grown complacent with federal contracts and being generally mismanaged.

Aireon’s collapse opened a door for Bob Harmon. To provide work for himself and the many skilled individuals unemployed after the war, Harmon in September 1946 started his own firm, Harmon Electronics, as a sole proprietorship. As Aireon’s chief sales engineer, Harmon had made numerous contacts with railroad managers, so he felt he was ready to open his own business. In the company’s first two years, it made no profits and survived with the help of a bank loan.

Operating from his first office in an Independence, Missouri, upholstery shop, Harmon set his initial goal as using radio and other electronics to help railroads. For example, he found a better way to inform railroad engineers about overheated axle bearings called hotboxes, which, if ineffective, could lock up wheels and cause trains to derail. Harmon’s solution was to transmit data from hotbox detectors, trackside devices that used infrared beams to detect overheated bearings, to a central point using either power or telephone circuits already in place. Once the railroad’s central office received the information, it used radio to notify its train engineer of an impending hotbox failure.

With a contract signed with Southern Railway for hot box detector equipment, in 1958 Harmon Electronics moved from its leased building at 11431 Truman Road to its first owned facilities, a new building on farm land next to Bob Harmon’s home. The company that year also began replacing vacuum tubes with transistors in its products. Bob Harmon in his company newsletter called 1958 “a memorable year, and a turning point in the business.”

In an interview in the January 1990 issue of Nation’s Business, Bob Harmon’s son Robert E. (Gene) Harmon said his father’s firm for 20 years remained a “custom engineering firm” that helped its clients find technical solutions. It employed just two dozen workers and brought in less than $1 million in annual revenues, but change was just around the corner.

Expansion in the 1960s and 1970s

In 1961 Harmon Electronics, Inc. was incorporated with Bob Harmon as president, Gene Harmon as vice-president, and the founder’s wife Mildred I. Harmon as secretary-treasurer. After graduating from Georgia Tech, Gene Harmon joined his father’s firm on a full-time basis, a decision that proved to be a turning point for Harmon Electronics.

Gene Harmon’s first contribution was an electronic switch that improved the timing on railroad crossing gates. Previous devices were quite slow, as the gates would not open to cars until trains had gone 100 feet or more down the track. Gene Harmon’s device opened gates after just two feet of clearance. His father liked the idea, and by 1964 the company had a major product to sell.

Sales increased for Harmon Electronics, but the founder reportedly did not enjoy the expansion. “I was primarily an engineer, not a manager,” said Bob Harmon in the Nation’s Business article, adding “I didn’t really have any major wish to operate a larger company.” Thus, in 1969 Bob Harmon left management while retaining most stock in the still private firm. In 1972 Gene Harmon took Harmon Electronics public.

The company remained profitable through the 1970s, but Gene Harmon thought the firm was complacent and limited with just one major product. Competition and railroads’ resistance to price increases led to a dramatic change for Harmon in the 1980s.

Acquisitions, Innovations, and Restructuring

The 1980s began with the Staggers Rail Act, which deregulated the nation’s railroads. Deregulation allowed railroads to compete with trucks, although through most of the decade trucks continued to gain market share. The railroads simply had a lot of catching up to do in terms of modernization and investment.

In October 1981 Harmon purchased a line of hot box detectors from General Electric, devices that Harmon Electronics’ West Coast operation had started selling in the 1970s. Meanwhile, the company began acquiring complementary firms, including in 1984 Electro Pneumatic Corporation (EPC), which owned a plant in Riverside, California. With its plants for manufacturing and assembling grade crossing hardware in Jacksonville, Florida, and Louisville, Kentucky, Modern Industries was acquired in 1986.

In 1987 Harmon Industries, Inc. was formed as a holding company. Harmon Electronics remained a subsidiary, selling its railroad crossing gate switches, which provided about $20 million in sales out of a total of almost $65 million in 1988. Harmon Electronics ran two manufacturing facilities in Grain Valley, Missouri, and two more in Warrensburg, Missouri. Acquired firms made crossing gates, warning lights, and electronics to control train flow. Under Harmon Industries Chair and President Gene Harmon, things were looking up. In 1985, Harmon was able to repurchase the 51 percent share of its stock bought by SAB Industries AB of Malmo, Sweden, in 1977.

A major train wreck in 1987 led to a Harmon innovation to prevent such tragedies. At Chase, Maryland, a Conrail freight train run by a marijuana-smoking engineer went through a stop signal and was hit by an Amtrak passenger train going over 100 mph, resulting in the deaths of several people. The Federal Railroad Administration began requiring that all freight trains operating between Boston and Washington, D.C., install automatic devices to slow down and stop.

Harmon responded in early 1989 by installing its Locomotive Speed Limiter in its Ultra Cab systems, first on Conrail locomotives and later on locomotives around the nation, including the freight trains of the Florida East Coast line. Instead of engineers watching traffic signals along the track, Harmon’s system automatically read electronic pulses traveling through the rails. Even if engineers ignored the Limiter’s signals inside the cab, the Harmon device would gradually bring the train to a complete halt. This was particularly important for freight trains, which had to be stopped gradually, as sudden braking tended to derail unstable freight trains.

Harmon Industries in 1987 created a subsidiary called Consolidated Asset Management Company, Inc. (CAMCO) to warehouse inventories of railroad signaling equipment so that it could rapidly put together complete products ready to ship to railroads on demand. CAMCO expanded in the 1990s to provide railroads with comprehensive purchasing and inventory management in a good example of outsourcing. CAMCO benefitted railroads by volume purchasing, saving on inventory costs, and installing and long-term maintenance of a variety of products, such as crossing hardware, track circuitry, and data recording items. CAMCO operated warehouses in Lee’s Summit, Missouri, and Riverside, California.

Company Perspectives:

Harmon Industries will endeavor to provide an adequate rate of return on investment for its SHAREHOLDERS consistent with its long-term growth objectives. It will provide for its CUSTOMERS products and services of the highest quality and value possible while maintaining technological leadership in all product lines. Harmon Industries will provide for its EMPLOYEES a positive and open work environment that will allow everyone to develop to their full potential and provide compensation and incentives competitive with our industry and geographic location. Harmon Industries will strive to be a good corporate citizen within the community while complying with GOVERNMENT regulations.

Recovery and Growth in the 1990s

From 1989 to 1991 Harmon Industries suffered economic setbacks. Its earnings per share from continuing operations declined from $.84 in 1989 to $.65 in 1990 and $.57 in 1991. And net income declined from $3.9 million in 1989 to $2.9 million in 1991. One reason for the downturn was the losses from three unprofitable subsidiaries.

First was Harmon’s 80-percent-owned subsidiary Cedrite Technologies, Inc. At the Cedrite plant in Kansas City, Kansas, old wooden railroad ties were ground into chips and then mixed with a special resin. Under high pressure, the mixture was baked to produce new ties which were heavier and more durable than regular wooden ties. Cedrite by 1990 had received orders for 200,000 ties each from Union Pacific and Santa Fe, but Harmon in April 1991 shut down this unprofitable operation. Harmon also eliminated another unprofitable subsidiary called Phoenix Data, Inc., a maker of data acquisition and analysis systems for industrial, military, and scientific uses purchased in 1989. Phoenix operations were ended in 1990, and its assets were sold the following year. The third costly subsidiary, Modern Industries, was merged into another Harmon subsidiary in 1990, resulting in reduced labor and overhead costs.

As high technology increased in the railroad industry, the First International Symposium on Advanced Train Control was held in Denver in June 1991. Harmon Industries, along with other firms that provided railroads with communication, signaling, and control technologies, such as General Railway Signal, Safetran, and Union Switch and Signal, took part in this meeting. Issues such as train safety, training personnel to use advanced computerized equipment, and the possibility of creating precision train scheduling of freight deliveries were just a few of the topics discussed.

At about the same time, both the railroads and the federal government began spending more money to upgrade railroads. For example, a new highway bill in 1992 contained $160 million for better train crossing warning systems. Furthermore, more federal money was being spent on mass transit. Such external factors plus Harmon’s heavy investment in research and development, about five percent of annual sales, helped Harmon recover.

By the early 1990s, Harmon Industries’ products had helped increase safety at railroad-highway crossings. Over 30,000 motion detectors or constant warning time systems had been installed on North American railroads by 1993. In spite of increased auto and train traffic, the Federal Railroad Administration reported fewer accidents and fatalities; there were 6.3 percent fewer accidents and 13.7 percent fewer fatalities in 1991 compared to 1990.

Burlington Northern Railroad emphasized such safety concerns in 1993 when it began installing Harmon’s HXP predictor equipment in the busy Chicago area. The HXP system provided constant warnings along a three-track main line used by commuter trains, Amtrak, and local freight trains.

In 1993 Harmon Industries entered the growing mass transit market with a contract to provide the St. Louis MetroLink light rail line with its grade crossings signal devices and its Ultra-Cab II onboard computer-based control system. Harmon reported that entering this new market helped its sales for the first half of 1993 increase 40 percent over the first half of 1992. Harmon won praise from the railway industry for a very successful entry into light rail. Installation went smoothly and almost no problems bothered the system in 1994. By adapting its freight train technology, Harmon was able to enter a new market.

The company in 1993 received other mass transit orders. In August 1993 the New York City Transit Authority announced a $4.5 million contract to have Harmon install its microcomputer-based speed limiting equipment at 30 points along the transit line. According to Dick Daniels, Harmon’s vice-president for transit sales, this New York City contract was quite challenging, partially because the firm was relatively new in the mass transit field, but mainly because of the sheer size of the contract.

Harmon also received a $1.4 million contract for block signaling along Denver’s new light rail system, and the Southern California Regional Rail Authority chose Harmon’s subsidiary CAMCO to warehouse and assemble track and signal items for its commuter rail system.

Harmon Industries in December 1994 announced it had completed acquiring the transportation division of Hicksville, New York’s Servo Corporation of America. Since Servo had competed against Harmon in detecting hot box problems, Harmon gained technical expertise in that area. In addition, Harmon gained Servo’s established networks for international sales. The acquisition resulted in the Servo division’s manufacturing relocating to Riverside, California, where it began integration with Harmon’s subsidiary, Electro Pneumatic Corporation. Harmon also opened in Long Island, New York, a new office to handle sales, engineering, and product management concerning its hot box technology. The following year Harmon acquired Serrmi Services of Atlanta, Georgia, a company with combined office and manufacturing space of 35,360 square feet.

Harmon gained new international contracts in 1995 and 1996. In April 1995 it announced it had gained a $2.4 million agreement with Western Australia’s BHP Iron Ore railroad. Harmon agreed to upgrade the railroad’s wayside signaling systems using its computer technology and install its advanced Ultra Cab II system, which gave engineers more information and automatically controlled braking. Moreover, in October 1995 the People’s Republic of China (PRC) awarded Harmon a $727,000 contract for hot box detectors for its mainline railroads. The following spring the PRC expanded its hot box Harmon contract by another $800,000.

In spite of a $2.2 million contract with Union Pacific to install equipment on UP’s Chicago suburban line, Harmon experienced some difficulties in 1995, mainly in integrating its acquired Servo unit. Sales for fiscal year 1995 increased 14 percent to reach $137 million, but net earnings declined ten percent to $6.9 million and earnings per share declined 13 percent.

Harmon enjoyed much better years in 1996 and 1997, based on new acquisitions, contracts, facilities, improved technology, and increased reliability and quality of its products and services. During this time, Harmon Industries acquired the following firms: Vaughan Systems, a U.K.-based maker of train describers and passenger information and modular railway control systems; First Coast Signal Engineering, Inc., a private company with 13 engineers focusing on designing highway train crossings for class one railroads; Omaha Railway Signal, Inc., a Florida-based firm with five experienced engineers in the railway industry; Devtronics, Inc., a firm supplying railroad products and services, including hot box detectors, highway crossing event monitoring and alarm equipment, and stand-alone defect detectors for high and wide loads and dragging equipment; CSS, Inc., and Indiana fir, that installed and maintained railroad equipment, mainly warning systems for highway crossings in the Midwest and Florida.

At the same time, Harmon gained many new or extended contracts. Harmon’s Incremental Train Control System (ITCS) was installed and successfully demonstrated in Michigan on the Chicago-Detroit line as part of a joint project with the Federal Railroad Administration, Amtrak, and the Michigan Department of Transportation to allow trains to run at higher speeds with better safety. Improving productivity by increasing the number of trains that safely run on the same track, the ITCS employed Global Positioning System that used radio waves from satellites to determine train position. In 1996, Harmon was selected to provide the signals and control systems for the Florida Overland Express’ high-speed route between Miami, Orlando, and Tampa Bay. Moreover, in 1997, Harmon gained two contracts from the Utah Transit Authority for signaling projects along UTA’s new light rail system from downtown Salt Lake City to Sandy 15 miles to the south, a route expected to carry 20,000 passengers daily, done in preparation for the 2002 A.D. Winter Olympics.

In 1998 Harmon planned to introduce a new product, the Electro Code 5, an advanced model of signaling technology that electronically replaced pole lines between signals. And the firm intended to start a new training school and a new 24-hour service desk.

To improve the quality of its products and services, Harmon Industries in the 1990s upgraded its facilities and processes to meet International Organization for Standardization (ISO) standards. In 1996 the firm announced ISO-9001 certification with TickIT for its Grain Valley and Warrensburg, Missouri, manufacturing plants and its engineering offices in Omaha, Nebraska; Jacksonville, Florida; Louisville, Kentucky; and Grain Valley. TickIT certification was supported by the Department of Trade and Industry and the British Computer Society to increase quality in developing and producing software. In December 1997 Harmon’s Atlanta facility was ISO certified, followed by its Lee’s Summit plant also becoming ISO certified in early 1998. In a press release dated April 1, 1998, Harmon President/CEO Bjorn E. Olsson stated, “With the certification of Lee’s Summit, we have completed a major strategic initiative to have every Harmon operation ISO certified. We have increased the standards by which our company operates and will hold all future acquisitions to the same level of quality.”

With these changes in place, Harmon’s finances showed considerable improvement in 1996 and 1997. Gross sales increased from $136.1 million in 1995 to $183.9 million in 1996 and then to $214.4 million in 1997. Likewise, net earnings jumped from $6.9 million in 1995 to $9.3 million in 1996 and to $11 million in 1997. Although its international business in 1997 resulted in a small fraction of Harmon’s gross sales, it was the fastest growing part of the company, mainly from Vaughan Harmon contracts in the United Kingdom. Harmon at the end of 1997 was creating a Mexican subsidiary and trying to expand its operations in China and India. Its international customers were found in Latin America, the West Indies, Africa, the Middle East, Asia, and New Zealand.

Robert Heggestad, Harmon’s vice-president for technology, pointed out a long-term trend helping his company. “The capability of most new electronic equipment for internal diagnostics, data logging and remote access for diagnostics and data retrieval are very much in tune with the continued downsizing of maintenance staffs on most railroads,” said Heggestad in the December 1995 Progressive Railroading.

In 1998 Harmon Industries operated under the directions of its ten-member Board of Directors chaired by Bob Harmon, the only member of the Harmon family still involved in the firm. The company’s president/CEO was Bjorn E. Olsson, who had worked for several Swedish firms before becoming Harmon’s president and COO; in 1995 he became president and CEO. Harmon Industries had an impressive track record through most of the 1990s and good prospects for the near future as railroads continue to modernize.

Principal Subsidiaries

Consolidated Asset Management Company, Inc. (CAMCO); Vaughan Harmon Systems Ltd. (United Kingdom); Vale Harmon Enterprises, Ltd. (Canada); Henkes-Harmon Industries, Pty. Ltd. (Australia).