1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended April 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to _______
Commission file number 1-5450
------
THE WACKENHUT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0857245
- ----------------------- ----------------
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
4200 Wackenhut Drive #100, Palm Beach Gardens, FL 33410-4243
- ----------------------------------------------------- ------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (561) 622-5656
--------------
Not Applicable
- --------------------------------------------------------------------------------
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 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 [ ]
At May 7, 2001, 3,855,582 shares of Series A were issued and outstanding and
11,165,686 shares of Series B of the registrant's Common Stock were outstanding.
================================================================================
2
The Wackenhut Corporation and Subsidiaries
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of The Wackenhut Corporation and
subsidiaries (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and, therefore, omit or condense certain footnotes and
other information normally included in financial statements prepared in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the thirteen weeks
ended April 1, 2001 are not necessarily indicative of the results for the entire
fiscal year ending December 30, 2001.
2
3
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Income
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 2001 and APRIL 2, 2000
(in millions except per share data)
(Unaudited)
Restated*
2001 2000
-------- --------
REVENUES $ 663.5 $ 593.4
-------- --------
OPERATING EXPENSES
Payroll and related taxes 533.8 459.5
Other operating expenses 115.0 119.5
Depreciation and amortization 6.8 6.3
-------- --------
655.6 585.3
-------- --------
OPERATING INCOME 7.9 8.1
OTHER INCOME (EXPENSE)
Interest and investment income 1.7 1.3
Interest expense (2.3) (1.9)
-------- --------
INCOME BEFORE INCOME TAXES 7.3 7.5
INCOME TAXES (2.9) (3.0)
MINORITY INTEREST, NET OF INCOME TAXES OF $0.9 AND $1.5 (1.4) (2.3)
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET OF INCOME TAX
(BENEFIT) PROVISION OF $(3.0) AND $1.0 (4.5) 1.5
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(1.5) 3.7
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- (0.8)
-------- --------
NET INCOME (LOSS) $ (1.5) $ 2.9
-------- --------
EARNING (LOSS) PER SHARE:
Basic
Income (loss) before cumulative effect of change in accounting principle $ (0.10) $ 0.25
Cumulative effect of change in accounting principle -- (0.05)
-------- --------
Net income (loss) $ (0.10) $ 0.20
-------- --------
Diluted
Income (loss) before cumulative effect of change in accounting principle $ (0.10) $ 0.24
Cumulative effect of change in accounting principle -- (0.05)
-------- --------
Net income (loss) $ (0.10) $ 0.19
-------- --------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15.0 15.0
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15.0 15.1
* Restated for the adoption of SAB No. 101.
See accompanying notes to unaudited consolidated financial statements.
3
4
The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
APRIL 1, 2001 AND DECEMBER 31, 2000
(in millions except per share data)
April 1,
2001 December 31,
Unaudited 2000
----------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 64.2 $ 60.8
Accounts receivable, net 231.0 218.4
Inventories 9.7 11.5
Deferred taxes 12.6 12.1
Prepaid expenses 11.1 10.6
Other 14.9 15.1
------ ------
343.5 328.5
------ ------
MARKETABLE SECURITIES 39.1 37.3
------ ------
PROPERTY AND EQUIPMENT 120.7 118.2
Less: accumulated depreciation and amortization (41.7) (38.8)
------ ------
79.0 79.4
------ ------
DEFERRED TAXES 12.7 7.5
------ ------
OTHER ASSETS
Goodwill, net 49.7 50.1
Other intangibles 3.9 14.1
Investment in and advances to affiliates 33.1 44.9
Other 9.8 8.5
------ ------
96.5 117.6
------ ------
$570.8 $570.3
====== ======
(continued)
4
5
The Wackenhut Corporation and Subsidiaries
Consolidated Balance Sheets
APRIL 1, 2001 AND DECEMBER 31, 2000
(in millions except share data)
(Unaudited)
(continued)
April 1,
2001 December 31,
Unaudited 2000
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 4.6 $ 5.1
Accounts payable 33.4 36.9
Accrued payroll and related taxes 96.0 90.3
Accrued expenses 67.8 65.6
------ ------
201.8 197.9
------ ------
RESERVES FOR INSURANCE LOSSES 98.4 92.7
------ ------
LONG-TERM DEBT, net of current portion 16.3 11.4
------ ------
DEFERRED REVENUE 12.0 12.8
------ ------
OTHER 21.2 19.6
------ ------
COMMITMENTS AND CONTINGENCIES (note 7)
MINORITY INTEREST 52.0 58.1
------ ------
SHAREHOLDERS' EQUITY
Preferred stock, 10 million shares authorized, none outstanding -- --
Common stock, $.10 par value, 50 million shares authorized
Series A, 3.9 million issued and outstanding 0.4 0.4
Series B, 11.1 million issued and outstanding 1.1 1.1
Additional paid-in capital 122.1 121.9
Retained earnings 66.2 67.8
Accumulated other comprehensive loss (20.7) (13.4)
------ ------
169.1 177.8
------ ------
$570.8 $570.3
====== ======
See accompanying notes to unaudited consolidated financial statements.
5
6
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 2001 AND APRIL 2, 2000
(In millions)
(Unaudited)
Restated*
April 1, April 2,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1.5) $ 2.9
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change -- 0.8
Depreciation and amortization 6.8 6.3
Deferred taxes (5.7) 0.2
Provision for bad debts 1.6 0.7
Equity in loss (income), net of dividends received 7.5 (2.3)
Minority interest in net income 2.3 3.8
Other (1.5) (1.2)
Changes in operating assets and liabilities, net of divestitures:
Accounts receivable 3.4 (23.0)
Inventories (0.2) (0.4)
Prepaid expenses (0.5) 0.1
Other current assets (0.5) (1.3)
Other assets (1.3) (1.3)
Accounts payable and accrued expenses (11.6) (3.5)
Accrued payroll and related taxes 5.4 3.9
Reserves for insurance losses 5.7 (2.1)
Other liabilities 0.7 0.3
----- -----
Net Cash Provided By (Used In) Operating Activities 10.6 (16.1)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from partial sale of food service division 13.6 --
Net investment in and advances to affiliates and joint ventures (3.4) (5.1)
Capital expenditures (3.3) (10.7)
Sales of marketable securities 22.5 8.0
Purchases of marketable securities (23.8) (3.2)
----- -----
Net Cash Provided By (Used In) Investing Activities 5.6 (11.0)
----- -----
(continued)
6
7
The Wackenhut Corporation and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 2001 AND APRIL 2, 2000
(in millions)
(Unaudited)
(continued)
Restated*
April 1, April 2,
2001 2000
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 129.6 95.6
Payments on debt (125.2) (82.3)
Net cash settlements from sales of accounts receivable (17.5) 1.0
Shares repurchased and retired, including subsidiary's -- (4.2)
------ ------
Net Cash (Used In) Provided By Financing Activities (13.1) 10.1
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 0.3 (0.9)
------ ------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3.4 (17.9)
CASH AND CASH EQUIVALENTS, beginning of period 60.8 67.0
------ ------
CASH AND CASH EQUIVALENTS, end of period $ 64.2 $ 49.1
====== ======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for - interest $ 2.5 $ 1.7
- income taxes 0.3 0.1
*Restated for the adoption of SAB No. 101.
See accompanying notes to unaudited consolidated financial statements.
7
8
THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR INFORMATION IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. GENERAL
The consolidated financial statements of the Company are unaudited and, in the
opinion of management, include all adjustments necessary to fairly present the
Company's financial condition, results of operations and cash flows for the
interim period. The Company's subsidiary, Wackenhut Corrections Corporation
("WHC"), is listed on the New York Stock Exchange as "WHC." The results for the
thirteen weeks ended April 1, 2001 are not necessarily indicative of the results
of operations to be expected for the full year. These statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000. Certain prior year amounts have been reclassified to conform to the
current year presentation. Accounts receivable are net of allowances of $6.3
million and $4.8 million at April 1, 2001 and December 31, 2000, respectively.
During the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin: No. 101 (SAB No. 101) - Revenue Recognition. Government contract award
fees, previously accrued for based on the Company's performance and long-term
experience of being awarded such fees, are now only recognized when formally
awarded. SAB No. 101 applied retroactively to the first quarter of 2000,
resulted in a one-time charge in 2000 of $0.8 million, net of income taxes. On a
diluted basis, the cumulative effect of change in accounting principle was $0.05
per share during 2000.
The Company and WHC adopted Statement of Financial Accounting Standards No.133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. WHC's 50% owned equity
affiliate operating in the United Kingdom has entered into interest rate swaps
to fix the interest rate it receives on its variable rate credit facility.
Management of WHC has determined the swaps to be effective cash flow hedges.
Accordingly, WHC recorded its share of the affiliate's change in other
comprehensive income as a result of applying SFAS 133. The adoption of SFAS 133
resulted in approximately a $14 million reduction in shareholders' equity in
WHC's financial statements for the quarter ended April 1, 2001, and
approximately $7.9 million in the Company's financial statements for the same
period.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of FASB No. 125" ("SFAS 140").
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures
effective for fiscal years ending after December 15, 2000. Accounting for
transfers and servicing of financial assets and extinguishment of liabilities
under SFAS 140 is effective for transactions occuring after March 31, 2001 and
the Company does not expect the adoption of SFAS 140, as currently interpreted,
to have a material impact on the Company's Consolidated Financial Statements.
2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of affiliates approximated $12.1 million and
$27.6 million at April 1, 2001 and December 31, 2000, respectively, and is
included in "Investment in and advances to affiliates" in the consolidated
balance sheets. The following is a summary of condensed unaudited information
pertaining to affiliates (dollars in millions):
April 1, December
Balance sheet items: 2001 31, 2000
----------------- ------------------
Current assets $ 200.1 $ 190.0
Noncurrent assets 368.4 358.5
Current liabilities 159.1 147.3
Noncurrent liabilities 337.7 320.7
Minority interest liability 0.5 0.4
8
9
Income statement items for the April 1, April 2,
thirteen weeks ended: 2001 2000
----------------- ------------------
Revenues $ 160.0 $ 147.9
Operating income 4.4 12.1
Net income before taxes (17.8) 7.4
3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as follows
(dollars in millions):
Thirteen weeks ended
-----------------------------------------
April 1, April 2,
2001 2000
------------------ -------------------
Net income (loss) $ (1.5) $ 2.9
Foreign currency translation adjustments, net of income tax
benefit (expense) of $(0.2) million and $0.6 million, respectively 0.3 (0.9)
Unrealized gain (loss) on marketable securities and derivative
instruments, net of income tax benefit (expense) of $5.1
million and (0.3) million, respectively (7.6) 0.5
------------------ -------------------
Comprehensive income (loss) $ (8.8) $ 2.5
================== ===================
4. GOODWILL AND OTHER INTANGIBLES
Intangibles consisted of the following (dollars in millions):
April 1, December 31,
2001 2000
---------------- ----------------
Goodwill $ 58.0 $ 58.0
Contract value -- 15.6
Other 8.7 8.7
---------------- ----------------
66.7 82.3
Accumulated amortization
Goodwill 8.3 7.9
Contract value -- 5.7
Other 4.8 4.5
---------------- ----------------
13.1 18.1
---------------- ----------------
Net $ 53.6 $ 64.2
---------------- ----------------
The reduction of contract value is related to the sale of the Company's food
services division.
9
10
5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following (dollars in millions):
April 1, December 31,
2001 2000
---------------- ----------------
Revolving loans -
The Wackenhut Corporation, parent $ 9.8 $ 0.5
WHC 5.0 10.0
Lease obligation payable in
installments through 2004 at a
weighted average rate of 4.5% 1.1 1.3
Other debt principally related to
security services 5.0 4.7
----------- -----------
Total 20.9 16.5
Less: current portion 4.6 5.1
----------- - -----------
Total $ 16.3 $ 11.4
=========== ===========
As of April 1, 2001, the net amount available to the Company from its existing
revolving credit and accounts receivable securitization facilities, after
deducting $50.0 million accounts receivable sold under the Company's
securitization agreement, $58.6 million in outstanding letters of credit, and
$9.8 of revolving loans, was $ 69.1 million.
10
11
6. EARNINGS PER SHARE
The table below shows the amounts used in computing earnings per share and the
effects on income and the weighed average number of shares of potential dilutive
common stock (in millions except for per share amounts).
April 1, April 2,
2001 2000
-------- --------
Basic
Net income (loss) $ (1.5) $ 2.9
Weighted average common
shares outstanding 15.0 15.0
-------- --------
Basic earnings (loss) per share $ (0.10) $ 0.20
-------- --------
Diluted
Net income (loss) $ (1.5) $ 2.9
Effect of Wackenhut Corrections
stock options -- (0.1)
-------- --------
Net income (loss) $ (1.5) $ 2.8
-------- --------
Weighted average common
shares outstanding 15.0 15.0
Assumed exercise of stock
options, net of common
shares assumed repurchased
with the proceeds -- 0.1
-------- --------
Adjusted weighted average
common shares outstanding 15.0 15.1
-------- --------
Diluted earnings (loss) per share $ (0.10) $ 0.19
-------- --------
Common stock equivalents related to stock options if exercised were excluded
from the diluted loss per share calculation at April 1, 2001, as their effect
would have been anti-dilutive. Options to purchase 924,300 shares of common
stock at April 2, 2000, were excluded from the diluted earnings per share
calculation as their impact would have been anti-dilutive.
11
12
7. COMMITMENTS AND CONTINGENCIES
During the first quarter of 2001 the Company recorded after tax charges of $5.6
million ($9.3 million pre-tax) representing its share of the losses of its 50%
owned affiliated operations in Chile.
The Company has launched a full scale analysis of all aspects of the business in
Chile and is currently working with the affiliate's management team and its
bankers in assessing its alternatives with respect to the affiliate's operations
in Chile, including the sale of its non-strategic businesses and a bridge loan
during the restructuring period, supported by the assets of the businesses to be
sold. During fiscal 2000, in connection with a consideration of strategic
alternatives with respect to the Chilean operations, the Chilean affiliate
received offers for certain segments of its business. However, at the time of
the offers, the ownership structure of the Chilean companies would not
facilitate the Chilean Company to act upon these offers.
The Chilean affiliates total outstanding debt is approximately $60.0 million,
and although several of the affiliates businesses are local market leaders,
there can be no assurance that the Chilean affiliate will be able to obtain a
bridge loan while it sells non-strategic businesses. The Company has exposure
for $32.0 million in letters of credit issued to secure a portion of the Chilean
affiliates $60.0 million debt. The Company has also provided comfort letters for
approximately $6.8 million. At this time management is unable to estimate the
amount of loss, if any, that would be recorded should the sale of assets, or
ongoing operating results, be unable to generate sufficient cash to repay the
Chilean affiliate's obligations secured by the Company's outstanding letters of
credit, and there can be no assurance that the ultimate outcome of this
uncertainty would not have a material adverse impact on the Company's financial
position and results of operations.
In December 1999, a Travis County, Texas grand jury indicted twelve of WHC's
former facility employees for various types of sexual misconduct. Management
believes these indictments are not expected to have any material financial
impact on WHC. Eleven of the twelve indicted former employees already resigned
from or had been terminated by WHC as a result of WHC initiated investigations
over the course of the prior three years. WHC is not providing counsel to assist
in the defense of these twelve individuals. The District Attorney in Travis
County continues to review WHC documents at the Travis County Facility. At this
time WHC cannot predict the outcome of this investigation.
During the third quarter of 2000, WHC recorded an operating charge of $3.8
million ($2.3 million after tax) for the 276-bed Jena Juvenile Justice Center in
Jena, Louisiana. The charge represented the expected losses to be incurred on
the lease with Correctional Properties Trust (CPV), including lease costs and
property taxes. Management estimates that the facility will remain inactive
through the end of 2001.
WHC is continuing its efforts to sublease or find an alternative correctional
use for the facility. If WHC is unable to sublease or find an alternative
correctional use for the facility by the end of 2001, there would be an adverse
impact on WHC's and the Company's financial position, future results of
operations and future cash flows.
12
13
8. BUSINESS SEGMENTS
The Company's principal segments are grouped based on similarity of business
services provided and the type of customer for which these services are offered.
These services consist of global security services, correctional services and
flexible staffing services. The Company is a major provider of global business
services including providing security-related and other support services to
business and government, developing and managing privatized correctional,
detention and public sector mental health services through WHC, a 57% owned
public subsidiary, and providing worksite employees and temporary staffing. For
segment reporting, the accounts of the Company's captive insurance company have
been included in unallocated corporate expenses. Intersegment transactions are
accounted for on an arms-length basis and are eliminated in consolidation.
Direct general and administrative expenses are allocated based on usage.
Thirteen weeks ended
----------------------------------
April 1, 2001 April 2, 2000
--------------- --------------
Revenues:
Global Security services $298.0 $284.4
Correctional services 135.0 130.5
Flexible Staffing services 230.5 178.5
------ ------
Total Revenues $663.5 $593.4
====== ======
Operating Income:
Global Security services $ 10.2 $ 7.7
Correctional services 2.5 5.6
Flexible Staffing services 0.9 0.7
Unallocated corporate expenses (5.7) (5.9)
------ ------
Total operating income $ 7.9 $ 8.1
====== ======
Equity Income (Loss) of Affiliates, net of taxes:
Global Security services $ (5.4) $ 0.4
Correctional services 0.9 1.1
------ ------
Total equity income $ (4.5) $ 1.5
====== ======
Capital Expenditures:
Global Security services $ 0.3 $ 0.2
Correctional services 2.6 10.1
Flexible Staffing services 0.1 0.2
Unallocated corporate expenditures 0.3 0.2
------ ------
Total capital expenditures $ 3.3 $ 10.7
====== ======
Depreciation and Amortization:
Global Security services $ 3.2 $ 3.1
Correctional services 2.5 2.1
Flexible Staffing services 0.6 0.6
Unallocated corporate expenses 0.5 0.5
------ ------
Total depreciation and amortization expense $ 6.8 $ 6.3
====== ======
13
14
April 1, December 31,
2001 2000
-------- ------------
Identifiable Assets:
Global Security services $186.6 $181.5
Correctional services 200.0 223.6
Flexible Staffing services 83.7 85.0
Unallocated corporate assets 100.5 80.2
------ ------
Total identifiable assets $570.8 $570.3
====== ======
14
15
DOMESTIC AND INTERNATIONAL OPERATIONS
Non-U.S. operations of the Company and its subsidiaries are conducted primarily
in South America, the United Kingdom and Australia. No individual foreign
subsidiary of the Company represented over 10% of combined revenues in 2000 or
in the first quarter of 2001. Minority interest in consolidated foreign
subsidiaries has been reflected, net of applicable income taxes, in the
accompanying consolidated financial statements. The Company carries its
investment in affiliates under the equity method. U.S. income taxes, which would
be payable upon remittance of affiliates' earnings to the Company, are provided
currently. Long-lived assets consist of property, plant and equipment. A summary
of domestic and international operations is shown below:
THIRTEEN WEEKS ENDED
-------------------------------
APRIL 1, 2001 APRIL 2, 2000
------------- -------------
Revenues:
Domestic operations $592.4 $518.2
International operations 71.1 75.2
------ ------
Total Revenues $663.5 $593.4
====== ======
Operating Income:
Domestic operations $ 5.0 $ 1.6
International operations 2.9 6.5
------ ------
Total operating income $ 7.9 $ 8.1
====== ======
Equity Income (Loss) of Affiliates, net of taxes:
Domestic operations $ 0.1 $ 0.1
International operations (4.6) 1.4
------ ------
Total equity income $ (4.5) $ 1.5
====== ======
Capital Expenditures:
Domestic operations $ 2.2 $ 7.9
International operations 1.1 2.8
------ ------
Total capital expenditures $ 3.3 $ 10.7
====== ======
Depreciation and Amortization:
Domestic operations $ 5.3 $ 4.8
International operations 1.5 1.5
------ ------
Total depreciation and amortization expense $ 6.8 $ 6.3
====== ======
APRIL 1, 2001 DECEMBER 31, 2000
------------- ------------------
Long-lived Assets:
Domestic operations $ 61.4 $ 61.1
International operations 17.6 18.3
------ ------
Total long-lived assets $ 79.0 $ 79.4
====== ======
15
16
THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Wackenhut Corporation, a Florida corporation, and subsidiaries (the
"Company" or "TWC") is a major provider of global business services including
providing security-related and other support services to business and
government, developing and managing privatized correctional, detention and
public sector mental health services facilities through Correctional Services or
WHC, a 57% owned public subsidiary, and providing employee leasing and temporary
staffing. Global Security Services includes security operations, facility
management and fire and emergency medical services. WHC designs, constructs,
finances and manages correctional, detention and mental health psychiatric
facilities and performs separate correctional-related services, including
prisoner transportation, home detention monitoring and correctional health care.
The Company's flexible staffing business includes worksite employee leasing,
temporary services, recruiting, risk management, payroll processing and human
resource services. The Company partially sold certain assets of its food service
division, part of Security Services, and anticipates completion of the sale in
the second quarter 2001.
FINANCIAL CONDITION
Reference is made to the Company's Annual Report to Shareholders, filed as
Exhibit 13.0 with the Company's Annual Report Form 10-K for the fiscal year
ended December 31, 2000, for further discussion and analysis of information
pertaining to the Company's financial condition.
LIQUIDITY
The Company's borrowing capacity under its Credit Facility and securitization
agreement totals $187.5 million. As of April 1, 2001, the net amount available
to the Company from its existing revolving credit and accounts receivable
securitization facilities, after deducting $50.0 million accounts receivable
sold under the Company's securitization agreement, $58.6 million in outstanding
letters of credit, and $9.8 of revolving loans, was $ 69.1 million. Some of the
Company's $58.6 million of outstanding letters of credit are in support of
international operations including support of the affiliate in Chile of $32.0
million.
During the first quarter of 2001, the Company recorded after-tax charges of $5.6
million ($9.3 million pre-tax) representing its share of the losses of its 50%
owned affiliated operations in Chile.
The Company has launched a full scale analysis of all aspects of the business in
Chile and is currently working with the affiliate's management team and its
bankers in assessing its alternatives with respect to the affiliate's operations
in Chile, including the sale of its non-strategic businesses and a bridge loan
during the restructuring period, supported by the assets of the
16
17
businesses to be sold. During fiscal 2000, in connection with a consideration of
strategic alternatives with respect to the Chilean operations, the Chilean
affiliate received offers for certain segments of its business. However, at the
time of the offers, the ownership structure of the Chilean companies would not
facilitate the Chilean Company to act upon these offers.
The Chilean affiliates total outstanding debt is approximately $60.0 million,
and although several of the affiliates businesses are local market leaders,
there can be no assurance that the Chilean affiliate will be able to obtain a
bridge loan while it sells non-strategic businesses. The Company has exposure
for $32.0 million in letters of credit issued to secure a portion of the Chilean
affiliates $60.0 million debt. The Company has also provided comfort letters for
approximately $6.8 million. At this time management is unable to estimate the
amount of loss, if any, that would be recorded should the sale of assets, or
ongoing operating results, be unable to generate sufficient cash to repay the
Chilean affiliate's obligations secured by the Company's outstanding letters of
credit, and there can be no assurance that the ultimate outcome of this
uncertainty would not have a material adverse impact on the Company's financial
position and results of operations.
During fiscal 2000, the Company began a review of its international security
operations in order to enhance quality revenue and earnings growth by focusing
its resources in international markets where it can achieve proper critical
mass. In aligning its international resources with this strategy, conditions may
arise that indicate an impairment of an investment, particularly in certain
subsidiaries and affiliates that are experiencing liquidity problems, which
could have an adverse impact on the Company's results of operations and cash
position.
During the third quarter of 2000, WHC recorded an operating charge of $3.8
million ($2.3 million after tax) for the 276-bed Jena Juvenile Justice Center in
Jena, Louisiana. The charge represented the expected losses to be incurred on
the lease with Correctional Properties Trust (CPV), including lease costs and
property taxes. Management estimates that the facility will remain inactive
through the end of 2001.
WHC is continuing its efforts to sublease or find an alternative correctional
use for the facility. If WHC is unable to sublease or find an alternative
correctional use for the facility by the end of 2001, there would be an adverse
impact on WHC's and the Company's financial position, future results of
operations and future cash flows.
WHC's access to capital and ability to compete for future capital intensive
projects is dependent upon, among other things, its ability to meet certain
financial covenants included in its $220 million operating lease facility and
$30 million revolving credit facility. A substantial decline in WHC's financial
performance as a result of an increase in operational expenses relative to
revenue could negatively impact WHC's ability to meet these covenants, and could
therefore limit WHC's access to capital. As of April 1, 2001, approximately
$154.3 million of WHC's $220 million operating lease facility, established to
acquire and develop new correctional facilities, was outstanding for properties
in operation. Also as of April 1, 2001, $5.0 million was outstanding of WHC's
$30 million multi-currency revolving credit facility.
Current cash requirements consist of amounts needed for capital expenditures,
increased working capital needs resulting from corporate growth and business
expansion, payment of liabilities incurred in the operation of the Company's
business, the renovation or construction of correctional facilities by WHC, and
possible acquisitions. The Company continues to expand its domestic and
17
18
international businesses and to pursue major contracts, some of which may
require substantial initial cash outlays, which are partially or fully
recoverable over the original term of the contract
Management believes that cash on hand, cash provided by operating activities and
available lines of credit will be adequate to support currently planned business
expansion and various obligations incurred in the operation of the Company's
business through 2001. Management will continue to review its capital/financial
planning alternatives to ensure long-term financial capital access and
availability. Proceeds from the sale of the Company's food services division
were used for general corporate purposes.
MARKET RISK
The Company is exposed to market risks, including changes in interest rates and
currency exchange rates. These exposures primarily relate to outstanding
balances under the revolving line of credit and securitization facilities and
international investments. In addition, WHC is exposed to market risks arising
from changes in interest rates with respect to its $220.0 million operating
lease facility and the $30.0 million revolving credit facility. Based on the
Company's interest rate and foreign exchange rate position at April 1, 2001, a
hypothetical 100 basis point change in market interest rate or a 10% change in
the historical currency rates would not have a material effect on the Company's
financial position or results of operations over the next fiscal year.
*FORWARD-LOOKING STATEMENTS The management's discussion and analysis of
financial condition and results of operations, corporate profile, letter to
shareholders, and the May 4, 2001 press release contain forward-looking
statements that are based on current expectations, estimates and projections
about the segments in which the corporation operates. These sections of the
annual report also include beliefs and assumptions made by management. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include increasing price and product/service competition by
domestic and foreign competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the mix of
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes including environmental
regulations; protection and validity of patent and other intellectual property
rights; reliance on large customers; technological, implementation and
cost/financial risks in increasing use of large, multi-year contracts; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
corporation's future business; and other factors discussed in the Company's
filings with the Securities and Exchange Commission. These are representative of
the Future Factors that could affect the outcome of the forward-looking
statements. In addition, such statements could be affected by general industry
18
19
and market conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange rate
fluctuations and other future factors. The Company does not assume any
obligation to update any such forward-looking statements.
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations by its
organizational business segments. The following discussion and analysis should
be read in conjunction with the Company's consolidated financial statements and
notes thereto (dollars in millions):
Thirteen weeks ended
---------------------------------------------------
Restated*
April 1, 2001 April 2, 2000
------------------------ -------------------------
$ % $ %
----------- ----------- ------------- ----------
REVENUES (a)
Global Security Services 298.0 45.0 284.4 47.9
Correctional Services 135.0 20.3 130.5 22.0
Flexible Staffing Services 230.5 34.7 178.5 30.1
----------- ----------- ------------- ----------
Consolidated revenues 663.5 100.0 593.4 100.0
=========== =========== ============= ==========
OPERATING INCOME (b)
Global Security Services 10.2 3.4 7.7 2.7
Correctional Services 2.5 1.9 5.6 4.3
Flexible Staffing Services 0.9 0.4 0.7 0.4
Unallocated corporate expense (5.7) (0.9) (5.9) (1.0)
----------- -------------
Consolidated operating income 7.9 1.2 8.1 1.4
=========== =============
- -------------
* Restated for the adoption of SAB No. 101.
(a) Represents percent of total revenues.
(b) Represents percent of respective business related revenues.
COMPARISON OF FIRST QUARTER ENDED APRIL 1, 2001 AND RESTATED FIRST QUARTER ENDED
APRIL 2, 2000
REVENUES
Global Security Services
First quarter 2001 Global Security Services' revenues increased $13.6 million,
or 4.8%, to $298.0 million from $284.4 million in the first quarter 2000. North
American market revenues increased $13.6 million, or 5.6%, to $256.7 million in
the first quarter of 2001 from $243.1 million in the first quarter 2000. There
was continued expansion of revenues from national accounts due to new contracts
and increases in existing contracts. International market revenues remained the
same at $41.3 million for both the first quarter 2001 and first quarter 2000.
19
20
Correctional Services
First quarter 2001 Correctional Services' revenues increased $4.5 million, or
3.4%, to $135.0 million from $130.5 million in the comparable quarter last year.
Approximately $12.8 million of the increase in revenues in the first quarter
2001 compared to the first quarter 2000 is attributable to increased compensated
resident days resulting from the opening of two facilities in 2000 and two
facilities in the first quarter 2001. The number of compensated resident days in
domestic facilities increased to 2,295,225 in the first quarter 2001 from
2,165,872 in the first quarter 2000. Compensated resident days in Australian
facilities decreased to 449,999 from 486,346 for the comparable periods
primarily due to lower compensated resident days at the immigration detention
facilities. Revenues decreased by approximately $7.1 million in the first
quarter 2001 compared to first quarter 2000 due to the substantial completion of
construction of South Florida State Hospital. Revenues also decreased by
approximately $1.7 million in first quarter 2001 as compared to the same period
in 2000 due to the cessation of operations at the Jena Juvenile Justice Center.
The balance of the increase in revenues was attributable to facilities open
during all of both periods. The average facility occupancy in domestic
facilities was 96.9% of capacity in the first quarter 2001 compared to 97.3% in
the first quarter 2000.
Staffing Services
Staffing Services' first quarter 2001 revenues increased $52.0 million, or
29.1%, to $230.5 million from $178.5 million in the comparable quarter last
year. Leased employees grew to approximately 38,000 at the end of the first
quarter 2001 from 31,000 at the end of the first quarter 2000. Temporary
placement hours decreased 9.8% to approximately 791,000 during the first quarter
2001 from approximately 877,000 during the first quarter 2000 due to lower
demand from a major client and lower demand in the midwest light industrial
segment.
OPERATING INCOME
First quarter 2001 consolidated operating income decreased $0.2 million, or
2.5%, to $7.9 million from $8.1 million in the first quarter 2000. First quarter
2001 operating income was reduced by $3.5 million of start-up costs associated
with the opening of two domestic facilities by correctional services compared to
$0.2 million for the first quarter 2000. Operating income also had the favorable
impact of award fees for government contract work in security services. The
operating margin for the first quarter 2000 decreased to 1.2% as compared to
1.4% for the comparable first quarter 2000. During a period of low unemployment,
some business units may experience difficulty in finding qualified personnel.
This could have an adverse impact on the Company's results of operations to the
extent wages and overtime premium increase at a faster rate than the per diem or
fixed rates received by the Company for its services or cannot be passed on to
clients.
Security Services
Security Services' business operating income increased $2.5 million, or 32.5%,
to $10.2 million in the first quarter 2001 from $7.7 million for the comparable
quarter last year. North American market operating income increased $2.2
million, or 33.8%, to $8.7 million in the first quarter 2001 from $6.5 million
in the first quarter 2000. This increase can be attributed mainly to award fees
associated with the Company's contract at the Department of Energy's Oak Ridge
facility which were not available for award in the first quarter of 2000 and
increased revenue growth. North American market operating income as a percentage
of revenues increased 70 basis points to 3.4% in the first quarter 2001 compared
20
21
to the same quarter 2000, due primarily to award fees now only recognized when
formally awarded under SAB No. 101. Security Services operating income in the
international market increased $0.3 million to $1.5 million in the first quarter
2001 from $1.2 million in the first quarter 2000.
During fiscal 2000, the Company began a review of its international security
operations in order to enhance quality revenue and earnings growth by focusing
its resources in international markets where it can achieve proper critical
mass. In aligning its international resources with this strategy, conditions may
arise that indicate an impairment of an investment, particularly in certain
subsidiaries and affiliates that are experiencing liquidity problems, which
could have an adverse impact on the Company's results of operations and cash
position.
Correctional Services
First quarter 2001 operating income decreased $3.1 million, or 54.4%, to $2.5
million from $5.6 million in the comparable period in 2000. As a percentage of
revenue, operating income decreased to 1.9% in the first quarter 2001 from 4.3%
in the first quarter 2000. This decrease is due principally to $3.5 million in
start-up expenses related to the opening of two facilities. In addition,
secondary factors contributing to this decrease include expenses related to
construction activities and increases in general and comprehensive liability
insurance premiums. WHC continues to incur increasing insurance costs due to
adverse claims experience. WHC is implementing a strategy to improve the
management of future loss claims incurred by WHC but can provide no assurances
that this strategy will be successful. Unanticipated additional insurance costs
could adversely impact WHC's and the Company's Fiscal 2001 results of
operations.
STAFFING SERVICES
The operating profit of Staffing Services was $0.9 million in the first quarter
2001 compared to $0.7 million for the first quarter 2000. This increase is
attributable to revenue growth.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate general and administrative expenses decreased 3.4% to $5.7
million in the first quarter 2001 from $5.9 million in the first quarter 2000.
As a percentage of consolidated revenues, unallocated corporate general and
administrative expenses remained relatively the same at 0.9% of revenues in the
first quarter 2001 versus 1.0% in the first quarter 2000.
OTHER INCOME/EXPENSE
The Company incurred other expense of $0.6 million in the first quarter 2001 and
in the first quarter 2000. Investment income increased $0.4 million to $1.7
million in the first quarter 2001 from $1.3 million in the first quarter 2000.
This increase is primarily attributable to increased returns related to an
increase in the average balance outstanding of the Company's reinsurance
subsidiary's marketable securities. Interest expense increased $0.4 million to
$2.3 million in the first quarter 2001 from $1.9 million in the first quarter
2000, which is primarily attributable to higher interest rates.
MINORITY INTEREST
Minority interest (net of income taxes) decreased $0.9 million to $1.4 million
in the first quarter 2001 from $2.3 million in the first quarter 2000,
reflecting principally the decrease in earnings of WHC.
EQUITY INCOME (LOSS) OF AFFILIATES
Equity loss of affiliates (net of income taxes) was $4.5 million in the first
quarter 2001 compared to income of $1.5 million for the first quarter 2000. The
21
22
loss in the first quarter of 2001 was due to the Company recording after tax
charges of $5.6 million ($9.3 million pre-tax) representing its share of losses
of its 50% owned affiliated operations in Chile.
The Company has launched a full scale analysis of all aspects of the business in
Chile and is currently working with the affiliate's management team and its
bankers in assessing its alternatives with respect to the affiliate's operations
in Chile, including the sale of its non-strategic businesses and a bridge loan
during the restructuring period, supported by the assets of the businesses to be
sold. During fiscal 2000, in connection with a consideration of strategic
alternatives with respect to the Chilean operations, the Chilean affiliate
received offers for certain segments of its business. However, at the time of
the offers, the ownership structure of the Chilean companies would not
facilitate the Chilean Company to act upon these offers. See the "Liquidity"
section for additional discussion regarding Chile.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 2000, the Company adopted SEC Staff Accounting
Bulletin: No. 101 (SAB No. 101) - Revenue Recognition. Government contract award
fees, previously accrued for based on the Company's performance and long-term
experience of being awarded such fees, are now only recognized when formally
awarded. SAB No. 101 applied retroactively to the first quarter of 2000,
resulted in a one-time charge in 2000 of $0.8 million, net of income taxes. On a
diluted basis, the cumulative effect of change in accounting principle was $0.05
per share during 2000.
NET INCOME (LOSS)
Net loss was $1.5 million for the first quarter 2001, or $0.10 basic loss per
share, as compared to $2.9 million income, or $0.20 basic earnings per share for
the same period in 2000. Loss per share on a diluted basis was $0.10 in the
first quarter 2001 compared to income of $0.19 per share for the same period in
2000. Goodwill amortization, after tax, amounted to $0.3 million for both the
first quarter 2001 and first quarter 2000. Excluding goodwill amortization,
after tax, basic earnings per share would have been $0.02 more for both the
first quarters 2001 and 2000. In addition, diluted earnings per share would have
been $0.01 more and $0.02 more for the first quarter 2001 and the first quarter
2000, respectively.
22
23
THE WACKENHUT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1999, a Travis County, Texas grand jury indicted twelve of WHC's
former facility employees for various types of sexual misconduct. Management
believes these indictments are not expected to have any material financial
impact on WHC. Eleven of the twelve indicted former employees already resigned
from or had been terminated by WHC as a result of WHC initiated investigations
over the course of the prior three years. WHC is not providing counsel to assist
in the defense of these twelve individuals. The District Attorney in Travis
County continues to review WHC documents at the Travis County Facility. At this
time WHC cannot predict the outcome of this investigation.
The Company is presently, and is from time to time, subject to claims arising in
the ordinary course of its business. In certain of such actions, plaintiffs
request punitive or other damages that may not be covered by insurance. In the
opinion of management, there are no other pending legal proceedings except those
disclosures above, for which the potential impact if decided unfavorable to the
Company could have a material adverse effect on the consolidated financial
statements of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits - None
(b). Reports on Form 8-K
The Company did not file a Form 8-K during the first quarter of 2001.
23
24
THE WACKENHUT CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q for the thirteen
weeks ended April 1, 2001 to be signed on its behalf by the undersigned hereunto
duly authorized.
THE WACKENHUT CORPORATION
DATE: May 10, 2001 /s/ PHILIP L. MASLOWE
----------------------------------------
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
DATE: May 10, 2001 /s/ JUAN D. MIYAR
----------------------------------------
Juan D. Miyar,
VICE PRESIDENT AND CORPORATE CONTROLLER
24