<PAGE> 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 September 28, 1997 29, 1996
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 November 3, 1997, 3,855,582 shares of Series A Common Stock were issued and
outstanding and 10,991,203 shares of the registrant's Series B Common Stock were
issued and outstanding after deducting 87,000 shares held in treasury.
Page 1 of 23
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
SEPTEMBER 28, 1997 and SEPTEMBER 29, 1996
(In thousands except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-nine Weeks
Ended Ended
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 294,885 $ 236,869 $ 810,611 $ 672,247
--------- --------- --------- ---------
OPERATING EXPENSES
Payroll and related taxes 211,600 171,915 591,969 488,599
Other operating expenses 74,400 58,018 197,108 167,194
Depreciation expense 1,706 1,242 4,505 3,112
Amortization of intangible assets 499 470 1,441 1,584
Provision for relocation costs -- -- -- 750
--------- --------- --------- ---------
288,205 231,645 795,023 661,239
--------- --------- --------- ---------
OPERATING INCOME 6,680 5,224 15,588 11,008
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (421) (425) (1,284) (2,288)
Interest and investment income 813 1,015 2,637 3,180
--------- --------- --------- ---------
392 590 1,353 892
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 7,072 5,814 16,941 11,900
Provision for income taxes 2,675 2,010 6,370 4,201
Minority interest, net of income taxes 1,572 1,335 4,200 3,085
Equity income of foreign affiliates, net of
income taxes (505) (569) (1,435) (1,276)
--------- --------- --------- ---------
NET INCOME $ 3,330 $ 3,038 $ 7,806 $ 5,890
========= ========= ========= =========
EARNINGS PER SHARE $ 0.23 $ 0.21 $ 0.53 $ 0.44
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 2 of 23
<PAGE> 3
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1997 AND DECEMBER 29, 1996
(In thousands except share data)
<TABLE>
<CAPTION>
1997 1996
(Unaudited)
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,106 $ 52,755
Accounts receivable, less allowance for doubtful accounts
of $2,935 in 1997 and $1,997 in 1996 146,125 131,325
Inventories 9,846 10,082
Other 28,115 26,412
-------- --------
229,192 220,574
-------- --------
NOTES RECEIVABLE 1,244 1,181
-------- --------
MARKETABLE SECURITIES of casualty reinsurance subsidiary 12,399 14,753
-------- --------
PROPERTY AND EQUIPMENT, at cost 66,558 46,726
Accumulated depreciation (15,450) (12,184)
-------- --------
51,108 34,542
-------- --------
OTHER ASSETS:
Investment in and advances to foreign affiliates, at cost 19,040 13,508
Other 58,353 39,360
-------- --------
77,393 52,868
-------- --------
$371,336 $323,918
======== ========
</TABLE>
(Continued)
See notes to unaudited consolidated financial statements.
Page 3 of 23
<PAGE> 4
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1997 AND DECEMBER 29, 1996
(In thousands except share data)
(Continued)
<TABLE>
<CAPTION>
1997 1996
(Unaudited)
----------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,462 $ 20,488
Accrued payroll and related taxes 42,357 35,715
Accrued expenses 25,264 16,295
-------- --------
102,083 72,498
-------- --------
RESERVES FOR LOSSES of casualty reinsurance subsidiary 45,737 43,806
-------- --------
LONG-TERM DEBT 5,060 5,890
-------- --------
DEFERRED TAX LIABILITY, NET 4,538 1,165
-------- --------
OTHER 14,815 11,372
-------- --------
MINORITY INTEREST 45,132 40,958
-------- --------
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 in 1997
and 3,858,885 in 1996 386 386
Series B common stock, 11,018,741 issued in 1997 and 10,902,199
issued in 1996 1,102 1,090
Additional paid-in capital 122,642 120,703
Retained earnings 36,282 31,347
Cumulative translation adjustment (5,508) (4,128)
Unrealized gain/(loss) on marketable securities 167 (69)
Treasury stock at cost, 87,000 shares of Series B (1,100) (1,100)
-------- --------
153,971 148,229
-------- --------
$371,336 $323,918
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 4 of 23
<PAGE> 5
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net Income $ 7,806 $ 5,890
Adjustments -
Depreciation expense 4,505 3,112
Amortization of intangible assets 1,441 1,584
Other amortization expense 6,787 5,359
Provision for bad debts 1,081 966
Equity income, net of dividends (2,084) (1,676)
Minority interests in net income 6,720 4,674
Other (1,727) 201
Changes in assets and liabilities, net of acquisitions and divestitures -
(Increase) decrease in assets:
Accounts receivable (12,210) (18,427)
Inventories (3,755) (5,316)
Other current assets 174 (3,692)
Marketable securities (11) (190)
Other assets (642) 1,259
Deferred tax asset, net 974 5,511
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 16,273 (3,428)
Accrued payroll and related taxes 5,423 4,594
Deferred tax liability, net 3,540 (117)
Reserves for losses of casualty reinsurance subsidiary 1,931 2,978
Other long term liabilities 2,523 414
-------- --------
Net Cash Provided By Operating Activities 38,749 3,696
-------- --------
</TABLE>
(Continued)
Page 5 of 23
<PAGE> 6
THE WACKENHUT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
(In thousands)
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Net proceeds from public offering of subsidiary's common stock $ - $ 51,593
Proceeds from exercise of stock options of subsidiary 1,011 719
Payments for acquisitions, net of cash acquired (10,349) (13,703)
Investment in and advances to foreign affiliates (2,796) (261)
Capital expenditures (21,211) (14,128)
Proceeds from sales (payments for purchases) of marketable
securities of casualty reinsurance subsidiary, net 3,102 (7,752)
Deferred charge expenditures (11,259) (4,339)
-------- --------
Net Cash Provided By (Used In) Investing Activities (41,502) 12,129
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from public offering of the Company's common stock -- 54,029
Proceeds from exercise of stock options 509 1,100
Purchase and cancellation of Company's common stock (139) --
Proceeds from issuance of debt 4,207 10,171
Payments on debt (6,602) (11,786)
Payment for repurchases of accounts receivable -- (27,000)
Dividends paid (2,871) (2,547)
-------- --------
Net Cash Provided By (Used In) Financing Activities (4,896) 23,967
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,649) 39,792
Cash and Cash Equivalents, at beginning of period 52,755 20,185
-------- --------
Cash and Cash Equivalents, at end of period $ 45,106 $ 59,977
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 1,028 $ 2,356
Income taxes $ 1,823 $ 1,043
</TABLE>
See notes to unaudited consolidated financial statements.
Page 6 of 23
<PAGE> 7
THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements of The Wackenhut Corporation and its
subsidiaries (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
results for the thirteen and thirty-nine weeks ended September 28, 1997 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 29, 1996.
2. ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
On occasion the Company enters into swap agreements to reduce the interest rate
exposure associated with a portion of its variable rate indebtedness. The
Company does not utilize derivative financial instruments for trading or other
speculative purposes. The accounting policy for these derivative financial
instruments, which are designated as hedges of its interest rate risk, follows -
Interest rate swap - Interest rate swap agreements modify the interest
characteristics of the Company's variable rate indebtedness by synthetically
converting a portion of the indebtedness to fixed rate. Interest earned
(payable) under the interest rate swap is credited (charged) to interest expense
using the accrual method. The related accrued receivable or payable is included
in accounts receivable or accrued expenses. The fair market value of the swap
agreement is not reflected in the financial statements. Derivative financial
instruments terminated at a loss (gain) prior to maturity are (credited) charged
to interest expense over the remaining original life of the derivative financial
instrument.
The Company is a party to two offsetting interest rate swaps. The notional
principal amount under both agreements is $81,200,000 and the agreements expire
in December 1998.
3. ACCOUNTS RECEIVABLE
The Company has entered into a three year agreement expiring in January 1998
with two financial institutions to sell, on an on-going basis, an undivided
interest in a defined pool of eligible receivables up to a maximum of
$35,000,000. The costs associated with this program are based upon the
purchasers' level of investment and cost of issuing commercial paper plus
predetermined fees. Such costs are included in "Interest expense" in the
Consolidated Statements of Income. At September 28, 1997, $2,000,000 had been
received under this agreement and has been recorded as part of long-term debt in
accordance with Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." As of December 29, 1996, no accounts receivable had been sold
under this agreement.
Page 7 of 23
<PAGE> 8
THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. FINANCING INSTRUMENTS
Wackenhut Corrections Corporation, a majority-owned subsidiary of the Company,
is listed on the NYSE as "WHC". In June 1997, WHC entered into a $30 million
multi-currency revolving credit facility with a syndicate of banks, the proceeds
of which may be used for working capital, acquisitions and general corporate
purposes. The credit facility also includes a letter of credit of up to $10
million for the issuance of standby letters of credit. As of November 3, 1997,
no amounts were outstanding under this facility. In June 1997, WHC also entered
into a $80 million operating lease facility that has been established to acquire
and develop new correctional institutions used in its business. As of November
3, 1997, approximately $47 million of properties were under development.
5. INVESTMENT IN AFFILIATES
Equity in undistributed earnings of foreign affiliates approximated $8,276,000
and $5,540,000 at September 28, 1997 and December 29, 1996, respectively, and is
included in "Investment in and advances to foreign affiliates" in the
Consolidated Balance Sheets. The following is a summary of condensed unaudited
financial information pertaining to foreign affiliates (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance sheet items as of September 28, 1997
Current assets $ 51,637
Noncurrent assets 31,819
Current liabilities 41,427
Noncurrent liabilities 16,862
Minority interest liability 97
Income Statement items for the
thirty-nine weeks ended September 28, 1997
Revenues 133,908
Operating income 8,433
Net income before taxes 6,922
</TABLE>
Page 8 of 23
<PAGE> 9
THE WACKENHUT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
requires the disclosure of basic and diluted earnings per share for periods
ending after December 15, 1997. The computation under SFAS No. 128 differs from
the primary and fully diluted earnings per share computed under APB Opinion No.
15 primarily in the manner in which potential common stock is treated. Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding. In the computation of diluted earnings per
share, the weighted-average number of common shares outstanding is adjusted for
the effect of all potential common stock. The pro forma basic and diluted
earnings per share computed according to SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Pro forma
---------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
Sept. 28, 1997 Sept. 29, 1996 Sept. 28, 1997 Sept. 29, 1996
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic earnings per share $ 0.23 $ 0.21 $ 0.53 $ 0.44
Diluted earnings per share 0.22 0.20 0.52 0.44
</TABLE>
Page 9 of 23
<PAGE> 10
7. BUSINESS SEGMENTS
Security-Related and Other Support Services and Correctional Services
The Company's principal business consists of security-related and other support
services to commercial and governmental clients. In the thirteen weeks ended
September 29, 1996, the Company entered into the professional employer
organization ("PEO") and temporary staffing businesses by establishing the
Staffing Services Group. The financial information related to the Staffing
Services Group is not material and has been included in "Security-related and
other support services." WHC provides facility management and construction
services to detention and correctional facilities. Provided below is various
financial information for each segment:
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------
(thousands of dollars) Sept. 28, 1997 Sept. 29,1996
-------------- -------------
<S> <C> <C>
Revenues:
Security-related and other support services $662,771 $572,612
Correctional services 147,840 99,635
-------- --------
Total revenues $810,611 $672,247
-------- --------
Operating Income:
Security-related and other support services $ 3,726 $ 5,187
Correctional services 11,862 6,571
Provision for relocation costs -- (750)
-------- --------
Total operating income $ 15,588 $ 11,008
-------- --------
Equity income of affiliates, net of taxes:
Security-related and other support services $ 751 $ 814
Correctional services 684 462
-------- --------
Total equity income $ 1,435 $ 1,276
-------- --------
Capital expenditures:
Security-related and other support services $ 3,159 $ 5,317
Correctional services 18,278 8,811
-------- --------
Total capital expenditures $ 21,437 $ 14,128
-------- --------
Depreciation and amortization expense:
Security-related and other support services $ 8,171 $ 7,501
Correctional services 4,562 2,554
-------- --------
Total expenses $ 12,733 $ 10,055
-------- --------
Identifiable assets at September 28, 1997 and December 29, 1996:
Security-related and other support services $247,187 $217,107
Correctional services 124,149 106,811
-------- --------
Total identifiable assets $371,336 $323,918
-------- --------
</TABLE>
Page 10 of 23
<PAGE> 11
Domestic and International Operations
Non-U.S. Operations of the Company are conducted primarily in Latin America and
Australia. 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.
Minority interest in consolidated foreign subsidiaries have been reflected net
of applicable income taxes on the accompanying financial statements. A summary
of domestic and international operations is shown below.
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------
(thousands of dollars) Sept. 28, 1997 Sept. 29, 1996
-------------- --------------
<S> <C> <C>
Revenues:
Domestic operations $683,711 $562,263
International operations 126,900 109,984
-------- --------
Total revenues $810,611 $672,247
-------- --------
Operating Income:
Domestic operations $ 13,537 $ 10,475
International operations 2,051 1,283
Provision for relocation costs -- (750)
-------- --------
Total operating income $ 15,588 $ 11,008
-------- --------
Equity income of affiliates, net of taxes:
Domestic operations $ -- $ --
International operations 1,435 1,276
-------- --------
Total equity income $ 1,435 $ 1,276
-------- --------
Capital expenditures:
Domestic operations $ 17,720 $ 12,169
International operations 3,717 1,959
-------- --------
Total capital expenditures $ 21,437 $ 14,128
-------- --------
Depreciation and amortization expense:
Domestic operations $ 9,307 $ 7,430
International operations 3,426 2,625
-------- --------
Total expenses $ 12,733 $ 10,055
-------- --------
Identifiable assets at September 28, 1997 and December 29, 1996:
Domestic operations $297,654 $263,044
International operations 73,682 60,874
-------- --------
Total identifiable assets $371,336 $323,918
-------- --------
</TABLE>
8. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
presentation.
Page 11 of 23
<PAGE> 12
THE WACKENHUT CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides security-related and other support services through the
Services Business, correctional services through the Correctional Business and
temporary employment and employee leasing through Staffing Services. Through the
Services Business, the Company provides physical security services, food
services, and other related services to commercial and governmental customers.
Through the Correctional Business, the Company provides correctional and
detention facility design, development and management services to government
agencies. The Services Business is managed through two operating groups: the
North American Operations Group and the International Operations Group. The
Correctional Business is operated through the Company's 55%-owned Wackenhut
Corrections Corporation subsidiary. The Correctional Business includes an
Australian subsidiary and United Kingdom affiliate of WHC.
In the third quarter of 1996, the Company entered into the temporary employment
and PEO business. Staffing Services is operated through Wackenhut Resources,
Inc., a wholly owned subsidiary of the Comapany.
FORWARD-LOOKING STATEMENTS: The Management's Discussion and Analysis of
Financial Condition and Results of Operations and the October 28, 1997 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.
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.
Page 12 of 23
<PAGE> 13
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.
FINANCIAL CONDITION
In May 1997, the Company purchased the King Companies in Jacksonville, Florida,
for approximately $10.6 million in cash and $842,000 in shares of Wackenhut
Series B (non-voting) Common Stock. The King Companies operate PEO and temporary
employment businesses.
In June 1997, WHC entered into an $80 million operating lease facility that has
been established to acquire and develop new correctional institutions used in
its business. As a condition of the facility, WHC unconditionally agreed to
guarantee certain obligations of First Security Bank, National Association, a
party to the aforementioned operating lease facility. As of November 3, 1997,
approximately $47 million of properties were under development.
In June 1997, WHC entered into a $30 million multi-currency revolving credit
facility with a syndicate of banks, the proceeds of which may be used for
working capital, acquisitions and general corporate purposes. The credit
facility also includes a letter of credit of up to $10 million for the issuance
of standby letters of credit. As of November 3, 1997, no amounts were
outstanding under this facility.
In June 1997, WHC purchased the Queens Private Correctional Facility in New York
City, New York, a 66,000 square foot building currently being used by WHC as a
200-bed federal detention facility, for $6.6 million. WHC also has invested
another $5.5 million to renovate the building.
On July 18, 1997, Atlantic Shores Healthcare, Inc. a wholly-owned subsidiary of
Wackenhut Corrections Corporation, completed the purchase of an 86-bed
psychiatric hospital in Fort Lauderdale, Florida for $6 million. The hospital
has been renamed Atlantic Shores Hospital.
Reference is made to Item 7, Part II of the Company's Annual Report on Form 10-K
for the fiscal year ended December 29, 1996 for further discussion and analysis
of information pertaining to the Company's financial condition.
Page 13 of 23
<PAGE> 14
RESULTS OF OPERATIONS
Comparison of Thirteen Weeks Ended September 28, 1997 and Thirteen Weeks
Ended September 29, 1996
The table below summarizes the Company's results of operations for the thirteen
weeks ended September 28, 1997 ("Third Quarter of 1997") and September 29, 1996
("Third Quarter of 1996") by the Company's two business segments by
organizational group. The following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
(Dollars in thousands)
------------------------------------------------
Third Third Percent Increase
Quarter 1997 Quarter 1996 (Decrease)
1997 versus 1996
------------------------------------------------
<S> <C> <C> <C>
REVENUES
SERVICES BUSINESS:
North American Operations Group $180,786 $170,615 6.0
International Operations Group 29,043 28,754 1.0
Staffing Services Group 29,872 -- --
Other 79 715 (89.0)
-------- --------
239,780 200,084 19.8
CORRECTIONAL BUSINESS:
Wackenhut Corrections Corporation 55,105 36,785 49.8
-------- --------
$294,885 $236,869 24.5
======== ========
OPERATING INCOME
SERVICES BUSINESS:
North America Operations Group $ 5,342 $ 5,785 (7.7)
International Operations Group 22 (282) 107.8
Staffing Services Group 191 (85) --
Corporate Expenses and Underwriting Losses (3,676) (3,133) 17.3
-------- --------
1,879 2,285 (17.8)
CORRECTIONAL BUSINESS:
Wackenhut Corrections Corporation 4,801 2,939 63.4
-------- --------
$ 6,680 $ 5,224 27.9
======== ========
</TABLE>
Page 14 of 23
<PAGE> 15
REVENUES
Third Quarter 1997 consolidated revenues increased $58.0 million, or 24.5%, to
$294.9 million in the Third Quarter 1997 from $236.9 million in the Third
Quarter 1996.
SERVICES BUSINESS
Third Quarter 1997 Services Business revenues increased $39.7 million or 19.8%
to $239.8 million in the Third Quarter of 1997 from $200.1 million in the Third
Quarter 1996. The increase is due principally to the start-up of the Staffing
Services Group.
North American Operations Group. Revenues of the North American Operations Group
increased $10.2 million, or 6.4%, to $180.8 million in the Third Quarter 1997
from $170.6 million in the Third Quarter 1996. Within the North American
Operations Group, revenues from the Security Services Division increased 9.3% to
$102.9 million in the Third Quarter 1997 from $94.1 million in the Third Quarter
1996. The Security Services Division continued to increase its revenue base,
primarily as a result of obtaining and maintaining contracts with major national
accounts. In addition, the Division continued to expand its Custom Protection
Officer(R) ("CPO") business, which increased 37% during the Third Quarter 1997
compared to the Third Quarter 1996. Revenues of the Food Services Division
increased 9% to $19.4 million in the Third Quarter 1997 from $17.8 million in
the Third Quarter 1996, but revenues of Wackenhut Services, Inc. decreased 3.1%
to $37.5 million from $38.7 million during the same period, due principally to
the loss of the Strategic Petroleum Reserve contract with DynnMcDermott.
International Operations Group. International Operations Group revenues remained
relatively unchanged during the Third Quarter 1997.
Staffing Services. The Staffing Services Group was started in the Third Quarter
1996, and in May 1997, a subsidiary of the Company acquired the business and
certain assets of the Jim King Companies in Jacksonville, Florida. Staffing
Services revenues were $29.9 million in the Third Quarter 1997. The Company
intends to continue developing the staffing services business through internal
growth and acquisitions.*
CORRECTIONAL BUSINESS
Third Quarter 1997 Correctional Business revenues increased $18.3 million, or
49.8%, to $55.1 million in the Third Quarter 1997 from $36.8 million for the
comparable quarter last year. The increase is attributable principally to the
increase in compensated resident days to 1,319,070 in the Third Quarter 1997
from 976,045 in the Third Quarter 1996. The increase in compensated resident
days resulted from the opening of three domestic facilities and one in Puerto
Rico in the first quarter of 1997. Occupancy has remained at approximately 98%.
In addition, revenues of Australasian Correctional Management Pty. Limited
("ACM") increased $2.6 million, or 35.2%, in the Third Quarter 1997 as compared
to the Third Quarter 1996, principally due to the opening of the Fulham
Correctional Center in Victoria, Australia in March of 1997.
* Refer to Forward-Looking Statements on page 12.
Page 15 of 23
<PAGE> 16
OPERATING INCOME
Third Quarter 1997 consolidated operating income of $6.7 million increased $1.5
million, or 27.9% from $5.2 million in the Third Quarter 1996.
SERVICES BUSINESS
Third Quarter 1997 Services Business operating income of $1.9 million decreased
$406,000, or 17.8%, from $2.3 million in the Third Quarter 1996.
North American Operations Group. North American Operations Group operating
income decreased 7.7% to $5.3 million in the Third Quarter 1997 from $5.8
million in the Third Quarter 1996. Security-related and food services Third
Quarter 1996 operating results benefited from a one-time reduction ("holiday")
in health insurance costs and adjustments to insurance accruals. Excluding this
prior year adjustment, Third Quarter 1997 operating income would have been flat
compared to the Third Quarter 1996. In addition, the profit contribution of
Wackenhut Services, Inc. decreased 11.1%, or $192,000, principally due to
reductions in the services provided at certain United States Department of
Energy facilities and the loss of the Strategic Petroleum Reserves contract with
DynnMcDermott.
International Operations Group. International Operations Group operating income
of $22,000 in the Third Quarter 1997 was $304,000 better than the Third Quarter
1996 loss of $282,000. The operating income of subsidiaries in Latin America and
Europe continued to show significant improvement as a result of increases in the
core security business and diversification into other services. The operating
loss of Wackenhut of Australia decreased to $87,000 in the Third Quarter 1997
compared to an operating loss of $585,000 in the Third Quarter 1996. While the
operating losses of Wackenhut of Australia for the Third Quarter 1997 were
reduced, when compared to the same quarter last year, they do not reflect the
full impact of recent government-mandated, wage and fringe benefit increases.
Management is considering several alternative strategies in relation to its
Australian operation, some of which could adversely impact the carrying value of
this investment.*
Staffing Services. Staffing Services Group operating profit was $191,000 in the
Third Quarter 1997 compared to a loss of $85,000 in the Third Quarter 1996. The
operating profit in the Third Quarter 1997 includes the profit contribution from
the acquisition of the King Companies.
Corporate Expenses and Underwriting Losses. The increase in corporate expenses
and underwriting losses resulted principally from increases in personnel-related
costs attributable to the return to fully-staffed levels after the relocation of
the headquarters facility. In addition, there was an increase in information
technology costs in the Third Quarter 1997 compared to the same quarter in 1996,
as the Company redesigns its systems hardware and software architecture. During
the Third Quarter 1997, the Company deferred additional costs related to the
development of information systems.
* Refer to Forward-Looking Statements on page 12.
Page 16 of 23
<PAGE> 17
Approximately $6.2 million of costs related to systems development has been
deferred as of September 28, 1997. Management is actively reviewing the
deferred charges for information systems investments as it determines its
enterprise-wide strategy for delivering management information systems.*
CORRECTIONAL BUSINESS
Third Quarter 1997 operating income from the Correctional Business increased
$1.9 million, or 63.4% to $4.8 million in the Third Quarter 1997 from the Third
Quarter 1996. The increase was principally attributable to the increase in
domestic facility management services as a result of the opening of new
facilities and the related increase in compensated resident days.
OTHER INCOME/EXPENSE
Other income decreased $198,000 to $392,000 in the Third Quarter 1997 from
$590,000 in the Third Quarter 1996 due to a decrease in excess cash available
for short term investments. During 1997, the Company and WHC have made
significant investments due to acquisitions, investments in and improvement to
facilities, respectively.
INCOME BEFORE INCOME TAXES
Third Quarter 1997 income before income taxes increased $1.3 million, or 21.6%
to $7.1 million from income before income taxes of $5.8 million in the Third
Quarter 1996.
The combined federal and state effective income tax rate was 37.8% for the Third
Quarter 1997 and 34.6% for the Third Quarter 1996, respectively. The higher
effective rate in the Third Quarter 1997 was due to decreases in the utilization
of capital loss carryforwards and in the tax exempt income of the reinsurance
subsidiary.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased $237,000, or 17.8%, to
$1.6 million in the Third Quarter 1997 from $1.3 million in the Third Quarter
1996, reflecting principally the increase in earnings attributable to the public
ownership in WHC.
EQUITY INCOME OF FOREIGN AFFILIATES
Equity income of foreign affiliates (net of income taxes) decreased $64,000, or
11.2%, to $505,000 in the Third Quarter 1997 from $569,000 in the Third Quarter
1996, primarily due to a decrease in the income of the joint venture of WHC in
the United Kingdom offset by increased management fees to WHC recorded in
revenues.
* Refer to Forward-Looking Statements on page 12.
Page 17 of 23
<PAGE> 18
NET INCOME
Net income increased $292,000, or 9.6%, to $3.3 million in the Third Quarter
1997, or $0.23 per share, as compared to $3.0 million, or $0.21 per share for
the Third Quarter 1996.
COMPARISON OF THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997 AND THIRTY-NINE
WEEKS ENDED SEPTEMBER 29, 1996
The table below summarizes the Company's results of operations for the
thirty-nine weeks ended September 28, 1997 ("The First Nine Months of 1997") and
September 29, 1996 ("The First Nine Months of 1996") by the Company's two
business segments by organizational group. The following discussion and analysis
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto.
<TABLE>
<CAPTION>
(Dollars in thousands)
---------------------------------------------------
First First
Nine Nine Percent Increase
Months Months (Decrease)
1997 1996 1997 versus 1996
---------------------------------------------------
<S> <C> <C> <C>
REVENUES
SERVICES BUSINESS:
North American Operations Group $524,101 $490,028 7.0
International Operations Group 86,023 78,504 9.6
Staffing Services Group 52,369 -- --
Other 278 4,080 (93.2)
-------- --------
662,771 572,612 15.7
CORRECTIONAL BUSINESS:
Wackenhut Corrections Corporation 147,840 99,635 48.4
-------- --------
$810,611 $672,247 20.6
======== ========
OPERATING INCOME
SERVICES BUSINESS:
North America Operations Group $ 14,882 $ 14,198 4.8
International Operations Group (63) (907) (93.1)
Staffing Services Group (274) (85) 222.4
Corporate Expenses and Underwriting Losses (10,819) (8,019) 34.9
-------- --------
3,726 5,187 (28.2)
CORRECTIONAL BUSINESS:
Wackenhut Corrections Corporation 11,862 6,571 80.5
Provision for Relocation Costs -- (750) --
-------- --------
$ 15,588 $ 11,008 41.6
======== ========
</TABLE>
Page 18 of 23
<PAGE> 19
REVENUES
Consolidated revenues increased $138.4 million, or 20.6%, to $810.6 million for
the First Nine Months of 1997 from $672.2 million for the First Nine Months of
1996.
SERVICES BUSINESS
Services Business revenues increased $90.2 million, or 15.7%, to $662.8 million
in the First Nine Months of 1997 from $572.6 million in the First Nine Months of
1996.
North American Operations Group. Revenues of the North American Operations Group
increased $34.1 million, or 7%, to $524.1 million in the First Nine Months of
1997 from $490.0 million in the First Nine Months of 1996. Within the North
American Operations Group, revenues from the Security Services Division
increased 10.6% to $298.5 million in the First Nine Months of 1997 from $269.8
million in the First Nine Months of 1996. The Security Services Division
continued to increase its revenue base, primarily as a result of obtaining and
maintaining contracts with major national accounts. In addition, the Division
continued to expand the CPO business, which increased 37% during the First Nine
Months of 1997 compared to the First Nine Months of 1996. Revenues of the Food
Services Division increased 14.1% to $58.4 million in the First Nine Months of
1997 from $51.2 million in the First Nine Months of 1996, principally as a
result of new business development. Revenues of the Nuclear divisions increased
5.4% to $42.9 million during the First Nine Months of 1997 from $40.7 million
for the comparable period in 1996. Revenues of Wackenhut Services, Inc.
decreased 7.7% to $101.9 million in the First Nine Months of 1997 from $110.4
million for the same quarter of 1996, due principally to the loss of the
Strategic Petroleum Reserve contract with DynnMcDermott.
International Operations Group. International Operations Group revenues
increased $7.5 million, or 9.6 %, to $86.0 million for the First Nine Months of
1997 from $78.5 million for the First Nine Months of 1996. The increase was
attributable to the expansion of the core security services in Latin America and
Europe, as well as diversification into other services in the Latin American
market.
Staffing Services. The Staffing Services Group was started in the third quarter
of 1996, and in May 1997, a subsidiary of the Company acquired the business and
certain assets of the King Companies in Jacksonville, Florida. Staffing Services
revenues were $52.4 million in the First Nine Months of 1997. The Company
intends to continue developing the staffing services business through internal
growth and acquisitions.*
*Refer to Forward-Looking Statements on page 12.
Page 19 of 23
<PAGE> 20
CORRECTIONAL BUSINESS
Correctional Business revenues increased $48.2 million, or 48.4%, to $147.8
million in the First Nine Months of 1997 from $99.6 million for the period last
year. The increase is attributable principally to an increase in compensated
resident days to 3,674,503 in the First Nine Months of 1997 from 2,588,836 for
the First Nine Months of 1996. The increase in compensated resident days was due
principally to the opening of three new domestic facilities and one in Puerto
Rico, in the first quarter of 1997. Occupancy was kept at approximately 97%.
In addition, revenues of Australasian Correctional Management Pty. Limited
("ACM") increased $6.0 million, or 26.9%, as compared with the same period in
1996. The increase resulted principally from the opening of the Fulham
Correctional Center in Victoria Australia, in March 1997.
OPERATING INCOME
Consolidated operating income increased $4.6 million, or 41.6%, to $15.6 million
in the First Nine Months of 1997 from $11.0 million in the First Nine Months of
1996. Operating income for the First Nine Months of 1996 included a $750,000
provision for relocation costs.
SERVICES BUSINESS
Services Business operating income of $3.7 million for the First Nine Months of
1997 decreased $1.5 million, or 28.2%, from $5.2 million for the First Nine
Months of 1996.
North American Operations Group. North American Operations Group operating
income increased $684,000, or 4.8%, to $14.9 million in the First Nine Months of
1997 from $14.2 million in the First Nine Months of 1996. There was a decrease
of 8.7% in the profit contribution of Wackenhut Services, Inc., or $406,000,
principally due to reductions in the services provided at certain United States
Department of Energy facilities and the loss of the Strategic Petroleum Reserves
contract with DynnMcDermott.
International Operations Group. International Operations Group operating loss of
$63,000 in the First Nine Months of 1997 decreased $844,000, as compared to a
loss of $907,000 in the First Nine Months of 1996. Otherwise, the operating
income of subsidiaries in Latin America and Europe continued to show significant
improvement as a result of increases in the core security business and
diversification into other services businesses. The operating loss of Wackenhut
of Australia decreased to $1.2 million in the First Nine Months of 1997 compared
to an operating loss of $1.8 million in the First Nine Months of 1996. While the
operating losses of Wackenhut of Australia for the First Nine Months of 1997
were reduced, they do not reflect the full impact of recent government-mandated
wage and fringe benefit increases. Management is considering several alternative
strategies in relation to its Australian operation, some of which could
adversely impact the carrying value of this investment.*
Staffing Services. Staffing Services operating loss was $274,000 in the First
Nine Months of 1997 compared to a loss of $85,000 in the First Nine Months of
1996. The operating loss in the First Nine Months of 1997 includes the initial
costs related to the development of the division early in 1997, whereas the
profit contribution from the acquisition of the King Companies is included
since May of 1997.
* Refer to Forward-Looking Statements on page 12.
Page 20 of 23
<PAGE> 21
Corporate Expenses and Underwriting Losses. The increase in corporate expenses
and underwriting losses resulted principally from increases in personnel-related
costs attributable to the return to fully-staffed levels after the relocation of
the headquarters facility. In addition, there was an increase in information
technology costs during the First Nine Months of 1997 compared to the same
period in 1996, as the Company redesigns its systems hardware and software
architecture.
During the First Nine Months of 1997, the Company deferred additional costs
related to the development of information systems. Approximately $6.2 million of
costs related to systems development has been deferred as of September 28, 1997.
Management is actively reviewing the deferred charges for information systems
investments as it determines its enterprise-wide strategy for delivering
management information systems.*
CORRECTIONAL BUSINESS
Operating income from the Correctional Business increased $5.3 million, or
80.5%, to $11.9 million in the First Nine Months of 1997 from $6.6 million in
the First Nine Months of 1996. The increase was principally attributable to the
increase in domestic facility management services as a result of the opening of
new facilities and the related increase in compensated resident days.
OTHER INCOME/EXPENSE
Other income increased $461,000, or 51.7%, to $1.4 million in the First Nine
Months of 1997 from $892,000 in the First Nine Months of 1996. The increase was
due principally to lower interest expense, which decreased 43.9% in the First
Nine Months of 1997 compared to the same period in 1996 due to a decrease in the
level of corporate bank borrowings.
INCOME BEFORE INCOME TAXES
Income before income taxes increased $5.0 million, or 42.4% , to $16.9 million
in the First Nine Months of 1997 from income before income taxes of $11.9
million in the First Nine Months of 1996.
The combined federal and state effective income tax rate was 37.6% for the First
Nine Months of 1997 and 35.3% for the First Nine Months of 1996, respectively.
The higher effective rate in the First Nine Months of 1997 was due to decreases
in the utilization of capital loss carryforwards and in the tax exempt income of
the reinsurance subsidiary.
MINORITY INTEREST EXPENSE
Minority interest expense (net of income taxes) increased $1.1 million, or
36.1%, to $4.2 million in the First Nine Months of 1997 from $3.1 million in the
First Nine Months of 1996, reflecting principally the increase in earnings
attributable to the public ownership in WHC.
* Refer to Forward-Looking Statements on page 12.
Page 21 of 23
<PAGE> 22
EQUITY INCOME OF FOREIGN AFFILIATES
Equity income of foreign affiliates (net of income taxes) increased $159,000, or
12.5%, to $1.4 million in the First Nine Months of 1997 from $1.3 million in the
First Nine Months of 1996, primarily resulting from an increase in the net
income of the joint venture of WHC in the United Kingdom, due to an increase in
occupancy at that facility.
NET INCOME
Net income increased to $7.8 million in the Third Quarter 1997, or $0.53 per
share, as compared to $5.9 million, or $0.44 per share for the Third Quarter
1996.
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
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 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 Third Quarter 1997.
Page 22 of 23
<PAGE> 23
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 28, 1997 to be signed on its behalf by the
undersigned hereunto duly authorized.
THE WACKENHUT CORPORATION
DATE: November 11, 1997 /s/ PHILIP L. MASLOWE
------------------------------------------
Philip L. Maslowe, Senior Vice President,
Finance and Chief Financial Officer
(Duly Authorized Officer)
DATE: November 11, 1997 /s/ JUAN D. MIYAR
------------------------------------------
Juan D. Miyar, Vice President and
Corporate Controller
(Chief Accounting Officer)
Page 23 of 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 45,106
<SECURITIES> 12,399<F1>
<RECEIVABLES> 149,060
<ALLOWANCES> 2,935
<INVENTORY> 9,846
<CURRENT-ASSETS> 229,192<F2>
<PP&E> 66,558
<DEPRECIATION> 15,450
<TOTAL-ASSETS> 371,336
<CURRENT-LIABILITIES> 102,083
<BONDS> 5,060
0
0
<COMMON> 1,488
<OTHER-SE> 152,483
<TOTAL-LIABILITY-AND-EQUITY> 371,336<F3>
<SALES> 0
<TOTAL-REVENUES> 810,611
<CGS> 0
<TOTAL-COSTS> 795,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,081
<INTEREST-EXPENSE> 1,284
<INCOME-PRETAX> 16,941
<INCOME-TAX> 6,370
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,806<F4>
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.00
<FN>
<F1>MARKETABLE SECURITIES AND CERTIFICATES OF DEPOSIT ARE CLASSIFIED AS NON-CURRENT
ASSETS ON THE BALANCE SHEET.
<F2>INCLUDES $28,115 OF OTHER CURRENT ASSETS.
<F3>INCLUDES $45,737 RESERVE FOR LOSSES OF CASUALTY REINSURANCE SUBSIDIARY $45,132
MINORITY INTEREST, $4,538 DEFERRED TAX LIABILITY NET AND $14,815 OTHER
LIABILITIES.
<F4>INCLUDES MINORITY INTEREST AND EQUITY INCOME OF FOREIGN AFFILIATES - NET OF
INCOME TAXES OF $4,200 AND $(1,435) RESPECTIVELY.
</FN>
</TABLE>
