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HARMON INDUSTRIES INC
10-Q, 2000-08-04
COMMUNICATIONS EQUIPMENT, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2000

Commission File Number: 0-7916

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HARMON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

816-229-3345
(Registrant's telephone number, including area code)

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    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    Number of shares of Registrant's common stock outstanding as of June 30, 2000: 11,417,022

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

    The Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders' Equity are unaudited, but reflect, in the opinion of management, all adjustments necessary, all of which are considered normal and recurring, to present fairly the financial position of the Company at June 30, 2000 and December 31, 1999 as well as the results of its operations for the interim periods ended June 30, 2000 and June 30, 1999. The Consolidated Balance Sheet as of December 31, 1999 is derived from the audited Consolidated Balance Sheet as of that date.

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HARMON INDUSTRIES, INC.
Consolidated Statements of Earnings (Loss)
For periods ended June 30, 2000 and 1999
Amounts in thousands (except per share data)
(Unaudited)

				Three months ended June 30,						Six months ended June 30,
				2000			1999			2000			1999
Net sales				$	76,764		$	79,779		$	156,028		$	138,732
Cost of sales					61,352			62,578			124,090			106,905
Special Charges					651			—			651			—
Research and development expenditures					1,178			2,355			2,795			4,292
	Gross profit				13,583			14,846			28,492			27,535
Selling, general and administrative expenses					10,060			10,520			20,745			20,396
Amortization of cost in excess of fair value of net assets acquired					769			586			1,504			994
Special Charges					2,544			—			3,301			—
Miscellaneous (income) expense-net					(803	)		(68	)		(1,853	)		(186	)
	Operating income				1,014			3,808			4,796			6,331
Interest expense					(1,481	)		(1,073	)		(2,895	)		(1,636	)
Investment income					96			66			175			128
Earnings (loss) before income taxes, minority interest and cumulative effect of accounting change					(371	)		2,801			2,076			4,823
Income tax expense					(254	)		1,387			677			2,206
Minority interest in income of consolidated subsidiaries					33			(35	)		45			(35	)
Earnings (loss) before cumulative effect of accounting change				$	(84	)	$	1,379		$	1,444		$	2,582
Cumulative effect of Accounting change, net of tax ($310) (See Note 1)					—			—			505			—
Net Earnings (loss)				$	(84	)	$	1,379		$	1,949		$	2,582
Earnings Per Share:
Earnings before cumulative effect of accounting change
	Basic			$	(0.01	)	$	0.13		$	0.13		$	0.24
	Diluted			$	(0.01	)	$	0.12		$	0.13		$	0.23
Net earnings per common share:
	Basic			$	(0.01	)	$	0.13		$	0.17		$	0.24
	Diluted			$	(0.01	)	$	0.12		$	0.17		$	0.23
Shares used for computation:
	Basic				11,372			11,012			11,367			10,873
	Diluted				11,413			11,111			11,406			10,988

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HARMON INDUSTRIES, INC.
Consolidated Balance Sheets
In thousands of dollars

					June 30, 2000 (unaudited)			December 31, 1999
ASSETS
Current assets:
	Cash and cash equivalents				$	5,805		$	7,524
	Trade receivables, less allowance for doubtful accounts of $999 in 2000 and $982 in 1999					71,266			92,262
	Costs and estimated earnings in excess of billings on uncompleted contracts					27,502			27,720
	Inventories:
		Work in process				8,324			5,208
		Raw materials and supplies				45,668			41,400
						53,992			46,608
	Income tax receivable					1,582			826
	Deferred tax asset					610			2,246
	Prepaid expenses and other current assets					2,156			1,248
			Total current assets			162,913			178,434
Property, plant and equipment, at cost:
	Land					555			555
	Buildings					17,307			14,902
	Machinery and equipment					25,680			24,852
	Office furniture and equipment					32,753			31,841
	Transportation equipment					4,822			4,825
	Leasehold improvements					3,390			3,081
						84,507			80,056
	Less accumulated depreciation and amortization					49,833			46,349
		Net property, plant and equipment				34,674			33,707
Deferred tax asset						5,853			5,853
Cost in excess of fair value of net assets acquired, net of accumulated amortization of $6,818 in 2000 and $5,314 in 1999						35,366			39,520
Deferred compensation asset						9,631			8,602
Other assets						5,844			4,859
					$	254,281		$	270,975

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HARMON INDUSTRIES, INC.
Consolidated Balance Sheets (Continued)
In thousands of dollars

					June 30, 2000 (unaudited)			December 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current debt installments				$	6,247		$	6,667
	Accounts payable					28,939			32,242
	Accrued payroll, bonus and employee benefit plan contributions					10,083			11,322
	Billings in excess of costs and estimated earnings on uncompleted contracts					21,698			30,792
	Accrued Special Charges					3,048			6,195
	Other accrued liabilities					9,273			11,915
			Total current liabilities			79,288			99,133
Deferred compensation liability						6,966			6,322
Other long-term liabilities						2,615			2,799
Long-term debt						69,967			67,896
			Total liabilities			158,836			176,150
Minority interests						1,146			1,191
Stockholders' equity
	Common stock of $.25 par value; authorized 50,000,000 shares, issued 11,417,022 in 2000 and 11,399,000 in 1999					2,854			2,850
	Additional paid-in capital					37,705			37,509
	Treasury stock at cost; 30,000 shares					(641	)		(641	)
	Foreign currency translation					(1,197	)		(377	)
	Unearned compensation					(170	)		(189	)
	Retained earnings					55,748			54,482
			Total stockholders' equity			94,299			93,634
					$	254,281		$	270,975

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HARMON INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2000 and 1999
In thousands of dollars
(Unaudited)

					June 30, 2000			June 30, 1999
Cash flows from operating activities:
Net earnings					$	1,949		$	2,582
Adjustments to reconcile net earnings to net cash provided by operating activities:
	Depreciation and amortization					5,970			4,472
	(Gain) loss on sale of property, plant and equipment					(21	)		10
	Earned stock compensation					19			101
	Minority Interest in income of consolidated subsidiaries					(45	)		—
	Special charges					2,619			—
Changes in assets and liabilities, net of businesses acquired:
	Trade receivables					20,996			11,494
	Inventories					(7,384	)		(2,764	)
	Estimated costs, earnings and billings on contracts					(8,876	)		(11,501	)
	Prepaid expenses and other current assets					(908	)		(661	)
	Income tax asset (net)					880			216
	Accounts payable					(3,303	)		1,617
	Accrued payroll and benefits					(1,239	)		(8,726	)
	Accrued special charges					(3,743	)		—
	Other accrued liabilities					(1,940	)		1,543
	Other deferred liabilities					644			860
		Total adjustments				3,669			(3,339	)
			Net cash provided by (used in) operating activities			5,618			(757	)
Cash flows from investing activities:
Capital expenditures						(5,839	)		(6,332	)
Acquisition of businesses						—			(20,857	)
Proceeds from sale of property, plant and equipment						—			5
Deferred compensation, net						(1,029	)		(1,091	)
Other investing activities						(985	)		46
			Net cash used in investing activities			(7,853	)		(28,229	)
Cash flows from financing activities:
Proceeds from issuance of common stock						200			289
Purchase of treasury stock						—			(641	)
Cash dividends paid						(683	)		(665	)
Borrowings under line of credit agreements						75,011			77,960
Repayments under line of credit agreements						(71,885	)		(39,996	)
Principal payments of long-term debt						(1,475	)		(207	)
			Net cash (used in) provided by financing activities			1,168			36,740
Foreign currency translation adjustment						(652	)		(590	)
			Net increase (decrease) in cash and cash equivalents			1,719			7,164
Cash and cash equivalents at beginning of period						7,524			1,669
Cash and cash equivalents at end of period					$	5,805		$	8,833
Supplemental disclosures of cash flow information:
Cash paid during the period for:
		Interest			$	2,473		$	1,496
		Income taxes			$	774		$	531
Acquisitions of businesses financed by issuance of common stock					$	—		$	5,234

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HARMON INDUSTRIES, INC.
Consolidated Statements of Stockholders' Equity
In thousands of dollars
(Unaudited)

					Common Stock			Additional Paid-in Capital			Treasury Stock			Foreign Currency Translation			Unearned Compensation			Retained Earnings			Total Stockholders' Equity			Comprehensive Income
Balance at December 31, 1998					$	2,666		$	27,457		$	0		$	127		$	(287	)	$	54,995		$	84,958
	Net earnings																				1,203			1,203		$	1,203
	Common stock issued:
		Acquisition of businesses				50			2,968															3,018
			Deferred compensation															32						32
			Stock options and other			8			308															316
		Foreign currency translation													(223	)								(223	)		(223	)
Comprehensive income																										$	980
Balance at March 31, 1999					$	2,724		$	30,733		$	0		$	(96	)	$	(255	)	$	56,198		$	89,304
	Net earnings																				1,379			1,379		$	1,379
	Cash dividends paid																				(665	)		(665	)
Purchase of Treasury stock												(641	)											(641	)
	Common stock issued:
		Acquisition of businesses				56			2,160															2,216
		Deferred compensation																37						37
		Stock options and other							5															5
	Foreign currency translation														(367	)								(367	)		(367	)
	Comprehensive income																									$	1,012
Balance at June 30, 1999					$	2,780		$	32,898		$	(641	)	$	(463	)	$	(218	)	$	56,912		$	91,268
	Net earnings																				1,093			1,093		$	1,093
	Common stock issued:
		Acquisition of businesses				73			4,687															4,760
		Deferred compensation																39						39
		Stock options and other							7															7
Foreign currency translation															545									545			545
	Comprehensive income																									$	1,638
Balance at September 30, 1999					$	2,853		$	37,592		$	(641	)	$	82		$	(179	)	$	58,005		$	97,712
Net earnings																					(2,829	)		(2,829	)	$	(2,829	)
	Cash dividends paid																				(694	)		(694	)
Common stock issued:
		Acquisition of businesses				(3	)		(85	)														(88	)
		Deferred compensation																(10	)					(10	)
		Stock options and other							2															2
Foreign currency translation															(459	)								(459	)		(459	)
Comprehensive income																										$	(3,288	)
Balance at December 31, 1999					$	2,850		$	37,509		$	(641	)	$	(377	)	$	(189	)	$	54,482		$	93,634
	Net earnings																				2,033			2,033			2,033
	Cash dividends paid
	Common stock issued:
		Deferred compensation																39						39
		Stock options and other				2			88															90
	Foreign currency translation														(430	)								(430	)		(430	)
	Comprehensive income																									$	1,603
Balance at March 31, 2000					$	2,852		$	37,597		$	(641	)	$	(807	)	$	(150	)	$	56,515		$	95,366
	Net earnings																				(84	)		(84	)		(84	)
	Cash dividends paid																				(683	)		(683	)
	Common stock issued:
		Deferred compensation																(20	)					(20	)
		Stock options and other				2			108															110
	Foreign currency translation														(390	)								(390	)		(390	)
	Comprehensive income																									$	(474	)
Balance at June 30, 2000					$	2,854		$	37,705		$	(641	)	$	(1,197	)	$	(170	)	$	55,748		$	94,299

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Harmon Industries, Inc. and Subsidiaries
Note to Condensed Consolidated Financial Statements
March 31, 2000 and 1999
(Unaudited)

Note (1)  Change in Accounting for Inventory Cost

    Effective January 1, 2000, the Company changed its method of applying certain overhead costs to inventories. Previously, all overhead costs were applied to inventory during the production process based on labor hours. Under the new method, certain overhead costs are applied to purchased raw materials at the time inventory is received based on cost of the related procurement activities, and the remaining overhead costs are applied to inventory during the production process. The change was made to improve the valuation of inventory by applying overhead costs to inventory as the costs are incurred, thereby resulting in a better matching of revenues and expenses. The change in accounting for inventory is recorded as a cumulative effect of a change in an accounting principle, which had the effect of increasing first quarter 2000 net income, by $505 thousand (net of $310 thousand for taxes). This change had no significant impact on the first quarter 2000 income before cumulative effect of accounting change. The financial statements have not been restated to reflect the accounting change. If this newly adopted policy had been applied in the first quarter of 1999 the impact on net income would not have been material.

PART I.  FINANCIAL INFORMATION

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Special note

    On July 16, 2000, Harmon Industries, Inc. entered into an Agreement and Plan of Merger, with General Electric Company. Pursuant to this agreement GE will commence an offer to exchange $30 of GE common stock (based on the weighted average trading price of GE common stock during a designated period prior to the closing of the offer) for each Harmon share tendered in the offer. See Harmon's Form 8-K, Schedule 14d-9 and other documents filed with the Securities Exchange Commission for more information.

Results of Operations: Three Months Ended June 30, 2000

Sales

    Harmon Industries, Inc. ("Harmon" or "the Company") recorded net sales for the quarter of $76.8 million, a decrease of $3.0 million, or 3.8%, from the second quarter of 1999. The decrease in net sales is primarily the result of a decrease in North American Freight sales of $6.2 million combined with a decrease in other product sales of $1.8 million. Offsetting the decreases described above was an increase in transit sales of $4.8 million.

Gross profit

    Gross profit for the quarter decreased by $1.2 million to $13.6 in 2000 from $14.8 million in 1999. The gross profit percentage decreased to 17.7% in the second quarter 2000 from 18.6% in the prior year second quarter. Gross profit was adversely effected by the special charges (discussed below - 0.8% of sales) and higher systems business sales which have a lower gross profit percentage. The majority of the increased system business sales were from the increase in transit business. Partially offsetting the reduced margin from these items were increased sales of products, which although increased in total dollars from last year, were still a lower portion of total sales. Reduced R&D expenditures also favorably affected the gross profit as a percent of sales. The reduced R&D spending does not reflect lower engineering capacity as in many cases the Company's engineers are working on direct projects. Direct project engineering costs are

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recorded as cost of sales. Further impacting gross profit was the $651 thousand impact of special charges associated with restructuring described below.

    Expenditures associated with the Bay Area Rapid Transit (BART) project have decreased margins for the second quarter ended 2000 as well as 1999. In 2000 the company experienced a $2.5 million cost overrun that was driven by longer than expected testing time and system interface issues. Whereas, in 1999 subcontractor performance issues decreased margins by $2.5 million. These events are not a normal component of the Company's project cost structure.

SG&A

    Selling, general and administrative expenses (SG&A) were $10.1 million during the 2000 quarter compared with $10.5 million during the prior year quarter. The decrease in SG&A consisted primarily of personnel related expenses. SG&A as a percent of net sales decreased from 13.2% during the 1999 quarter to 13.1% during the 2000 quarter.

Goodwill amortization

    Amortization expense increased to $769 thousand from $586 thousand in the same quarter one year ago. This increase is attributable to the increase in goodwill resulting from a full quarter in 2000 versus a partial amount of amortization experienced in 1999 as acquisitions were completed throughout the second quarter of 1999.

Special charges

    The Company recorded a special charge of $9.1 million ($5.6 million after tax) in the fourth quarter of 1999 in connection with a restructuring plan which was announced in November 1999. Reference is made to the Company's 10-K for the period ended December 31, 1999 for a complete discussion of the plan. The plan entails the consolidation of the Company's component assembly operations and the majority of its research and development efforts into its Grain Valley, Missouri facility and its product assembly and asset management operations into its Warrensburg, Missouri plant. Progress to date includes closure of the Long Island, New York facility by consolidating it into the Grain Valley, Missouri facility, completion of the move of operations from Riverside, California to Missouri, completion of the move of the asset management operations from Lees Summit to Warrensburg Missouri and completion of numerous cost reduction activities throughout the remainder of the Company.

    In June 2000 the Company recorded special charges of $3.3 million associated with the closure of its subsidiary, Golden Gate Switchgear, Inc ("Golden Gate"). The charges include severance and related costs of $0.1 million, lease cancellation and facility closure costs of $0.5 million and other costs of $0.1 million. In addition, the Company recorded asset impairment charges of $2.0 million related to goodwill and fixed assets of Golden Gate. A charge of $0.65 million was also recorded to reflect the write down of inventory related to Golden Gate products, which will be discontinued.

    The Company believes that the Golden Gate closure is the final major action related to this restructuring program. The Company expects the restructuring of operations to be completed during the year 2000. It is proceeding as planned with respect to all facility closings, transfer of manufacturing operations and severance payments.

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    A summary of activity related to accrued special charges is as follows (in thousands):

Golden Gate special charge reserve:

    Excluding the impact of the Golden Gate restructuring reserve, during the second quarter of 2000 the Company reduced by $1.2 million the accruals for severance costs relating to the restructuring plan announced in November 1999 as these costs are no longer expected to be paid. In addition, the Company incurred special charges of $1.1 million in the second quarter related to manufacturing inefficiencies of products previously assembled in the Riverside California plant, cross training expenses, consulting support, and travel related to restructuring.

    Total special charges, including those incurred to date, the Golden Gate charges and the remaining period expenses, are expected to be within the original estimates described in the restructuring plan announced in November 1999.

Miscellaneous Income

    Miscellaneous income for the second quarter 2000 was $800 thousand compared to $68 thousand for the same period 1999. The increase is due principally to a royalty payment from Nippon Signal as a result of a license agreement involving the Company's Advanced Automated Train Control technology.

Interest

    Net interest expense (interest expense less investment income) for the quarter increased to $1.4 million from $1.1 million for the prior year quarter as a result of higher borrowings required to support increased working capital and higher interest rates.

Taxes

    The effective tax rate for the quarter was 68.6% (Benefit) in 2000 as compared to 49.5% (Expense) in 1999. This change is due to certain foreign tax loss carry forwards that are being used against foreign net income and lower income earned in countries with higher tax rates.

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Net earnings

    Net income decreased to a loss of $84 thousand from $1.4 million in the prior year quarter. The decrease is primarily attributable to special charges recorded in the second quarter of 2000.

Earnings per Share

    Basic and diluted earnings per common share including special charges were ($0.01) for the second quarter 2000. The following pro forma table shows the effect of the various items on earnings per common share:

Basic				2000			1999
Net earnings before special charges				$	0.16		$	0.13
	Effect of special charge				(0.17	)		—
Net earnings				$	(0.01	)	$	0.13

Diluted				2000			1999
Net earnings before special charges				$	0.16		$	0.12
	Effect of special charge				(0.17	)		—
Net earnings				$	(0.01	)	$	0.12

Orders and Backlog

    Total orders for the second quarter were $63 million, down 46% from $116 million for the same period in 1999. While North American freight orders were down $6.2 million for the second quarter, orders for the first six months in 2000 are 8% percent above the last half of 1999.

    Transit orders were also down to $10.5 million during the period versus $39 million in the prior year. The Company anticipates bidding on $200 million worth of transit business in the second half of 2000, in addition to approximately $100 million in business where it is the designated signal supplier. Transit sales for the period increased to $20 million from $15 million in 1999, a 31 percent increase, reflecting shipments from backlog. The Company expects transit orders for 2000 to exceed those of 1999.

    International orders for the quarter totaled $6.5 million versus $18.9 million in the second quarter of 1999, a decrease of 66 percent. The decrease reflects timing of receipt of orders as the prior year reflected two major orders placed with Siliani Harmon in Italy totaling $3.0 million. The Company anticipates that orders received in the second half of 2000 will lead to growth in orders in this sector for the year.

Results of Operations: Six Months Ended June 30, 2000

Sales

    Net sales for the six months ended June 30, 2000 were $156.0 million, an increase of $17.3 million, or 12.5%, from the same period in 1999. The increase is due primarily to an increase in net sales of $14.8 million in North American transit sales, $8.7 million in international sales and $0.6 million in other sales. North American freight sales decreased $6.8 million.

Gross profit

    Gross margin percentage decreased to 18.3% in 2000 from 19.8% in 1999. The decline in gross margin percentage is primarily the result of the continuing trend in the sales mix toward lower margin transit and services sales.

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SG&A

    Selling, general and administrative expenses (SG&A) were $20.7 million during the six months ended June 30, 2000 compared with $20.4 million during the prior year period. SG&A as a percent of net sales decreased from 14.7% during the 1999 period to 13.3% during the 2000 period.

Goodwill amortization

    Amortization expense increased to $1.5 million from $1.0 million in the same period one year ago. This increase is attributable to the increase in goodwill resulting from a full quarter in 2000 versus a partial amount of amortization experienced in 1999 as acquisitions were completed throughout the first half of 1999.

Miscellaneous Income

    Miscellaneous income for the first six months 2000 was $1.85 million compared to $0.2 million for the same period 1999. The increase is due principally to royalty payments from Nippon Signal as a result of the agreement involving the Company's Advanced Automated Train Control technology.

Interest

    Net interest expense (interest expense less investment income) for the six months ended June 30, 2000 increased to $2.7 million from $1.5 million for the prior year period as a result of higher borrowings required to support increased working capital needs and higher interest rates.

Taxes

    The effective tax rate for the six months decreased to 32.6% in 2000 from 45.7% in 1999. This decrease is due primarily to certain foreign tax loss carry forwards that are being used against foreign net income and lower income earned in countries with higher tax rates.

Net Earnings

    For the six months ended June 30, 2000, net income decreased to $1.9 million from $2.6 million in the prior year. The Company experienced special charges related to the restructuring described above in the amount of $1.96 million, net of tax during the first six months. This was partially offset by the cumulative effect of an accounting change of $505 thousand, net of tax. In addition to the royalty income described above, other contributors to the Company's performance were strict cost controls, an earlier than expected effect of our restructuring effort and to some extent the effect of the increased sales volume.

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Earning per share

    Basic and diluted earnings per common share including special charges were $0.17 for the six months ended June 30, 2000. The following pro forma table shows the effect of the various items on earnings per common share:

Basic				2000			1999
Net earnings before special charges and accounting change
				$	0.34		$	0.24
	Cumulative effect of accounting change				0.04			—
	Effect of special charge				(0.21	)		—
Net earnings				$	0.17		$	0.24

Diluted				2000			1999
Net earnings before special charges and accounting change
				$	0.34		$	0.23
	Cumulative effect of accounting change				0.04			—
	Effect of special charge				(0.21	)		—
Net earnings				$	0.17		$	0.23

Segment Information

    The Company manages its operations through two business segments: USA operations and international operations. Each unit sells train control and train signal products as well as services to railroads and transit authorities. The international business segment sells the Company's products and services outside the U.S. The Company is reporting business segment information in accordance with the provisions of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which was issued in June 1997. The Company evaluates performance based upon net operating profit. Administrative functions such as finance, treasury and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. In the event any materials and/or services are provided to one operating segment by the other, the transaction is valued according to the company's transfer policy, which approximates market price. The costs of operating the manufacturing plants are captured discretely within each segment. The Company's property, plant and equipment, inventory and accounts receivable are captured and reported discretely within each operating segment.

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		Three months ended June 30, 2000			Three months ended June 30, 1999
USA Operations
Net Sales		$	67,610		$	70,782
Expenses excluding special charges			62,975			67,332
Special charges			3,195			—
Operating Income/(Loss)			1,440			3,450
International Operations
Net Sales			9,154			8,997
Expenses excluding special charges			9,580			8,637
Special charges			—			—
Operating Income/(Loss)			(426	)		360
Consolidated
Net Sales			79,764			79,779
Expenses excluding special charges			72,555			75,971
Special charges			3,195			—
Operating Income/(Loss)			1,014			3,808

		Six months ended June 30, 2000			Six months ended June 30, 1999
USA Operations
Net Sales		$	134,247		$	127,010
Expenses excluding special charges			124,887			120,805
Special charges			3,952			—
Operating Income/(Loss)			5,408			6,205
Assets			226,970			201,880
Accounts Receivable			57,523			44,595
Inventory			47,330			45,337
International Operations
Net Sales			21,781			11,722
Expenses excluding special charges			22,393			11,596
Special charges			—			—
Operating Income/(Loss)			(612	)		126
Assets			29,333			35,080
Accounts Receivable			13,743			15,209
Inventory			6,444			8,935
Consolidated
Net Sales			156,028			138,732
Expenses excluding special charges			147,280			132,401
Special charges			3,952			—
Operating Income/(Loss)			4,796			6,331
Assets			254,539			236,960
Accounts Receivable			71,266			59,804
Inventory			53,992			54,272

    The changes in the international operations are primarily due to the acquisition of Siliani Harmon on April 30, 1999 as described in the 10-K for the year ended December 31, 1999. Due to the timing regarding when the Italian railroads release projects to suppliers, Siliani Harmon normally generates the vast majority of its profit in the second half of the year.

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Liquidity at June 30, 2000

    At June 30, 2000, the Company had $26.2 million in liquidity. This consisted of $5.8 million in cash and cash equivalents plus $20.4 million available under bank lines of credit. The current ratio at June 30, 2000 was 2.05 to 1 compared to 1.80 to 1 at December 31, 1999 and 2.06 to 1 at June 30, 1999. Cash provided by operating activities for the six months ended June 30, 2000 was $5.6 million compared to cash used in operating activities of $0.8 million for the same period one year ago. Cash used for investing activities in the three months ended June 30, 2000 was $7.9 million as compared to $28.2 million in the prior year. The prior year included $20.9 million paid in connection with the acquisition of businesses. Cash provided by financing activities in the three months ended June 30, 2000 decreased to $1.2 million from $36.7 million in the prior year. The decrease was principally the result of borrowings in 1999 used to fund acquisitions and working capital requirements. The company believes it has sufficient liquidity to execute its plans.

Litigation Update

    Union Switch & Signal ("US&S") has declared the Company's subsidiary, Harmon Control and Information Systems, Inc. ("HCIS") in default on a New York City Transit System Automatic Train supervision subcontract. US&S consequently terminated the subcontract on April 18, 2000. The total original contract award was approximately $15 million. The Company considers the action taken by US&S to be improper and unjustified. HCIS therefore filed an arbitration claim dated June 6, 2000 in New York alleging wrongful termination by US&S of its subcontract. The amount claimed by HCIS is $5.6 million. US&S has filed a counterclaim dated July 6, 2000 for an amount in excess of $14.5 million. Because the dispute is in the early stages, the Company is unable to predict the likelihood of a favorable outcome.

    Rail Safety Engineering, PC ("RSE") filed a complaint against the Company on April 24, 2000 alleging that the Company breached its contract with RSE by not paying RSE $714 for work done to assist in the development of the vital station computer of the Company advanced automatic train control ("AATC") system. The Company is installing the AATC system on the San Francisco Bay Area Rapid Transit District ("BART"). The Company filed its answer on July 2, 2000 denying that any additional funds were owed to RSE and its counterclaim that RSE failed to perform its agreement. Because of this failure, the Company was damaged in an amount as yet to be determined, but in an amount expected to exceed $1.6 million. Because the dispute is in the early stages, the Company is unable to predict the likelihood of a favorable outcome.

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Forward-looking Statements

    Statements made in this document, which are not historical in nature, are forward-looking statements. The forward-looking statements made in this document, as well as all other forward-looking statements or information provided by Harmon Industries, Inc. or its officers and employees, whether written or oral, are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements of Harmon Industries, Inc. are based upon, among other things, internal estimates, preliminary information, management assumptions, and the performance of the U.S. and international economies, as well as the freight rail and transit rail industries in which Harmon Industries, Inc. does business. These statements should be considered in light of risks and uncertainties, including but not limited to the Company's restructuring initiative, the uncertainty of the above described litigation and other factors which may affect Harmon Industries, Inc.'s actual performance, including the ability of Harmon Industries, Inc. to complete its long-term contracts within current estimated costs, the completion of the Company's restructuring consistent with estimated timing and cost assumptions, timing of Class 1 freight railroad orders, the ability of Harmon Industries, Inc. to achieve a product mix consistent with its current projections and other factors as discussed in the Company's most recent Form 10-K. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)

Exhibits:

Exhibit Number		Exhibit		Page(s)
3(ii)		Bylaw amendments
11		Computation of per share earnings
27		Financial Data Schedule

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(b)

Reports on Form 8-K:

None during the second quarter of 2000.

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HARMON INDUSTRIES, INC.
Date: August 3, 2000	/s/ BJORN E. OLSSON    Bjorn E. Olsson, President and Chief Executive Officer
Date: August 3, 2000	/s/ STEPHEN L. SCHMITZ    Stephen L. Schmitz, Executive Vice President-Finance

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QuickLinks

PART I. FINANCIAL INFORMATION
HARMON INDUSTRIES, INC. Consolidated Statements of Earnings (Loss) For periods ended June 30, 2000 and 1999 Amounts in thousands (except per share data) (Unaudited)
HARMON INDUSTRIES, INC. Consolidated Balance Sheets In thousands of dollars
HARMON INDUSTRIES, INC. Consolidated Balance Sheets (Continued) In thousands of dollars
Harmon Industries, Inc. and Subsidiaries Note to Condensed Consolidated Financial Statements March 31, 2000 and 1999 (Unaudited)
SIGNATURES