Sensormatic: The Alarms Are Still Going Off
In 1994, Sensormatic Electronics Corp. was on top of the world. The Boca Raton (Fla.) maker of retail and commercial security systems boasted annual revenue growth of 20% or more for 30 consecutive quarters as its stock soared to 37 5/8. Sales, then $487 million, reached $1 billion this year.
Yet insecurity might better describe the company these days. Its stock has slumped below 13. Sensormatic is embroiled in a Securities & Exchange Commission investigation and a shareholder class action stemming from questionable accounting practices that surfaced two years ago. The California Public Employees' Retirement System in February placed Sensormatic on its list of the 10 worst-performing companies and said, "its success is uncertain."
NEW SHOCK. Now, 18 months into a major overhaul, the bad news keeps getting worse. A new management team, led by Chief Executive Robert A. Vanourek, has faltered in delivering earnings growth and restoring credibility. The latest shock came on Aug. 14, when Sensormatic suspended dividends, announced a $65 million after-tax charge to revamp its troubled European division, and cut 1,200 jobs, 19% of its workforce. Including the charge, the company reported a $21.4 million loss in fiscal 1997 ended June 30, after posting a $97.7 million loss in 1996, including a $118 million restructuring charge. More troubling: Excluding the write-off, net income plummeted to $13.2 million in 1997 from $20.5 million in 1996. Revenues rose only 3.1%, to $1.02 billion.
Vanourek attributes the poor results to investments in infrastructure and training and legal expenses rather than pricing pressures in the dogfight it faces with its chief competitor, Checkpoint Systems Inc. in Thoroughfare, N.J. "We could have had higher earnings if we had not gone with the reinvestment program," says Vanourek, who joined Sensormatic in October, 1995, as president and became CEO last August. He concedes past problems, especially Sensormatic's structural shortcomings: poor or nonexistent financial and management controls, aging computer systems, and runaway expenses. "The job is certainly more challenging than anyone anticipated in 1995," he says. But he insists the company can achieve 15% annual growth by 2000.
"BLACK HOLE" IN BRITAIN. Vanourek must also cope with fallout from the tenure of Ronald G. Assaf, Sensormatic's founder and former CEO, who remains board chairman. After the accounting irregularities surfaced in 1995, an Ernst & Young report said that company officials, including Assaf, knew that "out-of-period" revenue--recorded after the reporting deadline--was being recorded improperly, requiring a restatement of 1995 third-quarter results. Computer clocks had been reset to make it appear revenues had been recorded on time. And shipments to warehouses were counted as sales. Assaf says amounts involved were "immaterial."
Internal probes revealed other accounting and reporting problems, especially in Britain, which an internal memo termed a "multimillion pound black hole." Such actions as counting revenue twice for products shipped through two warehouses overstated profits by at least $7.2 million included in 1996 writedowns. The class action, filed in 1995, contends that accounting irregularities enabled Sensormatic to maintain its growth while Assaf, other senior executives, and some board members profited by selling shares. While conceding the out-of-period shipments, the company and individual defendants, including Assaf, have denied any fraud.
While much of the shareholder suit is sealed, some public documents raise questions about how far knowledge of the improper accounting extended. Former Chief Financial Officer Michael E. Pardue, who resigned in March, 1995, months before the accounting problems became public, testified in an SEC deposition he had mentioned the out-of-period shipments to longtime board members James E. Lineberger and Jerome M. LeWine. Both Lineberger and LeWine, through company counsel, dispute Pardue's testimony and deny any prior knowledge. The two remain directors. Pardue could not be reached for comment, but in replying to the suit he denied wrongdoing.
Vanourek and new CFO Garrett Pierce are reorganizing financial systems and striving to clean up Sensormatic's image. They recruited two new directors with solid reputations: former Time Inc. CEO J. Richard Munro and Wayland R. Hicks, former CEO of Nextel Communications Inc., who joined in June.
Some of Sensormatic's harshest critics give the new team some credit. "To a decent degree, they've cleaned up the accounting," says analyst Howard A. Rosencrans of HD Brous & Co. He is a skeptic on the company's long-term viability, given the competition from Checkpoint. Checkpoint has recently ratcheted up pressure with retail store tags that undercut Sensormatic's price--under 2 cents vs. less than 1 cents for Checkpoint.
Vanourek acknowledges the Aug. 14 moves hurt. But he is unperturbed. He has been through worse, he recalls, as CEO at Dallas-based Recognition Inc. That company was the target of a Justice Dept. probe as a former CEO faced charges, later dismissed, of influencing a postal service contract. Although the company was nearly out of cash, he turned it around. "I've been through high growth, no growth, federal issues, lawsuits--they have kind of prepared me for what we have today--this is now showtime." Given Sensormatic's travails, it should attract a big audience.