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 September 30, 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
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(State of incorporation or organization) (I.R.S. Employer Identification No.)
4200 Wackenhut Drive #100, Palm Beach Gardens, FL 33410-4243
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(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 November 12, 2001, 3,855,582 shares of the registrant's Series A Common Stock
were issued and outstanding and 11,172,249 shares of Series B Common Stock were
issued and outstanding.
Page 1 of 33
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 accounting principles generally accepted in the United States.
In the opinion of management, all adjustments necessary for a fair presentation
of the financial information for the interim periods reported have been made.
Results of operations for the thirty-nine weeks ended September 30, 2001 are not
necessarily indicative of the results for the entire fiscal year ending December
30, 2001.
Page 2 of 33
The Wackenhut Corporation and Subsidiaries
Condensed Consolidated Statements of Income
FOR THE PERIODS ENDED SEPTEMBER 30, 2001 and OCTOBER 1, 2000
(In millions except per share data)
UNAUDITED
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------- ------------------------
*Restated *Restated
2001 2000 2001 2000
------- --------- --------- ---------
REVENUES $ 706.2 $ 638.8 $ 2,055.7 $ 1,849.5
------- ------- --------- ---------
OPERATING EXPENSES
Payroll and related taxes 570.7 497.7 1,651.9 1,435.1
Other operating expenses 113.6 128.8 352.5 373.0
Depreciation and amortization expense 7.3 6.8 20.9 19.2
------- ------- --------- ---------
OPERATING INCOME 14.6 5.5 30.4 22.2
------- ------- --------- ---------
OTHER INCOME (EXPENSE)
Interest and investment income 1.4 1.4 4.7 4.7
Interest expense (1.4) (2.2) (5.1) (6.0)
------- ------- --------- ---------
INCOME BEFORE INCOME TAXES 14.6 4.7 30.0 20.9
PROVISION FOR INCOME TAXES (5.7) (1.9) (11.7) (8.3)
MINORITY INTEREST, NET OF INCOME
TAXES OF $1.8, $0.8, $4.3, and $3.9 (2.8) (1.2) (6.7) (5.8)
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET OF INCOME
TAX (BENEFIT) PROVISION OF $(3.4), $1.0, $(7.2), $3.5 (5.2) 1.5 (11.2) 5.2
------- ------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ 0.9 $ 3.1 $ 0.4 $ 12.0
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- -- (0.8)
------- ------- --------- ---------
NET INCOME $ 0.9 $ 3.1 $ 0.4 $ 11.2
======= ======= ========= =========
EARNINGS PER SHARE
Basic
Income before cumulative effect of
change in accounting principle $ 0.06 $ 0.21 $ 0.03 $ 0.80
Cumulative effect of change in accounting principle -- -- -- (0.05)
------- ------- --------- ---------
Net income $ 0.06 $ 0.21 $ 0.03 $ 0.75
------- ------- --------- ---------
Diluted
Income before cumulative effect of
change in accounting principle $ 0.06 $ 0.21 $ 0.02 $ 0.78
Cumulative effect of change in accounting principle -- -- -- (0.05)
------- ------- --------- ---------
Net income $ 0.06 $ 0.21 $ 0.02 $ 0.73
------- ------- --------- ---------
BASIC WEIGHTED AVERAGE SHARE OUTSTANDING 15.0 15.0 15.0 15.0
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15.4 15.1 15.3 15.1
*Restated for the adoption of SAB No. 101.
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 33
The Wackenhut Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions except share data)
September 30,
2001 December 31,
Unaudited 2000
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 50.4 $ 60.8
Accounts receivable, net 243.9 218.4
Inventories 8.6 11.5
Deferred taxes 19.6 12.1
Prepaid expenses 8.6 10.6
Other 14.9 15.1
-------- --------
346.0 328.5
-------- --------
MARKETABLE SECURITIES 47.9 37.3
-------- --------
PROPERTY AND EQUIPMENT 122.8 118.2
Less: accumulated depreciation and amortization (46.2) (38.8)
-------- --------
76.6 79.4
-------- --------
DEFERRED TAXES 17.6 7.5
-------- --------
OTHER ASSETS
Goodwill, net 50.2 50.1
Other intangibles, net 6.0 14.1
Investment in and advances to affiliates 45.3 44.9
Other 8.9 8.5
-------- --------
110.4 117.6
-------- --------
$ 598.5 $ 570.3
======== ========
(Continued)
Page 4 of 33
The Wackenhut Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions except share data)
September 30,
2001 December 31,
Unaudited 2000
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 5.3 $ 5.1
Accounts payable 30.1 36.9
Accrued payroll and related taxes 96.4 90.3
Accrued expenses 81.2 65.6
-------- --------
213.0 197.9
RESERVES FOR INSURANCE LOSSES 101.8 92.7
-------- --------
LONG-TERM DEBT, net of current portion 19.8 11.4
-------- --------
DEFERRED REVENUE 10.4 12.8
-------- --------
OTHER 28.1 19.6
-------- --------
MINORITY INTEREST 56.8 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 shares issued and outstanding 0.4 0.4
Series B, 11.2 million shares issued and outstanding 1.1 1.1
Additional paid-in capital 123.6 121.9
Retained earnings 68.2 67.8
Accumulated other comprehensive loss (24.7) (13.4)
-------- --------
168.6 177.8
-------- --------
$ 598.5 $ 570.3
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 33
The Wackenhut Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2001 AND OCTOBER 1, 2000
(In millions)
UNAUDITED
Restated*
September 30, October 1,
2001 2000
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 0.4 $ 11.2
Adjustments to reconcile net income to net cash
provided by operating activities -
Cumulative effect of change in accounting principle -- 0.8
Depreciation and amortization 20.9 19.2
Deferred taxes (16.2) (0.9)
Provision for bad debts 4.9 2.0
Equity in loss (income) of affiliates, net of dividends received 21.5 (7.2)
Minority interest in net income, net of income taxes 6.7 5.8
Tax benefit from exercise of stock options 0.3 --
Foreign currency adjustments 0.5 0.4
Other (1.4) (1.5)
Changes in operating assets and liabilities, net of divestitures -
Accounts receivable (31.5) (42.9)
Inventories (5.1) (3.4)
Prepaid expenses 1.8 2.1
Other current assets (1.4) (6.1)
Other assets (2.7) (1.0)
Accounts payable and accrued expenses 10.5 25.1
Accrued payroll and related taxes 6.3 7.5
Reserves for insurance losses 9.1 7.7
Other liabilities 6.0 0.8
------- -------
Net Cash Provided By Operating Activities 30.6 19.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of food service division 14.6 --
Payments for contingent acquisition fees (1.9) (10.3)
Net investment in and advances to affiliates and joint ventures (39.1) (11.7)
Capital expenditures (9.5) (20.7)
Sales of marketable securities 53.3 12.6
Purchases of marketable securities (62.9) (14.8)
------- -------
Net Cash Used In Investing Activities (45.5) (44.9)
------- -------
(Continued)
Page 6 of 33
The Wackenhut Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2001 AND OCTOBER 1, 2000
(In millions)
UNAUDITED
(continued)
Restated*
September 30, October 1,
2001 2000
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt $ 305.1 $ 312.4
Payments on debt (296.4) (310.9)
Net cash settlements from sales of accounts receivable (0.6) --
Net proceeds from exercise of stock options of subsidiary 0.4 --
Shares repurchased and retired, including subsidiary's -- (4.9)
-------- --------
Net Cash (Used in) Provided by Financing Activities 8.5 (3.4)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4.0) (2.1)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10.4) (30.8)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60.8 67.0
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 50.4 $ 36.2
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for - interest $ 5.3 $ 5.9
- income tax $ 11.9 $ 6.8
* Restated for adoption of SAB No. 101.
See accompanying notes to unaudited consolidated financial statements.
Page 7 of 33
THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR INFORMATION IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. GENERAL
The unaudited condensed consolidated financial statements of the Company, 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
thirty-nine weeks ended September 30, 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
current year presentation.
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 ("SFAS")
No.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. As of September 30, 2001,
the swaps approximated $13.5 million which is reflected as a reduction in
shareholders' equity in WHC's financial statements for the quarter ended
September 30, 2001, and approximately $7.7 million in the Company's financial
statements for the same period.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which was
effective for servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This statement replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," and revises the accounting and disclosure of such transactions;
however, most of SFAS No. 125's provisions will continue to be applicable. On
December 30, 1997, the Company entered into an agreement with a financial
institution to sell on a continuous basis undivided interests in certain,
eligible trade accounts receivable. In accordance with SFAS No. 140 during the
second quarter 2001, and
page 8 of 33
in accordance with SFAS 125 during all previous periods, the Company removes
receivable balances from the consolidated balance sheets at the time the
receivables are sold. Costs associated with the sale of receivables, primarily
related to the consolidated discount and loss on sale, are included in "Interest
expense" in the consolidated statements of income.
In June 2001, the FASB issued SFAS 141, "Business Combinations." SFAS 141
addresses financial accounting and reporting for business combinations and
supercedes APB No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of SFAS 141 are to be accounted for under the purchase
method. SFAS 141 is effective June 30, 2001. The adoption of SFAS 141 did not
have an impact on the Company's financial position, results of operations or
cash flows.
In June 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets." SFAS 142 addresses financial accounting and reporting for intangible
assets acquired individually or with a group of other assets (but not those
acquired in a business combination) at acquisition. SFAS 142 also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. With the adoption of SFAS 142, goodwill is no
longer subject to amortization. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair value test. The impairment
loss is the amount, if any, by which the implied fair value of goodwill is less
than the carrying or book value. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. Impairment loss for goodwill arising from the
initial application of SFAS 142 is to be reported as resulting from a change in
accounting principle. The Company is currently assessing the impact of adopting
SFAS 142 and believes, excluding impairments, that the Company's operating
results for fiscal year 2002 will be increased, since goodwill is no longer
subject to amortization, by approximately $2.3 million or $0.15 per diluted
share, excluding any possible tax impact.
In August 2001, the FASB also issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 is effective for fiscal years beginning after December 15,
2001. For long-lived assets to be held and used, SFAS 144 retains the existing
requirements to (a) recognize an impairment loss only if the carrying amount of
a long-lived asset is not recoverable from its discounted cash flows and (b)
measure an impairment loss as the difference between the carrying amount and the
fair value of the asset. SFAS 144 establishes one accounting model to be used
for the long-lived asset to be disposed of by sale and revises guidance for
assets to be disposed of other than by sale. The Company does not expect there
will be an impact to its financial position, results of operations or cash flows
upon adoption of SFAS 144.
2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of affiliates approximated $1.2 million and
$27.6 million at September 30, 2001 and December 31, 2000, respectively, and is
included in "Investment in and advances to affiliates" in the accompanying
consolidated balance sheets. This decrease in undistributed earnings is
primarily attributable to losses the Company recorded on its Chilean affiliate.
The following is a summary of condensed unaudited financial information
pertaining to affiliates:
Page 9 of 33
September 30, December 31,
Balance sheet items: 2001 2000
------------- ------------
Current assets $ 201.5 $ 190.0
Non-current assets 411.8 365.0
Current liabilities 195.6 147.3
Non-current liabilities 373.1 320.7
Minority interest liability 0.6 0.4
September 30, October 1,
Income statement items for the thirty-nine weeks ended: 2001 2000
------------- ----------
Revenues $ 499.5 $ 439.3
Operating (loss) income (20.0) 27.3
(Loss) Income before taxes (21.1) 21.2
3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as follows:
Thirteen weeks ended Thirty-nine weeks ended
---------------------- ------------------------
September October September October
30, 2001 1, 2000 30, 2001 1, 2000
--------- ------- --------- -------
Income $ 0.9 $ 3.1 $ 0.4 $ 11.2
Foreign currency translation adjustments, net of income tax
benefit of $0.8, $1.1, $2.9, and $2.2, respectively (1.3) (1.7) (4.5) (3.3)
Cumulative effect of change in accounting principle related
to WHC's affiliate's derivative instruments, net of income
tax benefit of $4.4 million -- -- (6.9) --
Unrealized loss on WHC's affiliate's derivative instruments,
net of income tax benefit of $1.6 million and $0.5 million,
respectively (2.5) -- (0.8) --
Unrealized gain on marketable securities, net of
income tax expense of $(0.5), $(0.1), $(0.6), and
$(0.5), respectively 0.8 0.2 0.9 0.8
------ ------ ------- -------
Comprehensive income (loss) $ (2.1) $ 1.6 $ (10.9) $ 8.7
====== ====== ======= =======
Page 10 of 33
4. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following:
September 30, December 31,
2001 2000
- -----------------------------------------------------------------------
Goodwill $ 59.6 $ 58.0
Contract value - 15.6
Other 11.3 8.7
----------------------------------
70.9 82.3
Accumulated amortization
Goodwill 9.4 7.9
Contract value - 5.7
Other 5.3 4.5
----------------------------------
14.7 18.1
----------------------------------
Net $ 56.2 $ 64.2
==================================
The reduction of contract value is related to the sale of the Company's food
services division.
5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
September 30, December 31,
2001 2000
- --------------------------------------------------------------------------------------------
Revolving loans -
The Wackenhut Corporation, parent $ 17.1 $ 0.5
WHC -- 10.0
Lease obligation payable in
installments through 2004 at a
weighted average rate of 4.5% 0.8 1.3
Other debt principally related to
security services 7.2 4.7
---------------------------------
Total 25.1 16.5
Less: current portion 5.3 5.1
---------------------------------
Total $ 19.8 $ 11.4
- --------------------------------------------------------------------------------------------
On December 30, 1997, the Company entered into an agreement (the "Securitization
Agreement") with a financial institution to sell on a continuous basis undivided
interests in certain, eligible trade accounts receivable. On January 26, 2001,
the Company amended, restated and extended the Securitization Agreement to
expire in January 2002, where it may be extended further upon the financial
institution's acceptance. Pursuant to the Securitization Agreement, the Company
formed Wackenhut Funding Corporation ("WFC"), a wholly owned, non-qualifying
special purpose, bankruptcy-remote subsidiary. WFC was formed for the sole
purpose of buying and selling receivables generated by the Company, where the
Company sells all of their accounts receivable to WFC irrevocably and without
recourse.
Page 11 of 33
From time to time and in accordance with the Securitization Agreement, WFC will
sell undivided interests in these receivables to the financial institution, up
to a maximum purchase limit of $75 million. This two-step transaction is
accounted for as a sale of receivables under the provisions of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." There were $67.0 million and $67.5 million accounts receivable
sold under the Securitization Agreement at September 30, 2001 and December 31,
2001, respectively, where such amounts were removed from the consolidated
balance sheet. The costs associated with this sale of receivables are based on
the volume of receivables sold and existing markets for A2/P2 commercial paper
and primarily relate to the discount and loss on sale. Such costs are included
in "Interest Expense" in the consolidated statements of income and were
approximately $0.5 million and $1.2 million for the three months ending
September 30, 2001 and October 1, 2000, respectively, and approximately $2.1 and
$3.4 for the nine months ending September 30, 2001 and October 1, 2000
respectively.
As of September 30, 2001, the net amount available to the Company from its
existing revolving credit and accounts receivable securitization facilities,
after deducting $67.0 million accounts receivable sold under the Company's
securitization agreement, $26.3 million in outstanding letters of credit, and
$17.1 million revolving loans, was $77.1 million.
6. EARNINGS PER SHARE
The table below shows the amounts used in computing earnings per share and the
effects on income and the weighted average number of shares of potential
dilutive common stock (in millions except for per share amounts).
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------ --------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Basic
Net Income (loss) $ 0.9 $ 3.1 $ 0.4 $ 11.2
------------ ------------ ------------ ------------
Weighted average common shares outstanding 15.0 15.0 15.0 15.0
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ 0.06 $ 0.21 $ 0.03 $ 0.75
------------ ------------ ------------ ------------
Diluted
Net Income (loss) $ 0.9 $ 3.1 $ 0.4 $ 11.2
Effect of subsidiary's stock options -- -- (0.1) (0.1)
------------ ------------ ------------ ------------
Net Income (loss) $ 0.9 $ 3.1 $ 0.3 $ 11.1
------------ ------------ ------------ ------------
Weighted average common shares outstanding 15.0 15.0 15.0 15.0
Assumed exercise of stock options, net of common
shares assumed repurchased with the proceeds 0.4 0.1 0.3 0.1
------------ ------------ ------------ ------------
Adjusted weighted average common shares outstanding 15.4 15.1 15.3 15.1
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.06 $ 0.21 $ 0.02 $ 0.73
------------ ------------ ------------ ------------
Common stock equivalents related to stock options if exercised are excluded from
the diluted earnings per share calculations if their effect would have been
anti-dilutive. Options to purchase shares of 666,800, 1,421,250, 1,026,800, and
1,421,250 of common stock for the thirteen weeks ended September 30, 2001, and
October 1, 2000, and for the thirty-nine weeks ended September 30, 2001 and
October 1, 2000, respectively, were excluded from the diluted earnings per share
calculation as their impact would have been anti-dilutive.
Page 12 of 33
7. COMMITMENTS AND CONTINGENCIES
Through the first nine months of 2001, the Company recorded after-tax charges of
$12.3 million ($20.2 million pre-tax) representing its share of the losses of
its affiliated operations in Chile.
In the third quarter 2001, the Company completed the cash funding of its $32
million of bank letters of credit issued to secure a portion of its Chilean
affiliate's debt. With the payment of the bank standby letters of credit, the
Company's affiliate, Wackenhut Chile S.A., has substituted short-term debt
obligations with local Chilean lenders with a one-year term maturity funding
directly with the Company. The Company has also provided comfort letters for its
Chilean affiliate, which at October 31, 2001 were $5.8 million.
The Chilean affiliate suffered bank loan defaults earlier in the year on certain
of its obligations because it had been unable to generate sufficient cash,
either from ongoing operations or the sale of assets, to repay its obligations.
Wackenhut Chile S.A. continues to be in default on payments of its unsecured
loans, and continues to work on a bank creditor standstill agreement relating to
the unsecured portion of the remaining local currency-denominated debt, and the
securing of a bridge loan while it sells the non-core businesses. The affiliate
is requesting a 180-day term of the standstill whereby it plans to sell
sufficient non-core security businesses to repay the local Chilean unsecured
debt, as well as debt due the Company, and to provide sufficient working capital
for the core security business. Wackenhut Chile S.A. also has engaged a local
investment bank to assist in the sale of the non-core businesses.
At present there can be no assurance that the Chilean affiliate will obtain a
local bank creditor standstill agreement and a bridge loan. Inability to obtain
a standstill or bridge loan would have a material adverse impact on the Chilean
affiliate's financial position, results of operations and/or cash flows.
Further, while the Chilean affiliate is continuing its efforts to sell certain
segments of its businesses, there can be no assurances that this will occur. The
timing of such activities cannot be certain as the completion of any such
transaction depends upon the needs of potential acquirers, buyers or investors,
as well as financing, regulatory/legal requirements and other factors.
The Chilean affiliates' total outstanding debt is approximately $49.8 million as
of October 28, 2001, including $36.3 million owed to the Company, and there can
be no assurance that the Chilean affiliate will be able to generate enough cash
from operations or obtain a stand-still agreement and a bridge loan while it
sells non-strategic businesses. The Company has also provided comfort letters
for approximately $5.8 million. As of September 30, 2001, the Company's
investment balance related to its Chilean affiliate approximated $17.4 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
including $36.3 million owed to the Company, 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, results of operations or cash flows.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. In aligning its international resources with this strategy, management
believes that there may be conditions where the Company may consider exiting a
country, or refocusing an operation. As a result, there could be an impairment
of assets, or a need to provide for losses, particularly
Page 13 of 33
in certain subsidiaries and affiliates that were or are experiencing liquidity
issues or were thinly capitalized.
The Company is in the process of realigning its international security
management and consolidating its global security operations. During the first
nine months of 2001, as it focused on this repositioning and change in its
management structure, the Company's management provided for asset impairments
and provisions for losses after tax of approximately $6.5 million ($10.6 million
pre-tax) associated with various international operations, excluding Chile,
principally in Latin America. The Company has operations in most Latin America
countries, and therefore, has exposure to the ongoing economic difficulties in
the region, including, but not limited to, Argentina, where the country is at
risk of default on its foreign-currency debt. As the Company continues this
process, additional asset impairments and provisions for losses may need to be
provided for.
During the third quarter of 2000, WHC recorded an operating charge of $3.8
million (effect on Company $1.3 million after tax and minority interest) related
to the lease of the 276-bed Jena Juvenile Justice Center in Jena, Louisiana,
which had been vacated. The charge represented the expected losses to be
incurred under the lease agreement with Correctional Properties Trust ("CPV"),
including lease costs and property taxes for the second half of 2000 and all of
2001. At that time, management estimated the Jena facility would remain inactive
through the end of 2001.
In June 2001, the Louisiana State Senate passed a resolution requesting the
Louisiana Department of Public Safety and Corrections to enter into discussions
and negotiations regarding the potential purchase of a facility in LaSalle
Parish. Subsequently, the State and the Company in coordination with CPV began
discussions regarding the sale of the Jena facility located in LaSalle Parish.
In addition to these activities, WHC is continuing its efforts to sublease or
find an alternative correctional use for the facility including a sale of the
facility to a Federal agency. There can be no assurance that WHC and CPV will be
able to successfully negotiate with any of these entities for the final sale or
alternate use of the facility. In the event the facility is sold or subleased at
a loss, WHC would be required to compensate CPV for such loss. If CPV does not
complete a sale of the facility prior to December 30, 2001 or if WHC is unable
to sublease or find an alternative correctional use for the facility during
2001, an additional charge related to the facility would be required. WHC
estimates the impact of any delay past December 30, 2001 to be approximately $2
million per year during the period in which the facility is expected to be
vacant. WHC's total remaining obligation under the lease agreement is
approximately $16 million.
In December 1997, WHC entered into a $220 million operating lease facility
established to acquire and develop new correctional institutions used in its
business. As of September 30, 2001, approximately $154.3 million was outstanding
on the operating lease facility for completed properties. As a condition of this
facility, WHC unconditionally agreed to guarantee certain obligations of First
Security Bank, National Association, a party to the operating lease facility.
These obligations include, among other things, amounts equal to 88% of amounts
outstanding under the operating lease facility.
Page 14 of 33
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.
Page 15 of 33
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------ ------------------------------
Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000
-------------- -------------- -------------- --------------
Revenues: *
Global security services $ 306.6 $ 293.5 $ 901.6 $ 865.3
Correctional services 142.2 135.9 418.9 400.3
Flexible staffing services 257.4 209.4 735.2 583.9
-------------- -------------- -------------- --------------
Total revenues $ 706.2 $ 638.8 $ 2,055.7 $ 1,849.5
============== ============== ============== ==============
Operating Income: *
Global security services $ 10.6 $ 7.8 $ 26.5 $ 23.0
Correctional services 9.0 1.9 18.0 12.5
Flexible staffing services 1.0 1.0 2.8 2.8
Unallocated corporate expenses (6.0) (5.2) (16.9) (16.1)
-------------- -------------- -------------- --------------
Total operating income $ 14.6 $ 5.5 $ 30.4 $ 22.2
============== ============== ============== ==============
Equity in Income (Loss) of Affiliates, net of taxes: *
Global security services $ (5.4) $ 0.2 $ (13.6) $ 1.7
Correctional services 0.2 1.3 2.4 3.5
-------------- -------------- -------------- --------------
Total equity in income (loss) $ (5.2) $ 1.5 $ (11.2) $ 5.2
============== ============== ============== ==============
Capital Expenditures:
Global security services $ 1.4 $ 1.1 $ 2.6 $ 2.4
Correctional services 1.3 2.7 5.2 17.6
Flexible staffing services 0.3 0.2 1.2 0.6
Unallocated corporate expenditures 0.1 (0.2) 0.5 0.1
-------------- -------------- -------------- --------------
Total capital expenditures $ 3.1 $ 3.8 $ 9.5 $ 20.7
============== ============== ============== ==============
Depreciation and Amortization:
Global security services $ 3.3 $ 3.1 $ 9.9 $ 9.3
Correctional services 2.8 2.5 7.5 6.4
Flexible staffing services 0.7 0.7 2.0 1.9
Unallocated corporate expenses 0.5 0.5 1.5 1.6
-------------- -------------- -------------- --------------
Total depreciation and amortization $ 7.3 $ 6.8 $ 20.9 $ 19.2
============== ============== ============== ==============
Identifiable Assets: * Sept. 30, 2001 Dec. 31, 2000
-------------- --------------
Global security services $ 154.9 $ 181.5
Correctional services 215.7 223.6
Flexible staffing services 85.6 85.0
Unallocated corporate assets 142.3 80.2
-------------- --------------
Total identifiable assets $ 598.5 $ 570.3
============== ==============
* Restated thirteen and thirty-nine weeks ended October 1, 2000, for
adoption of SAB No. 101.
Page 16 of 33
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
the first nine months 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 Thirty-nine Weeks Ended
------------------------------- -------------------------------
Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000
-------------- -------------- -------------- --------------
Revenues: *
Domestic operations $ 630.8 $ 564.8 $ 1,834.7 $ 1,625.3
International operations 75.4 74.0 221.0 224.2
-------------- -------------- -------------- --------------
Total revenues $ 706.2 $ 638.8 $ 2,055.7 $ 1,849.5
============== ============== ============== ==============
Operating Income: *
Domestic operations $ 15.8 $ 3.3 $ 29.6 $ 11.2
International operations (1.2) 2.2 0.8 11.0
-------------- -------------- -------------- --------------
Total operating income $ 14.6 $ 5.5 $ 30.4 $ 22.2
============== ============== ============== ==============
Equity in Income (Loss) of Affiliates,
net of taxes: *
Domestic operations $ -- $ -- $ 0.9 $ 0.8
International operations (5.2) 1.5 (12.1) 4.4
-------------- -------------- -------------- --------------
Total equity in income (loss) $ (5.2) $ 1.5 $ (11.2) $ 5.2
============== ============== ============== ==============
Capital Expenditures:
Domestic operations $ 2.4 $ 2.6 $ 7.0 $ 15.1
International operations 0.7 1.2 2.5 5.6
-------------- -------------- -------------- --------------
Total capital expenditures $ 3.1 $ 3.8 $ 9.5 $ 20.7
============== ============== ============== ==============
Depreciation and Amortization:
Domestic operations $ 4.9 $ 5.4 $ 15.3 $ 15.2
International operations 2.4 1.4 5.6 4.0
-------------- -------------- -------------- --------------
Total depreciation and amortization expense $ 7.3 $ 6.8 $ 20.9 $ 19.2
============== ============== ============== ==============
Sept. 30, 2001 Dec. 31, 2000
-------------- --------------
Long-lived Assets:
Domestic operations $ 59.7 $ 61.1
International operations 16.9 18.3
-------------- --------------
Total long-lived assets $ 76.6 $ 79.4
============== ==============
*Restated thirteen and thirty-nine weeks ended October 1, 2000, for adoption of
SAB No. 101.
Page 17 of 33
THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements made in this management discussion and analysis of financial
condition and results of operations, the corporate profile, the letter to
shareholders, and the November 2, 2001 press release are based on current
expectations, estimates and projections, are forward-looking in nature and these
statements 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, but are not limited to, 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 Company'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 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.
UNCERTAINTY IN THE AFTERMATH OF SEPTEMBER 11
The effects of the terrorist attacks of September 11, 2001 and of potential
future terrorist attacks on general economic conditions and on the Company's
businesses, in particular, are uncertain. For example, in the event that any
facilities at which the Company provides security related services are attacked
by terrorists in the future, liabilities resulting from such attacks could, to
the extent not covered by insurance, have a material adverse effect on the
Company's business. In addition, terrorist attacks, including the attacks of
September 11th that do not directly involve facilities serviced by the Company
or that are fully insured against, could have a material impact on the Company
by, among other things, sharply increasing the Company's insurance coverage
costs, making insurance coverage unavailable altogether or prompting expanded
security rules and regulations for airports, commercial buildings or other
facilities. Other effects of terrorist acts that could materially impact the
Company include but are not limited to: (i) an overall decline in the economy;
(ii) a decline in air travel; and/or (iii) a decrease in the efficiency of the
Company's security services as a result of compliance with expanded security
rules and regulations.
Page 18 of 33
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.
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 AND CAPITAL RESOURCES
The Company's borrowing capacity under its Credit Facility and securitization
agreement totals $187.5 million. As of September 30, 2001, the net amount
available to the Company from its existing revolving credit and accounts
receivable securitization facilities, after deducting $67.0 million accounts
receivable sold under the Company's securitization agreement, $26.3 million in
outstanding letters of credit, and $17.1 of revolving loans, was $77.1 million.
Through the first nine months of 2001, the Company recorded after-tax charges of
$12.3 million ($20.2 million pre-tax) representing its share of the losses of
its affiliated operations in Chile.
In the third quarter 2001, the Company completed the cash funding of its $32
million of bank letters of credit issued to secure a portion of its Chilean
affiliate's debt. With the payment of the bank standby letters of credit, the
Company's affiliate, Wackenhut Chile S.A., has substituted short-term debt
obligations with local Chilean lenders with a one-year term maturity funding
directly with the Company. The Company has also provided comfort letters for its
Chilean affiliate, which at October 31, 2001 were $5.8 million.
The Chilean affiliate suffered bank loan defaults earlier in the year on certain
of its obligations because it had been unable to generate sufficient cash,
either from ongoing operations or the sale of assets, to repay its obligations.
Wackenhut Chile S.A. continues to be in default on payments of its unsecured
loans, and continues to work on a bank creditor standstill agreement relating to
the unsecured portion of the remaining local currency-denominated debt, and the
securing of a bridge loan while it sells the non-core businesses. The affiliate
is requesting a 180-day term of the standstill whereby it plans to sell
sufficient non-core security businesses to repay the local Chilean unsecured
debt, as well as debt due the Company, and to provide sufficient working capital
for the core security business. Wackenhut Chile S.A. also has engaged a local
investment bank to assist in the sale of the non-core businesses.
Page 19 of 33
At present there can be no assurance that the Chilean affiliate will obtain a
local bank creditor standstill agreement and a bridge loan. Inability to obtain
a standstill or bridge loan would have a material adverse impact on the Chilean
affiliate's financial position, results of operations and/or cash flows.
Further, while the Chilean affiliate is continuing its efforts to sell certain
segments of its businesses, there can be no assurances that this will occur. The
timing of such activities cannot be certain as the completion of any such
transaction depends upon the needs of potential acquirers, buyers or investors;
as well as financing, regulatory/legal requirements and other factors.
The Chilean affiliates' total outstanding debt is approximately $49.8 million as
of October 28, 2001, including $36.3 million owed to the Company, and there can
be no assurance that the Chilean affiliate will be able to generate enough cash
from operations or obtain a stand-still agreement and a bridge loan while it
sells non-strategic businesses. The Company has also provided comfort letters
for approximately $5.8 million. As of September 30, 2001, the Company's
investment balance related to its Chilean affiliate approximated $17.4 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
including $36.3 million owed to the Company, 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, results of operations or cash flows.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. In aligning its international resources with this strategy, management
believes that there may be conditions where the Company may consider exiting a
country, or refocusing an operation. As a result, there could be an impairment
of assets, or a need to provide for losses, particularly in certain subsidiaries
and affiliates that were or are experiencing liquidity issues or were thinly
capitalized.
The Company is in the process of realigning its international security
management and consolidating its global security operations. During the first
nine months of 2001, as it focused on this repositioning and change in its
management structure, the Company's management provided for asset impairments
and provisions for losses after tax of approximately $6.5 million ($10.6 million
pre-tax) associated with various international operations, excluding Chile,
principally in Latin America. The Company has operations in most Latin American
countries, and therefore, has exposure to the ongoing economic difficulties in
the region, including, but not limited to, Argentina, where the country is at
risk of default on its foreign-currency debt. As the Company continues this
process, additional asset impairments and provisions for losses may need to be
provided for.
During the third quarter of 2000, WHC recorded an operating charge of $3.8
million (effect on Company $1.3 million after tax and minority interest) 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.
Page 20 of 33
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 September 30, 2001, approximately
$154.3 million of WHC's $220 million operating lease facility, established to
acquire and develop new correctional facilities, was outstanding for completed
properties. Currently, WHC has no properties under development and has
approximately $32 million of available capacity remaining under its operating
lease facility. WHC is exploring other financing alternatives for future project
development such as the sale of facilities to government entities, the
third-party sale and leaseback of facilities, and the issuance of taxable or
nontaxable bonds by local government entities. As of September 30, 2001, no
amounts were outstanding on WHC's $30 million revolving credit facility for the
funding of construction projects.
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
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.
Page 21 of 33
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations for the thirteen
weeks ended September 30, 2001 ("third quarter 2001") and October 1, 2000
("third quarter 2000") 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 *
September 30, 2001 October 1, 2000
--------------------- ---------------------
$ % $ %
----- ----- ----- -----
REVENUES [a]
GLOBAL SECURITY SERVICES 306.6 43.4 293.5 45.9
CORRECTIONAL SERVICES 142.2 20.1 135.9 21.3
FLEXIBLE STAFFING SERVICES 257.4 36.5 209.4 32.8
----- ----- ----- -----
CONSOLIDATED REVENUES 706.2 100.0 638.8 100.0
===== ===== ===== =====
OPERATING INCOME [b]
GLOBAL SECURITY SERVICES 10.6 [c] 3.5 7.8 2.7
CORRECTIONAL SERVICES 9.0 6.3 1.9 1.4
FLEXIBLE STAFFING SERVICES 1.0 0.4 1.0 0.5
UNALLOCATED CORPORATE EXPENSE (6.0) (0.8) (5.2) (0.8)
----- -----
CONSOLIDATED OPERATING INCOME 14.6 2.1 5.5 0.9
===== =====
* Restated for the adoption of SAB No. 101.
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
[c] For the third quarter, 2001 (year 2000 had no comparative charges),
operating income had pre-tax charges of $3.3 million connected with the
Company's efforts to reposition and stabilize its international
operations.
Page 22 of 33
COMPARISON OF THIRTEEN WEEKS ENDED SEPTEMBER 30, 2001 AND THIRTEEN WEEKS ENDED
OCTOBER 1, 2000
REVENUES
Global Security Services
Third quarter 2001 Global Security Services revenues increased $13.1 million, or
4.5%, to $306.6 million from $293.5 million in the third quarter 2000. Revenues
of the North American Operations increased $12.4 million, or 4.9%, to $264.5
million in the third quarter 2001 from $252.1 million in the third quarter 2000.
There was continued expansion of revenues from national accounts and in other
domestic guard services due to increases in existing contracts. International
market revenues increased $0.7 million, or 1.7%, to $42.1 million in the third
quarter 2001 compared to $41.4 million in the third quarter 2000. Increases in
international security revenues are primarily attributable to growth in the
United Kingdom due to new contracts.
Correctional Services
Third quarter 2001 Correctional Services revenues increased $6.3 million, or
4.6%, to $142.2 million from $135.9 million in the comparable quarter last year.
The increase in revenues is the result of new facility openings offset by lower
construction revenue and the closure of two facilities. Approximately $12.6
million of the increase in revenues in the third quarter 2001 compared to the
third quarter 2000 is attributable to increased compensated resident days
resulting from the opening of two facilities in 2001 and the opening of two
facilities in 2000. The number of compensated resident days in domestic
facilities was approximately 2.3 million in the third quarter 2001 and 2.2
million in the third quarter 2000. Compensated resident days in Australian
facilities increased to approximately 467,000 from 435,000 for the comparable
periods primarily due to higher compensated resident days at the immigration
detention facilities and the opening of one prison in the third quarter 2000.
Revenues decreased by approximately $5.5 million due to less construction
activity. Revenues also decreased approximately $3.3 million due to the
expiration of contracts for two facilities. The balance of the increase is
attributable to facilities open during all of both periods. The average facility
occupancy in domestic facilities increased to 97.6% of capacity in the third
quarter 2001 compared to 97.4% in the third quarter 2000.
Flexible Staffing Services
Staffing Services third quarter 2001 revenues increased $48.0 million, or 22.9%,
to $257.4 million from $209.4 million in the comparable quarter last year.
Leased employees grew 23.3% to approximately 42,700 at the end of the third
quarter 2001 from 34,600 at the end of the third quarter 2000. Temporary
placement hours grew 8.4% to approximately 957,600 during the third quarter 2001
from approximately 883,000 during the third quarter 2000.
OPERATING INCOME
Third quarter 2001 consolidated operating income increased $9.1 million, or
165.5%, to $14.6 million from $5.5 million in the third quarter 2000. The
operating margin for the third quarter 2001 increased to 2.1% as compared to
0.9% for the third quarter 2000. The operating margin increases for Global
Security Services and Correctional Services more than offset the operating
margin decrease for Flexible Staffing Services. 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 salaries increase at a faster rate than the
per diem or fixed rate re-
Page 23 of 33
ceived by the Company for its services. Management continually monitors the
operations of its subsidiaries and affiliates. If conditions were to arise that
indicate an impairment of one of these investments, this could have an adverse
impact on the Company's results of operations.
Global Security Services
The operating income of the Global Security Services business increased $2.8
million, or 35.9%, to $10.6 million in the third quarter 2001 from $7.8 million
for the comparable quarter last year. North American market operating income
increased $5.6 million, or 81.2%, to $12.5 million in the third quarter 2001
from $6.9 million in the third quarter 2000. The increase in operating income of
the North American market is principally attributable to improved margins and
growth, and a timing difference associated with an award fee on the U.S.
government contract at Oak Ridge, Tennessee, which was received in the third
quarter of this year, while in year 2000 it was not received until the fourth
quarter. North American market operating income as a percentage of revenues
increased approximately 100 basis points in the third quarter 2001 compared to
the third quarter 2000, excluding award fees at major government contract sites
and food service operations, which was sold in the second quarter 2001.
International Operations' operating income decreased $2.8 million to a loss of
$1.9 million in the third quarter 2001 from income of $0.9 million in the third
quarter 2000, primarily due to $3.3 million of charges related to the Company's
review of its international security operations.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. During the third quarter, 2001, as it focused on this repositioning and
change in its management structure, the Company's management provided for asset
impairments and provisions for losses impacting operating income of
approximately $3.3 million associated with various international operations,
excluding Chile, principally in Latin America. The Company has operations in
most Latin American countries, and therefore, has exposure to the ongoing
economic difficulties in the region, including, but not limited to, Argentina,
where the country is at risk of default on its foreign-currency debt. As the
Company looks forward to the remaining portion of 2001, it is management's
intent to accelerate this review and repositioning process, so that it will have
been substantially completed by year-end 2001, however, there can be no
assurances that it will be completed within this timeframe. In completing this
process, conditions may arise that will cause the Company to record additional
impairments to investments in particular locations. Also, in some locations
local economic conditions may result in reporting losses. At this time,
management is unable to estimate the amount of these write-downs or losses, if
any, that would be reported, and again there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Correctional Services
Third quarter 2001 operating income increased $7.1 million to $9.0 million from
$1.9 million in the comparable period in 2000. As a percentage of revenue,
operating income increased to 6.3% in the third quarter 2001 from 1.4% in the
third quarter 2000. WHC had a third quarter 2000 operating charge of $3.8
million ($2.3 million after tax, or $0.11 (eleven cents) per share), related to
the de-activation of the Jena, Louisiana facility. After taking into
consideration the minority shareholders' interest, this charge after tax
effected the Company's third quarter 2000 earnings per share by $0.09 (nine
cents). WHC estimates this facility will remain inactive through the end of
2001. The third quarter 2001 favorable operating income variance versus third
quarter 2000, excluding the Jena deactivation charge, is primarily attributable
to the opening of two facilities in 2001 and generally improved performance at
other domestic facilities. WHC continues to incur increasing insurance costs due
to adverse claims experience. WHC is implementing a strategy to improve the
management of future loss
Page 24 of 33
claims incurred but can provide no assurances that this strategy will be
successful. WHC anticipates significant increases in insurance costs during the
fourth quarter of 2001, which could adversely impact WHC's 2001 results of
operations and cash flows.
Flexible Staffing Services
The operating income of Staffing Services was $1.0 million in both the third
quarter 2001 and the third quarter 2000 despite revenue increases, due
principally to higher operating costs.
Unallocated Corporate Expenses
Unallocated corporate general and administrative expenses increased $0.8 million
or 15.4% to 6.0 million for the third quarter 2001 from $5.2 million in the
third quarter 2000. Unallocated corporate general and administrative expenses as
a percentage of consolidated revenues remained the same at 0.8% for both the
third quarter of 2001 and 2000.
OTHER INCOME (EXPENSE)
Investment income remained the same at $1.4 million for both the third quarter
2001 and 2000. Interest expense decreased $0.8 million to $1.4 million in the
third quarter 2001 from $2.2 million in the third quarter 2000, primarily due to
a decrease in average debt outstanding as well as a decrease in average
borrowing rates.
MINORITY INTEREST
Minority interest (net of income taxes) increased $1.6 million to $2.8 million
in the third quarter 2001 from $1.2 million in the third quarter 2000,
principally reflecting the increase in earnings of WHC for the second quarter
2001 compared to the second quarter 2000.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income of affiliates (net of income taxes) decreased $6.7 million to a
$5.2 million loss in the third quarter 2001 compared to income of $1.5 million
in the third quarter 2000. The loss in the third quarter of 2001 was due to the
Company recording after-tax charges of $3.4 million ($5.5 million pre-tax)
representing its share of losses of its affiliated operations in Chile plus a
$2.1 million after tax charge ($3.5 million pre-tax) related to the write-down
of its investments in Argentina, Hong Kong, Thailand and China. In addition,
WCC's U.K. affiliate had a $1.7 million pre-tax decrease in income due to
facility phase-in costs incurred in the third quarter 2001 when no such costs
were incurred in the third quarter 2000. After taxes and minority interest, this
decrease reduced the Company's equity income in the third quarter 2001 compared
to the third quarter 2000 by $0.6 million.
The Company has launched a full scale analysis of all aspects of the uncertain
situation of its affiliated operations 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
non-strategic businesses. See the "Liquidity" section for additional discussion
regarding Chile and the Company's international strategy.
NET INCOME
Net income was $0.9 million for the third quarter 2001, or $0.06 basic earnings
per share, as compared to $3.1 million, or $0.21 basic earnings per share for
the same period in 2000. Earnings per share on a diluted basis was $0.06 in the
third quarter 2001 compared to $0.21 per share for the same period in 2000.
Goodwill amortization, after tax, amounted to $0.4 million for both third
quarters 2001 and
Page 25 of 33
2000. Excluding goodwill amortization, after tax, basic earnings per share would
have been $0.03 more and $0.02 more for the third quarter 2001 and third quarter
2000, respectively. In addition, diluted earnings per share would have been
$0.02 more for both periods.
Page 26 of 33
RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations for the
thirty-nine weeks ended September 30, 2001 ("year-to-date") and October 1, 2000
("year-to-date") by the Company's 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):
Thirty-nine Weeks Ended
----------------------------------------------------
Restated *
September 30, 2001 October 1, 2000
----------------------- --------------------
$ % $ %
------- ----- ------- -----
REVENUES [a]
GLOBAL SECURITY SERVICES 901.6 43.8 865.3 46.8
CORRECTIONAL SERVICES 418.9 20.4 400.3 21.6
FLEXIBLE STAFFING SERVICES 735.2 35.8 583.9 31.6
------- ----- ------- -----
CONSOLIDATED REVENUES 2,055.7 100.0 1,849.5 100.0
======= ===== ======= =====
OPERATING INCOME [b]
GLOBAL SECURITY SERVICES 26.5 [c] 2.9 23.0 2.7
CORRECTIONAL SERVICES 18.0 4.3 12.5 3.1
FLEXIBLE STAFFING SERVICES 2.8 0.4 2.8 0.5
UNALLOCATED CORPORATE EXPENSE (16.9) (0.8) (16.1) (0.9)
------- -------
CONSOLIDATED OPERATING INCOME 30.4 1.5 22.2 1.2
======= =======
* Restated for the adoption of SAB No. 101.
[a] Represents percent of total revenues.
[b] Represents percent of respective business related revenues.
[c] For the first nine months of 2001 (year 2000 had no comparative
charges), operating income had pre-tax charges of $6.4 million
connected with the Company's efforts to reposition and stabilize its
international operations.
Page 27 of 33
COMPARISON OF THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000 AND THIRTY-NINE WEEKS
ENDED OCTOBER 1, 2001
REVENUES
Global Security Services
Year-to-date 2001 Global Security Services revenues increased $36.3 million, or
4.2%, to $901.6 million from $865.3 million in the same period in 2000. Revenues
from North American Operations increased $33.5 million, or 4.5%, to $775.2
million through the third quarter 2001 from $741.7 million through the third
quarter 2000. There was continued expansion of revenues from national accounts
and in other domestic guard services due to increases in existing contracts.
International Operations revenues increased $2.8 million, or 2.3%, to $126.4
million through the third quarter 2001 compared to $123.6 million through the
third quarter 2000. Increases in international security revenues are primarily
attributable to growth in the United Kingdom due to new contracts.
Correctional Services
Year-to-date 2001 Correctional Services revenues increased $18.6 million, or
4.6%, to $418.9 million from $400.3 million in the comparable period last year.
The increase in revenues is the result of new facility openings offset by lower
construction revenues, closure of two facilities and lower mandays at the
immigration facilities in Australia. Approximately $44.1 million of the increase
in revenues through the third quarter 2001 compared to the same period in 2000
is attributable to an increase in compensated resident days resulting from the
opening of two facilities in 2001 and two facilities in 2000. The number of
compensated resident days in domestic facilities increased to approximately 6.9
million through the third quarter 2001 from 6.5 million through the third
quarter 2000. Compensated resident days in Australian facilities decreased
approximately 4.1% to slightly below 1.4 million as compared to the previous
period in 2000, primarily due to lower compensated resident days at the
Australian immigration facilities. Revenues decreased approximately $16.4
million due to less construction activity. Revenues also decreased by
approximately $11.9 million due to the cessation of operations at the Jena
facility, the expiration of contracts for two facilities and a decline in
mandays at the Australian immigration facilities. The balance of the increase is
attributable to facilities open during all of both periods and increases in per
diem rates. The average facility occupancy in domestic facilities decreased
slightly to 97.1% of capacity through the third quarter 2001 compared to 97.3%
through the third quarter 2000.
Flexible Staffing Services
Flexible Staffing Services' year-to-date 2001 revenues of $735.2 million were
$151.3 million above revenues of $583.9 in the same period last year due to
growth. Leased employees grew 23.3% to approximately 42,700 at the end of the
third quarter 2001 from 34,600 at the end of the third quarter 2000. Temporary
placement hours declined 2.1% to approximately 2,617,000 through the third
quarter 2001 from approximately 2,673,000 during the same period in 2000, due to
lower demand from a major client and lower demand in the midwest light
industrial segment. However, comparing the third quarter 2001 to the second
quarter 2001, temporary placement hours increased 10.3%.
OPERATING INCOME
Year-to-date 2001 consolidated operating income increased $8.2 million, or
36.9%, to $30.4 million from $22.2 million for the same period in 2000. The
operating margin through the third quarter 2001 increased to 1.5% from 1.2% for
the same period in the prior year. The operating margin increases for Global
Security Services and Correctional Services more than offset the operating
margin decrease for
Page 28 of 33
Flexible Staffing Services and unallocated corporate expenses as a percentage of
consolidated revenues decreased by 1%. 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 salaries increase at a faster rate than the per diem or fixed
rate received by the Company for its services. Management continually monitors
the operations of its subsidiaries and affiliates. If conditions were to arise
that indicate an impairment of one of these investments, this could have an
adverse impact on the Company's results of operations.
Global Security Services
The operating income of the Global Security Services business increased $3.5
million, or 15.2%, to $26.5 million through the third quarter 2001 from $23.0
million for the comparable period last year. North American Operations'
operating income increased $8.7 million, or 43.3%, to $28.8 million through the
third quarter 2001 from $20.1 million for the same period in 2000. The increase
in operating income of the North American market is principally attributable to
improved margins and growth, and a timing difference associated with an award
fee on the U.S. government contract at Oak Ridge, Tennessee, which was received
in the third quarter of this year, while in year 2000 it was not received until
the fourth quarter. North American market operating income as a percentage of
revenues increased approximately 60 basis points for the first nine months of
2001 compared to the same period in 2000, excluding major award fees at
government contract sites and food service operations, which was sold in the
second quarter 2001. International Operations' operating income decreased $5.2
million to a loss of $2.3 million in the first nine months of 2001 from income
of $2.9 million for the same period in 2000, primarily due to $6.4 million of
charges related to the Company's review of its international security
operations.
During fiscal 2000, the Company's management began reviewing its international
security operations in order to enhance the quality of revenue and earnings
growth. Management determined at that time that it needed to focus the Company's
resources in international markets where it could best achieve a proper critical
mass. For the first nine months ended 2001, as it focused on this repositioning
and change in its management structure, the Company's management provided for
asset impairments and provisions for losses impacting operating income of
approximately $6.4 million associated with various international operations,
excluding Chile, principally in Latin America. The Company has operations in
most Latin American countries, and therefore, has exposure to the ongoing
economic difficulties in the region, including, but not limited to, Argentina,
where the country is at risk of default on its foreign-currency debt. As the
Company looks forward to the remaining portion of 2001, it is management's
intent to accelerate this review and repositioning process, so that it will have
been substantially completed by year-end 2001, however, there can be no
assurances that it will be completed within this timeframe. In completing this
process, conditions may arise that will cause the Company to record additional
impairments to investments in particular locations. Also, in some locations
local economic conditions may result in reporting losses. At this time,
management is unable to estimate the amount of these write-downs or losses, if
any, that would be reported, and again there can be no assurance that the
ultimate outcome of this process would not have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Correctional Services
Year-to-date 2001 operating income increased $5.5 million, or 44.0%, to $18.0
million from $12.5 million in the comparable period in 2000. As a percentage of
revenue, operating income increased to 4.3% through the third quarter 2001 from
3.1% in the same period in 2000. WHC had a third quarter 2000 operating charge
of $3.8 million ($2.3 million after tax, or $0.11 (eleven cents) per share),
related to the de-activation of the Jena, Louisiana facility. After taking into
consideration the minority shareholders' interest, this charge after tax
effected the Company's third quarter 2000 earnings per share by
Page 29 of 33
$0.09 (nine cents). WHC estimates this facility will remain inactive through the
end of 2001. The third quarter year-to-date 2001 favorable operating income
variance versus the same period in 2000, excluding the Jena deactivation charge,
is primarily attributable to the opening of two facilities and generally
improved performance at other domestic facilities. 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 but can
provide no assurances that this strategy will be successful. WHC anticipates
significant increases in insurance costs during the fourth quarter of 2001,
which could adversely impact WHC's 2001 results of operations and cash flows.
Flexible Staffing Services
The operating income of Staffing Services was $2.8 million for both the first
nine months ended 2001 and 2000 despite revenue increases, due principally to
higher operating costs.
Unallocated Corporate Expenses
Unallocated corporate general and administrative expenses increased 5.0% to
$16.9 million through the third quarter 2001 from $16.1 million in the same
period in 2000. A percentage of consolidated revenues, unallocated corporate
general and administrative expenses decreased to 0.8% of revenues through the
third quarter of 2001 compared to 0.9% for the same period in the prior year.
OTHER INCOME (EXPENSE)
Investment income remained the same at $4.7 million for both the first nine
months ended 2001 and 2000. Interest expense decreased $0.9 million to $5.1
million for the first nine months ended 2001 from $6.0 million for the same
period in 2000, primarily due to a decrease in average debt outstanding as well
as a decrease in average borrowing rates.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased $0.9 million to $6.7
million through the third quarter 2001 from $5.8 million for the same period
2000, principally reflecting the increase in earnings of WHC for the first nine
month of 2001 compared to the same period in the prior year.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income of affiliates (net of income taxes) decreased $16.4 million to
an $11.2 million loss for the first nine months of 2001 compared to income of
$5.2 for the same period in the prior year. The loss in the first nine months of
2001 was due to the Company recording after-tax charges of $12.3 million ($20.2
million pre-tax) representing its share of losses of its affiliated operations
in Chile plus a $2.6 million after tax charge ($4.2 million pre-tax) primarily
related to the write-down of its investments in Argentina, Hong Kong, Thailand,
India and China. In addition, WCC's U.K. affiliate had a $1.7 million pre-tax
decline in income due to facility phase-in costs incurred in the third quarter
2001 when no such costs were incurred in the third quarter 2000. After taxes and
minority interest, this decline reduced the Company's equity income for the
first nine months ended 2001 compared to the same period in the prior year by
$0.6 million.
The Company has launched a full scale analysis of all aspects of the uncertain
situation of its affiliated operations 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
non-strategic businesses. See the "Liquidity" section for additional discussion
regarding Chile and the Company's international strategy.
Page 30 of 33
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
Net income was $0.4 million through the third quarter 2001, or $0.03 basic
earnings per share, as compared to $11.2 million, or $0.75 basic earnings per
share for the same period in 2000. Earnings per share on a diluted basis was
$0.02 through the third quarter 2001 compared to $0.73 per share for the same
period in 2000. Goodwill amortization, after tax, amounted to $1.0 million and
$1.1 million through the third quarter 2001 and the same period 2000,
respectively. Excluding goodwill amortization, after tax, basic earnings per
share would have been $0.06 and $0.07 more through the third quarter 2001 and
the same period 2000, respectively. Likewise, diluted earnings per share would
have been $0.07 more for both periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS -- ITEM 305 OF 8-K
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 September 30,
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.
Page 31 of 33
THE WACKENHUT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is presently, and is from time to time, subject to claims arising in
the ordinary course of its business. In certain 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 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 -
Exhibit 10.1 - Amendment Number 1, dated October 12, 2001 to Amended and
Restated Transfer and Administration Agreement dated as of January 26, 2001,
among Wackenhut Funding Corporation as Transferor, The Wackenhut Corporation as
Servicer, Enterprise Funding Corporation as Purchaser, Bank of America, N.A. as
Agent, and The Bank of Nova Scotia as a Bank Investor.
Exhibit 10.2 - Amendment Agreement No. 3, dated September 24, 2001 to the Credit
Agreement dated November 13, 2000, among The Wackenhut Corporation as Borrower
and Bank of America, N.A. as Agent for the Lenders, as amended by Amendment
Agreement No. 1 dated December 12, 2000 and Amendment Agreement No. 2 dated June
22, 2001.
(b). Reports on Form 8-K
The Company filed a Form 8-K on October 3, 2001 reporting payment on standby
letters of credit.
Page 32 of 33
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
thirty-nine weeks ended September 30, 2001 to be signed on its behalf by the
undersigned hereunto duly authorized.
THE WACKENHUT CORPORATION
DATE: November 14, 2001 /s/ PHILIP L. MASLOWE
----------------------------------------
Philip L. Maslowe,
Executive Vice President,
Chief Financial Officer
Page 33 of 33