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U.S., this includes a fully computerized Customer
have grown from a single-focus retail loss preven-
Response Center, providing 24-hour access to Sen-
tion company to a large, diversi¬ed operation pro-
sormatic™s sales and service organizations; a “Help
viding turnkey, integrated electronic security systems
Desk,” providing expert technical and product infor-
for retail and commercial/industrial establishments
mation to Sensormatic representatives; and a
across the globe.
national Operations Group to service customers
In 1995 we continued to make the investments when product installations extend beyond regional
required of a leader. We strengthened our product lines. We are undertaking similar initiatives interna-
714 Management Communications




17-30
Management Communications




tionally. In addition, we increased the number of operating expenses by 10 percent.
customer service engineers supporting our global We are increasing throughput at our Irish production
customer base to over 1,600 worldwide.




Sensormatic Electronics Corporation
plant to increase margins.
To continue building our commercial/industrial busi-
We initiated programs to improve inventory turns
ness, we restructured our product companies”
and accelerated the collection of receivables.
Robot Research, American Dynamics, Software
Improving our cash ¬‚ow and reducing debt and
House and Continental Instruments”into the Secu-
related interest expense is a key priority.
rity Product Division (SPD). With a single organiza-
Most importantly, we are pleased to announce the
tion, we will be better able to coordinate, control
appointment of Bob Vanourek as President and
and expand our product offerings to our dealers. In
Chief Operating Of¬cer. Previously, Bob was Presi-
April, we established the ¬rst non-U.S. of¬ce of SPD
dent and Chief Executive Of¬cer of Recognition
in Paris, which will serve as the headquarters of
International, Inc., an international provider of doc-
SPD™s European operations.
ument processing hardware, software and services.
Despite our customer and product successes, which
He has more than 25 years™ experience in market-
generated impressive revenue growth, we failed to
ing and general management, including eight years
meet our earnings targets this year. Our fourth quar-
at Pitney Bowes and several years™ experience in our
ter earnings shortfall and an extensive year-end
industry. We welcome Bob and look forward to his
examination by our auditors graphically demon-
contributions to Sensormatic™s continued growth in
strated that in focusing on revenue growth, we have
the months and years to come.
grown the Company faster than the management
organization. As a consequence, we stretched our Despite the disappointments of the past year, the
management resources”with adverse bottom-line fundamentals of our business remain strong. Our
results. market is large and growing. Our leadership posi-
tion is intact. As we address the ¬nancial and
Contributing to our disappointing results were the
administrative issues described above, we will con-
following:
tinue to pursue our many growth opportunities by:
Expenses grew signi¬cantly faster than revenues,
• Increasing global market penetration;
particularly in the second half of the ¬scal year.
• Accelerating source tagging;
The integration of the Knogo European operations
was slower and more costly than anticipated. • Building and marketing our systems integration
Revenues from three of our four international units capabilities for both retail and commercial/
were below forecast, impacting overall margins. industrial customers.
A downward restatement of our third quarter results And ¬nally, to help shareholders better understand
was required primarily due to the premature recog- the uniqueness of our business and measure our
nition of revenue on certain shipments made after progress against the objectives outlined above, with
quarter-end and on certain shipments subject to this annual report, we have expanded the discussion
non-standard contractual terms. of our lines of business and the presentation of our
¬nancial results. We are committed to achieving and
As a result of these problems, we initiated immedi-
maintaining the highest standards of performance
ate corrective action.
in all aspects of our business”for employees, cus-
We centralized all ¬nancial activities that formerly
tomers, and fellow investors.
reported to the individual Business Units. This will
Ronald G. Assaf
provide for closer corporate control, as well as
Chairman of the Board and Chief Executive
improve the speed of reporting.
Of¬cer
We are implementing a company-wide expense
reduction program, intended to reduce corporate October 16, 1995
715
Management Communications




17-31 Part 3 Business Analysis and Valuation Applications




MANAGEMENT™S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (edited by the casewriters)
Sensormatic Electronics Corporation




The Company™s consolidated ¬nancial statements vention Systems (ALPS), as well as the merger with
present a consolidation of its worldwide operations. Knogo Corporation™s operations outside of the U.S.,
This discussion supplements the detailed informa- Puerto Rico and Canada (Knogo), all under the
tion presented in the Consolidated Financial State- diversi¬cation strategy (see Note 11 to Notes to
ments and Notes thereto and is intended to assist Consolidated Financial Statements).
the reader in understanding the ¬nancial results and The acquisitions of Knogo and ALPS signi¬cantly
condition of the Company. broadened the Company™s presence and direct dis-
tribution capacity in Europe. The acquisitions of Soft-
Overview
ware House, Robot Research and Case Security, as
Consolidated revenues increased 36% in ¬scal 1995
well as American Dynamics and Continental Instru-
compared to ¬scal 1994, and 35% and 57% in ¬s-
ments Corporation in ¬scal 1991 and 1990, respec-
cal 1994 and 1993, respectively, over the prior
tively, broadened the Company™s customer base by
years, representing an annual compounded growth
adding new proprietary products and distribution
rate of 42% over the last three ¬scal years. This
channels aimed at commercial, industrial and other
growth rate is largely attributable to successfully
non-retail customers.
implementing a strategy of product, customer and
Another strategy is to focus on expanding the Com-
geographic market diversi¬cation. More than 52%
pany™s base of recurring revenues. Recurring reve-
of ¬scal 1995 revenues were generated from out-
nues are generated from sales of disposable labels
side of the United States.
to the hard goods retailers, maintenance agree-
The Company™s increased internal product ments entered into in connection with the sale or
research, development and engineering activities lease of systems, and rental revenues from operat-
resulting in a broad array of new proprietary prod- ing leases. The latter is a particular focus of the mar-
ucts, as well as selected strategic acquisitions over keting efforts of certain European and Asia/Paci¬c
the last several years, have been a key element in subsidiaries. In ¬scal 1995, recurring revenues were
the diversi¬cation strategy. The Company invested approximately $152 million compared to approxi-
$25.5 million in ¬scal 1995, and anticipates invest- mately $120 million and $106 million in ¬scal 1994
ing approximately $31.0 million in ¬scal 1996, in and 1993, respectively. The sale of disposable
research and product development and engineering labels to the hard goods retailers is the fastest grow-
support. These activities will contribute to broaden- ing component of the recurring revenue stream,
ing product lines and expanding product applica- growing from less than $4 million in ¬scal 1988 to
tions. Introduction of new products into the market approximately $76 million in ¬scal 1995, an annual
place will be made in accordance with its strategic compounded growth rate of over 52%.
marketing plans.
In ¬scal 1993, the Company took a major step in its
Additionally, the Company has made a number of efforts to increase future recurring label revenues
strategic acquisitions over the last several years through the introduction of its Universal Product Pro-
including Security Tag Systems, Inc. (Security Tag), a tection (UPPSM) program. Under this program (also
U.S.-based manufacturer and marketer of loss pre- referred to as source labeling), EAS labels are incor-
vention products, Software House, Inc. (Software porated into or af¬xed to the merchandise to be
House), a premier U.S.-based developer of high- protected during the process of manufacturing,
end Access Control and integrated security systems, packaging or distribution rather than at the retail
Robot Research Inc. (Robot Research), a U.S. manu- store. At June 30, 1995, over 500 manufacturers
facturer of sophisticated CCTV equipment, and and suppliers located worldwide applied the Com-
Case Security Limited (Case Security), a distributor pany™s labels to merchandise delivered to retailers™
of visual security systems, and Automated Loss Pre- stores. The Company has been working with a num-
716 Management Communications




17-32
Management Communications




ber of its retailer customers around the world, from at June 30, 1995 principally as a result of the higher
various segments of the soft and hard goods retail level of business in ¬scal 1995 and from the acquisi-
marketplace (including retailers from the music, tion of Knogo (approximately $37 million acquired




Sensormatic Electronics Corporation
home improvement centers and discount industries), at December 29, 1994); offset in part by an
as well as strategic suppliers and manufacturers, to increase in sales of receivables and sales-type
accelerate this initiative. leases to third party ¬nancing institutions (described
further below).
Operating income in ¬scal 1995 decreased 7%
The Company has historically had a high level of
from ¬scal 1994. This was primarily a result of a
receivables and sales-type leases outstanding, mea-
51% increase in selling, customer service and
sured as a percentage of revenues. This results in
administrative and research, development and engi-
part from a key element of the Company™s market-
neering expenses (increasing as a percentage of
ing strategy, based on its size and ¬nancial strength,
revenue to 46% in ¬scal 1995 from 41% in ¬scal
to increase market penetration by providing alterna-
1994), including approximately $6.0 million of
tive ¬nancing options to its retail customers (i.e.,
expenses related to acquisitions, primarily the
vendor ¬nancing). This strategy has given the Com-
merger with Knogo. This was partially offset by a
pany a signi¬cant competitive advantage and has
36% increase in product sales earning gross mar-
helped the Company penetrate markets and
gins of 54% (consistent with ¬scal 1994). Operating
increase customer loyalty and commitment to Sen-
income as a percentage of total revenues decreased
sormatic. The ability to pursue such a strategy results
to 11% compared to 16% in ¬scal 1994. Operating
from the Company™s relatively high pro¬t margins,
income in ¬scal 1994 increased 48% over ¬scal
strong balance sheet, and its ability to sell receiv-
1993. Growth in operating income outpaced the
ables and leases to ¬nancing institutions.
revenue growth as a result of improved gross mar-
gins and a reduction in operating expenses. Additionally, like other companies which do business
with retailers, the Company has experienced an his-
Income from continuing operations decreased 3% in
torical pattern of delayed payments by certain major
¬scal 1995 and increased 33% in ¬scal 1994 as a
retail customers which has extended the Company™s
result of the matters discussed above. In addition net
receivables aging pro¬le. Internal approvals and
income was $74 million for ¬scal 1995 compared
processing of accounts payable for many retailers
to $72 million for ¬scal 1994. Fiscal 1995 net
normally take between 30 and 90 days, which has
income included the effects of a $4.1 million reduc-
extended its receivables aging pro¬le. In addition,
tion of income taxes payable relating to a previously
further delays in payments are often a business
discontinued business, which reserve was no longer
practice by large retailers, and not an indication of
required.
credit unworthiness. Though working to accelerate
Financial Condition collection of receivables, the Company historically
During ¬scal 1995, cash and marketable securities has accepted the longer collection cycles as part of
increased $16 million primarily due to: (a) increased its strategy to maintain and further penetrate this
short-term borrowings ($105 million); (b) proceeds important market segment. The lost interest income
from issuance of Common Stock pursuant to due to the delayed payment is another cost factor
employee bene¬t plans ($13 million); and (c) a net that is considered by the Company in the pricing of
decrease in deferred and installment receivables the product.
and sales-type leases ($14 million). These were off- The Company continues to manage its receivables
set in part by (a) increased inventory available for and sales-type leases by, among other things, using
sale ($63 million); (b) capital expenditures ($63 mil- third-party servicing agents to enhance the ef¬ciency
lion); and (c) the payment of dividends on Common of its billing and collection practices and expanding
Stock ($16 million). the number and use of relationships with third-party
Total receivables and sales-type leases increased ¬nancing institutions to sell or assign receivables
from $309 million at June 30, 1994 to $401 million and sales-type leases (see Note 2. of Notes to Con-
717
Management Communications




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