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17-33 Part 3 Business Analysis and Valuation Applications




solidated Financial Statements). The results of these Inventories at June 30, 1995 increased $77 million
ongoing efforts have been to reduce the average over June 30, 1994 to meet increased forecasted
collection time and to provide the Company with the production and sales levels and reduce the risk of
Sensormatic Electronics Corporation




¬‚exibility to convert its receivables and sales-type inventory shortages resulting from the rapid growth
leases into cash as needed. The Company received in market demand. Other property, plant and equip-
proceeds of $458 million and $271 million from the ment increased $44 million primarily due to the
sale and assignment of receivables and sales-type purchases of additional production equipment in
leases in ¬scal 1995 and 1994, respectively (net Florida and Puerto Rico and the start-up of the man-
of repurchases due to customer non-payment of ufacturing facility in Ireland. Deferred income taxes,
approximately $14 million and $13 million, respec- patents and other assets increased $42 million pri-
tively). marily as a result of increased deferred income
taxes and other assets principally related to compa-
Finally, short-term receivables from the Company™s
nies acquired in ¬scal 1995.
slower paying retail customers are becoming a rela-
tively smaller part of its overall business as a result Total stockholders™ equity at June 30, 1995
of 1) the expansion of the Company™s source label- increased $225 million over the June 30, 1994 bal-
ing program, whereby Sensormatic sells labels to ance, to $953 million, principally as a result of the
vendors and manufacturers who apply the labels issuance of 4.6 million shares of Common Stock
prior to shipment to the retailer; and 2) the contin- (aggregating $149 million) in connection with
ued growth of the commercial/ industrial customer acquisitions, and net income.
base which is made up of customers which (i) tend
Total debt increased $108 million over the June 30,
to be the higher end commercial/industrial users
1994 balance, to $327 million, primarily as a result
with higher credit ratings than many retailers and (ii)
of an increase in short-term credit line borrowings
a closely monitored network of third-party dealers
and other debt (approximately $23 million of Knogo
and distributors. In adding this new commercial/
debt was incurred as part of the merger). The debt-
industrial customer base to the Company™s historical
to-total capitalization ratio was .26 to 1 at June 30,
retail customer base, the Company has developed a
1995 compared to .23 to 1 at June 30, 1994.
base of generally faster paying customers.
The Company estimates capital requirements for ¬s-
The Company believes its total allowance for doubt-
cal 1996 to include capital expenditures for new
ful accounts for receivables and sales-type leases,
production equipment and a facility to consolidate
and its related reserve for receivables and sales-type
the Company™s research and product development,
leases sold to ¬nancing institutions which are subject
engineering support, and certain corporate market-
to full or partial recourse, are adequate after taking
ing and administrative personnel and equipment at
into account, among other things: (a) the aging of
approximately $30 million, and expenditures for
its receivables and sales-type leases (including those
research and product development and engineering
repurchased or subject to repurchase from ¬nancing
support at approximately $31 million. Such capital
institutions); (b) the payment history of its customers;
requirements and other expenditures will be funded
(c) the Company™s security interest in equipment
through operating activities (including sale of receiv-
¬nanced under deferred and installment sales con-
ables and sales-type leases), existing cash and mar-
tracts and the Company™s retention of title in equip-
ketable securities and worldwide credit lines (see
ment under sales-type leases; (d) its ability to re-
Note 6. of Notes to Consolidated Financial State-
market such equipment if needed; (e) the prospects
ments).
of its collection efforts; and (f) its relationship with
major retail customers. Additionally, with the broad- Additionally, future niche acquisitions, a fundamen-
ening of the Company™s customer base both geo- tal element of the Company™s diversi¬cation and
graphically and to include hard goods retailers, and growth strategy, may be funded, when deemed
commercial and industrial customers, the Com- appropriate, through the issuance of shares of Sen-
pany™s historical concentration in soft goods retail- sormatic Common Stock. The Company maintains a
ers is being reduced. shelf registration statement ¬led with the Securities
718 Management Communications




17-34
Management Communications




and Exchange Commission under which the Com- In ¬scal 1994, consolidated revenues increased
pany is able to issue up to 4.5 million shares of its $169 million (35%) compared to ¬scal 1993 princi-
Common Stock (approximately 2.5 million shares pally as a result of increased revenue from the Ultra-




Sensormatic Electronics Corporation
remain available). Max product line, inclusion of revenue from the
Security Tag EAS and Ink Tag® product lines,
Results from Continuing Operations increased revenues from the sale of CCTV products
Revenues. Consolidated revenues for ¬scal 1995 to retailers, and increased revenues from the Com-
were $889 million, a 36% increase from $656 mil- mercial/ Industrial Group; offset in part by the
lion in ¬scal 1994. The revenue growth in 1995 foreign exchange effect caused by the stronger aver-
resulted principally from: (a) increased EAS reve- age U.S. dollar (approximately $34 million).
nues, particularly from the Ultra-Max product line,
primarily for hard goods retail customers and used In ¬scal 1993, consolidated revenues increased
in source labeling programs; (b) increased CCTV $177 million (57%) compared to ¬scal 1992 princi-
product volume from retailers; (c) increased volume pally as a result of the inclusion of revenues gener-
from the U.S.-based Commercial/Industrial Group; ated from ALPS products, increased worldwide
and (d) the foreign exchange effect on the interna- revenues in every EAS product line for the hard
tional subsidiaries™ local currency revenues when goods retailers, increased revenues from the sale of
translated into U.S. dollars for ¬nancial statement CCTV products to retailers and increased revenues
purposes caused by the weaker average U.S. dollar from the Commercial/Industrial Group.
(relative to the international subsidiaries™ local cur-
Operating Costs and Expenses. Operating costs and
rencies, in the aggregate) throughout ¬scal 1995
expenses in ¬scal 1995 increased to 89% of con-
compared to ¬scal 1994 (approximately $3 million).
solidated revenues, compared with 84% in ¬scal
Consolidated revenues from the EAS product lines
1994 and 85% in ¬scal 1993. The reduced operat-
for retail customers increased 25% to $511 million
ing margin in ¬scal 1995 was due primarily to:
in ¬scal 1995 compared to $406 million in ¬scal
1) higher than budgeted selling and customer ser-
1994. This increase resulted principally from a 47%
vice expenses (in part due to the opening of a distri-
volume increase from the Ultra-Max product line
bution center and a customer response center in the
and the inclusion in the last six months of ¬scal
U.S., and activities associated with the expansion of
1995 of revenues from the Knogo product line
the source labeling program); 2) signi¬cant integra-
($29 million). Revenues from the CCTV product
tion costs and expenses related to acquisitions, pri-
lines for retailers exceeded $112 million compared
marily Knogo (approximately $6 million); 3) costs
to $72 million in ¬scal 1994. Revenues from the
associated with the opening of the manufacturing
Commercial/Industrial Group (including installation
facility in Ireland; and 4) expenses associated with
revenues) increased 83%, to $143 million compared
the Company™s sponsorship of the 1996 Summer
to $78 million in ¬scal 1994, due primarily to the
Olympics.
sale of CCTV and Access Control products to non-
retail customers, and incremental revenue from Gross margin on product sales in ¬scal 1995
recent acquisitions. Revenues from the Company™s remained at 54% compared to ¬scal 1994. Gross
CamEra„ systems increased 38% to $66 million in margin on product sales in ¬scal 1994 increased to
¬scal 1995 compared to $48 million in ¬scal 1994. 54% from 53% in ¬scal 1993, primarily from
The Company generated $256 million of revenue in improved gross margins on certain EAS and CCTV
¬scal 1995 from all of its CCTV products and sys- product lines (resulting from improved manufactur-
tems combined, worldwide. ing ef¬ciencies) and the inclusion of the manufac-
International revenues were $468 million, $333 mil- turer™s gross margin (as a result of the acquisition of
lion and $267 million in ¬scal 1995, 1994 and Security Tag) on the Security Tag product line; offset
1993, respectively, and included revenues of the in part by a relative increase in sales of lower mar-
European subsidiaries of $386 million, $275 million gin products (such as CCTV products and labels)
and $232 million, respectively. compared to ¬scal 1993.
719
Management Communications




17-35 Part 3 Business Analysis and Valuation Applications




Total selling and customer service, administrative, based on six month LIBOR rates (throughout the
research, development and engineering expenses term of the swap agreements) in order to take
(operating expenses) for ¬scal 1995 increased to advantage of the then lower prevailing short-term
Sensormatic Electronics Corporation




46%, as a percentage of total consolidated revenues, interest rates. The effective rate on the Senior Notes
from 41% in ¬scal 1994, and increased 51% over ¬s- was approximately 9.2%, 6.8% and 6.8% in ¬scal
cal 1994, primarily as a result of higher selling and 1995, 1994 and 1993 through the use of these
customer service expenses including signi¬cant inte- swap agreements.
gration costs of the Knogo operations in Europe. The
Income Taxes
increases in operating expenses include the foreign
The effective consolidated tax rate on income from
exchange effect caused by the weaker average U.S.
continuing operations was 22% for ¬scal 1995, and
dollar (approximately $15 million). Operating
25% for both ¬scal 1994 and 1993. The ¬scal 1995
expenses in ¬scal 1994 and 1993 increased 31%
effective tax rate was negatively affected by (i) earn-
and 62% over the respective prior ¬scal year prima-
ings of the Company™s international subsidiaries
rily as a result of the higher levels of business (includ-
which are subject to statutory tax rates generally
ing the effect of the ALPS acquisition in ¬scal 1993)
higher than the U.S. effective rate, (ii) increases in
and an increase in research, development and engi-
U.S. earnings not qualifying for U.S./Puerto Rico
neering expenses of 31% and 20% over the respec-
“Section 936” tax bene¬ts (see Note 5. Of Notes to
tive prior years; offset in part by the foreign exchange
Consolidated Financial Statements) and (iii)
effect caused by the stronger average U.S. dollar in
increases in amortization of costs in excess of net
¬scal 1994 compared to 1993 ($14 million).
assets acquired (substantially all of which are non-
Other Income (Expenses). Interest income increased deductible for income tax purposes). However, these
by $3 million in ¬scal 1995 principally due to higher effects were offset by an adjustment of prior years™
amounts of sales-type leases and deferred and tax accruals which were no longer required. In addi-
installment receivables outstanding throughout ¬scal tion to the items above, changes in U.S. and Puerto
1995 compared to ¬scal 1994. Interest income Rico tax law related to the Company™s operations in
declined by $3 million in ¬scal 1994 due primarily Puerto Rico (effective for ¬scal 1995), as well as
to a decline in long-term interest rates throughout potentially more adverse changes presently being
the year earned on higher amounts of sales-type considered by the U.S. Congress, will continue to
leases and deferred and installment receivables. In exert upward pressure on the Company™s effective
¬scal 1993 interest income increased by $10 million tax rate. Legislation proposals in the U.S. Congress
principally due to interest income earned on sales- in recent years have sought to limit or phase out the
type leases acquired in connection with the ALPS favorable tax status in Puerto Rico. The potential
acquisition and higher amounts of deferred and effect of these items is continually being examined
installment receivables. by the Company in order to develop strategies to
minimize their effect.
Interest expense increased by $6 million, $4 million
and $7 million in ¬scal 1995, 1994 and 1993,
Discontinued Operations
respectively, due to higher levels of net short-term
In ¬scal 1995, the Company recorded a $4.1 mil-
bank borrowings used to fund (i) increases in the
lion reduction in income tax liabilities related to a
Company™s working capital (including the longer-
previously discontinued business which was no
term receivables and sales-type leases) and (ii) in
longer required.
¬scal 1995, debt assumed as part of the acquisition
of Knogo and increased long-term debt in ¬scal Net Income
1993, incurred with respect to the acquisition of Consolidated net income for ¬scal 1995, 1994 and
ALPS. As previously mentioned, the Company 1993 increased $2 million, $18 million and $23
entered into three-year interest rate swaps in ¬scal million compared to their respective prior years,
1993 to lower its current interest expense on the representing an annual compounded rate of growth
$135 million 8.21% Senior Notes by exchanging of 33% over the last three ¬scal years, due princi-
their ¬xed interest rate for a ¬‚oating interest rate pally to the factors discussed above.
720 Management Communications




17-36
Management Communications




CONSOLIDATED BALANCE SHEETS
June 30, 1995 and 1994 (In thousands, except par value amounts)




Sensormatic Electronics Corporation
1995 1994
ASSETS
Cash and marketable securities (including marketable securi-
ties of $26,727 in 1995 and $33,618 in 1994) $ 70,307 $ 54,542
Accounts receivable, net 221,873 134,517
Deferred and installment receivables, net 67,843 64,375
Net investment in sales-type leases 110,942 109,607

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