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 March 29, 1998
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 or organization) (I.R.S. Employer 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
- --------------------------------------------------------------------------------
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 4, 1998, 3,855,582 shares of Series A were issued and outstanding and
11,029,703 shares of Series B of the registrant's Common Stock was outstanding
after deducting 87,000 shares held in treasury.
Page 1 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the 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 March 29, 1998 are not necessarily indicative of the results for the
entire fiscal year ending January 3, 1999.
Page 2 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
MARCH 29, 1998 and MARCH 30, 1997
(In thousands except per share data)
UNAUDITED
1998 1997
--------- ---------
REVENUES $ 398,623 $ 242,134
--------- ---------
OPERATING EXPENSES:
Payroll and related taxes 314,148 179,454
Other operating expenses 73,949 54,973
Depreciation expense 1,966 1,436
Amortization of intangible assets 2,132 2,271
--------- ---------
392,195 238,134
--------- ---------
OPERATING INCOME 6,428 4,000
--------- ---------
OTHER INCOME (EXPENSE):
Interest and investment income 698 912
Interest expense (586) (335)
--------- ---------
112 577
--------- ---------
INCOME BEFORE INCOME TAXES 6,540 4,577
Provision for income taxes 2,726 1,709
Minority interest, net of income taxes of $1,189 and $769 1,783 1,309
Equity income of foreign affiliates, net of income taxes
of $391 and $284 (630) (409)
--------- ---------
NET INCOME $ 2,661 $ 1,968
========= =========
EARNINGS PER SHARE:
Basic $ .18 $ .13
Assuming dilution $ .17 $ .13
========= =========
Basic weighted average shares outstanding 14,857 14,671
Diluted weighted average shares outstanding 15,222 14,883
See notes to unaudited consolidated financial statements.
Page 3 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND DECEMBER 28, 1997
(In thousands except share data)
UNAUDITED
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,168 $ 45,168
Accounts receivable, less allowance for doubtful accounts
of $3,199 in 1998 and $2,713 in 1997 162,935 171,373
Inventories 12,095 10,270
Deferred taxes 3,611 3,548
Other 25,732 21,568
--------- ---------
234,541 251,927
--------- ---------
NOTES RECEIVABLE 665 667
--------- ---------
MARKETABLE SECURITIES of casualty reinsurance subsidiary 22,846 7,772
--------- ---------
PROPERTY AND EQUIPMENT, at cost 74,859 72,280
Accumulated depreciation (17,656) (15,810)
--------- ---------
57,203 56,470
--------- ---------
DEFERRED TAXES 62 450
--------- ---------
OTHER ASSETS:
Intangibles and deferred start-up costs 59,791 61,565
Investment in and advances to foreign affiliates, at cost 20,250 20,578
Other 9,100 5,013
--------- ---------
89,141 87,156
--------- ---------
$ 404,458 $ 404,442
========= =========
See notes to unaudited consolidated financial statements.
Page 4 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND DECEMBER 28, 1997
(In thousands except share data)
UNAUDITED
1998 1997
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,560 $ 2,508
Accounts payable 34,155 38,640
Accrued payroll and related taxes 58,629 52,456
Accrued expenses 46,818 41,414
--------- ---------
142,162 135,018
--------- ---------
RESERVES FOR LOSSES of casualty reinsurance subsidiary 45,458 45,786
--------- ---------
LONG-TERM DEBT 899 13,341
--------- ---------
OTHER 15,124 15,528
--------- ---------
MINORITY INTEREST 50,522 47,930
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized - -
Common stock, $.10 par value, 50,000,000 shares authorized:
Series A common stock, 3,855,582 issued and outstanding 386 386
Series B common stock, 11,102,578 issued and outstanding in 1998 and
11,085,703 issued and outstanding in 1997 1,110 1,109
Additional paid-in capital 127,210 125,248
Retained earnings 29,160 27,614
Accumulated other comprehensive income (6,473) (6,418)
Treasury stock at cost, 87,000 shares of Series B (1,100) (1,100)
--------- ---------
150,293 146,839
--------- ---------
$ 404,458 $ 404,442
========= =========
See notes to unaudited consolidated financial statements.
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 AND MARCH 30, 1997
(In thousands)
UNAUDITED
1998 1997
------- -------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net Income $ 2,661 $ 1,968
Adjustments -
Depreciation expense 1,966 1,436
Amortization expense 3,772 2,305
Provision for bad debts 528 136
Equity income, net of dividends (953) (633)
Minority interests in net income 2,972 2,078
Income tax benefit related to stock options 2,044
Other 806 (365)
(Increase) decrease in assets:
Accounts receivable (9,090) (2,140)
Inventories (3,322) (1,601)
Other current assets 111 (4,884)
Marketable securities and certificates of deposit (108) (31)
Deferred taxes 325
Other (4,590) (4,450)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (763) 7,367
Accrued payroll and related taxes 6,173 3,180
Reserve for losses of casualty reinsurance subsidiary (328) 61
Deferred taxes 928
Other (404) 596
------- -------
Net Cash Provided by Operating Activities 1,800 5,951
------- -------
See notes to unaudited consolidated financial statements.
Page 6 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 AND MARCH 30, 1997
(In thousands)
UNAUDITED
(Continued)
1998 1997
-------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Net proceeds from exercise of stock options of subsidiary $ 1,031 $ 197
Investment in and advances to foreign affiliates 692 (977)
Capital expenditures (2,700) (2,905)
Proceeds from sales (payments for purchases) of marketable securities (15,243) 1,970
Deferred charges (4,162) (3,819)
-------- --------
Net Cash Used In Investing Activities (20,382) (5,534)
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from exercise of stock options 138
Purchase and cancellation of common stock (139)
Net payment on revolving credit agreement (12,441) (405)
Proceeds from sales of accounts receivable 17,000
Dividends paid (1,115) (953)
-------- --------
Net Cash Provided By (Used In) Financing Activities 3,582 (1,497)
-------- --------
Net increase (decrease) in Cash and Cash Equivalents (15,000) (1,080)
Cash and Cash Equivalents, at beginning of period 45,168 52,755
-------- --------
Cash and Cash Equivalents, at end of period $ 30,168 $ 51,675
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 548 $ 470
Income taxes $ 101 $ 102
See notes to unaudited consolidated financial statements.
Page 7 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 March 29, 1998 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 year ended December 28,
1997. Certain prior year amounts have been reclassified to conform with current
year presentation.
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2. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of foreign affiliates approximated $9.2 million
and $8.8 million at March 29, 1998 and December 28, 1997, respectively, and is
included in "Investment in and advances to foreign affiliates" in the
accompanying consolidated balance sheets. The following is a summary of
condensed unaudited financial information pertaining to foreign affiliates
(dollars in thousands):
Mar. 29, Dec. 28,
1998 1997
------- -------
Balance sheet items:
Current assets $40,947 $55,563
Noncurrent assets 36,131 31,229
Current liabilities 32,747 39,721
Noncurrent liabilities 18,027 19,413
Minority interest liability 301 292
Mar. 29, Mar. 30,
1998 1997
------- -------
Income statement items for the thirteen weeks ended:
Revenues $50,068 $42,759
Operating income 3,418 3,147
Net income before taxes 2,580 2,262
3. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130"), "Reporting Comprehensive Income", effective January 1, 1998. SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in financial statements. The components of the Company's
comprehensive income are as follows (dollars in thousands):
Thirteen weeks ended
---------------------
Mar. 29, Mar. 30,
1998 1997
------- -------
Net income $ 2,661 $ 1,968
Unrealized loss on marketable securities, net of income taxes (108)
Foreign currency translation adjustments, net of income taxes (55) 29
------- -------
Comprehensive income $ 2,606 $ 1,889
======= =======
The effect of income taxes on unrealized loss and on foreign currency
translation adjustments was not significant.
Page 9 of 21
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4. INTANGIBLES AND DEFERRED START-UP COSTS
Intangibles and deferred start-up costs at March 29, 1998 and December 28, 1997
consist of the following:
1998 1997
---------- ----------
Goodwill $ 34,799 $ 34,199
Contract value 15,586 15,586
Deferred start-up costs 20,904 21,550
Other 3,035 2,105
---------- ----------
27,703 73,440
Accumulated amortization 14,533 11,875
---------- ----------
$ 59,791 $ 61,565
========== ==========
Goodwill represents the excess of cost over net assets of businesses acquired.
Through December 28, 1997, WHC capitalized and amortized facility start-up costs
on a straight-line basis over the lesser of the original contract term plus
renewals or five years. Deferred facility start-up costs consist of costs of
initial employee training, travel and other direct expenses incurred in
connection with the opening of new facilities. Effective December 29, 1997, WHC
modified this policy to amortize facility start-up costs over the lesser of the
initial contract term or five years. Had this policy been followed in prior
periods, the impact would have been immaterial. In April 1998, the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5") on
Accounting for Costs of Start-up Activities. SOP 98-5 requires the expensing of
start-up costs, defined as pre-opening, per-operating and pre-contract type
costs, as incurred and is effective for fiscal years beginning after December
15, 1998. If adopted by the Company in fiscal 1998, the Company anticipates a
pre-tax write-off of approximately $18.2 million (or $10.9 million after-tax) to
record the cumulative effect of the change in accounting principle. The Company
will concurrently record a $4.9 million reduction in minority interest
expense. The write-off includes both current and long-term portions of deferred
start-up costs. The current portion of deferred start-up costs is approximately
$6.6 million.
5. INCOME TAXES
The combined Federal and state effective income tax rate was 41.7% for the first
thirteen weeks of 1998 and 37.3% for the first thirteen weeks of 1997. The
higher effective rate in the first thirteen weeks of 1998 was due to decreases
in the utilization of capital loss carryforwards and tax exempt income of the
reinsurance subsidiary. In addition, the statutory Federal income tax rate
applicable to the Company increased to 35% from 34%. In 1998, consolidated
taxable income is expected to exceed the threshold where the 35% rate is
applicable.
Page 10 of 21
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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 thousands except for per share amounts).
March 29, 1998 March 30, 1997
---------------------------------- -----------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------------------------------------- -----------------------------------
Net income $ 2,661 $ 1,968
============ ==========
Basic EPS:
Income available to common
shareholders 2,661 14,857 $0.18 1,968 14,671 $ 0.13
===== ======
Effect of dilutive securities:
Stock options 365 212
Stock options of WHC (33) (40)
------------ ------ ---------- ------
Diluted EPS:
Income available to common
shareholders 2,628 15,222 0.17 1,928 14,883 0.13
===================================== ===================================
7. SALE OF FACILITIES TO CORRECTIONAL PROPERTIES TRUST
On April 28, 1998, Correctional Properties Trust ("CPV"), a Maryland real estate
investment trust, sold 6.2 million shares of common stock at an offering price
of $20.00 per share in an initial public offering. Approximately $113.0 million
of the net proceeds of the offering were used to acquire eight correctional and
detention facilities operated by WHC. Subsequent to the purchase, CPV is leasing
these eight facilities to WHC. In connection with the sale, Wackenhut
Corrections received approximately $42 million. WHC received approximately $42
million for the three facilities owned by it and for the rights to acquire four
of the remaining five facilities, resulting in a net profit of approximately $18
million which will be amortized over the ten-year lease term. Subsequent to the
purchase, CPV is leasing these eight facilities to WHC. CPV was also granted the
option to acquire three additional correctional facilities currently under
development by WHC and the fifteen-year right to acquire and lease back future
correctional and detention facilities developed or acquired by WHC.
Page 11 of 21
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8. BUSINESS SEGMENTS
The Company's principal segments are security services, correctional services,
and staffing services. The security services provides security-related and other
support services to commercial and governmental/regulated industries clients. A
subsidiary of the Company, WHC, provides facility management and construction
services to detention and correctional facilities. The staffing services
provides employee leasing and temporary staffing services.
THIRTEEN WEEKS ENDED
-------------------------------
(dollars in thousands) MAR. 29, 1998 MAR. 30, 1997
------------- -------------
Revenues:
Security services $ 222,868 $ 197,098
Correctional services 71,269 41,227
Staffing services 104,486 3,809
--------- ---------
Total revenues $ 398,623 $ 242,134
========= =========
Operating Income:
Security services $ 4,907 $ 4,721
Correctional services 5,556 3,272
Staffing services 280 (333)
Unallocated corporate expenses (4,315) (3,660)
--------- ---------
Total operating income $ 6,428 $ 4,000
========= =========
Equity Income of Affiliates, net of taxes:
Security services $ 366 $ 163
Correctional services 264 246
--------- ---------
Total equity income $ 630 $ 409
========= =========
Capital Expenditures:
Security services $ 1,194 $ 337
Correctional services 1,128 2,272
Staffing services 257 14
Unallocated corporate expenditures 121 282
--------- ---------
Total capital expenditures $ 2,700 $ 2,905
========= =========
Depreciation and Amortization:
Security services $ 2,601 $ 2,404
Correctional services 2,667 1,148
Staffing services 309 12
Unallocated corporate expenses 161 177
--------- ---------
Total expenses $ 5,738 $ 3,741
========= =========
Identifiable Assets: MAR. 29, 1998 DEC. 28, 1997
------------- -------------
Security services $ 183,018 $ 171,288
Correctional services 146,717 139,203
Staffing services 47,972 45,137
Unallocated corporate assets 26,751 48,814
--------- ---------
Total identifiable assets $ 404,458 $ 404,442
========= =========
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DOMESTIC AND INTERNATIONAL OPERATIONS
Non-U.S. operations of the Company and its subsidiaries are conducted primarily
in South America and Australia. Minority Interest in consolidated foreign
subsidiaries have been reflected net of applicable income taxes on the
accompanying financial statements. The Company carries its investments in
affiliates (20% to 50% owned) under the equity method. U.S. income taxes which
would be payable upon remittance of affiliates' earnings to the Company are
provided currently. A summary of domestic and international operations is shown
below.
THIRTEEN WEEKS ENDED
----------------------------
(dollars in thousands) MAR. 29, 1998 MAR. 30, 1997
------------- -------------
Revenues:
Domestic operations $350,190 $201,980
International operations 48,433 40,154
-------- --------
Total revenues $398,623 $242,134
======== ========
Operating Income:
Domestic operations $ 5,181 $ 3,157
International operations 1,247 843
-------- --------
Total operating income $ 6,428 $ 4,000
======== ========
Equity Income of Affiliates, net of taxes:
Domestic operations
International operations $ 630 $ 409
-------- --------
Total equity income $ 630 $ 409
======== ========
Capital Expenditures:
Domestic operations $ 2,277 $ 2,734
International operations 423 171
-------- --------
Total capital expenditures $ 2,700 $ 2,905
======== ========
Depreciation and Amortization:
Domestic operations $ 4,486 $ 2,620
International operations 1,252 1,121
-------- --------
Total expenses $ 5,738 $ 3,741
-------- --------
Identifiable Assets: MAR. 29, 1998 DEC. 28, 1997
------------- -------------
Domestic operations $364,325 $368,349
International operations 40,133 36,093
-------- --------
Total identifiable assets $404,458 $404,442
======== ========
Page 13 of 21
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THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Wackenhut Corporation and its Subsidiaries (the "Company") is a diversified
outsourcer providing security and physical protection, employee leasing and
temporary staffing, personnel and facility management, food service, education
and training, and fire, supplemental police and emergency services. The
Company's business is organized into four major groups: North American
Operations (security services), International Operations (security services),
Wackenhut Corrections Corporation and Staffing Services. The Company provides
security-related, outsourcing and other support services through the security
services business. The Wackenhut Corrections Corporation, a 54% owned
corrections subsidiary, is a developer and manager of privatized correctional
and detention facilities. Through the correctional business, the Company
provides correctional and detention facility design, development and management
services to government agencies. In 1996 the Company entered into the employee
leasing and temporary staffing businesses.
FINANCIAL CONDITION
Reference is made to pages 24 through 29 of 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 28, 1997 for further discussion and analysis
of information pertaining to the Company's financial condition.
During the thirteen weeks ended March 29, 1998, the Company sold $17 million of
accounts receivable under its accounts receivable securitization agreements and
paid down its revolving credit agreement by $12.3 million.
On April 28, 1998, WHC sold three facilities and the rights to acquire four
additional facilities to Correctional Properties Trust for approximately $42
million, resulting in a net profit of approximately $18 million which will be
amortized over the ten-year lease term. In connection with the sale, WHC
entered into a ten-year lease with CPV for eight correctional and detention
facilities currently operated by WHC.
FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of
financial condition and results of operations and the April 24, 1998, press
release contain forward-looking statements that are based on current
expectations, estimates and projections about the segments in which the Company
operates. This section of the quarterly report also includes management's
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," variation
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.
Page 14 of 21
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Future Factors include increasing price and product/service competition by
foreign and domestic 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. 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.
Page 15 of 21
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RESULTS OF OPERATIONS
The table below summarizes the Company's results of operations 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 thousands):
Thirteen weeks ended
--------------------------------------------------
Mar. 29, 1998 Mar. 30, 1997
----------------------- -----------------------
$ % $ %
-------- --------- -------- -------
REVENUES [a]
Security Services:
North American Operations 191,835 48.1 168,427 69.6
International Operations 31,033 7.8 28,671 11.8
-------- ------- -------- --------
222,868 55.9 197,098 81.4
Correctional Services 71,269 17.9 41,227 17
Staffing Services 104,486 26.2 3,809 1.6
-------- ------- -------- --------
Consolidated revenues 398,623 100 242,134 100
======== ======= ======== ========
OPERATING INCOME [b]
Security Services:
North America Operations 4,821 2.5 4,611 2.7
International Operations 86 0.3 110 0.4
-------- --------
4,907 2.2 4,721 2.4
Correctional Services 5,556 7.8 3,272 7.9
Staffing Services 280 0.3 (333) (8.7)
Unallocated corporate expense (4,315) (1.1) (3,660) (1.5)
-------- --------
Consolidated operating income 6,428 1.6 4,000 1.7
======== ========
[a] Percentages represent percent of total revenues
[b] Percentages represent percent of respective business related revenues.
Page 16 of 21
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COMPARISON OF THIRTEEN WEEKS ENDED MARCH 29, 1998 AND THIRTEEN WEEKS ENDED
MARCH 30, 1997
REVENUES
SECURITY SERVICES
First quarter 1998 Security Services revenues increased $25.8 million, or 13%,
to $222.9 million from $197.1 million in the first quarter of 1997. Revenues of
the North American Operations increased $23.4 million, or 14%, to $191.8 million
in the first quarter of 1998 from $168.4 million in the first quarter of 1997.
Both commercial and government/regulated services showed strong improvement in
the quarter versus the first quarter 1997. International Operations revenues
increased $2.4 million, or 8%, to $31.0 million in the first quarter of 1998
compared to $28.7 million in the first quarter of 1997. Increases in
international security revenues in Central, South America and Europe were
partially offset by the exit from the Australian security market. Revenues of
Wackenhut of Australia Pty., Ltd., were $4.0 million in the first quarter of
1997.
CORRECTIONAL SERVICES
First quarter 1998 Correctional Services revenues increased $30.0 million, or
73%, to $71.2 million from $41.2 million in the comparable quarter last year.
The increase was due principally to the increase in compensated resident days by
60% to approximately 1,541,000 in the first quarter of 1998 from 964,000 in the
first quarter of 1997, which resulted principally from the opening of new
facilities during 1997 and in the first quarter of 1998. Occupancy decreased
slightly to approximately 95.6% of capacity in domestic facilities compared to
97.6% in the first quarter of 1997 due to new openings.
STAFFING SERVICES
Staffing Services was started in the third quarter of 1996. In May 1997, the
Company acquired the business and certain assets of the King Companies in
Jacksonville, Florida and in December 1997, the Company acquired the business
and substantially all of the assets of Professional Employee Management, Inc.,
of Sarasota, Florida. Revenues of Staffing Services amounted to $104.5 million
in the first quarter of 1998, compared to $3.8 million in the comparable quarter
last year.
OPERATING INCOME
First quarter 1998 consolidated operating income increased $2.4 million, or 61%,
to $6.4 million from $4.0 million in the first quarter of 1997. The operating
margin for the first quarter of 1998 remained basically flat at 1.6% as compared
to 1.7% for the comparable first quarter of 1997.
Page 17 of 21
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SECURITY SERVICES
The operating income of the services business increased $186,000, or 4%, to $4.9
million in the first quarter of 1998 from $4.7 million for the comparable
quarter last year. North American Operations operating income increased
$210,000, or 5%, to $4.8 million in the first quarter of 1998 from $4.6 million
in the first quarter of 1997. The increase in operating income of the North
American Operations can be attributed mainly to its increased revenue growth and
improved profit margins in the Security Services which were partially offset by
an increase in the allocation of direct corporate general and administrative
costs. The increase in corporate general and administrative expenses this
quarter, as compared to the first quarter of 1997 was due to increases in
information technology and payroll related costs attributable to the corporate
staff. The operating income of the North American Operations as a percentage of
revenues decreased slightly to 2.5% in the first quarter of 1998 from 2.7% in
the first quarter of 1997. International Operations operating income remained
relatively flat in the first quarter of 1998 as compared with the first quarter
of 1997. In January 1998, the Company sold the security business and certain
related assets of Australian security operations, which incurred an operating
loss of $500,000 in the first quarter of 1997. Softness in the operating results
of European and Asian operations reduced income in the quarter versus the
comparable quarter in 1997. In addition, there was an increase in the allocation
of corporate general and administrative expenses for the first quarter of 1998,
as compared to the first quarter of 1997, as discussed above.
CORRECTIONAL SERVICES
First quarter 1998 operating income increased $2.3 million, or 70%, to $5.6
million from $3.3 million in the comparable period in 1997. The improved results
are attributable principally to increased profit contribution from new
facilities, increased utilization of existing facilities and continued
leveraging of overhead.
STAFFING SERVICES
The operating profit of Staffing Services was $280,000 in the first quarter of
1998 as compared to an operating loss of $333,000 for the first quarter of
1997. The improvement in operating profit is attributable principally to the
acquisitions of new businesses and improvement in the profit contribution of
internally developed staffing services.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate general and administrative expenses increase 18% to $4.3
million in the first quarter of 1998 from $3.6 million in the first quarter of
1997. The increase was due principally to an increase in information technology
costs in the first quarter of 1998 compared to the first quarter of 1997. In
addition, there were increases in labor and labor related costs attributable to
the corporate staff as the Company fully restaffed after its corporate
relocation. However, as a percentage of consolidated revenues, unallocated
corporate general and administrative expenses decreased to 1.1% of revenues in
the first quarter of 1998 from 1.5% of revenues in the first quarter of 1997.
OTHER INCOME/EXPENSE
Other income decreased $465,000, or 81%, to $112,000 in the first quarter of
1998 from $577,000 in the first quarter of 1997. Interest income was lower in
the first quarter of 1998, as compared to the first quarter of 1997, due to a
decrease in excess funds available for investment which were used for
acquisitions and renovation or construction of correctional facilities during
the latter part of 1997 and in the first quarter of 1998. Higher interest costs
were incurred on increased borrowings under the accounts receivable and
revolving credit facilities in the first quarter of 1998.
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INCOME BEFORE INCOME TAXES
First quarter 1998 income before taxes increased $2.0 million, or 43%, to $6.5
million from $4.5 million in the first quarter of 1997.
EBITDA, defined as earnings before interest expense, income taxes, depreciation
and amortization, was $12.2 million, or 3.1% of revenues for the first quarter
of 1998, which was $4.5 million, or 58.4%, higher than the first quarter of
1997. EBITDA does not necessarily indicate that cash flow is sufficient to fund
all the Company's cash needs or represent cash flow from operations as defined
by generally accepted accounting principles.
INCOME TAXES
The combined Federal and state effective income tax rate was 41.7% for the first
quarter of 1998 and 37.3% for the first quarter of 1997. The higher effective
rate in the first quarter of 1998 was due to decreases in the utilization of
capital loss carryforwards and tax exempt income of the reinsurance subsidiary.
In addition, the statutory federal income tax rate applicable to the Company
increased to 35% from 34%. In 1998, consolidated taxable income is expected to
exceed the threshold where the 35% taxable rate is applicable.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased $474,000 to $1.8
million in the first quarter of 1998 from $1.3 million in the first quarter of
1997, reflecting principally the increase in earnings of WHC.
EQUITY INCOME OF FOREIGN AFFILIATES
Equity income of foreign affiliates (net of income taxes) increased $221,000, or
54%, to $630,000 in the first quarter of 1998 from $409,000 in the first quarter
of 1997, primarily due to improved operations in Greece, Argentina and Chile.
NET INCOME
Net income increased $693,000, or 35%, to $2.7 million in the first quarter of
1998 compared to $2.0 million in the first quarter of 1997. Earnings per share
on a diluted basis was $0.17 in the first quarter of 1998 compared to $0.13 in
the first quarter of 1997.
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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 of such actions plaintiffs
request punitive or other damages that may not be covered by insurance. In the
opinion of management, the various asserted claims and litigation in which the
Company is currently involved will not materially affect its financial position
or future operating results, although no assurance can be given with respect to
the ultimate outcome from any such claims or litigation.
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
Wackenhut Corrections Corporation, a majority owned subsidiary of the Company
has filed Amendment No. 4 to Registration Statement on Form S-3 under the
Securities Act of 1993 on April 22, 1998 in connection with the public offering
of Correctional Properties Trust, a Maryland real estate investment trust,
formed to acquire correctional and detention facilities from both private prison
operators and governmental entities.
Correctional Properties Trust has also filed Amendment No. 4 to Registration
Statement on Form S-11 under the Securities Act of 1993 on April 22, 1998. The
Registration Statements on Form S-3 and S-11 and subsequent amendments are
hereby incorporated by reference into this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits -
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b). Reports on Form 8-K
The Company did not file a Form 8-K during the first quarter of 1998.
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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 March 29, 1998 to be signed on its behalf by the undersigned
hereunto duly authorized.
THE WACKENHUT CORPORATION
DATE: May 11, 1998 /s/ PHILIP L. MASLOWE
--------------------------
Philip L. Maslowe,
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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