<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT [ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended SEPTEMBER 30, 2000 Commission File No. 1-10739
------------------ -------
SENSORMATIC ELECTRONICS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1024665
-------------------------------- ---------------------------------------
(State or other jurisdiction of) (I.R.S. employer Identification number)
(Incorporation or organization)
951 YAMATO ROAD, BOCA RATON, FLORIDA 33431-0700
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(561) 989-7000
------------------------------------------------------
(Registrant's telephone number, including area code)
SAME
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
The Registrant had outstanding 77,378,792 shares of Common Stock (par value $.01
per share) as of November 3, 2000.
<PAGE> 2
SENSORMATIC ELECTRONICS CORPORATION
INDEX
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets........................ 3
Consolidated Condensed Statements of Operations.............. 4
Consolidated Condensed Statements of Cash Flows.............. 5
Notes to Consolidated Condensed Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 15
Item 6. Exhibits and Reports on Form 8-K..................................... 15
SIGNATURES........................................................................... 16
</TABLE>
2
<PAGE> 3
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 222.0 $ 223.9
Customer receivables, net 314.7 329.4
Inventories, net 168.5 152.9
Current portion of deferred income taxes 35.7 38.5
Other current assets 50.0 53.1
------------ ------------
Total current assets 790.9 797.8
Customer receivables - noncurrent 38.1 43.7
Revenue equipment, net 61.8 65.1
Property, plant and equipment, net 156.6 156.6
Costs in excess of net assets acquired, net 406.5 417.5
Deferred income taxes 147.6 149.5
Patents and other assets, net 125.1 132.7
------------ ------------
Total assets $ 1,726.6 $ 1,762.9
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term debt $ 52.1 $ 56.2
Accounts payable 73.7 71.9
Other current liabilities and deferred income taxes 223.4 255.7
------------ ------------
Total current liabilities 349.2 383.8
Long-term debt 372.8 371.3
Other non-current liabilities and deferred income taxes 68.5 62.0
------------ ------------
Total liabilities 790.5 817.1
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10.0 shares authorized
6 1/2% Convertible Preferred Stock, 0.7 shares outstanding 166.3 166.3
Common stock, $.01 par value, 125.0 shares authorized, 77.3 and 77.1
shares outstanding at September 30, 2000 and June 30, 2000, respectively 762.0 761.5
Retained earnings 202.9 193.7
Treasury stock at cost and other, 1.7 shares at September 30, 2000
and June 30, 2000 (11.1) (11.4)
Accumulated other comprehensive loss (184.0) (164.3)
------------ ------------
Total stockholders' equity 936.1 945.8
------------ ------------
Total liabilities and stockholders' equity $ 1,726.6 $ 1,762.9
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 4
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
Revenues:
Sales $ 212.1 $ 205.9
Installation, maintenance and other 51.4 48.7
-------- --------
Total revenues 263.5 254.6
Cost of sales 147.1 143.6
-------- --------
Gross margin 116.4 111.0
-------- --------
Operating expenses:
Selling, general and administrative 71.0 73.8
Provision for doubtful accounts 5.6 6.0
Research, development and engineering 8.8 6.3
Amortization of intangible assets 5.7 5.8
-------- --------
Total operating costs and expenses 91.1 91.9
-------- --------
Operating income 25.3 19.1
-------- --------
Other (expenses) income:
Interest income 3.8 4.3
Interest expense (8.9) (10.5)
Other, net (2.1) (1.1)
-------- --------
Total other expenses (7.2) (7.3)
-------- --------
Income before income taxes 18.1 11.8
Provision for income taxes 6.1 4.4
-------- --------
Net income $ 12.0 $ 7.4
======== ========
Earnings applicable to common stockholders $ 9.2 $ 4.3
======== ========
Basic and diluted earnings per common share $ 0.12 $ 0.06
======== ========
Weighted shares outstanding
Basic 77.3 75.8
Diluted 77.9 76.6
The accompanying notes are an integral part of these
financial statements.
4
<PAGE> 5
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12.0 $ 7.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16.4 16.5
Deferred income taxes 3.1 (1.5)
Other non-cash items (0.7) (0.7)
Net changes in operating assets and liabilities, net of effects of
acquisitions:
Decrease in receivables and sales-type leases 13.2 5.3
Decrease (increase) in receivables due from financing institutions 10.8 (3.7)
(Increase)/decrease in inventories (15.9) 9.5
Decrease in other assets 0.4 4.6
Decrease in accounts payable (0.4) (3.2)
Decrease in restructuring accruals (0.6) (1.2)
Decrease in other current liabilities (24.2) (13.9)
------- -------
Net cash provided by operating activities 14.1 19.1
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (7.9) (11.8)
Increase in revenue equipment, net (1.0) (7.9)
Cash paid for acquisitions, net of cash acquired (4.1) --
Other, net (0.1) (0.1)
------- -------
Net cash used in investing activities (13.1) (19.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and other debt 0.5 0.1
Repayment of bank borrowings and other debt (2.4) (3.5)
Proceeds from issuance of common stock
under employee benefit plans 0.7 --
Other, net -- (0.5)
------- -------
Net cash used in financing activities (1.2) (3.9)
------- -------
Effect of foreign currency translation on cash balances (1.7) 0.7
------- -------
Net decrease in cash (1.9) (3.9)
------- -------
Cash and cash equivalents at beginning of the year 223.9 209.0
------- -------
Cash and cash equivalents at end of the period $ 222.0 $ 205.1
======= =======
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE> 6
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements include the accounts of
Sensormatic Electronics Corporation and its subsidiaries (the "Company"). The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2001. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2000.
Certain prior year amounts have been reclassified to conform to the current
fiscal year's presentation.
2. RESTRUCTURING
The following tables set forth the details and the activity of the 1996 and
1997/1998 restructuring charge reserves as of September 30, 2000:
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT UTILIZATION BALANCE AT
JUNE 30, ----------------------------- SEPTEMBER 30,
1996 RESERVE 2000 CASH NON-CASH 2000
------------ -------------- ------------------------------ -------------
<S> <C> <C> <C> <C>
Closure of facilities and related costs $2.0 $(0.1) $ -- $1.9
</TABLE>
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT UTILIZATION BALANCE AT
JUNE 30, ----------------------------- SEPTEMBER 30,
1997/1998 RESERVE 2000 CASH NON-CASH 2000
----------------- -------------- ------------------------------ -------------
<S> <C> <C> <C> <C>
Closure of facilities and related costs $ 0.2 $(0.1) $ -- $ 0.1
Employee termination and related costs 3.8 (0.4) -- 3.4
Non-core business divestitures 0.9 -- -- 0.9
------ ----- ------- -----
Total $ 4.9 $(0.5) $ -- $ 4.4
====== ===== ======= ======
</TABLE>
6
<PAGE> 7
3. CUSTOMER RECEIVABLES
Amounts due to the Company in the form of accounts receivable (which are
generally due within 90 days), deferred receivables (which are generally due
within one year), installment receivables (which have periodic payments over a
term of five years, generally) and net investment in sales-type leases (which
have periodic payments over lease terms of five to six years, principally) at
September 30, 2000 and June 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
---------- ----------
<S> <C> <C>
Trade accounts receivable due within 1 year $ 326.6 $ 344.6
Allowance for doubtful accounts (44.7) (42.7)
---------- ----------
Total trade accounts receivable, net $ 281.9 $ 301.9
========== ==========
Deferred receivables $ 5.5 $ 2.5
Installment receivables 23.0 26.6
Allowance for doubtful accounts (2.0) (1.9)
Unearned interest and maintenance (17.0) (19.7)
---------- ----------
Total deferred and installment receivables, net 9.5 7.5
Less: Amounts due within 1 year, net (9.0) (6.5)
---------- ----------
Total noncurrent deferred and installment receivables, net $ 0.5 $ 1.0
========== ==========
Sales-type leases-minimum lease payments receivable $ 87.8 $ 93.9
Allowance for uncollectible minimum lease payments (5.7) (6.7)
Unearned interest and maintenance (20.7) (23.5)
---------- ----------
Total sales-type leases, net 61.4 63.7
Less: Amounts due within 1 year, net (23.8) (21.0)
---------- ----------
Total noncurrent sales-type leases, net $ 37.6 $ 42.7
========== ==========
Total customer receivables $ 352.8 $ 373.1
Less: Amounts due within 1 year, net 314.7 329.4
---------- ----------
Total noncurrent customer receivables $ 38.1 $ 43.7
========== ==========
</TABLE>
4. INVENTORY
Inventories are summarized as follows:
SEPTEMBER 30, JUNE 30,
2000 2000
---------- ----------
Finished goods $ 134.5 $ 128.6
Parts 52.1 41.3
Work-in-process 8.4 6.9
---------- ----------
195.0 176.8
Less allowance for excess and obsolete inventory 26.5 23.9
---------- ----------
Total inventories, net $ 168.5 $ 152.9
========== ==========
7
<PAGE> 8
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
NUMERATOR:
Net income $ 12.0 $ 7.4
Less: preferred stock dividends (2.8) (3.1)
-------- --------
Earnings applicable to common stockholders $ 9.2 $ 4.3
======== ========
DENOMINATOR:
Basic EPS - weighted average shares 77.3 75.8
Dilutive effect: stock options 0.6 0.8
-------- --------
Diluted EPS - weighted average shares 77.9 76.6
======== ========
Basic and diluted earnings per share $ 0.12 $ 0.06
======== ========
Antidilutive weighted options 4.9 6.6
======== ========
The above antidilutive weighted options to purchase shares of common stock were
not included in computing diluted earnings per share because their effects were
antidilutive for the respective periods. Additionally, Common Stock issuable
upon the conversion of the 6 1/2% Convertible Preferred Stock was not included
in the denominator in the computation of diluted EPS as the impact would be
anti-dilutive.
6. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income $ 12.0 $ 7.4
Other comprehensive income (loss):
Unrealized gain on derivatives designated as hedges 0.9 --
Change in accumulated translation adjustments (20.6) 12.0
---------- ----------
Total comprehensive (loss) income $ (7.7) $ 19.4
========== ==========
</TABLE>
7. SEGMENT INFORMATION
The Company operates in two reportable segments consistent with the way the
Company organizes its operations, which is based on geographic area. The two
reportable segments are (i) Americas and (ii) Europe, Middle East, Africa and
Asia/Pacific ("EMEA").
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, AMERICAS EMEA OTHER (1) TOTAL
------------- -------- ---- --------- -----
<S> <C> <C> <C> <C> <C>
Revenues 2000 $170.5 $93.0 $ -- $263.5
1999 162.2 92.4 -- 254.6
Operating income (loss) 2000 24.5 0.8 -- 25.3
1999 23.3 (0.4) (3.8) 19.1
</TABLE>
----------
(1) Other consists of $3.8 million for Chief Executive Officer change that was
not allocated to sales areas.
8
<PAGE> 9
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal years
beginning after June 15, 2000. Additionally, in June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133", which needs to be
adopted concurrently with Statement 133. The Company adopted SFAS 133 and 138 as
of July 1, 2000. The Company recorded an immaterial transition adjustment upon
adoption of these Statements.
As a result of its global operating activities, the Company is exposed to
changes in foreign currency exchange rates, which may adversely affect its
results of operations and financial position. The Company manages its foreign
currency related risk primarily through the use of foreign currency forward
contracts.
Upon adoption of SFAS 133 and 138, the Company initiated a program to hedge a
portion of its forecasted foreign currency-denominated intercompany sales with
forward exchange contracts. These contracts are entered into to reduce the risk
that the Company's cash flows resulting from certain forecasted transactions
will be adversely affected by changes in foreign currency exchange rates.
However, the Company may be impacted by foreign currency exchange rates related
to the unhedged portion. The success of the hedging program depends, in part, on
forecasts of transaction activity in various currencies (primarily the euro and
the British pound). The Company may experience unanticipated foreign currency
exchange gains or losses to the extent that there are timing differences between
forecasted and actual activity during periods of currency volatility.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at fair value and that changes in the fair value of the derivative
instruments, designated as cash flow hedges, be recorded in accumulated other
comprehensive income/(loss) (AOCI) until the third party transaction associated
with the hedged forecasted transaction occurs. Once the third party transaction
associated with the hedged forecasted transaction occurs, the related gain or
loss on the cash flow hedge will be reclassified from AOCI to earnings. In the
event the hedged forecasted intercompany or third party transaction does not
occur, or it becomes probable that it will not occur, the gain or loss on the
related cash flow hedge would be reclassified from AOCI to earnings at that
time. Since the critical terms of the hedging instruments are the same as the
underlying forecasted transaction, the changes in the fair value of the
derivatives should be highly effective in offsetting changes in the expected
cash flows from the forecasted transaction. The Company did not recognize any
material gains or losses resulting from either hedge ineffectiveness or changes
in forecast probability during the three months ended September 30, 2000.
The Company recognized a net gain of approximately $0.6 million, recorded in
other (expenses) income, from derivative instruments designated as cash flow
hedges of forecasted transactions during the three-month period ended September
30, 2000. The fair value of such derivative instruments is recorded in other
current assets. All of the derivative instruments, designated as cash flow
hedges, outstanding at September 30, 2000 mature within the subsequent three to
nine-month period. As of September 30, 2000, approximately $0.9 million of
unrealized net gains have been recorded in AOCI, net of tax, to recognize the
fair value of derivative instruments that are designated as cash flow hedges.
Amounts deferred to AOCI will be reclassified into other (expenses) income
within the next twelve months.
The table below details notional amounts indicated in U.S. dollars of the
Company's outstanding foreign exchange forward contracts at September 30, 2000
and 1999:
CURRENCIES 2000 1999
---------- ------ ------
Euro $33.5 $ 35.9
British Pounds 10.6 11.0
Various other 14.5 12.8
------- -------
Total $ 58.6 $ 59.7
======= =======
9
<PAGE> 10
9. ACQUISITIONS
During the first quarter of fiscal 2001, the Company acquired three companies
for a total of $4.1 million in cash. The acquisitions were accounted for under
the purchase method of accounting. Accordingly, the excess of the purchase price
over the estimated fair value of the assets acquired was recorded as costs in
excess of net assets acquired or other intangibles, which are being amortized on
a straight-line basis over periods ranging from seven to 20 years. The results
of operations of the respective acquired entities have been included in the
Company's consolidated financial statements from the respective dates of
acquisitions and are not significant in relation to the Company's consolidated
financial statements. Accordingly, pro forma financial disclosures have not been
presented.
10. COMMITMENTS AND CONTINGENCIES
By complaint dated May 14, 1999, the Company commenced an action against First
National Bank of Pennsylvania, Winner & Bagnara, P.C. ("W&B"), and James E.
Winner, Jr. ("Winner"), in the United States District Court for the Western
District of Pennsylvania, entitled Sensormatic Electronics Corporation v. First
National Bank of Pennsylvania et al, Case No. 99/756. The Company seeks, among
other things, a declaratory judgment that the Company is entitled to purchase
certain franchise rights from the defendants pursuant to the provisions of a
Franchise Lease Agreement, and seeks specific performance of certain contractual
obligations. Winner and W&B have interposed an amended joint answer with
counterclaims against the Company, seeking, among other things, a declaration
that the Company failed to properly exercise its right to purchase those
franchise rights and that the Company's rights to operate its Pennsylvania and
Delaware franchise ceased on December 1, 1998, as well as damages and injunctive
relief. Related litigation between these same parties was filed by the Company
in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County,
Florida. On December 15, 1999, the Company moved to dismiss certain of Winner
and W & B's counterclaims in the Pennsylvania action. The Company's motion was
denied, without prejudice to the Company's right to revive it by simple notice
once jurisdiction is established, by order dated September 29, 2000. The Florida
litigation has been stayed, pending determination of the Pennsylvania
proceedings. The Company believes that it has meritorious defenses to the
attempt by Winner and/or W&B to reclaim the Pennsylvania and Delaware franchise.
In addition, the Company is a party to other legal proceedings, which are being
handled and defended in the ordinary course of business. While the results of
these other proceedings cannot be predicted with certainty, there are no such
other proceeding pending that the Company expects to be material in relation to
the Company's business, financial position or results of operations.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's consolidated condensed financial statements present a
consolidation of its worldwide operations. This discussion supplements the
detailed information presented in the Consolidated Condensed Financial
Statements and Notes thereto (which should be read in conjunction with the
financial statements and related notes contained in the Company's 2000 Annual
Report on Form 10-K) and is intended to assist the reader in understanding the
financial results and condition of the Company.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
SEPTEMBER 30, 1999
REVENUES
Revenues increased $8.9 million, or 3.5%, to $263.5 million for the first
quarter of fiscal 2001 compared to $254.6 million for the same period in fiscal
2000. After adjusting for currency fluctuations, revenues for the first quarter
of fiscal 2001 increased 7.6%, as compared with the prior year period. The
results for the first quarter of fiscal 2001 reflect growth in the Company's
Americas business unit, which improved 5.1% with $170.5 million in revenues,
driven by strong sales of Ultra.Max equipment and source tagging labels
partially offset by sales declines in our video division. Revenues in the
Company's EMEA (Europe, Middle East, Africa and Asia/Pacific) business unit
totaled $93.0 million, a 0.6% improvement in the current quarter compared to the
comparable quarter a year ago. However, excluding the effects of foreign
currency fluctuations, EMEA's revenues increased by 11.5%. With an improved
infrastructure, the Company plans to focus more intensively on additional
revenue growth in EMEA for the remainder of fiscal 2001.
Consolidated revenues for the Electronic Article Surveillance ("EAS") product
lines increased 13.6% to $148.8 million in the first quarter of fiscal 2001 from
$131.0 million in the same period in fiscal 2000, contributing 56.4% of total
sales for the quarter. EAS revenue growth was driven by a 26.4% increase in
Ultra.Max sales in the current quarter as compared to the prior year period,
partially offset by declines in other EAS system revenues, principally microwave
systems, which decreased 27.1%. In the first quarter of fiscal 2001, the Company
sold 890 million Ultra.Max labels as compared to 727 million for the same period
a year ago. EAS label revenue for source tagging increased by approximately
41.0% in the first quarter of fiscal 2001 as compared to the comparable prior
year period, with sales of approximately 425 million labels, or $16.2 million,
in the first quarter of fiscal 2001 compared to approximately 319 million
labels, or $11.5 million, a year ago. The Company plans to continue making
additional capital investments for the remainder of fiscal year 2001 to increase
manufacturing capacity for Ultra.Max labels.
Revenues for the Video Systems product line declined 15.2%, from $72.3 million
for the first quarter of fiscal 2000 to $61.3 for the current first quarter, due
to decreases in analog and OEM video product offerings revenue driven by price
competition. The Company is investing increasing amounts in new product
development, specifically in digital video products, to enhance the video
product line with a view to addressing the needs of all potential customer
segments. During the first quarter of fiscal 2001, the Company brought to market
two new dome cameras and introduced a higher storage capacity version of
Intellex, its premiere digital video technology, and a new matrix switcher for
small to mid sized surveillance applications. The success of the Company's Video
Systems product line will depend on continued technical leadership--one reason
for the recent acquisitions of VideoCon, a Munich-based developer of digital
video processing and transmission equipment, and Saker Trax, a San-Diego-based
software developer that specializes in video management and object tracking
technology. Although the current quarter results for the Video Systems product
line were lower than expected, the Company remains optimistic about achieving
growth in this division for the remainder of fiscal 2001.
The Company's Access Control Division ("ACD") revenues decreased to $10.7
million, or 18.8%, in the current quarter compared to $13.1 million in the first
quarter of fiscal 2000. This decrease was in part attributable to an unusually
strong year ago first quarter in anticipation of potential year 2000 issues. As
with the other product divisions, the Company is concentrating on developing and
delivering products keeping in mind what the customers want and need to run
their businesses more efficiently and effectively. During the quarter, the
Company introduced versions of the C.CURE 800 product in various foreign
11
<PAGE> 12
languages to accommodate global customers. The Company also introduced a
scaled-down version of the C.CURE 800 so that small businesses and retail
establishments can enjoy the benefits of this robust technology. While the
Company addresses traditional security and asset management concerns, it is also
continuing to explore and apply new access control technologies based on hand
geometry, fingerprints and iris recognition for use at such events as the 2002
Olympic Games. The Company remains optimistic that sales will rebound in this
division for the remainder of fiscal 2001.
Installation and maintenance revenues increased 10.6% to $42.0 million in the
first quarter of fiscal 2001 versus $38.0 million in the comparable prior year
period. This increase was driven by installations at major retailers in both the
Americas and EMEA business units. During fiscal 2000, the Company formed a
Global Services business unit to ensure the delivery and installation of quality
products and services to customers around the world. During the quarter, several
major service contracts were signed with well-known retailers. Additionally,
progress is being made on updating the technology tools that the Company's
service staff is using to achieve further efficiencies in executing repair and
installation calls. The Company has recently appointed strong leadership in this
business unit to further support its goal of becoming profitable by the second
quarter of fiscal 2001.
GROSS MARGIN AND OPERATING EXPENSES
Gross margin for the first quarter of fiscal 2001 was 44.2 % compared with 43.6%
in the first quarter of fiscal 2000. This improvement was driven mainly by
reduced cost of sales resulting from manufacturing efficiencies and continued
price stability during the quarter. The Company achieved a substantial cost
reduction on hard tags used in the European markets by moving the production
from Ireland to China. Also, by expanding capacity and continuing cost reduction
efforts in its Boca Raton, Florida manufacturing facility, the Company increased
production of source tagging labels to record levels while significantly
reducing the unit cost. As the Company continues to focus on reducing
manufacturing costs and improving overall processes, it expects to further
improve the gross margin level to 45% in the current fiscal year.
Operating expenses for the first quarter of fiscal 2001 decreased slightly to
$91.1 million from the prior year period of $91.9 million. Operating expenses as
a percentage of revenue declined to 34.6% in the current quarter compared with
36.1% in the first quarter of 2000. This improvement was achieved even as the
Company increased research and development spending 39.7% over the first quarter
of fiscal 2000. The Company's long-term target is to reduce total operating
expenses to 30% of revenues.
Selling, general and administrative ("SG&A") expenses were $71.0 million, or
26.9% of revenues, for the first quarter of fiscal 2001 compared to $73.8
million, or 29.0% of revenues, for the first quarter of fiscal 2000. Results for
the year ago period included $3.8 million associated with the Company's change
of CEO. SG&A expenses decreased as a result of the Company's focused efforts to
reduce costs through implementation of shared services departments and of the
Company's Enterprise Resource Planning ("ERP") computer information system. The
Company continues to monitor operating expenses and to eliminate excess
resources wherever it seems prudent. However, in the near term, the Company may
incur additional expenses as it plans to invest in new marketing programs and
explore acquisition opportunities to promote revenue growth for the Company.
Provision for doubtful accounts, as a percentage of revenue, was 2.1% and 2.4%
in the first quarter of fiscal 2001 and 2000, respectively.
Research, development and engineering expenses increased 39.7% from $6.3
million, or 2.5% of revenue, to $8.8 million, or 3.3% of revenue, in the three
months ended September 30, 2000 as compared to the same period in fiscal 2000.
The Company continued to invest in high-potential technologies including radio
frequency identification (RFID or smartEAS) and digital video. The Company
believes that the timely introduction of new products and development of new
technology platforms are important components of its competitive strategy and
anticipates future research and development spending will increase to
approximately 5% of revenues.
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OPERATING INCOME
Operating income for the first quarter of fiscal 2001 was $25.3 million, an
increase of 32.5% over the $19.1 million reported for the first quarter of
fiscal 2000. The increase in operating income was a result of revenue growth,
improved gross margin, and controlling operating expenses, partially offset by
increased research, development and engineering expenses.
OTHER (EXPENSES) INCOME AND TAXES
Non-operating expenses declined slightly to $7.2 million for the first quarter
of 2001, compared with $7.3 million in the prior year period. The current
quarter produced positive free cash flow of $5.7 million mainly driven by higher
earnings. Lower debt levels and lower average cash balances drove a $1.1 million
decline in net interest expense. The increase in other, net expense from $1.1
million for the first quarter of 2000 to $2.1 million for the first quarter of
2001 is primarily due to increased foreign exchange losses and minority interest
expense partially offset by insurance recoveries.
The provision for income taxes for the first quarter of fiscal 2001 is based on
an estimated effective annual consolidated tax rate of 32.0%. The provision for
income taxes for the first quarter of fiscal 2000 was based on an estimated
effective annual consolidated tax rate of 35.0%. The decreased effective tax
rate is due primarily to the mix of earnings and income tax rates of
international subsidiaries.
NET INCOME
Net income for the first quarter ended September 30, 2000 was $12.0 million, or
$0.12 earnings per diluted common share, compared with net income of $7.4
million, or $0.06 per diluted common share, in the quarter ended September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal 2001, cash and cash equivalents
decreased $1.9 million to $222.0 million. For the three month period ended
September 30, 2000, cash flow provided by operating activities was $14.1 million
compared with $19.1 million for the same period a year ago. The decline in
operating cash flow in the three-month period ended September 30, 2000 was due
primarily to an increase in inventories to meet expected product requirements.
During the first quarter of fiscal 2001, the Company used $13.1 million in
investing activities compared with $19.8 million in the first three months of
fiscal 2000. Investing activities in the current quarter consisted of $7.9
million primarily for production and information system equipment and $4.1
million for the acquisition of three businesses, VideoCon, SakerTrax and
Integra, the Polish distributor of Sensormatic products.
For the three-month period ended September 30, 2000, $1.2 million was used for
financing activities as compared to $3.9 million during the three-month period
ended September 30, 1999. The principal use of cash in financing activities
during the current quarter was the repayment of $2.4 million of long-term debt
partially offset by proceeds of $0.7 million from exercises of stock options.
The Company's percentage of total debt to total capital (net of cash and
equivalents) was 17.8% at September 30, 2000 as compared with 17.7% at June 30,
2000. Under certain of the Company's financial agreements, the Company is only
permitted to pay cash dividends to the extent that cumulative income exceeds a
specified amount. Under these covenants, the Company has limited ability to pay
cash dividends at present. The dividend payable on October 2, 2000 to holders of
record of the Depositary Shares as of September 21, 2000 was made in cash, at a
rate of $0.40625 per Depositary Share, for a total of $2.8 million. The Company
intends to pay future preferred stock dividends in cash. The Company has no
plans in the foreseeable future to pay dividends on the Common Stock and will
use available funds for acquisitions, additional capital expenditures, preferred
stock dividends, and repayment of $50 million Senior Notes due in March 2001.
The Company uses the U.S. dollar as its reporting currency for financial
statement purposes. The Company conducts business in numerous countries through
its international subsidiaries that use local currencies to denominate their
transactions, and is, therefore, subject to certain risks associated with
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fluctuating foreign currencies. The resulting changes in the financial
statements do not indicate any underlying changes in the financial position of
the international subsidiaries but merely reflect the adjustment in the carrying
value of the net assets of these subsidiaries at the current U.S. dollar
exchange rate. Due to the long-term nature of the Company's investment in these
subsidiaries, the translation adjustments resulting from these exchange rate
fluctuations are excluded from the results of operations and are recorded in a
separate component of consolidated stockholders' equity. Currency translation
adjustments at September 30, 2000, compared to June 30, 2000, which is reflected
in the balance sheet caption "Accumulated other comprehensive loss", increased
approximately $20.6 million. The Company monitors its currency exposures but
does not hedge its translation exposures due to the high economic costs of such
a program and the long-term nature of its investment in its international
subsidiaries.
No borrowings were outstanding under the Company's $125.0 million revolving
credit facility as of September 30, 2000. However, the facility was utilized for
standby letters of credit totaling $3.7 million resulting in $121.3 million
available for use under the facility. The facility will expire in December 2002.
The Company requires significant cash flow to meet its debt service and other
continuing obligations. As of September 30, 2000, the Company had $424.9 million
of total indebtedness outstanding. The Company's expected principal liquidity
requirements are working capital, financing of customer equipment purchases,
investments in revenue equipment and capital expenditures, potential
acquisitions, interest and a $50.0 million principal payment on the Senior Notes
due on March 31, 2001, and payment of preferred stock dividends. At September
30, 2000, the Company's principal sources of liquidity are (i) cash on hand,
(ii) cash flow from operations, (iii) borrowings under the $125.0 million
Revolving Credit Facility, and (iv) receivable securitization facilities. The
Company believes that cash flow from operations together with borrowings under
the Revolving Credit Facility and receivable securitizations will be sufficient
to meet its liquidity needs for the foreseeable future.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Except for historical matters, the matters discussed in this Form 10-Q are
forward-looking statements that reflect the Company's current views with respect
to future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: 1) changes in international operations, 2) exchange rate risk, 3)
market conditions for the Company's products, 4) the Company's ability to
provide innovative and cost-effective solutions, 5) development risks, 6)
changes in regulations or standards applicable to the Company's products, 7)
competition and 8) changes in the economic climate.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
By complaint dated May 14, 1999, the Company commenced an action against First
National Bank of Pennsylvania, Winner & Bagnara, P.C. ("W&B"), and James E.
Winner, Jr. ("Winner"), in the United States District Court for the Western
District of Pennsylvania, entitled Sensormatic Electronics Corporation v. First
National Bank of Pennsylvania et al, Case No. 99/756. The Company seeks, among
other things, a declaratory judgment that the Company is entitled to purchase
certain franchise rights from the defendants pursuant to the provisions of a
Franchise Lease Agreement, and seeks specific performance of certain contractual
obligations. Winner and W&B have interposed an amended joint answer with
counterclaims against the Company, seeking, among other things, a declaration
that the Company failed to properly exercise its right to purchase those
franchise rights and that the Company's rights to operate its Pennsylvania and
Delaware franchise ceased on December 1, 1998, as well as damages and injunctive
relief. Related litigation between these same parties was filed by the Company
in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County,
Florida. On December 15, 1999, the Company moved to dismiss certain of Winner
and W & B's counterclaims in the Pennsylvania action. The Company's motion was
denied, without prejudice to the Company's right to revive it by simple notice
once jurisdiction is established, by order dated September 29, 2000. The Florida
litigation has been stayed, pending determination of the Pennsylvania
proceedings. The Company believes that it has meritorious defenses to the
attempt by Winner and/or W&B to reclaim the Pennsylvania and Delaware franchise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
27 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three-month period
ended September 30, 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 hereunto duly authorized.
SENSORMATIC ELECTRONICS CORPORATION
By: /s/ GREGORY C. THOMPSON
-------------------------------------------------------
Gregory C. Thompson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2000
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