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Section 1: 10-Q (FORM 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

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 June 30, 2016

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 1-14260

 

 

The GEO Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   65-0043078

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

One Park Place, 621 NW 53rd Street, Suite 700,

Boca Raton, Florida

  33487
(Address of principal executive offices)   (Zip Code)

(561) 893-0101

(Registrant’s telephone number, including area code)

(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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 2, 2016, the registrant had 74,992,196 shares of common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

     3   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

     4   

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

     5   

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

     6   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     7   

ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     38   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     60   

ITEM 4. CONTROLS AND PROCEDURES

     60   

PART II - OTHER INFORMATION

     61   

ITEM 1. LEGAL PROCEEDINGS

     61   

ITEM 1A. RISK FACTORS

     61   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     61   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     61   

ITEM 4. MINE SAFETY DISCLOSURES

     61   

ITEM 5. OTHER INFORMATION

     61   

ITEM 6. EXHIBITS

     62   

SIGNATURES

     63   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2016 AND 2015

(In thousands, except per share data)

 

     Three Months Ended     Six Months Ended  
     June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  

Revenues

   $ 548,350      $ 445,945      $ 1,058,535      $ 873,314   

Operating expenses

     416,837        333,930        805,343        651,839   

Depreciation and amortization

     28,652        26,560        57,103        51,501   

General and administrative expenses

     36,904        32,174        70,965        64,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     65,957        53,281        125,124        105,952   

Interest income

     5,902        2,868        10,459        4,941   

Interest expense

     (31,089     (26,651     (60,455     (51,297

Loss on extinguishment of debt

     (15,866     —          (15,866     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     24,904        29,498        59,262        59,596   

Provision for income taxes

     3,879        2,369        7,030        5,196   

Equity in earnings of affiliates, net of income tax provision of $728, $516, $1,199 and $1,128, respectively

     2,131        1,124        3,250        2,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     23,156        28,253        55,482        57,010   

Net loss attributable to noncontrolling interests

     53        38        77        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 23,209      $ 28,291      $ 55,559      $ 57,068   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     74,044        73,665        73,960        73,607   

Diluted

     74,319        73,903        74,254        73,894   

Net income per common share attributable to The GEO Group, Inc.:

        

Basic:

        

Net income per common share attributable to The GEO Group, Inc. - basic

   $ 0.31      $ 0.38      $ 0.75      $ 0.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net income per common share attributable to The GEO Group, Inc. - diluted

   $ 0.31      $ 0.38      $ 0.75      $ 0.77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.65      $ 0.62      $ 1.30      $ 1.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2016 AND 2015

(In thousands)

 

     Three Months Ended     Six Months Ended  
     June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  

Net income

   $ 23,156      $ 28,253      $ 55,482      $ 57,010   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     (413     (287     1,101        (1,968

Pension liability adjustment, net of tax provision of $20, $21, $41 and $42, respectively

     33        40        65        77   

Unrealized (loss) gain on derivative instrument classified as cash flow hedge, net of tax (provision) benefit of $391, $(869), $817 and $(150), respectively

     (2,198     5,097        (4,642     1,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (2,578     4,850        (3,476     (874
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     20,578        33,103        52,006        56,136   

Comprehensive loss attributable to noncontrolling interests

     52        43        68        81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 20,630      $ 33,146      $ 52,074      $ 56,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2016 AND DECEMBER 31, 2015

(In thousands, except share data)

 

     June 30, 2016     December 31, 2015  
     (Unaudited)        
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 38,865      $ 59,638   

Restricted cash and investments

     72,453        8,489   

Accounts receivable, less allowance for doubtful accounts of $4,092 and $3,088, respectively

     297,253        314,097   

Current deferred income tax assets

     —          27,914   

Prepaid expenses and other current assets

     29,072        28,208   
  

 

 

   

 

 

 

Total current assets

     437,643        438,346   
  

 

 

   

 

 

 

Restricted Cash and Investments

     22,536        20,236   

Property and Equipment, Net

     1,913,670        1,916,386   

Contract Receivable

     302,575        174,141   

Direct Finance Lease Receivable

     —          1,826   

Non-Current Deferred Income Tax Assets

     24,154        7,399   

Goodwill

     615,446        615,438   

Intangible Assets, Net

     214,023        224,148   

Other Non-Current Assets

     70,399        64,307   
  

 

 

   

 

 

 

Total Assets

   $ 3,600,446      $ 3,462,227   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 92,636      $ 77,523   

Accrued payroll and related taxes

     50,533        48,477   

Accrued expenses and other current liabilities

     128,549        135,483   

Current portion of capital lease obligations, long-term debt and non-recourse debt

     17,150        17,141   
  

 

 

   

 

 

 

Total current liabilities

     288,868        278,624   
  

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

     —          11,471   

Other Non-Current Liabilities

     92,291        87,694   

Capital Lease Obligations

     8,075        8,693   

Long-Term Debt

     1,869,281        1,855,810   

Non-Recourse Debt

     374,434        213,098   

Commitments, Contingencies and Other (Note 10)

    

Shareholders’ Equity

    

Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued or outstanding

     —          —     

Common stock, $0.01 par value, 125,000,000 shares authorized, 74,972,436 and 74,642,859 issued and outstanding, respectively

     750        747   

Additional paid-in capital

     885,497        879,599   

Earnings in excess of distributions

     117,108        158,796   

Accumulated other comprehensive loss

     (35,889     (32,404
  

 

 

   

 

 

 

Total shareholders’ equity attributable to The GEO Group, Inc.

     967,466        1,006,738   

Noncontrolling interests

     31        99   
  

 

 

   

 

 

 

Total shareholders’ equity

     967,497        1,006,837   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 3,600,446      $ 3,462,227   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

FOR THE SIX MONTHS ENDED

JUNE 30, 2016 AND 2015

(In thousands)

 

     Six Months Ended  
     June 30, 2016     June 30, 2015  

Cash Flow from Operating Activities:

    

Net income

   $ 55,482      $ 57,010   

Net loss attributable to noncontrolling interests

     77        58   
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     55,559        57,068   

Adjustments to reconcile net income attributable to The GEO Group, Inc. to net cash provided by operating activities:

    

Depreciation and amortization expense

     57,103        51,501   

Stock-based compensation

     6,489        5,578   

Loss on extinguishment of debt

     15,866        —     

Amortization of debt issuance costs, discount and/or premium and other non-cash interest

     5,027        3,216   

Provision for doubtful accounts

     1,170        323   

Equity in earnings of affiliates, net of tax

     (3,250     (2,610

Income tax deficiency (benefit) related to equity compensation

     791        (651

Loss on sale/disposal of property and equipment

     172        (745

Changes in assets and liabilities, net of effects of acquisitions:

    

Changes in accounts receivable, prepaid expenses and other assets

     14,047        13,955   

Changes in contract receivable

     (124,273     (46,600

Changes in accounts payable, accrued expenses and other liabilities

     9,551        (1,237
  

 

 

   

 

 

 

Net cash provided by operating activities

     38,252        79,798   
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Acquisition of LCS, cash consideration

     —          (307,403

Acquisition of SoberLink, cash consideration

     —          (24,402

Insurance proceeds - damaged property

     548        901   

Proceeds from sale of property and equipment

     43        123   

Change in restricted cash and investments

     (65,853     (5,417

Capital expenditures

     (46,014     (71,694
  

 

 

   

 

 

 

Net cash used in investing activities

     (111,276     (407,892
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Proceeds from long-term debt

     641,000        518,000   

Payments on long-term debt

     (627,506     (134,744

Payments on non-recourse debt

     (3,044     (4,513

Proceeds from non-recourse debt

     159,068        49,731   

Taxes paid related to net share settlements of equity awards

     (2,257     (1,784

Proceeds from issuance of common stock in connection with ESPP

     224        218   

Debt issuance costs

     (19,497     (2,438

Income tax (deficiency) benefit related to equity compensation

     (791     651   

Proceeds from the exercise of stock options

     2,057        2,037   

Cash dividends paid

     (97,247     (92,254
  

 

 

   

 

 

 

Net cash provided by financing activities

     52,007        334,904   

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     244        (1,103
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (20,773     5,707   

Cash and Cash Equivalents, beginning of period

     59,638        41,337   
  

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 38,865      $ 47,044   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Capital expenditures in accounts payable and accrued expenses

   $ 2,204      $ 2,536   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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THE GEO GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company” or “GEO”) is a fully-integrated real estate investment trust (“REIT”) specializing in the ownership, leasing and management of correctional, detention and reentry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa and the United Kingdom. The Company owns, leases and operates a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, as well as community based reentry facilities and offers an expanded delivery of offender rehabilitation services under its ‘GEO Continuum of Care’ platform. The Company develops new facilities based on contract awards, using its project development expertise and experience to design, construct and finance what it believes are state-of-the-art facilities that maximize security and efficiency. The Company provides innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. The Company also provides secure transportation services for offender and detainee populations as contracted domestically and in the United Kingdom through its joint venture GEO Amey PECS Ltd. (“GEOAmey”). The Company’s worldwide operations include the management and/or ownership of approximately 87,000 beds at 104 correctional and detention facilities, including idle facilities, projects under development and recently awarded contracts, and also include the provision of community supervision services for more than 127,000 offenders and pre-trial defendants, including approximately 83,000 individuals through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.

The Company’s unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016 for the year ended December 31, 2015. The accompanying December 31, 2015 consolidated balance sheet has been derived from those audited financial statements. Additional information may be obtained by referring to the Company’s Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results for the entire year ending December 31, 2016, or for any other future interim or annual periods.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has recorded goodwill as a result of its business combinations. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible assets and intangible assets acquired net of liabilities assumed, including noncontrolling interests. Changes in the Company’s goodwill balances from December 31, 2015 to June 30, 2016 are as follows (in thousands):

 

     December 31, 2015      Foreign
Currency
Translation
     June 30, 2016  

U.S. Corrections & Detention

   $ 277,774       $  —         $ 277,774   

GEO Care

     337,257         —           337,257   

International Services

     407         8         415   
  

 

 

    

 

 

    

 

 

 

Total Goodwill

   $ 615,438       $ 8       $ 615,446   
  

 

 

    

 

 

    

 

 

 

 

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The Company has also recorded other finite and indefinite-lived intangible assets as a result of its various business combinations. The Company’s intangible assets include customer relationships, facility management contracts, trade names and technology, as follows (in thousands):

 

     June 30, 2016      December 31, 2015  
     Weighted Average
Useful Life
(years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Facility management contracts and customer relationships

     15.6       $ 233,076       $ (79,377   $ 153,699       $ 233,041       $ (71,538   $ 161,503   

Technology

     7.3         33,700         (18,576     15,124         33,700         (16,255     17,445   

Trade name (Indefinite lived)

     Indefinite         45,200         —          45,200         45,200         —          45,200   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 311,976       $ (97,953   $ 214,023       $ 311,941       $ (87,793   $ 224,148   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense was $5.1 million and $10.2 million for the three and six months ended June 30, 2016, respectively. Amortization expense was $4.8 million and $9.1 million for the three and six months ended June 30, 2015, respectively. Amortization expense was primarily related to the U.S. Corrections & Detention and GEO Care segments’ amortization of acquired facility management contracts. As of June 30, 2016, the weighted average period before the next contract renewal or extension for the acquired facility management contracts was approximately 1.6 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the current contractual periods.

Estimated amortization expense related to the Company’s finite-lived intangible assets for the remainder of 2016 through 2020 and thereafter is as follows (in thousands):

 

Fiscal Year

   Total Amortization
Expense
 

Remainder of 2016

   $ 10,160   

2017

     20,323   

2018

     17,463   

2019

     17,135   

2020

     17,135   

Thereafter

     86,607   
  

 

 

 
   $ 168,823   
  

 

 

 

3. FINANCIAL INSTRUMENTS

The following tables provide a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):

 

            Fair Value Measurements at June 30, 2016  
     Carrying Value at
June 30, 2016
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

     

Restricted investment:

     

Rabbi Trust

   $ 14,973       $  —         $ 14,973       $  —    

Fixed income securities

     1,833         —           1,833         —     

Interest rate cap derivatives

     13         —         $ 13         —     

Liabilities:

     

Interest rate swap derivatives

   $ 26,288       $ —         $ 26,288       $ —     

 

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            Fair Value Measurements at December 31, 2015  
     Carrying
Value at
December 31,
2015
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Restricted investments:

           

Rabbi Trust

   $ 13,071       $  —         $ 13,071       $  —     

Fixed income securities

     1,717         —           1,717         —     

Interest rate cap derivatives

     93         —           93         —     

Liabilities:

           

Interest rate swap derivatives

   $ 20,835       $ —         $ 20,835       $ —     

The Company’s Level 2 financial instruments included in the tables above as of June 30, 2016 and December 31, 2015 consist of interest rate swap derivative liabilities and interest rate cap derivative assets held by the Company’s Australian subsidiary, the Company’s rabbi trust established for GEO employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and an investment in Canadian dollar denominated fixed income securities.

The Australian subsidiary’s interest rate swap derivative liabilities and interest rate cap derivative assets are valued using a discounted cash flow model based on projected Australian borrowing rates. The Company’s restricted investment in the rabbi trust is invested in Company owned life insurance policies which are recorded at their cash surrender values. These investments are valued based on the underlying investments held in the policies’ separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities. The Canadian dollar denominated securities, not actively traded, are valued using quoted rates for these and similar securities.

 

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4. FAIR VALUE OF ASSETS AND LIABILITIES

The Company’s consolidated balance sheets reflect certain financial assets and liabilities at carrying value. The carrying value of certain debt instruments, if applicable, is net of unamortized discount. The following tables present the carrying values of those financial instruments and the estimated corresponding fair values at June 30, 2016 and December 31, 2015 (in thousands):

 

            Estimated Fair Value Measurements at June 30, 2016  
     Carrying Value as
of June 30, 2016
     Total Fair Value      Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 38,865       $ 38,865       $ 38,865       $ —         $  —     

Restricted cash and investments

     80,016         80,016         75,160         4,856         —     

Liabilities:

              

Borrowings under senior credit facility

   $ 741,000       $ 741,728       $ —         $ 741,728       $ —     

5.875% Senior Notes due 2024

     250,000         253,438         —           253,438         —     

5.125% Senior Notes

     300,000         292,500         —           292,500         —     

5.875% Senior Notes due 2022

     250,000         253,438         —           253,438         —     

6.00% Senior Notes

     350,000         351,313         —           351,313         —     

Non-recourse debt, Australian subsidiary

     366,164         366,120         —           366,120         —     

Other non-recourse debt, including current portion

     42,668         45,047         —           45,047         —     
            Estimated Fair Value Measurements at December 31, 2015  
     Carrying Value
as of December 31,
2015
     Total Fair Value      Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 59,638       $ 59,638       $ 59,638       $ —         $ —     

Restricted cash and investments

     15,654         15,654         11,536         4,118         —     

Liabilities:

              

Borrowings under senior credit facility

   $ 777,500       $ 777,500       $ —         $ 777,500       $ —     

5.875% Senior Notes due 2024

     250,000         245,783         —           245,783         —     

5.125% Senior Notes

     300,000         285,189         —           285,189         —     

5.875% Senior Notes due 2022

     250,000         248,125         —           248,125         —     

6.625% Senior Notes

     300,000         308,625         —           308,625         —     

Non-recourse debt, Australian subsidiary

     204,539         204,531         —           204,531         —     

Other non-recourse debt, including current portion

     42,592         43,353         —           43,353         —     

The fair values of the Company’s cash and cash equivalents, and restricted cash approximates the carrying values of these assets at June 30, 2016 and December 31, 2015. Restricted cash consists of money market funds, bank deposits, commercial paper and time deposits used for payments on the Company’s non-recourse debt, asset replacement funds contractually required to be maintained at the Company’s Australian subsidiary and contractual commitments related to the design and construction of a new facility in Ravenhall Australia. The fair value of the money market funds and bank deposits is based on quoted market prices (Level 1) and the fair value of commercial paper and time deposits is based on market prices for similar instruments (Level 2).

 

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The fair values of the Company’s 5.875% senior unsecured notes due 2022 (“5.875% Senior Notes due 2022”), 5.875% senior unsecured notes due 2024 (“5.875% Senior Notes due 2024”), 6.625% senior unsecured notes due 2021 (“6.625 Senior Notes”), 6.00% senior unsecured notes due 2026 (“6.00% Senior Notes”), and the 5.125% senior unsecured notes due 2023 (“5.125% Senior Notes”), although not actively traded, are based on published financial data for these instruments. On April 18, 2016, the Company completed an offering of $350 million aggregate principal amount of the 6.00% Senior Notes. The Company used part of the net proceeds to fund the tender offer or the repurchase, redemption or other discharge of any and all of its 6.625% Senior Notes. Refer to Note 9 - Debt. The fair values of the Company’s non-recourse debt related to the Washington Economic Development Finance Authority (“WEDFA”) is based on market prices for similar instruments. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of borrowings under the senior credit facility is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.

5. SHAREHOLDERS’ EQUITY

The following table presents the changes in shareholders’ equity that are attributable to the Company’s shareholders and to noncontrolling interests (in thousands):

 

     Common shares     

Additional

Paid-In

    Earnings in
Excess of
   

Accumulated

Other

Comprehensive

    Noncontrolling    

Total

Shareholders’

 
     Shares     Amount      Capital     Distributions     Loss     Interests     Equity  

Balance, December 31, 2015

     74,643      $ 747       $ 879,599      $ 158,796      $ (32,404   $ 99      $ 1,006,837   

Proceeds from exercise of stock options

     93        —           2,057        —          —          —          2,057   

Tax deficiency related to equity compensation

     —          —           (791     —          —          —          (791

Stock-based compensation expense

     —          —           6,489        —          —          —          6,489   

Restricted stock granted

     349        3         (3     —          —          —          —     

Restricted stock canceled

     (48     —           —          —          —          —          —     

Dividends paid

     —          —           —          (97,247     —          —          (97,247

Shares withheld for net settlements of share-based awards

     (72     —           (2,257     —          —          —          (2,257

Other adjustments to additional paid-in-capital

     —          —           179        —          —          —          179   

Issuance of common stock - ESPP

     7        —           224        —          —          —          224   

Net income (loss)

     —          —           —          55,559        —          (77     55,482   

Other comprehensive (loss) income

     —          —           —          —          (3,485     9        (3,476
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

     74,972      $ 750       $ 885,497      $ 117,108      $ (35,889   $ 31      $ 967,497   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the six months ended June 30, 2016, the Company withheld shares through net share settlements to satisfy minimum statutory tax withholding requirements upon vesting of shares of restricted stock held by employees.

REIT Distributions

As a REIT, GEO is required to distribute annually at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) and began paying regular quarterly REIT dividends in 2013. The amount, timing and frequency of future dividends, however, will be at the sole discretion of GEO’s Board of Directors (the “Board”) and will be declared based upon various factors, many of which are beyond GEO’s control, including, GEO’s financial condition and operating cash flows, the amount required to maintain REIT status, limitations on distributions in GEO’s existing and future debt instruments, limitations on GEO’s ability to fund distributions using cash generated through GEO’s taxable REIT subsidiaries (“TRSs”) and other factors that GEO’s Board may deem relevant.

 

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During the six months ended June 30, 2016 and the year ended December 31, 2015, respectively, GEO declared and paid the following regular cash distributions to its shareholders as follows:

 

Declaration Date

  

Record Date

  

Payment Due

   Distribution Per Share      Aggregate
Payment Amount
(in millions)
 

February 6, 2015

   February 17, 2015    February 27, 2015    $ 0.62       $ 46.0   

April 29, 2015

   May 11, 2015    May 21, 2015    $ 0.62       $ 46.3   

July 31, 2015

   August 14, 2015    August 24, 2015    $ 0.62       $ 46.3   

November 3, 2015

   November 16, 2015    November 25, 2015    $ 0.65       $ 48.5   

February 3, 2016

   February 16, 2016    February 26, 2016    $ 0.65       $ 48.5   

April 20, 2016

   May 2, 2016    May 12, 2016    $ 0.65       $ 48.7   

Prospectus Supplement

On May 8, 2013, the Company filed with the Securities and Exchange Commission a prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $100.0 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and equity distribution agreements entered into with the sales agents, if any, were to be made in negotiated transactions or transactions that were deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933. On July 18, 2014, the Company filed with the Securities and Exchange Commission a post-effective amendment to its shelf registration statement on Form S-3 (pursuant to which the prospectus supplement had been filed) as a result of the merger of the Company into GEO REIT effective June 27, 2014. There were no shares of the Company’s common stock sold under the prospectus supplement during the year ended December 31, 2015 nor the six months ended June 30, 2016.

In September 2014, the Company filed with the Securities and Exchange Commission a new automatic shelf registration statement on Form S-3. On November 10, 2014, in connection with the new shelf registration, the Company filed with the Securities and Exchange Commission a new prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $150.0 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and the equity distribution agreements entered into with the sales agents, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933. There were no shares of the Company’s stock issued under this prospectus supplement during the year ended December 31, 2015 nor the six months ended June 30, 2016.

Comprehensive Income (Loss)

Comprehensive income (loss) represents the change in shareholders’ equity from transactions and other events and circumstances arising from non-shareholder sources. The Company’s total comprehensive income (loss) is comprised of net income attributable to GEO, net income attributable to noncontrolling interests, foreign currency translation adjustments that arise from consolidating foreign operations that do not impact cash flows, net unrealized gains and/or losses on derivative instruments, and pension liability adjustments within shareholders’ equity and comprehensive income (loss).

The components of accumulated other comprehensive income (loss) attributable to GEO within shareholders’ equity are as follows:

 

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     Six Months Ended June 30, 2016  
     (In thousands)  
     Foreign currency
translation adjustments,
net of tax attributable to
The GEO Group, Inc. (1)
    Unrealized (loss)/gain on
derivatives, net of tax
    Pension adjustments, net
of tax
    Total  

Balance, December 31, 2015

   $ (11,747   $ (17,697   $ (2,960   $ (32,404

Current-period other comprehensive (loss) income

     1,092        (4,642     65        (3,485
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

   $ (10,655   $ (22,339   $ (2,895   $ (35,889
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  The foreign currency translation related to noncontrolling interests was not significant at June 30, 2016 or December 31, 2015.

6. EQUITY INCENTIVE PLANS

The Board has adopted The GEO Group, Inc. 2014 Stock Incentive Plan (the “2014 Plan”), which was approved by the Company’s shareholders on May 2, 2014. The 2014 Plan replaced the 2006 Stock Incentive Plan (the “2006 Plan”). As of the date the 2014 Plan was adopted, it provided for a reserve of 3,083,353 shares, which consisted of 2,000,000 new shares of common stock available for issuance and 1,083,353 shares of common stock that were available for issuance under the 2006 Plan prior to the 2014 Plan replacing it. The Company filed a Form S-8 registration statement related to the 2014 Plan on June 4, 2014, which was amended on July 18, 2014.

Stock Options

The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. For options granted during the six months ended June 30, 2016, the fair value was estimated using the following assumptions: (i) volatility of 25%; (ii) expected term of 5.00 years; (iii) risk free interest rate of 1.45%; and (iv) expected dividend yield of 8.85%. A summary of the activity of stock option awards issued and outstanding under Company plans is as follows for the six months ended June 30, 2016:

 

     Shares     Wtd. Avg.
Exercise
Price
     Wtd. Avg.
Remaining
Contractual Term
(years)
     Aggregate
Intrinsic
Value
 
     (in thousands)                   (in thousands)  

Options outstanding at December 31, 2015

     749      $ 29.98         6.85       $ 3,057   

Options granted

     295        29.39         

Options exercised

     (93     21.20         

Options forfeited/canceled/expired

     (46     35.14         
  

 

 

         

Options outstanding at June 30, 2016

     905      $ 30.42         7.45       $ 5,323   
  

 

 

         

Options vested and expected to vest at June 30, 2016

     848      $ 30.23         7.34       $ 5,136   
  

 

 

         

Options exercisable at June 30, 2016

     472      $ 27.45         6.09       $ 3,955   
  

 

 

         

During the six months ended June 30, 2016, the Company granted approximately 295,000 options to certain employees which had a weighted-average grant-date fair value of $2.08 per share. For the six months ended June 30, 2016 and June 30, 2015, the amount of stock-based compensation expense related to stock options was $0.3 million and $0.5 million, respectively. As of June 30, 2016, the Company had $1.1 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.0 years.

 

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Restricted Stock

Compensation expense for nonvested stock awards is recorded over the vesting period based on the fair value at the date of grant. Generally, the restricted stock awards vest in equal increments over either a three or four-year period. The fair value of restricted stock awards, which do not contain a market-based vesting condition, is determined using the closing price of the Company’s common stock on the date of grant. The Company has issued share-based awards with service-based, performance-based and market-based vesting criteria.

A summary of the activity of restricted stock outstanding is as follows for the six months ended June 30, 2016:

 

     Shares      Wtd. Avg.
Grant Date
Fair Value
 
     (in thousands)         

Restricted stock outstanding at December 31, 2015

     863       $ 39.74   

Granted

     349         30.21   

Vested

     (248      36.29   

Forfeited/canceled

     (48      39.14   
  

 

 

    

Restricted stock outstanding at June 30, 2016

     916       $ 36.26   
  

 

 

    

During the six months ended June 30, 2016, the Company granted approximately 349,000 shares of restricted stock to certain employees and executive officers. Of these awards, 115,000 are market and performance-based awards which will be forfeited if the Company does not achieve certain annual metrics during 2016, 2017 and 2018.

The vesting of these performance-based restricted stock grants are subject to the achievement by GEO of two annual performance metrics as follows: (i) up to 50% of the shares of restricted stock (“TSR Target Award”) can vest at the end of a three year performance period if GEO meets certain total shareholder return (“TSR”) performance targets, as compared to the total shareholder return of a peer group of companies, over a three year period from January 1, 2016 to December 31, 2018 and (ii) up to 50% of the shares of restricted stock (“ROCE Target Award”) can vest at the end of a three year period if GEO meets certain return on capital employed (“ROCE”) performance targets over a three year period from January 1, 2016 to December 31, 2018. These market and performance awards can vest at between 0% and 200% of the target awards for both metrics. The number of shares shown for the performance-based awards is based on the target awards for both metrics.

The metric related to ROCE is considered to be a performance condition. For share-based awards that contain a performance condition, the achievement of the targets must be probable before any share-based compensation expense is recorded. The Company reviews the likelihood of which the target in the range will be achieved and if deemed probable, compensation expense is recorded at that time. If subsequent to initial measurement there is a change in the estimate of the probability of meeting the performance condition, the effect of the change in the estimated quantity of awards expected to vest is recognized by cumulatively adjusting compensation expense. If ultimately the performance targets are not met, for any awards where vesting was previously deemed probable, previously recognized compensation expense will be reversed in the period in which vesting is no longer deemed probable. The fair value of these awards was determined based on the closing price of the Company’s common stock on the date of grant.

The metric related to TSR is considered to be a market condition. For share-based awards that contain a market condition, the probability of satisfying the market condition must be considered in the estimate of grant-date fair value and previously recorded compensation expense is not reversed if the market condition is never met. The fair value of these awards was determined based on a Monte Carlo simulation, which calculates a range of possible outcomes and the probabilities that they will occur, using the following key assumptions: (i) volatility of 23.5%; (ii) beta of 1.04; and (iii) risk free rates of 1.08%.

For the six months ended June 30, 2016 and June 30, 2015, the Company recognized $6.1 million and $5.0 million, respectively, of compensation expense related to its restricted stock awards. As of June 30, 2016, the Company had $26.0 million of unrecognized compensation costs related to non-vested restricted stock awards, including non-vested restricted stock awards with performance-based and market-based vesting, that are expected to be recognized over a weighted average period of 2.6 years.

 

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Table of Contents

Employee Stock Purchase Plan

The Company previously adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan”) which was approved by the Company’s shareholders. The purpose of the Plan, which is qualified under Section 423 of the Internal Revenue Service Code of 1986, as amended, is to encourage stock ownership through payroll deductions by the employees of GEO and designated subsidiaries of GEO in order to increase their identification with the Company’s goals and secure a proprietary interest in the Company’s success. These deductions are used to purchase shares of the Company’s common stock at a 5% discount from the then current market price. The Company has made available up to 500,000 shares of its common stock, which were registered with the Securities and Exchange Commission on May 4, 2012, as amended on July 18, 2014, for sale to eligible employees under the Plan.

The Plan is considered to be non-compensatory. As such, there is no compensation expense required to be recognized. Share purchases under the Plan are made on the last day of each month. During the six months ended June 30, 2016, 7,362 shares of the Company’s common stock were issued in connection with the Plan.

 

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7. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing the net income from continuing operations attributable to The GEO Group, Inc. by the weighted average number of outstanding shares of common stock. The calculation of diluted earnings per share is similar to that of basic earnings per share except that the denominator includes dilutive common stock equivalents such as stock options and shares of restricted stock. Basic and diluted earnings per share were calculated for the six months ended June 30, 2016 and June 30, 2015 as follows (in thousands, except per share data):

 

     Three Months Ended      Six Months Ended  
     June 30, 2016      June 30, 2015      June 30, 2016      June 30, 2015  

Net income

   $ 23,156       $ 28,253       $ 55,482       $ 57,010   

Net loss attributable to noncontrolling interests

     53         38         77         58   

Net income attributable to The GEO Group, Inc.

     23,209         28,291         55,559         57,068   

Basic earnings per share attributable to The GEO Group, Inc.:

           

Weighted average shares outstanding

     74,044         73,665         73,960         73,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.31       $ 0.38       $ 0.75       $ 0.78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to The GEO Group, Inc.:

           

Weighted average shares outstanding

     74,044         73,665         73,960         73,607   

Dilutive effect of equity incentive plans

     275         238         294         287   

Weighted average shares assuming dilution

     74,319         73,903         74,254         73,894   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.31       $ 0.38       $ 0.75       $ 0.77   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months

For the three months ended June 30, 2016, 255,463 weighted average shares of common stock underlying options were excluded from the computation of diluted earnings per share (“EPS”) because the effect would be anti-dilutive. There were 178,574 common stock equivalents from restricted shares that were anti-dilutive.

For the three months ended June 30, 2015, 249,506 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. There were 264,500 common stock equivalents from restricted shares that were anti-dilutive.

Six Months

For the six months ended June 30, 2016, 543,098 weighted average shares of common stock underlying options were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive. There were 265,089 common stock equivalents from restricted shares that were anti-dilutive.

For the six months ended June 30, 2015, 166,860 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. There were 176,319 common stock equivalents from restricted shares that were anti-dilutive.

8. DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. The Company measures its derivative financial instruments at fair value.

 

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Australia - Fulham

The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on its variable rate non-recourse debt (related to its Fulham facility) to 9.7%. The Company has determined the swap, which has a notional amount of AUD 50.9 million, or $37.9 million, based on exchange rates in effect as of June 30, 2016, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt, to be an effective cash flow hedge. Accordingly, the Company records the change in the fair value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total unrealized gains recorded in other comprehensive income, net of tax, related to this cash flow hedge were not significant for the six months ended June 30, 2016 and 2015. The total fair value of the swap liability was not significant as of June 30, 2016 and December 31, 2015, respectively, and is recorded as a component of other non-current liabilities within the accompanying consolidated balance sheets. There was no material ineffectiveness of this interest rate swap for the periods presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income (loss).

Australia - Ravenhall

The Company’s Australian subsidiary has entered into interest rate swap agreements to fix the interest rate on its variable rate non-recourse debt related to a prison project in Ravenhall, a locality near Melbourne, Australia to 3.3% during the design and construction phase and 4.2% during the project’s operating phase. The swaps’ notional amounts coincide with construction draw fixed commitments throughout the project. At June 30, 2016, the swaps had a notional amount of approximately AUD 483 million, or $359 million, based on exchange rates at June 30, 2016, related to the outstanding draws for the design and construction phase and approximately AUD 466 million, or $347 million, based on exchange rates at June 30, 2016 related to future construction draws. The Company has determined that the swaps have payment, expiration dates, and provisions that coincide with the terms of the non-recourse debt and are therefore considered to be effective cash flow hedges. Accordingly, the Company records the change in the fair value of the interest rate swaps in accumulated other comprehensive income, net of applicable income taxes. Total unrealized loss recorded in other comprehensive income, net of tax, related to this cash flow hedge was approximately $4.6 million during the six months ended June 30, 2016. The total fair value of the swap liability as of June 30, 2016 was $26.2 million and is recorded as a component of Other Non-Current liabilities within the accompanying consolidated balance sheet. There was no material ineffectiveness for the periods presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with these swaps currently reported in accumulated other comprehensive income (loss).

Additionally, upon completion and commercial acceptance of the prison project, the Department of Justice in the State of Victoria (the “State”) in accordance with the prison contract, will make a lump sum payment of AUD 310 million, or approximately $231 million, based on exchange rates at June 30, 2016, towards a portion of the outstanding principal of the non-recourse debt. The Company’s Australian subsidiary also entered into interest rate cap agreements in September 2014 giving the Company the option to cap the interest rate on its variable non-recourse debt related to the project in the event that the completion of the prison project is delayed which could delay the State’s payment. The Company paid $1.7 million for the interest rate cap agreements. These instruments do not meet the requirements for hedge accounting, and therefore, changes in fair value of the interest rate caps are recorded in earnings. Total losses related to a decrease in the fair value of the interest rate cap assets were not significant during the six months ended June 30, 2016. The total fair value of the interest rate cap assets was not significant as of June 30, 2016 and December 31, 2015, respectively and is recorded as a component of other non-current assets within the accompanying consolidated balance sheets.

 

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9. DEBT

Debt outstanding as of June 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

     June 30, 2016     December 31, 2015  

Senior Credit Facility:

    

Term loan

   $ 291,000      $ 292,500   

Unamortized debt issuance costs on term loan

     (431     (486

Revolver

     450,000        485,000   
  

 

 

   

 

 

 

Total Senior Credit Facility

   $ 740,569      $ 777,014   

6.00% Senior Notes

    

Notes Due in 2026

     350,000        —     

Unamortized debt issuance costs

     (5,932     —     

Total 6.00% Senior Notes due 2026

     344,068        —     

5.875% Senior Notes

    

Notes Due in 2024

     250,000        250,000   

Unamortized debt issuance costs

     (3,960     (4,140
  

 

 

   

 

 

 

Total 5.875% Senior Notes Due in 2024

     246,040        245,860   

5.125% Senior Notes:

    

Notes due in 2023

     300,000        300,000   

Unamortized debt issuance costs

     (5,078     (5,358
  

 

 

   

 

 

 

Total 5.125% Senior Notes Due in 2023

     294,922        294,642   

5.875% Senior Notes

    

Notes Due in 2022

     250,000        250,000   

Unamortized debt issuance costs

     (4,250     (4,564
  

 

 

   

 

 

 

Total 5.875% Senior Notes Due in 2022

     245,750        245,436   

6.625% Senior Notes:

    

Notes due in 2021

     —          300,000   

Unamortized debt issuance costs

     —          (5,198
  

 

 

   

 

 

 

Total 6.625% Senior Notes Due in 2021

     —          294,802   

Non-Recourse Debt :

    

Non-Recourse Debt

     409,304        247,679   

Unamortized debt issuance costs on non-recourse debt

     (21,779     (21,369

Unamortized discount on non-recourse debt

     (472     (548
  

 

 

   

 

 

 

Total Non-Recourse Debt

     387,053        225,762   

Capital Lease Obligations

     9,285        9,856   

Other debt

     1,253        1,370   
  

 

 

   

 

 

 

Total debt

     2,268,940        2,094,742   

Current portion of capital lease obligations, long-term debt and non-recourse debt

     (17,150     (17,141

Capital Lease Obligations, long-term portion

     (8,075     (8,693

Non-Recourse Debt, long-term portion

     (374,434     (213,098
  

 

 

   

 

 

 

Long-Term Debt

   $ 1,869,281      $ 1,855,810   
  

 

 

   

 

 

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, “Interest-Imputation of Interest,” which is intended to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. In accordance with ASU No. 2015-03, the Company adopted the new standard during the six months ended June 30, 2016 and has applied the new guidance on a retrospective basis. Refer to Note 13 - Recent Accounting Pronouncements.

 

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Amended Credit Agreement

On May 19, 2016 (the “Amendment Effective Date”), GEO executed Amendment No. 1, among GEO and GEO Corrections Holdings, Inc. (together with GEO, the “Borrowers”), GEO Australasia Holdings Pty Ltd (“GEO Australasia Holdings”), GEO Australasia Finance Holdings Pty Ltd as trustee for the GEO Australasia Finance Holding Trust (the “Australian Trust”) (the “Australian Trustee”, and together with GEO Australasia Holdings, collectively, the “Australian Borrowers”), the guarantors party thereto, the issuing lenders party thereto, the lenders party thereto and BNP Paribas, as administrative agent (the “Amendment”), to the Second Amended and Restated Credit Agreement, dated as of August 27, 2014, by and among the Borrowers, BNP Paribas, as administrative agent, and the lenders who are, or may from time to time become, a party thereto (the “Existing Credit Agreement”).

The Amendment amends certain terms of the Existing Credit Agreement to effect a revolving credit increase in the amount of $200.0 million, increases to the total leverage thresholds used in the determination of the applicable interest rates, and certain other modifications (the Existing Credit Agreement as so modified, the “Amended Credit Agreement”).

The Amendment provides that each lender (including each Increasing Lender and each Assuming Lender as defined in the Amended Credit Agreement) that executed a lender addendum as a revolving credit lender agrees to provide a revolving credit commitment, inclusive of letters of credit issued thereunder, to the Borrowers at the Amendment Effective Time in an aggregate principal amount equal to $900.0 million (the“Revolving Credit Commitment”) on the terms set forth in the Amended Credit Agreement. In addition, the Amendment increases the principal amount of letters of credit that may be issued under the Revolving Credit Commitment from $175.0 million to $300.0 million.

The Amendment further provides that each Revolving Credit Lender (including each applicable Increasing Lender and each Assuming Lender) that executed a lender addendum as a multicurrency subfacility lender agrees to provide a multicurrency subfacility commitment to the Borrowers and the Australian Borrowers at the Amendment Effective Time in an aggregate principal amount equal to $100.0 million (the “Multicurrency Subfacility Commitment”) on the terms set forth in the Amended Credit Agreement. The aggregate amount of loans and letters of credit that may be issued under the Revolving Credit Commitment and the Multicurrency Subfacility Commitment may not exceed $900.0 million.

Giving effect to the Amendment, the Amended Credit Agreement currently evidences a Credit Facility (the “Credit Facility”) consisting of a $291.0 million Term Loan (the “Term Loan”) bearing interest at LIBOR plus 2.50% (with a LIBOR floor of .75%), and a $900.0 million revolving credit facility (the “Revolver”) initially bearing interest at LIBOR plus 2.25% (with a LIBOR floor of 0.00%) together with AUD225.0 million available solely for the issuance of financial letters of credit and performance letters of credit, in each case denominated in Australian Dollars (the “Australian LC Facility”). The Amended Credit Agreement also includes a $100.0 million Multicurrency Subfacility Commitment that is part of the Revolver and a $300.0 million letter of credit subfacility that is part of the Revolver. The Amended Credit Agreement also has an accordion feature of $450.0 million, subject to lender demand and prevailing market conditions and satisfying the relevant borrowing conditions. The Term Loan Maturity Date under the Amended Credit Agreement did not change from the Existing Credit Agreement and is April 3, 2020. The Amendment amended the termination date for the Revolving Credit Commitment component to May 19, 2021; provided, that if on October 3, 2019 both the maturity dates of all Term Loans and Incremental Term Loans have not been extended to November 19, 2021 or a later date, and the senior secured leverage ratio exceeds 2.50 to 1.00, then the termination date of the Revolving Credit Commitments will be October 3, 2019. The Amendment amended the maturity date for the performance letter of credit component of the Australian LC Facility to October 1, 2016, and the maturity date for the financial letter of credit component of the Australian LC Facility to February 15, 2017.

The Amended Credit Agreement contains certain customary representations and warranties, and certain customary covenants that restrict GEO’s ability to, among other things (i) create, incur or assume any indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make certain restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio

 

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to exceed 6.25 to 1.00, allow the senior secured leverage ratio to exceed 3.50 to 1.00, or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, except as permitted, (x) allow the Australian Trustee to resign or retire as trustee of the Australian Trust or cause or permit any other person to become an additional trustee of the Australian Trust or take, or omit to take any action, which might or would result in the retirement, removal or replacement of the Australian Trustee as trustee of the Australian Trust, except as permitted, (xi) alter the business GEO conducts, and (xii) materially impair GEO’s lenders’ security interests in the collateral for its loans.

Events of default under the Amended Credit Agreement include, but are not limited to, (i) GEO’s or any Australian Borrower’s failure to pay principal or interest when due, (ii) GEO’s material breach of any representation or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default under certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) certain material environmental liability claims which have been asserted against GEO, (viii) unless the Australian Borrower Resignation Date (as defined in the Amended Credit Agreement) has occurred, certain events involving the Australian Trustee or the Australian Trust occur including the Australian Trustee ceases to be the trustee of the Australian Trust or the Australian Trust is terminated, and (ix) a change in control.

All of the obligations under the Amended Credit Agreement are unconditionally guaranteed by certain domestic subsidiaries of GEO and the Amended Credit Agreement and the related guarantees are secured by a perfected first-priority pledge of substantially all of GEO’s present and future tangible and intangible domestic assets and all present and future tangible and intangible domestic assets of each guarantor, including but not limited to a first-priority pledge of all of the outstanding capital stock owned by GEO and each guarantor in their domestic subsidiaries.

The Australian Borrowers are wholly owned foreign subsidiaries of GEO, and became party to the Amended Credit Agreement by executing the Amendment. Pursuant to the Amendment, GEO designated each of the Australian Borrowers as restricted subsidiaries under the Amended Credit Agreement. However, the Australian Borrowers are not obligated to pay or perform any obligations under the Amended Credit Agreement other than their own obligations as Australian Borrowers under the Amended Credit Agreement. The Australian Borrowers do not pledge any of their assets to secure any obligations under the Amended Credit Agreement.

As of June 30, 2016, the Company had $291.0 million in aggregate borrowings outstanding under the Term Loan, $450.0 million in borrowings under the Revolver, and approximately $54.2 million in letters of credit which left $395.8 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Amended Credit Agreement as of June 30, 2016 was 2.9%.

6.00% Senior Notes due 2026

On April 18, 2016, the Company completed an offering of $350 million aggregate principal amount of 6.00% senior notes due 2026. The 6.00% Senior Notes were offered and sold in a registered offering pursuant to an underwriting agreement, dated as of April 11, 2016 (the “Underwriting Agreement”) among the Company, certain of the Company’s domestic subsidiaries, as guarantors and Wells Fargo Securities, LLC, as representative for the underwriters named therein. The 6.00% Senior Notes were issued by the Company pursuant to the Indenture, dated as of September 25, 2014 (the “Base Indenture”), by and between the Company and Wells Fargo Bank, National Association, as trustee, as supplemented by a Second Supplemental Indenture, dated as of April 18, 2016 (the “Second Supplemental Indenture” and together with the Base Indenture, the “Indenture”), by and among the Company, the guarantors and the trustee which governs the terms of the 6.00% Senior Notes. The sale of the 6.00% Senior Notes was registered under GEO’s existing shelf registration statement on Form S-3 filed on September 12, 2014, as amended (File No. 333-198729). The 6.00% Senior Notes were issued at a coupon rate and yield to maturity of 6.00%. Interest on the 6.00% Senior Notes is payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2016. The 6.00% Senior Notes mature on April 15, 2026. The Company used part of the net proceeds to fund the tender offer or the repurchase, redemption or other discharge of any and all of its 6.625% Senior Notes (see discussion below), to pay all related fees, costs and expenses and for general corporate purposes including repaying borrowings under the Company’s Revolver. Loan costs of approximately $6 million were incurred and capitalized in connection with the offering.

 

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6.625% Senior Notes due 2021

On February 10, 2011, the Company completed a private offering of $300.0 million in aggregate principal amount of its 6.625% Senior Notes. Interest on the 6.625% Senior Notes accrued at the stated rate. The Company paid interest semi-annually in arrears on February 15 and August 15 of each year.

On April 11, 2016, the Company announced that it had commenced a cash tender offer for any and all of its $300.0 million aggregate principal amount of its 6.625% Senior Notes due 2021. On April 18, 2016, the Company completed the purchase of $231.0 million in aggregate principal amount of its 6.625% Senior Notes validly tendered in connection with the Company’s tender offer on or prior to the expiration time. On May 20, 2016, the Company completed the redemption of the remaining 6.625% Senior Notes in connection with the terms of the notice of redemption delivered to the note holders on April 20, 2016 pursuant to the terms of the indenture governing the 6.625% Senior Notes. The Company financed the purchase of the 6.625% Senior Notes under the tender offer with part of the net cash proceeds from the 6.00% Senior Notes (see discussion above). As a result of the tender offer and redemption, the Company incurred a $15.9 million loss on extinguishment of debt related to the tender premium and deferred costs associated with the 6.625% Senior Notes.

5.875% Senior Notes due 2024

Interest on the 5.875% Senior Notes due 2024 accrues at the stated rate. The Company pays interest semi-annually in arrears on April 15 and October 15 of each year. On or after October 15, 2019, the Company may, at its option, redeem all or part of the 5.875% Senior Notes due 2024 at the redemption prices set forth in the indenture governing the 5.875% Senior Notes due 2024. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 14-Condensed Consolidating Financial Information.

5.125% Senior Notes due 2023

Interest on the 5.125% Senior Notes accrues at the stated rate. The Company pays interest semi-annually in arrears on April 1 and October 1 of each year. On or after April 1, 2018, the Company may, at its option, redeem all or part of the 5.125% Senior Notes at the redemption prices set forth in the indenture governing the 5.125% Senior Notes. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 14-Condensed Consolidating Financial Information.

5.875% Senior Notes due 2022

Interest on the 5.875% Senior Notes due 2022 accrues at the stated rate. The Company pays interest semi-annually in arrears on January 15 and July 15 of each year. On or after January 15, 2017, the Company may, at its option, redeem all or part of the 5.875% Senior Notes due 2022 at the redemption prices set forth in the indenture governing the 5.875% Senior Notes due 2022. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 14-Condensed Consolidating Financial Information.

Non-Recourse Debt

Northwest Detention Center

The remaining balance of the original debt service requirement under the $54.4 million note payable (“2011 Revenue Bonds”) to WEDFA will mature in October 2021 with fixed coupon rates of 5.25%, is $43.1 million, of which $6.5 million is classified as current in the accompanying consolidated balance sheet as of June 30, 2016. The payment of principal and interest on the 2011 Revenue Bonds issued by WEDFA is non-recourse to GEO.

 

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As of June 30, 2016, included in current restricted cash and investments and non-current restricted cash and investments is $8.4 million of funds held in trust for debt service and other reserves with respect to the above mentioned note payable to WEDFA.

Australia - Fulham

The non-recourse obligation of the Company totaled $6.2 million (AUD 8.3 million) and $9.0 million (AUD 12.4 million), based on the exchange rates in effect at June 30, 2016 and December 31, 2015, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, based on exchange rates as of June 30, 2016, was $3.7 million. This amount is included in non-current restricted cash and investments and the annual maturities of the future debt obligation are included in Non-Recourse Debt in the accompanying consolidated balance sheets.

Australia - Ravenhall

In connection with a new design and build prison project agreement with the State, the Company entered into a syndicated facility agreement (the “Construction Facility”) with National Australia Bank Limited to provide debt financing for construction of the project. The Construction Facility provides for non-recourse funding up to AUD 791.0 million, or approximately $589.0 million, based on exchange rates as of June 30, 2016. Construction draws will be funded throughout the project according to a fixed utilization schedule as defined in the syndicated facility agreement. The term of the Construction Facility is through October 2019 and bears interest at a variable rate quoted by certain Australian banks plus 200 basis points. Upon completion of the prison, the Construction Facility will be converted to a term loan with payments due quarterly beginning in 2018 through 2041. In accordance with the terms of the Construction Facility, upon completion and commercial acceptance of the prison, in accordance with the prison contract, the State will make a lump sum payment of AUD 310 million, or approximately $231 million, based on exchange rates as of June 30, 2016, towards a portion of the outstanding principal. The remaining outstanding principal balance will be repaid over the term of the operating agreement. As of June 30, 2016, approximately $359 million was outstanding under the Construction Facility. The Company also entered into interest rate swap and interest rate cap agreements related to its non-recourse debt in connection with the project. Refer to Note 8 - Derivative Financial Instruments.

Guarantees

Australia

The Company has entered into certain guarantees in connection with the financing and construction performance of a facility in Australia. The obligations amounted to approximately AUD 215.0 million, or $160.1 million, based on exchange rates as of June 30, 2016. These guarantees are secured by outstanding letters of credit under the Company’s Revolver as of June 30, 2016.

At June 30, 2016, the Company also had thirteen other letters of credit outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $19.6 million.

South Africa

In connection with the creation of South African Custodial Services Pty. Limited (“SACS”), the Company entered into certain guarantees related to the financing, construction and operation of the prison. As of June 30, 2016, the Company guaranteed obligations amounting to 15.0 million South African Rand, or $1.0 million based on exchange rates as of June 30, 2016. In the event SACS is unable to maintain the required funding in a rectification account maintained for the payment of certain costs in the event of contract termination, a previously existing guarantee by the Company for the shortfall will need to be re-instated. The remaining guarantee of 15.0 million South African Rand is secured by outstanding letters of credit under the Company’s Revolver as of June 30, 2016.

 

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In addition to the above, the Company has also agreed to provide a loan, if required, of up to 20 million South African Rand, or $1.4 million based on exchange rates as of June 30, 2016, referred to as the Shareholder’s Loan, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the standby facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Shareholder’s Loan expire upon the earlier of full funding or SACS’s release from its obligations under its debt agreements. SACS’ ability to draw on the Shareholder’s Loan is limited to certain circumstances, including termination of the contract.

The Company has also guaranteed certain obligations of SACS to the security trustee for SACS’ lenders. The Company secured its guarantee to the security trustee by ceding its rights to claims against SACS in respect of any loans or other finance agreements, and by pledging the Company’s shares in SACS. The Company’s liability under the guarantee is limited to the cession and pledge of shares. The guarantee expires upon expiration of the cession and pledge agreements.

Canada

In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of a trust. The potential estimated exposure of these obligations is Canadian Dollar 1.5 million, or $1.2 million, based on exchange rates as of June 30, 2016, commencing in 2017. The liability related to this exposure is included in Other Non-Current Liabilities as of June 30, 2016 and December 31, 2015, respectively. To secure this guarantee, the Company purchased Canadian Dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset equal to the current fair value of those securities included in Other Non-Current Assets as of June 30, 2016 and December 31, 2015 on its consolidated balance sheets. The Company does not currently operate or manage this facility.

United Kingdom

In connection with the creation of GEOAmey, the Company and its joint venture partner guarantee the availability of working capital in equal proportion to ensure that GEOAmey can comply with current and future contractual commitments related to the performance of its operations. The Company and the 50% joint venture partner have each extended a £12 million line of credit, or $16.1 million, based on exchange rates as of June 30, 2016, of which £6.0 million, or $8.0 million, based on exchange rates as of June 30, 2016, was outstanding as of June 30, 2016. On June 29, 2016, GEOAmey made a principal payment in the amount of £2.5 million. The Company’s maximum exposure relative to the joint venture is its note receivable of approximately $8 million, which is included in Other Non-Current Assets in the accompanying consolidated balance sheets, and future financial support necessary to guarantee performance under the contract.

Except as discussed above, the Company does not have any off balance sheet arrangements.

10. COMMITMENTS, CONTINGENCIES AND OTHER

Litigation, Claims and Assessments

The nature of the Company’s business exposes it to various types of third-party legal claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. The Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.

Commitments

The Company currently has contractual commitments for a number of projects using Company financing. The Company’s management estimates that the cost of these existing capital projects will be approximately $109 million of which $6 million

 

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was spent through the first half of 2016. The Company estimates the remaining capital requirements related to these capital projects will be $103 million which will be spent through 2017. Included in these commitments is a contractual commitment to provide a capital contribution towards the design and construction of a prison project in Ravenhall, a locality near Melbourne, Australia, which is estimated to be approximately $84 million as of June 30, 2016. This capital contribution is expected to be made in January 2017.

Additionally, in connection with the Ravenhall Prison Project, the Company has a contractual commitment for construction of the facility and has entered into a syndicated facility agreement with National Australia Bank Limited to provide funding for the project up to AUD 791 million, or approximately $589 million, based on exchange rates as of June 30, 2016. Refer to Note 9 - Debt.

Idle Facilities

The Company is currently marketing approximately 3,300 vacant beds at four of its idle facilities to potential customers. The carrying values of these idle facilities, which are included in Property and Equipment, Net in the accompanying consolidated balance sheets, totaled $34.6 million as of June 30, 2016, excluding equipment and other assets that can be easily transferred for use at other facilities.

11. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

Operating and Reporting Segments

The Company conducts its business through four reportable business segments: the U.S. Corrections & Detention segment; the GEO Care segment; the International Services segment; and the Facility Construction & Design segment. The Company’s segment revenues from external customers and a measure of segment profit are as follows (in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30, 2016      June 30, 2015      June 30, 2016      June 30, 2015  

Revenues:

           

U.S. Corrections & Detention

   $ 341,573       $ 304,329       $ 679,943       $ 589,938   

GEO Care

     96,529         82,658         189,943         162,014   

International Services

     38,497         38,543         76,052         79,197   

Facility Construction & Design (1)

     71,751         20,415         112,597         42,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 548,350       $ 445,945       $ 1,058,535       $ 873,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income:

           

U.S. Corrections & Detention

   $ 74,989       $ 62,617       $ 142,427       $ 126,213   

GEO Care

     26,580         19,218         50,551         37,724   

International Services

     1,074         3,270         2,836         5,085   

Facility Construction & Design (1)

     218         350         275         952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income from segments

   $ 102,861       $ 85,455       $ 196,089       $ 169,974   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In September 2014, the Company began the design and construction of a new prison contract located in Ravenhall, a locality near Melbourne, Australia. During the design and construction phase, the Company recognizes revenue as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to estimated total costs for the design and construction of the facility. Costs incurred and estimated earnings in excess of billings is classified as Contract Receivable in the accompanying consolidated balance sheets and is recorded at the net present value based on the timing of expected future settlement. A portion of the Contract Receivable will be paid by the State upon commercial acceptance of the prison and the remainder will be paid quarterly over the life of the contract. Refer to Note 8 - Derivative Financial Instruments and Note 9 - Debt for additional information.

 

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Pre-Tax Income Reconciliation of Segments

The following is a reconciliation of the Company’s total operating income from its reportable segments to the Company’s income before income taxes and equity in earnings of affiliates (in thousands):

 

     Three Months Ended     Six Months Ended  
     June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  

Total operating income from segments

   $ 102,861      $ 85,455      $ 196,089      $ 169,974   

Unallocated amounts:

        

General and Administrative Expenses

     (36,904     (32,174     (70,965     (64,022

Net Interest Expense

     (25,187     (23,783     (49,996     (46,356

Loss on Extinguishment of Debt

     (15,866     —          (15,866     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

   $ 24,904      $ 29,498      $ 59,262      $ 59,596   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in Earnings of Affiliates

Equity in earnings of affiliates includes the Company’s 50% owned joint ventures in SACS, located in South Africa, and GEOAmey, located in the United Kingdom. The Company’s investments in these entities are accounted for under the equity method of accounting. The Company’s investments in these entities are presented as a component of Other Non-Current Assets in the accompanying consolidated balance sheets.

The Company has recorded $0.9 million and $1.8 million in earnings, net of tax, for SACS operations during the three and six months ended June 30, 2016, and $1.1 million and $2.2 million in earnings, net of tax, for SACS operations during the three and six months ended June 30, 2015, respectively, which are included in equity in earnings of affiliates, net of income tax provision in the accompanying consolidated statements of operations. As of June 30, 2016 and December 31, 2015, the Company’s investment in SACS was $10.9 million and $9.0 million, respectively.

The Company has recorded $1.1 million and $1.4 million in earnings, net of tax, for GEO Amey’s operation during the three and six months ended June 30, 2016 and less than $0.1 million and $0.4 million in earnings, net of tax, for GEOAmey’s operations during the three and six months ended June 30, 2015, respectively, net of income tax provision, in the accompanying consolidated statements of operations. As of June 30, 2016 and December 31, 2015, the Company’s investment in GEOAmey was $0.2 million and $(1.2) million, respectively, and represents its share of cumulative reported losses. Losses in excess of the Company’s investment have been recognized as the Company has provided certain loans and guarantees to provide financial support to GEOAmey. Refer to Note 9 - Debt.

12. BENEFIT PLANS

The following table summarizes key information related to the Company’s pension plans and retirement agreements (in thousands):

 

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     Six Months Ended
June 30, 2016
     Year Ended
December 31, 2015
 

Change in Projected Benefit Obligation

     

Projected benefit obligation, beginning of period

   $ 25,935       $ 25,826   

Service cost

     497         1,173   

Interest cost

     578         1,082   

Actuarial gain

     —           (1,818

Benefits paid

     (168      (328
  

 

 

    

 

 

 

Projected benefit obligation, end of period

   $ 26,842       $ 25,935   
  

 

 

    

 

 

 

Change in Plan Assets

     

Plan assets at fair value, beginning of period

   $ —         $ —     

Company contributions

     168         328   

Benefits paid

     (168      (328

Plan assets at fair value, end of period

   $ —         $ —     
  

 

 

    

 

 

 

Unfunded Status of the Plan

   $ (26,842    $ (25,935
  

 

 

    

 

 

 

 

     Three Months Ended      Six Months Ended  
     June 30, 2016      June 30, 2015      June 30, 2016      June 30, 2015  

Components of Net Periodic Benefit Cost

           

Service cost

   $ 249       $ 293       $ 497       $ 586   

Interest cost

     289         271         578         541   

Net loss

     53         107         107         213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 591       $ 671       $ 1,182       $ 1,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

The long-term portion of the pension liability as of June 30, 2016 and December 31, 2015 was $26.5 million and $25.1 million, respectively, and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheets.

13. RECENT ACCOUNTING PRONOUNCMENTS

The Company implemented the following accounting standards during the six months ended June 30, 2016:

In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest,” which is intended to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance in this update does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the debt issuance costs ratable over the term of the line-of-credit agreement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. In accordance with ASU No. 2015-03, the Company has applied the new guidance on a retrospective basis. As a result, the Company has reclassified debt issuance costs of $41.4 million and $41.1 million from Other Non-Current Assets to a direct reduction of Long-Term Debt and Non-Recourse Debt in the accompanying consolidated balance sheets at June 30, 2016 and December 31, 2015, respectively. In accordance with the SEC guidance discussed above, the Company continues to present debt issuance costs related to its Revolver as an asset which is included in Other Non-Current Assets. The implementation of this standard during the six months ended June 30, 2016 did not have a material impact on the Company’s financial position, results of operations or cash flows. Refer to Note 9 - Debt.

 

 

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In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes,” which simplifies the presentation of deferred income taxes by requiring that all deferred income tax assets and liabilities be classified as non-current in a classified statement of financial position. ASU No. 2015-17 is effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods with earlier application permitted. The Company early adopted this standard during the six months ended June 30, 2016 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company’s net current deferred tax asset and net non-current deferred tax liability to the net non-current deferred tax asset in the accompanying consolidated balance sheet as of June 30, 2016. The prior reporting period was not retroactively adjusted. The implementation of this standard during the six months ended June 30, 2016 did not have a material impact on the Company’s financial position, results of operations or cash flows.

The following accounting standards will be adopted in future periods:

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses,” which changes the methodology for recognizing credit losses for entities holding financial assets that are not accounted for at fair value through net income. The amendments in this update affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the current incurred loss methodology with a methodology that reflects expected credit losses and requires consideration in a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in ASU No. 2016-13 are effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The implementation of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2016, the FASB amended ASU No. 2016-10, “Revenue from Contracts with Customers,” which clarifies the implementation guidance on identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This amendment clarifies that before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. Also, an entity is permitted, as an accounting policy to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. The amendment also includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in ASU No. 2016-08 are effective for public companies for annual periods beginning after December 15, 2017. The Company is in the process of evaluating whether this standard would have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718), as a part of its Simplification Initiative. Key areas of the amendments in this standard are (i) all excess tax benefits from stock plan transactions should be recognized in the income statement as opposed to being recognized in additional paid-in capital; (ii) the tax withholding threshold for triggering liability accounting on a net settlement transaction has been increased from the minimum statutory rate to the maximum statutory rate; and (iii) an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The amendments in ASU No. 2016-09 are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted. The implementation of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers—Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the implementation guidance on principal versus agent considerations. This amendment clarifies that when another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (entity is a principal) or to arrange for that good or service to be provided by the other party (entity is an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to the customer. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The amendments in ASU No. 2016-08 are effective for public companies for annual periods beginning after December 15, 2017. The Company is in the process of evaluating whether this standard would have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-07, “Investments-Equity Method and Joint Ventures,” as a part of its Simplification Initiative. The amendments in this standard eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in ASU 2016-07 also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this standard are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The implementation of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-05, “Derivatives and Hedging,” which clarifies that a change in the counter party to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in ASU 2016-05 are effective for public companies for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this standard on either a prospective basis or a modified retrospective basis, with early adoption permitted. The implementation of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2016, FASB issued ASU 2016-02, “Leases,” which requires entities to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. For finance leases and operating leases, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term with each initially measured at the present value of the lease payments. The amendments in ASU 2016-02 are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is in the process of evaluating whether this standard would have a material impact on the Company’s financial position, results of operations or cash flows.

 

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14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of June 30, 2016, the Company’s 6.00% Senior Notes, 5.125% Senior Notes and each of the 5.875% Senior Notes were fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Company and certain of its wholly-owned domestic subsidiaries (the “Subsidiary Guarantors”). The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:

 

  (i) The GEO Group, Inc., as the issuer of the notes;

 

  (ii) The Subsidiary Guarantors, on a combined basis, which are 100% owned by The GEO Group, Inc., and which are guarantors of the notes;

 

  (iii) The Company’s other subsidiaries, on a combined basis, which are not guarantors of the notes (the “Non-Guarantor Subsidiaries”);

 

  (iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among the Company, the Subsidiary Guarantors and the Subsidiary Non-Guarantors and (b) eliminate the investments in the Company’s subsidiaries; and

 

  (v) The Company and its subsidiaries on a consolidated basis.

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Three Months Ended June 30, 2016  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 174,414      $ 404,798      $ 112,811      $ (143,673   $ 548,350   

Operating expenses

     135,603        323,791        101,116        (143,673     416,837   

Depreciation and amortization

     6,265        21,424        963        —          28,652   

General and administrative expenses

     14,846        15,250        6,808        —          36,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     17,700        44,333        3,924        —          65,957   

Interest income

     5,440        409        6,013        (5,960     5,902   

Interest expense

     (16,369     (13,932     (6,748     5,960        (31,089

Loss on extinguishment of debt

     (15,866     —          —          —          (15,866
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     (9,095     30,810        3,189        —          24,904   

Income tax provision

     (101     3,099        881        —          3,879   

Equity in earnings of affiliates, net of income tax provision

     —          —          2,131        —          2,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in income of consolidated subsidiaries

     (8,994     27,711        4,439        —          23,156   

Income from consolidated subsidiaries, net of income tax provision

     32,150        —          —          (32,150     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     23,156        27,711        4,439        (32,150     23,156   

Net loss attributable to noncontrolling interests

     —          —          53        —          53   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 23,156      $ 27,711      $ 4,492      $ (32,150   $ 23,209   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 23,156      $ 27,711      $ 4,439      $ (32,150   $ 23,156   

Other comprehensive income (loss), net of tax

     —          33        (2,611     —          (2,578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 23,156      $ 27,744      $ 1,828      $ (32,150   $ 20,578   

Comprehensive loss attributable to noncontrolling interests

     —          —          52        —          52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 23,156      $ 27,744      $ 1,880      $ (32,150   $ 20,630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Three Months Ended June 30, 2015  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 161,365      $ 367,482      $ 61,521      $ (144,423   $ 445,945   

Operating expenses

     141,323        286,414        50,616        (144,423     333,930   

Depreciation and amortization

     6,381        19,182        997        —          26,560   

General and administrative expenses

     11,049        16,928        4,197        —          32,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,612        44,958        5,711        —          53,281   

Interest income

     5,735        847        3,183        (6,897     2,868   

Interest expense

     (15,537     (14,743     (3,268     6,897        (26,651
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     (7,190     31,062        5,626        —          29,498   

Income tax provision

     (61     1,588        842        —          2,369   

Equity in earnings of affiliates, net of income tax provision

     —          —          1,124        —          1,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in income of consolidated subsidiaries

     (7,129     29,474        5,908        —          28,253   

Income from consolidated subsidiaries, net of income tax provision

     35,382        —          —          (35,382     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     28,253        29,474        5,908        (35,382     28,253   

Net loss attributable to noncontrolling interests

     —          —          38        —          38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 28,253      $ 29,474      $ 5,946      $ (35,382   $ 28,291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 28,253      $ 29,474      $ 5,908      $ (35,382   $ 28,253   

Other comprehensive income, net of tax

     —          40        4,810        —          4,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 28,253      $ 29,514      $ 10,718      $ (35,382   $ 33,103   

Comprehensive loss attributable to noncontrolling interests

     —          —          43        —          43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 28,253      $ 29,514      $ 10,761      $ (35,382   $ 33,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30, 2016  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 342,051      $ 805,140      $ 193,776      $ (282,432   $ 1,058,535   

Operating expenses

     273,513        643,695        170,567        (282,432     805,343   

Depreciation and amortization

     12,527        42,657        1,919        —          57,103   

General and administrative expenses

     22,821        35,216        12,928        —          70,965   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     33,190        83,572        8,362        —          125,124   

Interest income

     10,881        1,018        10,670        (12,110     10,459   

Interest expense

     (32,726     (27,876     (11,963     12,110        (60,455

Loss on extinguishment of debt

     (15,866     —          —          —          (15,866
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings of affiliates

     (4,521     56,714        7,069        —          59,262   

Income tax (benefit) provision

     (91     5,290        1,831        —          7,030   

Equity in earnings of affiliates, net of income tax provision

     —          —          3,250        —          3,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of consolidated subsidiaries

     (4,430     51,424        8,488        —          55,482   

Income from consolidated subsidiaries, net of income tax provision

     59,912            (59,912     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     55,482        51,424        8,488        (59,912     55,482   

Net loss attributable to noncontrolling interests

     —          —          77        —          77   

Net income attributable to The GEO Group, Inc.

   $ 55,482      $ 51,424      $ 8,565      $ (59,912   $ 55,559   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 55,482      $ 51,424      $ 8,488      $ (59,912   $ 55,482   

Other comprehensive income (loss), net of tax

     —          65        (3,541     —          (3,476
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 55,482      $ 51,489      $ 4,947      $ (59,912   $ 52,006   

Comprehensive loss attributable to noncontrolling interests

     —          —          68        —          68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 55,482      $ 51,489      $ 5,015      $ (59,912   $ 52,074   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30, 2015  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 305,748      $ 707,369      $ 126,488      $ (266,291   $ 873,314   

Operating expenses

     257,548        555,195        105,387        (266,291     651,839   

Depreciation and amortization

     12,585        36,879        2,037        —          51,501   

General and administrative expenses

     21,372        33,808        8,842        —          64,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     14,243        81,487        10,222        —          105,952   

Interest income

     11,914        2,078        5,319        (14,370     4,941   

Interest expense

     (29,847     (29,379     (6,441     14,370        (51,297
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings of affiliates

     (3,690     54,186        9,100        —          59,596   

Income tax (benefit) provision

     (61     3,328        1,929        —          5,196   

Equity in earnings of affiliates, net of income tax provision

     —          —          2,610        —          2,610   

Income (loss) from continuing operations before equity in income of consolidated subsidiaries

     (3,629     50,858        9,781        —          57,010   

Income from consolidated subsidiaries, net of income tax provision

     60,639        —          —          (60,639     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 57,010      $ 50,858      $ 9,781      $ (60,639   $ 57,010   

Net loss attributable to noncontrolling interests

     —          —          58        —          58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 57,010      $ 50,858      $ 9,839      $ (60,639   $ 57,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 57,010      $ 50,858      $ 9,781      $ (60,639   $ 57,010   

Other comprehensive income (loss), net of tax

     —          77        (951     —          (874
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 57,010      $ 50,935      $ 8,830      $ (60,639   $ 56,136   

Comprehensive loss attributable to noncontrolling interests

     —          —          81        —          81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 57,010      $ 50,935      $ 8,911      $ (60,639   $ 56,217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of June 30, 2016  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS   

Cash and cash equivalents

   $ 14,727       $ —         $ 24,138       $ —        $ 38,865   

Restricted cash and investments

     —           —           72,453         —          72,453   

Accounts receivable, less allowance for doubtful accounts

     110,299         172,229         14,725         —          297,253   

Current deferred income tax assets

     —           —           —           —          —     

Prepaid expenses and other current assets

     3,982         18,983         7,419         (1,312     29,072   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     129,008         191,212         118,735         (1,312     437,643   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     150         17,951         4,435         —          22,536   

Property and Equipment, Net

     738,819         1,093,039         81,812         —          1,913,670   

Contract Receivable

     —           —           302,575         —          302,575   

Intercompany Receivable

     1,000,004         101,871         3,087         (1,104,962     —     

Non-Current Deferred Income Tax Assets

     713         11,898         11,543         —          24,154   

Goodwill

     79         614,941         426         —          615,446   

Intangible Assets, Net

     —           213,281         742         —          214,023   

Investment in Subsidiaries

     1,098,855         453,636         2,190         (1,554,681     —     

Other Non-Current Assets

     16,298         110,789         23,317         (80,005     70,399   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,983,926       $ 2,808,618       $ 548,862       $ (2,740,960   $ 3,600,446   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Accounts payable

   $ 8,368       $ 53,802       $ 30,466       $ —        $ 92,636   

Accrued payroll and related taxes

     —           36,849         13,684         —          50,533   

Accrued expenses and other current liabilities

     39,067         77,585         13,209         (1,312     128,549   

Current portion of capital lease obligations, long-term debt and non-recourse debt

     3,000         1,532         12,618         —          17,150   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     50,435         169,768         69,977         (1,312     288,868   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

     —           —           —           —          —     

Intercompany Payable

     92,498         1,000,527         11,937         (1,104,962     —     

Other Non-Current Liabilities

     4,246         142,534         25,516         (80,005     92,291   

Capital Lease Obligations

     —           8,075         —           —          8,075   

Long-Term Debt

     1,869,281         —           —           —          1,869,281   

Non-Recourse Debt

     —           —           374,434         —          374,434   

Commitments & Contingencies and Other

             

Shareholders’ Equity:

             

The GEO Group, Inc. Shareholders’ Equity

     967,466         1,487,714         66,967         (1,554,681     967,466   

Noncontrolling Interests

     —           —           31         —          31   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Shareholders’ Equity

     967,466         1,487,714         66,998         (1,554,681     967,497   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,983,926       $ 2,808,618       $ 548,862       $ (2,740,960   $ 3,600,446   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 

     As of December 31, 2015  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS   

Cash and cash equivalents

   $ 37,077       $ —        $ 22,561       $ —        $ 59,638   

Restricted cash and investments

     —           —          8,489         —          8,489   

Accounts receivable, less allowance for doubtful accounts

     131,747         162,538        19,812         —          314,097   

Current deferred income tax assets

     —           23,120        4,794         —          27,914   

Prepaid expenses and other current assets

     1,190         17,917        10,310         (1,209     28,208   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     170,014         203,575        65,966         (1,209     438,346   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     138         16,386        3,712         —          20,236   

Property and Equipment, Net

     746,478         1,088,417        81,491         —          1,916,386   

Direct Finance Lease Receivable

     —           —          1,826         —          1,826   

Contract Receivable

     —           —          174,141           174,141   

Intercompany Receivable

     971,291         86,519        —           (1,057,810     —     

Non-Current Deferred Income Tax Assets

     710         (102     6,791         —          7,399   

Goodwill

     79         614,941        418         —          615,438   

Intangible Assets, Net

     —           223,426        722         —          224,148   

Investment in Subsidiaries

     1,106,546         453,636        —           (1,560,182     —     

Other Non-Current Assets

     2,387         116,561        25,486         (80,127     64,307   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,997,643       $ 2,803,359      $ 360,553       $ (2,699,328   $ 3,462,227   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Accounts payable

   $ 9,731       $ 54,675      $ 13,117       $ —        $ 77,523   

Accrued payroll and related taxes

     —           35,516        12,961         —          48,477   

Accrued expenses and other current liabilities

     43,043         78,510        15,139         (1,209     135,483   

Current portion of capital lease obligations, long-term debt and non-recourse debt

     3,000         1,477        12,664         —          17,141   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     55,774         170,178        53,881         (1,209     278,624   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

        11,120        351         —          11,471   

Intercompany Payable

     76,427         967,048        14,335         (1,057,810     —     

Other Non-Current Liabilities

     2,894         143,887        21,040         (80,127     87,694   

Capital Lease Obligations

     —           8,693        —           —          8,693   

Long-Term Debt

     1,855,810         —          —           —          1,855,810   

Non-Recourse Debt

     —           —          213,098         —          213,098   

Commitments & Contingencies and Other

            

Shareholders’ Equity:

            

The GEO Group, Inc. Shareholders’ Equity

     1,006,738         1,502,433        57,749         (1,560,182     1,006,738   

Noncontrolling Interests

     —           —          99         —          99   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Shareholders’ Equity

     1,006,738         1,502,433        57,848         (1,560,182     1,006,837   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,997,643       $ 2,803,359      $ 360,553       $ (2,699,328   $ 3,462,227   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30, 2016  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        

Net cash (used in) provided by operating activities

   $ 84,523      $ 40,602      $ (86,873   $ 38,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Proceeds from sale of property and equipment

     —          41        2        43   

Insurance proceeds - damaged property

     —          —          548        548   

Change in restricted cash and investments

     (12     (1,565     (64,276     (65,853

Capital expenditures

     (5,137     (39,078     (1,799     (46,014
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (5,149     (40,602     (65,525     (111,276
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Proceeds from long-term debt

     641,000        —          —          641,000   

Payments on long-term debt

     (627,506     —          —          (627,506

Payments on non-recourse debt

     —          —          (3,044     (3,044

Proceeds from non-recourse debt

     —          —          159,068        159,068   

Taxes paid related to net share settlements of equity awards

     (2,257     —          —          (2,257

Proceeds from issuance of common stock in connection with ESPP

     —            224        224   

Debt issuance costs

     (16,980     —          (2,517     (19,497

Tax deficiency related to equity compensation

     (791     —          —          (791

Proceeds from stock options exercised

     2,057        —          —          2,057   

Cash dividends paid

     (97,247       —          (97,247
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (101,724     —          153,731        52,007   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          244        244   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (22,350     —          1,577        (20,773

Cash and Cash Equivalents, beginning of period

     37,077        —          22,561        59,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 14,727      $ —        $ 24,138      $ 38,865   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30, 2015  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        

Net cash provided by (used in) operating activities

   $ 39,103      $ 62,486      $ (21,791   $ 79,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Acquisition of SoberLink, cash consideration

       (24,402       (24,402

Acquisition of LCS, net of cash acquired

     (307,403       —          (307,403

Proceeds from sale of property and equipment

     —          123        —          123   

Insurance proceeds - damaged property

     —          901        —          901   

Acquisition of LCS, net of cash acquired

     (307,403       —          (307,403

Change in restricted cash and investments

     (97     2,396        (7,716     (5,417

Capital expenditures

     (36,367     (34,273     (1,054     (71,694
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (343,867     (55,255     (8,770     (407,892
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Taxes paid related to net share settlements of equity awards

     (1,784     —          —          (1,784

Proceeds from long-term debt

     518,000        —          —          518,000   

Payments on long-term debt

     (134,744       —          (134,744

Payments on non-recourse debt

     —          —          (4,513     (4,513

Proceeds from non-recourse debt

     —          —          49,731        49,731   

Proceeds from issuance of common stock in connection with ESPP

     218        —          —          218   

Debt issuance costs

       —          (2,438     (2,438

Tax benefit related to equity compensation

     651        —          —          651   

Proceeds from stock options exercised

     2,037        —          —          2,037   

Cash dividends paid

     (92,254     —          —          (92,254
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     292,124        —          42,780        334,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          (1,103     (1,103
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     (12,640     7,231        11,116        5,707   

Cash and Cash Equivalents, beginning of period

     18,492        782        22,063        41,337   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 5,852      $ 8,013      $ 33,179      $ 47,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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15. SUBSEQUENT EVENTS

Dividend

On July 20, 2016, the Board of Directors declared a quarterly cash dividend of $0.65 per share of common stock, which is to be paid on August 12, 2016 to shareholders of record as of the close of business on August 1, 2016.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Information

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking” statements are any statements that are not based on historical information. Statements other than statements of historical facts included in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking” statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:

 

    our ability to timely build and/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;

 

    our ability to remain qualified for taxation as a real estate investment trust, or REIT;

 

    our ability to fulfill our debt service obligations and its impact on our liquidity;

 

    our ability to activate the inactive beds at our idle facilities;

 

    our ability to maintain or increase occupancy rates at our facilities;

 

    an increase in unreimbursed labor rates;

 

    our ability to expand, diversify and grow our correctional, detention, reentry, community-based services, youth services, monitoring services, evidence-based supervision and treatment programs and secure transportation services businesses;

 

    our ability to win management contracts for which we have submitted proposals, retain existing management contracts and meet any performance standards required by such management contracts;

 

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    our ability to control operating costs associated with contract start-ups;

 

    our ability to raise new project development capital given the often short-term nature of the customers’ commitment to use newly developed facilities;

 

    our ability to estimate the government’s level of dependency on public-private partnerships for correctional services;

 

    our ability to accurately project the size and growth of public-private partnerships for correctional services in the U.S. and internationally and our ability to capitalize on opportunities for public-private partnerships;

 

    our ability to successfully respond to delays encountered by states pursuing public-private partnerships for correctional services and cost savings initiatives implemented by a number of states;

 

    our ability to develop long-term earnings visibility;

 

    our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisitions on satisfactory terms, and estimate the synergies to be achieved as a result of such acquisitions;

 

    our exposure to the impairment of goodwill and other intangible assets as a result of our acquisitions;

 

    our ability to successfully conduct our operations in the United Kingdom, South Africa and Australia through joint ventures or a consortium;

 

    our ability to obtain future financing on satisfactory terms or at all, including our ability to secure the funding we need to complete ongoing capital projects;

 

    our exposure to political and economic instability and other risks impacting our international operations;

 

    the instability of foreign exchange rates, exposing us to currency risks in Australia, Canada, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;

 

    our exposure to risks impacting our information systems, including those that may cause an interruption, delay or failure in the provision of our services;

 

    our exposure to rising general insurance costs;

 

    our exposure to state, federal and foreign income tax law changes, including changes to the REIT provisions and our exposure as a result of federal and international examinations of our tax returns or tax positions;

 

    our exposure to claims for which we are uninsured;

 

    our exposure to rising employee and inmate medical costs;

 

    our ability to manage costs and expenses relating to ongoing litigation arising from our operations;

 

    our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers compensation and automobile liability claims;

 

    the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us and continue to operate under our existing agreements and/or renew our existing agreements;

 

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    our ability to pay quarterly dividends consistent with our requirements as a REIT, and expectations as to timing and amounts;

 

    our ability to comply with government regulations and applicable contractual requirements;

 

    our ability to acquire, protect or maintain our intellectual property;

 

    the risk that future sales of shares of our common stock could adversely affect the market price of our common stock and may be dilutive; and

 

    other factors contained in our filings with the Securities and Exchange Commission, or the SEC, including, but not limited to, those detailed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2015 and our Current Reports on Form 8-K filed with the SEC.

We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q.

Introduction

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under “Forward-Looking Information”, those described below under “Part II - Item 1A. Risk Factors” and under “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. The discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

We are a real estate investment trust (“REIT”) specializing in the ownership, leasing and management of correctional, detention and reentry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, and the United Kingdom. We own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, and community based reentry facilities and offer an expanded delivery of offender rehabilitation services under our ‘GEO Continuum of Care’ platform. We offer counseling, education and/or treatment to inmates with alcohol and drug abuse problems at most of the domestic facilities we manage. We are also a provider of innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants.

Our worldwide operations include the management and/or ownership of approximately 87,000 beds at 104 correctional, detention and reentry facilities, including idle facilities, projects under development and recently awarded contracts, and also include the provision of community supervision services for more than 139,000 offenders and pre-trial defendants, including approximately 83,000 individuals through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.

We provide a diversified scope of services on behalf of our government clients:

 

    our correctional and detention management services involve the provision of security, administrative, rehabilitation, education and food services, primarily at adult male correctional and detention facilities;

 

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    our community-based services involve supervision of adult parolees and probationers and the provision of temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community;

 

    our youth services include residential, detention and shelter care and community-based services along with rehabilitative and educational programs;

 

    our monitoring services provide our governmental clients with innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants; including services provided under the Intensive Supervision Appearance Program, which we refer to as ISAP, to the U.S. Immigration and Customs Enforcement, which we refer to as ICE, for the provision of services designed to improve the participation of non-detained aliens in the immigration court system;

 

    we develop new facilities using our project development experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency;

 

    we provide secure transportation services for offender and detainee populations as contracted domestically and internationally - our joint venture GEOAmey is responsible for providing prisoner escort and custody services in the United Kingdom, including all of Wales and England except London and the East of England; and

 

    our services are provided at facilities which we either own, lease or are owned by our customers.

For the six months ended June 30, 2016 and June 30, 2015, we had consolidated revenues of $1,058.5 million and $873.3 million, respectively, and we maintained an average company wide facility occupancy rate of 92.4% including 83,943 active beds and excluding 3,426 idle beds (including those being marketed to potential customers) for the six months ended June 30, 2016, and 93.1% including 82,646 active beds and excluding 3,740 idle beds (including those being marketed to potential customers) for the six months ended June 30, 2015.

As a REIT, we are required to distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) and we began paying regular quarterly REIT dividends in 2013. The amount, timing and frequency of future dividends, however, will be at the sole discretion of our Board of Directors (the “Board”) and will be declared based upon various factors, many of which are beyond our control, including, our financial condition and operating cash flows, the amount required to maintain REIT status, limitations on distributions in our existing and future debt instruments, limitations on our ability to fund distributions using cash generated through our taxable REIT subsidiaries (“TRSs”) and other factors that our Board may deem relevant.

During the six months ended June 30, 2016 and the year ended December 31, 2015, respectively, we declared and paid the following regular cash distributions to our shareholders as follows:

 

Declaration Date

  

Record Date

  

Payment Due

   Distribution Per Share      Aggregate
Payment Amount
(in millions)
 

February 6, 2015

   February 17, 2015    February 27, 2015    $ 0.62       $ 46.0   

April 29, 2015

   May 11, 2015    May 21, 2015    $ 0.62       $ 46.3   

July 31, 2015

   August 14, 2015    August 24, 2015    $ 0.62       $ 46.3   

November 3, 2015

   November 16, 2015    November 25, 2015    $ 0.65       $ 48.5   

February 3, 2016

   February 16, 2016    February 26, 2016    $ 0.65       $ 48.5   

April 20, 2016

   May 2, 2016    May 12, 2016    $ 0.65       $ 48.7   

On July 20, 2016, our Board of Directors declared a quarterly cash dividend of $0.65 per share of common stock, which is to be paid on August 12, 2016 to shareholders of record as of the close of business on August 1, 2016.

 

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Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 26, 2016, for further discussion and analysis of information pertaining to our financial condition and results of operations as of and for the fiscal year ended December 31, 2015.

Fiscal 2016 Developments

Credit Agreement

On May 19, 2016 (the “Amendment Effective Date”), we executed Amendment No. 1, among GEO and GEO Corrections Holdings, Inc. (together with GEO, the “Borrowers”), GEO Australasia Holdings Pty Ltd (“GEO Australasia Holdings”), GEO Australasia Finance Holdings Pty Ltd as trustee for the GEO Australasia Finance Holding Trust (the “Australian Trust”) (the “Australian Trustee”, and together with GEO Australasia Holdings, collectively, the “Australian Borrowers”), the guarantors party thereto, the issuing lenders party thereto, the lenders party thereto and BNP Paribas, as administrative agent (the “Amendment”), to the Second Amended and Restated Credit Agreement, dated as of August 27, 2014, by and among the Borrowers, BNP Paribas, as administrative agent, and the lenders who are, or may from time to time become, a party thereto (the “Existing Credit Agreement”).

The Amendment amends certain terms of the Existing Credit Agreement to effect a revolving credit increase in the amount of $200.0 million, increases to the total leverage thresholds used in the determination of the applicable interest rates, and certain other modifications (the Existing Credit Agreement as so modified, the “Amended Credit Agreement”).

The Amendment provides that each lender (including each Increasing Lender and each Assuming Lender as defined in the Amended Credit Agreement) that executed a lender addendum as a revolving credit lender agrees to provide a revolving credit commitment, inclusive of letters of credit issued thereunder, to the Borrowers at the Amendment Effective Time in an aggregate principal amount equal to $900.0 million (the“Revolving Credit Commitment”) on the terms set forth in the Amended Credit Agreement. In addition, the Amendment increases the principal amount of letters of credit that may be issued under the Revolving Credit Commitment from $175.0 million to $300.0 million. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

6.00% Senior Notes

On April 18, 2016, we completed an offering of $350 million aggregate principal amount of 6.00% senior notes due 2026 (the “6.00% Senior Notes”). The 6.00% Senior Notes were offered and sold in a registered offering pursuant to an underwriting agreement, dated as of April 11, 2016 (the “Underwriting Agreement”) among GEO, certain of the Company’s domestic subsidiaries, as guarantors and Wells Fargo Securities, LLC, as representative for the underwriters named therein. The 6.00% Senior Notes were issued by us pursuant to the Indenture, dated as of September 25, 2014 (the “Base Indenture”), by and between GEO and Wells Fargo Bank, National Association, as trustee, as supplemented by a Second Supplemental Indenture, dated as of April 18, 2016 (the “Second Supplemental Indenture” and together with the Base Indenture, the “Indenture”), by and among GEO, the guarantors and the trustee which governs the terms of the 6.00% Senior Notes. The sale of the 6.00% Senior Notes was registered under our existing shelf registration statement on Form S-3 filed on September 12, 2014, as amended (File No. 333-198729). The 6.00% Senior Notes were issued at a coupon rate and yield to maturity of 6.00%. Interest on the 6.00% Senior Notes is payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2016. The 6.00% Senior Notes mature on April 15, 2026. We used part of the net proceeds to fund the tender offer or the repurchase, redemption or other discharge of any and all of our 6.625% Senior Notes (see discussion below), to pay all related fees, costs and expenses and for general corporate purposes including repaying borrowings under our Revolver. Loan costs of $6 million were incurred and capitalized in connection with the offering. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

 

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Tender Offer

On April 11, 2016, we announced that we had commenced a cash tender offer for any and all of our $300.0 million aggregate principal amount of our 6.625% senior unsecured notes due 2021 (“6.625% Senior Notes”). On April 18, 2016, we completed the purchase of $231.0 million in aggregate principal amount of our 6.625% Senior Notes validly tendered in connection with our tender offer on or prior to the expiration time. On May 20, 2016, we completed the redemption of the remaining 6.625% Senior Notes in connection with the terms of the notice of redemption delivered to the note holders on April 20, 2016 pursuant to the terms of the indenture governing the 6.625% Senior Notes. We financed the purchase of the 6.625% Senior Notes under the tender offer with part of the net cash proceeds from the 6.00% Senior Notes (see discussion above). As a result of the tender offer and redemption, we incurred a $15.9 million loss on extinguishment of debt related to the tender premium and deferred costs associated with the 6.625% Senior Notes. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

Idle Facilities

We are currently marketing approximately 3,300 vacant beds at four of our idle facilities to potential customers. The carrying values of these idle facilities totaled approximately $34.6 million as of June 30, 2016, excluding equipment and other assets that can be easily transferred for use at other facilities.

Critical Accounting Policies

The accompanying unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. During the six months ended June 30, 2016, we did not experience any significant changes in estimates or judgments inherent in the preparation of our consolidated financial statements. A summary of our significant accounting policies is contained in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

 

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Comparison of Second Quarter 2016 and Second Quarter 2015

Revenues

 

     2016      % of Revenue     2015      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 341,573         62.3   $ 304,329         68.3   $ 37,244        12.2

GEO Care

     96,529         17.6     82,658         18.5     13,871        16.8

International Services

     38,497         7.0     38,543         8.6     (46     (0.1 )% 

Facility Construction & Design

     71,751         13.1     20,415         4.6     51,336        251.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 548,350         100.0   $ 445,945         100.0   $ 102,405        23.0
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

Revenues increased in Second Quarter 2016 compared to Second Quarter 2015 primarily due to aggregate increases of $25.2 million resulting from: (i) the activation and intake of detainees at our company-owned Great Plains correctional facility in June 2015; (ii) the activation and intake of inmates at our company-owned North Lake correctional facility in May 2015; (iii) the activation and intake of inmates at our company-owned Mesa Verde facility; (iv) the acquisition of the LCS Facilities in February 2015; and (v) our assumption of the management of the 3,400-bed Arizona State Prison facility in Kingman, Arizona in December 2015. We also experienced aggregate increases in revenues of $20.3 million at certain of our facilities primarily due to net increases in population, transportation services and/or rates. These increases were partially offset by a decrease of $8.3 million primarily due to contract terminations.

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 5.5 million in Second Quarter 2016 and 5.1 million in Second Quarter 2015. We experienced an aggregate net increase of approximately 379,000 mandays as a result of our new contracts and business acquisition discussed above. These increases were partially offset by decreases resulting from lower populations at certain facilities. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Corrections & Detention facilities was 93.3% and 93.2% of capacity in the Second Quarter 2016 and Second Quarter 2015, respectively, excluding idle facilities.

GEO Care

Revenues increased by $13.9 million for GEO Care in Second Quarter 2016 compared to Second Quarter 2015 primarily due to increases in average client and participant counts under our electronic monitoring contracts and ISAP services. We also experienced increases from new contracts and program growth at our community based and reentry centers, including our new contract for community-based case management services under a new pilot program in September 2015 by the Department of Homeland Security.

International Services

Revenues for International Services in Second Quarter 2016 compared to Second Quarter 2015 in total remained fairly consistent. We experienced a decrease of $6.8 million primarily attributable to our South African subsidiary related to temporary labor related matters. These decreases were partially offset by foreign exchange rate fluctuations of $6.8 million resulting from the weakening of the U.S. dollar against certain international currencies.

Facility Construction & Design

Revenues for our Facility Construction & Design services relate to the commencement of design and construction activity for our new Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The increase is due to increased construction activity during 2015 and into 2016.

 

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Operating Expenses

 

     2016      % of
Segment
Revenues
    2015      % of
Segment
Revenues
    $ Change      % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 248,019         72.6   $ 223,719         73.5   $ 24,300         10.9

GEO Care

     60,381         62.6     55,426         67.1     4,955         8.9

International Services

     36,904         95.9     34,720         90.1     2,184         6.3

Facility Construction & Design

     71,533         99.7     20,065         98.3     51,468         256.5
  

 

 

      

 

 

      

 

 

    

Total

   $ 416,837         76.0   $ 333,930         74.9   $ 82,907         24.8
  

 

 

      

 

 

      

 

 

    

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and community based facilities.

U.S. Corrections & Detention

The increase in operating expenses for U.S. Corrections & Detention reflects an increase of $16.4 million due to (i) the activation and intake of detainees at our company-owned Great Plains correctional facility in June 2015; (ii) the activation and intake of inmates at our company-owned North Lake correctional facility in May 2015; (iii) the activation and intake of inmates at our company-owned Mesa Verde facility; (iv) the acquisition of the LCS Facilities in February 2015; and (v) our assumption of the management of the 3,400-bed Arizona State Prison facility in Kingman, Arizona in December 2015. We also experienced increases of $11.6 million at certain of our facilities primarily attributable to expenditures related to the expansion of the delivery of offender rehabilitation services under our GEO Continuum of Care platform, net population increases, increased transportation services and the variable costs associated with those increases. These increases were partially offset by a decrease of $3.7 million primarily related to contract terminations.

GEO Care

Operating expenses for GEO Care increased by $5.0 million during Second Quarter 2016 from Second Quarter 2015 primarily due to increases in average client and participant counts under our electronic monitoring contracts and ISAP services. We also experienced increases from new contracts and program growth at our community based and reentry centers, including our new contract for community-based case management services under a new pilot program in September 2015 by the Department of Homeland Security.

International Services

Operating expenses for International Services in Second Quarter 2016 compared to Second Quarter 2015 increased by $2.2 million. The increase was primarily due to foreign exchange rate fluctuations of $5.5 million resulting from the weakening of the U.S. dollar against certain international currencies. This increase was partially offset by a decrease of $3.4 million primarily attributable to our South African subsidiary. Overall, our international segment experienced a slight decline in financial performance primarily driven by temporary labor related matters affecting our South African operation during Second Quarter 2016.

Facility Construction & Design

Operating expenses for our Facility Construction & Design services relate to the commencement of design and construction activity for our new Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The increase is due to increased construction activity during 2015 and into 2016.

 

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Depreciation and Amortization

 

     2016      % of
Segment
Revenue
    2015      % of
Segment
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 18,565         5.4   $ 17,994         5.9   $ 571        3.2

GEO Care

     9,568         9.9     8,014         9.7     1,554        19.4

International Services

     519         1.3     552         1.4     (33     (6.0 )% 
  

 

 

      

 

 

      

 

 

   

Total

   $ 28,652         5.2   $ 26,560         6.0   $ 2,092        7.9
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased slightly in Second Quarter 2016 compared to Second Quarter 2015 primarily due to renovations made at several of our facilities.

GEO Care

GEO Care depreciation and amortization expense increased in Second Quarter 2016 compared to Second Quarter 2015 primarily due to renovations made at several of our locations.

International Services

Depreciation and amortization expense decreased slightly in Second Quarter 2016 compared to Second Quarter 2015 as a result of certain assets becoming fully depreciated and there were no significant additions or renovations during 2015 or 2016 at our international subsidiaries.

Other Unallocated Operating Expenses

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

General and Administrative Expenses

   $ 36,904         6.7   $ 32,174         7.2   $ 4,730         14.7

General and administrative expenses comprise substantially all of our other unallocated operating expenses which primarily includes corporate management salaries and benefits, professional fees and other administrative expenses. The increase in general and administrative expenses in Second Quarter 2016 compared to Second Quarter 2015 was primarily attributable to (i) expenditures related to the expansion of the delivery of offender rehabilitation services under our GEO Continuum of Care platform of $0.3 million; (ii) non-cash stock-based compensation expense of $0.3 million; (iii) increases related to normal personnel and compensation adjustments of $2.6 million; and (iv) professional fees of $1.1 million.

Non Operating Expenses

Interest Income and Interest Expense

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Interest Income

   $ 5,902         1.1   $ 2,868         0.6   $ 3,034         105.8

Interest Expense

   $ 31,089         5.7   $ 26,651         6.0   $ 4,438         16.7

Interest income increased in the Second Quarter 2016 compared to Second Quarter 2015 primarily due to interest income earned on our contract receivable related to our prison project in Ravenhall, Australia. Refer to Note 11 - Business Segments and Geographic Information of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

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Interest expense increased in Second Quarter 2016 compared to Second Quarter 2015 primarily due to the construction loan interest related to our prison project in Ravenhall, Australia. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Loss on Extinguishment of Debt

 

     2016      % of
Revenue
    2015      % of
Revenue
     $ Change      % Change  
     (Dollars in thousands)  

Loss on Extinguishment of Debt

   $ 15,866         2.9   $  —           —         $ 15,866         (100.0 )% 

During Second Quarter 2016, we completed a tender offer and redemption of our 6.625% Senior Notes which resulted in a loss of $15.9 million related to the tender premium and deferred costs associated with the 6.625% Senior Notes. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Income Tax Provision

 

     2016      Effective Rate     2015      Effective Rate     $ Change      % Change  
     (Dollars in thousands)  

Income Taxes

   $ 3,879         15.5   $ 2,369         8.0   $ 1,510         63.7

The provision for income taxes during Second Quarter 2016 increased compared to Second Quarter 2015 along with the effective tax rate. The increase is primarily due to debt extinguishment costs incurred by the REIT in Second Quarter 2016 which carry no tax benefit. As a REIT, we are required to distribute at least 90% of our taxable income to shareholders and in turn are allowed a deduction for the distribution at the REIT level. Our wholly-owned taxable REIT subsidiaries continue to be fully subject to federal, state and foreign income taxes, as applicable. We estimate our annual effective tax rate to be in the range of approximately 10% to 12% exclusive of any non-recurring items.

Equity in Earnings of Affiliates, net of Income Tax Provision

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 2,131         0.4   $ 1,124         0.3   $ 1,007         89.6

Equity in earnings of affiliates, presented net of income taxes, represents the earnings of SACS and GEOAmey in the aggregate. Equity in earnings of affiliates during Second Quarter 2016 compared to Second Quarter 2015 increased primarily as a result of favorable performance by GEOAmey during the periods.

Comparison of First Half 2016 and First Half 2015

Revenues

 

     2016      % of Revenue     2015      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 679,943         64.3   $ 589,938         67.5   $ 90,005        15.3

GEO Care

     189,943         17.9     162,014         18.6     27,929        17.2

International Services

     76,052         7.2     79,197         9.1     (3,145     (4.0 )% 

Facility Construction & Design

     112,597         10.6     42,165         4.8     70,432        167.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 1,058,535         100.0   $ 873,314         100.0   $ 185,221        21.2
  

 

 

      

 

 

      

 

 

   

 

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U.S. Corrections & Detention

Revenues increased in First Half 2016 compared to First Half 2015 primarily due to aggregate increases of $63.0 million resulting from: (i) the activation and intake of detainees at our company-owned Great Plains correctional facility in June 2015; (ii) the activation and intake of inmates at our company-owned North Lake correctional facility in May 2015; (iii) the activation and intake of inmates at our company-owned Mesa Verde facility; (iv) the acquisition of the LCS Facilities in February 2015; and (v) our assumption of the management of the 3,400-bed Arizona State Prison facility in Kingman, Arizona in December 2015. We also experienced aggregate increases in revenues of $40.7 million at certain of our facilities primarily due to net increases in population, transportation services and/or rates. These increases were partially offset by a decrease of $13.7 million primarily due to contract terminations.

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 10.9 million in First Half 2016 and 9.9 million in First Half 2015. We experienced an aggregate net increase of approximately 1,059,000 mandays as a result of our new contracts and business acquisition discussed above. These increases were partially offset by decreases resulting from lower populations at certain facilities. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Corrections & Detention facilities was 92.6% and 93.3% of capacity in the First Half 2016 and First Half 2015, respectively, excluding idle facilities.

GEO Care

Revenues increased for GEO Care in First Half 2016 compared to First Half 2015 primarily due to increases in average client and participant counts under our electronic monitoring contracts and ISAP services. We also experienced increases from new contracts and program growth at our community based and reentry centers, including our new contract for community-based case management services under a new pilot program in September 2015 by the Department of Homeland Security.

International Services

Revenues for International Services in First Half 2016 compared to First Half 2015 decreased by $3.1 million. The decrease was primarily the result of a decrease of $18.5 million primarily attributable to our South African subsidiary related to temporary labor related matters. These decreases were partially offset by foreign exchange rate fluctuations of $15.3 million resulting from the weakening of the U.S. dollar against certain international currencies.

Facility Construction & Design

Revenues for our Facility Construction & Design services relate to the commencement of design and construction activity for our new Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The increase is due to increased construction activity during 2015 and into 2016.

Operating Expenses

 

     2016      % of
Segment
Revenues
    2015      % of
Segment
Revenues
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 500,358         73.6   $ 429,228         72.8   $ 71,130        16.6

GEO Care

     120,478         63.4     108,436         66.9     12,042        11.1

International Services

     72,184         94.9     72,962         92.1     (778     (1.1 )% 

Facility Construction & Design

     112,323         99.8     41,213         97.7     71,110        172.5
  

 

 

      

 

 

      

 

 

   

Total

   $ 805,343         76.1   $ 651,839         74.6   $ 153,504        23.5
  

 

 

      

 

 

      

 

 

   

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and community based facilities.

U.S. Corrections & Detention

The increase in operating expenses for U.S. Corrections & Detention reflects an increase of $50.1 million due to (i) the activation and intake of detainees at our company-owned Great Plains correctional facility in June 2015; (ii) the activation and

 

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intake of inmates at our company-owned North Lake correctional facility in May 2015; (iii) the activation and intake of inmates at our company-owned Mesa Verde facility; (iv) the acquisition of the LCS Facilities in February 2015; and (v) our assumption of the management of the 3,400-bed Arizona State Prison facility in Kingman, Arizona in December 2015. The timing of these activations and the corresponding start-up expenses resulted in an increase in our operating expenses as a percentage of segment revenue in First Half 2016. We also experienced increases of $28.4 million at certain of our facilities primarily attributable to expenditures related to the expansion of the delivery of offender rehabilitation services under our GEO Continuum of Care platform, net population increases, increased transportation services and the variable costs associated with those increases. These increases were partially offset by a decrease of $7.4 million primarily related to contract terminations.

GEO Care

Operating expenses for GEO Care increased by $12.0 million during First Half 2016 from First Half 2015 primarily due to increases in average client and participant counts under our electronic monitoring contracts and ISAP services. We also experienced increases from new contracts and program growth at our community based and reentry centers, including our new contract for community-based case management services under a new pilot program in September 2015 by the Department of Homeland Security.

International Services

Operating expenses for International Services in First Half 2016 compared to First Half 2015 decreased by $0.8 million. The decrease was primarily the result of a decrease of $13.8 million primarily attributable to our South African subsidiary. Overall, our international segment experienced a slight decline in financial performance primarily driven by temporary labor related matters affecting our South African operation during Second Quarter 2016. These decreases were partially offset by foreign exchange rate fluctuations of $13.0 million resulting from the weakening of the U.S. dollar against certain international currencies.

Facility Construction & Design

Operating expenses for our Facility Construction & Design services relate to the commencement of design and construction activity for our new Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The increase is due to increased construction activity during 2015 and into 2016.

Depreciation and Amortization

 

     2016      % of
Segment
Revenue
    2015      % of
Segment
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 37,157         5.5   $ 34,497         5.8   $ 2,660        7.7

GEO Care

     18,914         10.0     15,854         9.8     3,060        19.3

International Services

     1,032         1.4     1,150         1.5     (118     (10.3 )% 
  

 

 

      

 

 

      

 

 

   

Total

   $ 57,103         5.4   $ 51,501         5.9   $ 5,602        10.9
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased in First Half 2016 compared to First Half 2015 primarily due to renovations made at several of our facilities.

GEO Care

GEO Care depreciation and amortization expense increased in First Half 2016 compared to First Half 2015 primarily due to renovations made at several of our locations.

 

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International Services

Depreciation and amortization expense decreased slightly in First Half 2016 compared to First Half 2015 as a result of certain assets becoming fully depreciated and there were no significant additions or renovations during 2015 or 2016 at our international subsidiaries.

Other Unallocated Operating Expenses

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

General and Administrative Expenses

   $ 70,965         6.7   $ 64,022         7.3   $ 6,943         10.8

General and administrative expenses comprise substantially all of our other unallocated operating expenses which primarily includes corporate management salaries and benefits, professional fees and other administrative expenses. The increase in general and administrative expenses in First Half 2016 compared to First Half 2015 was primarily attributable to (i) expenditures related to the expansion of the delivery of offender rehabilitation services under our GEO Continuum of Care platform of $0.6 million; (ii) non-cash stock-based compensation expense of $0.9 million; and (iii) increases related to normal personnel and compensation adjustments of $4.1 million; and (iv) and professional fees of $2.2 million. These increases were partially offset by decreases in business development costs and non-recurring legal fees incurred in connection with our acquisition of Soberlink and the LCS Facilities in 2015.

Non Operating Expenses

Interest Income and Interest Expense

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Interest Income

   $ 10,459         1.0   $ 4,941         0.6   $ 5,518         111.7

Interest Expense

   $ 60,455         5.7   $ 51,297         5.9   $ 9,158         17.9

Interest income increased in the First Half 2016 compared to First Half 2015 primarily due to interest income earned on our contract receivable related to our prison project in Ravenhall, Australia. Refer to Note 11 - Business Segments and Geographic Information of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Interest expense increased in First Half 2016 compared to First Half 2015 primarily due to the construction loan interest related to our prison project in Ravenhall, Australia as well as additional Revolver interest incurred in connection with our acquisition of the LCS Facilities. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Loss on Extinguishment of Debt

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Loss on Extinguishment of Debt

   $ 15,866         1.5   $  —           —     $ 15,866         (100.0 )% 

During First Half 2016, we completed a tender offer and redemption of our 6.625% Senior Notes which resulted in a loss of $15.9 million related to the tender premium and deferred costs associated with the 6.625% Senior Notes. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

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Income Tax Provision

 

     2016      Effective Rate     2015      Effective Rate     $ Change      % Change  
     (Dollars in thousands)  

Income Taxes

   $ 7,030         11.8   $ 5,196         8.7   $ 1,834         35.3

The provision for income taxes during First Half 2016 increased compared to First Half 2015 along with the effective tax rate. The increase is primarily due to debt extinguishment costs incurred by the REIT in First Half 2016 which carry no tax benefit. As a REIT, we are required to distribute at least 90% of our taxable income to shareholders and in turn are allowed a deduction for the distribution at the REIT level. Our wholly-owned taxable REIT subsidiaries continue to be fully subject to federal, state and foreign income taxes, as applicable. We estimate our annual effective tax rate to be in the range of approximately 10% to 12% exclusive of any non-recurring items.

Equity in Earnings of Affiliates, net of Income Tax Provision

 

     2016      % of
Revenue
    2015      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 3,250         0.3   $ 2,610         0.3   $ 640         24.5

Equity in earnings of affiliates, presented net of income taxes, represents the earnings of SACS and GEOAmey in the aggregate. Equity in earnings of affiliates during First Half 2016 compared to First Half 2015 increased primarily as a result of favorable performance by GEOAmey during the periods.

Financial Condition

Capital Requirements

Our current cash requirements consist of amounts needed for working capital, distributions of our REIT taxable income in order to maintain our REIT qualification, debt service, supply purchases, investments in joint ventures, and capital expenditures related to either the development of new correctional, detention and reentry facilities, or the maintenance of existing facilities. In addition, some of our management contracts require us to make substantial initial expenditures of cash in connection with opening or renovating a facility. Generally, these initial expenditures are subsequently fully or partially recoverable as pass-through costs or are billable as a component of the per diem rates or monthly fixed fees to the contracting agency over the original term of the contract. In connection with GEOAmey, our joint venture in the United Kingdom, we and our joint venture partner have each provided a line of credit of £12 million, or $16.1 million, based on exchange rates as of June 30, 2016, for GEOAmey’s operations. As of June 30, 2016, $8.0 million was outstanding.

We currently have contractual commitments for a number of projects using Company financing. We estimate that the cost of these existing capital projects will be approximately $109 million of which $6 million was spent through June 30, 2016. We estimate that the remaining capital requirements related to these capital projects will be $103 million which will be spent through 2017. Included in these commitments is a contractual commitment to provide a capital contribution towards the design and construction of a prison project in Ravenhall, a locality near Melbourne, Australia, which is estimated to be approximately $84 million as of June 30, 2016. This capital contribution is expected to be made in January 2017. Additionally, in connection with the Ravenhall Prison Project, we have a contractual commitment for construction of the facility and have entered into a syndicated facility agreement with National Australia Bank Limited to provide funding for the project up to AUD 791.0 million, or $589.0 million, based on exchange rates as of June 30, 2016.

 

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Liquidity and Capital Resources

Indebtedness

On May 19, 2016 (the “Amendment Effective Date”), we executed Amendment No. 1, among GEO and GEO Corrections Holdings, Inc. (together with GEO, the “Borrowers”), GEO Australasia Holdings Pty Ltd (“GEO Australasia Holdings”), GEO Australasia Finance Holdings Pty Ltd as trustee for the GEO Australasia Finance Holding Trust (the “Australian Trust”) (the “Australian Trustee”, and together with GEO Australasia Holdings, collectively, the “Australian Borrowers”), the guarantors party thereto, the issuing lenders party thereto, the lenders party thereto and BNP Paribas, as administrative agent (the “Amendment”), to the Second Amended and Restated Credit Agreement, dated as of August 27, 2014, by and among the Borrowers, BNP Paribas, as administrative agent, and the lenders who are, or may from time to time become, a party thereto (the “Existing Credit Agreement”).

The Amendment amends certain terms of the Existing Credit Agreement to effect a revolving credit increase in the amount of $200.0 million, increases to the total leverage thresholds used in the determination of the applicable interest rates, and certain other modifications (the Existing Credit Agreement as so modified, the “Amended Credit Agreement”).

The Amendment provides that each lender (including each Increasing Lender and each Assuming Lender as defined in the Amended Credit Agreement) that executed a lender addendum as a revolving credit lender agrees to provide a revolving credit commitment, inclusive of letters of credit issued thereunder, to the Borrowers at the Amendment Effective Time in an aggregate principal amount equal to $900.0 million (the“Revolving Credit Commitment”) on the terms set forth in the Amended Credit Agreement. In addition, the Amendment increases the principal amount of letters of credit that may be issued under the Revolving Credit Commitment from $175.0 million to $300.0 million.

As of June 30, 2016, we had $291.0 million in aggregate borrowings outstanding, net of discount, under the Term Loan and $450.0 million in borrowings under the Revolver, and approximately $54.2 million in letters of credit which left $395.8 million in additional borrowing capacity under the Revolver. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

On April 18, 2016, we completed an offering of $350 million aggregate principal amount of 6.00% Senior Notes. The 6.00% Senior Notes were offered and sold in a registered offering pursuant to an underwriting agreement, dated as of April 11, 2016 (the “Underwriting Agreement”) among GEO, certain of the Company’s domestic subsidiaries, as guarantors and Wells Fargo Securities, LLC, as representative for the underwriters named therein. The 6.00% Senior Notes were issued by us pursuant to the Indenture, dated as of September 25, 2014 (the “Base Indenture”), by and between GEO and Wells Fargo Bank, National Association, as trustee, as supplemented by a Second Supplemental Indenture, dated as of April 18, 2016 (the “Second Supplemental Indenture” and together with the Base Indenture, the “Indenture”), by and among GEO, the guarantors and the trustee which governs the terms of the 6.00% Senior Notes. The sale of the 6.00% Senior Notes was registered under our existing shelf registration statement on Form S-3 filed on September 12, 2014, as amended (File No. 333-198729). The 6.00% Senior Notes were issued at a coupon rate and yield to maturity of 6.00%. Interest on the 6.00% Senior Notes is payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2016. The 6.00% Senior Notes mature on April 15, 2026. We used part of the net proceeds to fund the tender offer or the repurchase, redemption or other discharge of any and all of our 6.625% Senior Notes (see discussion below), to pay all related fees, costs and expenses and for general corporate purposes including repaying borrowings under our Revolver. Loan costs of approximately $6 million were incurred and capitalized in connection with the offering. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

On April 11, 2016, we announced that we had commenced a cash tender offer for any and all of our $300.0 million aggregate principal amount of its 6.625% Senior Notes. On April 18, 2016, we completed the purchase of $231.0 million in aggregate principal amount of its 6.625% Senior Notes validly tendered in connection with our tender offer on or prior to the expiration time. On May 20, 2016, we completed the redemption of the remaining 6.625% Senior Notes in connection with the terms of the notice of redemption delivered to the note holders on April 20, 2016 pursuant to the terms of the indenture governing the 6.625% Senior Notes. We financed the purchase of the 6.625% Senior Notes under the tender offer with part of the net cash proceeds from the 6.00% Senior Notes (see discussion above). As a result of the tender offer and redemption, we incurred a $15.9 million loss on extinguishment related to the tender premium and deferred costs associated with the 6.625% Senior Notes. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

 

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On September 25, 2014, we completed an offering of $250.0 million aggregate principal amount of senior unsecured notes. The notes will mature on October 15, 2024 and have a coupon rate and yield to maturity of 5.875%. Interest is payable semi-annually in cash in arrears on April 15 and October 15, which commenced on April 15, 2015. The 5.875% Senior Notes due 2024 are guaranteed on a senior unsecured basis by all our restricted subsidiaries that guarantee obligations. The 5.875% Senior Notes due 2024 rank equally in right of payment with any unsecured, unsubordinated indebtedness of the Company and the guarantors, including our 5.875% senior notes due 2022, the 5.125% senior notes due 2023, and the guarantors’ guarantees thereof, senior in right of payment to any future indebtedness of ours and the guarantors that is expressly subordinated to the 5.875% Senior Notes due 2024 and the guarantees, effectively junior to any secured indebtedness of ours and the guarantors, including indebtedness under our Credit Facility, to the extent of the value of the assets securing such indebtedness, and structurally junior to all obligations of our subsidiaries that are not guarantors. The sale of the 5.875% Senior Notes due 2024 was registered under our automatic shelf registration statement on Form S-3 filed on September 12, 2014. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

In connection with a new design and build prison project agreement in Ravenhall, Australia with the State of Victoria, in September 2014, we entered into a syndicated facility agreement (the “Construction Facility”) with National Australia Bank Limited to provide debt financing for construction of the project. The Construction Facility provides for non-recourse funding up to AUD 791 million, or approximately $589 million, based on exchange rates as of June 30, 2016. Construction draws will be funded throughout the project according to a fixed utilization schedule as defined in the syndicated facility agreement. The term of the Construction Facility is through October 2019 and bears interest at a variable rate quoted by certain Australian banks plus 200 basis points. After October 2019, the Construction Facility will be converted to a term loan with payments due quarterly beginning in 2019 through 2041. In accordance with the terms of the Construction Facility, upon completion and commercial acceptance of the prison, in accordance with the prison contract, the State will make a lump sum payment of AUD 310 million, or approximately $231 million, based on exchange rates as of June 30, 2016, towards a portion of the outstanding principal. The remaining outstanding principal balance will be repaid over the term of the operating agreement. As of June 30, 2016, approximately $359 million was outstanding under the Construction Facility. We also entered into interest rate swap and interest rate cap agreements related to our non-recourse debt in connection with the project. Refer to Note 8 - Derivative Financial Instruments of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

On October 3, 2013, we completed an offering of $250.0 million aggregate principal amount of 5.875% Senior Notes due 2022. The 5.875% Senior Notes due 2022 will mature on January 15, 2022 and have a coupon rate and yield to maturity of 5.875%. Interest is payable semi-annually on January 15 and July 15 each year, which commenced on January 15, 2014. The proceeds received from the 5.875% Senior Notes due 2022 were used, together with cash on hand, to fund the repurchase, redemption or other discharge of our 7.75% senior notes due 2017 and to pay related transaction fees and expenses. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

On March 19, 2013, we completed an offering of $300.0 million aggregate principal amount of 5.125% Senior Notes. The 5.125% Senior Notes will mature on April 1, 2023 and have a coupon rate and yield to maturity of 5.125%. Interest is payable semi-annually on April 1 and October 1 each year, which commenced on October 1, 2013. A portion of the proceeds received from the 5.125% Senior Notes were used on the date of the financing to repay the prior revolver credit draws outstanding under the prior senior credit facility. Refer to Note 9 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

In addition to the debt outstanding under the Credit Facility, the 6.00% Senior Notes, the 5.125% Senior Notes, the 5.875.% Senior Notes due 2022 and the 5.875% Senior Notes due 2024 discussed above, we also have significant debt obligations which, although these obligations are non-recourse to us, require cash expenditures for debt service. Our significant debt

 

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obligations could have material consequences. See “Risk Factors-Risks Related to Our High Level of Indebtedness” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015. We are exposed to various commitments and contingencies which may have a material adverse effect on our liquidity. We also have guaranteed certain obligations for certain of our international subsidiaries. These non-recourse obligations, commitments and contingencies and guarantees are further discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

We consider opportunities for future business and/or asset acquisitions as we deem appropriate when market conditions present opportunities. If we are successful in our pursuit of any new projects, our cash on hand, cash flows from operations and borrowings under the existing Credit Facility may not provide sufficient liquidity to meet our capital needs and we could be forced to seek additional financing or refinance our existing indebtedness. There can be no assurance that any such financing or refinancing would be available to us on terms equal to or more favorable than our current financing terms, or at all. In the future, our access to capital and ability to compete for future capital intensive projects will also be dependent upon, among other things, our ability to meet certain financial covenants in the indenture governing the 5.125% Senior Notes, the indenture governing the 5.875% Senior Notes due 2022, the indenture governing the 5.875% Senior Notes due 2024, the indenture governing the 6.00% Senior Notes due 2026 and our Credit Agreement. A substantial decline in our financial performance could limit our access to capital pursuant to these covenants and have a material adverse affect on our liquidity and capital resources and, as a result, on our financial condition and results of operations. In addition to these foregoing potential constraints on our capital, a number of state government agencies have been suffering from budget deficits and liquidity issues. While we expect to be in compliance with our debt covenants, if these constraints were to intensify, our liquidity could be materially adversely impacted as could our ability to remain in compliance with these debt covenants.

Prospectus Supplement

On May 8, 2013, the Company filed with the Securities and Exchange Commission a prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $100.0 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and equity distribution agreements entered into with the sales agents, if any, were to be made in negotiated transactions or transactions that were deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933. On July 18, 2014, the Company filed with the Securities and Exchange Commission a post-effective amendment to its shelf registration statement on Form S-3 (pursuant to which the prospectus supplement had been filed) as a result of the merger of the Company into The GEO Group REIT, Inc. effective June 27, 2014. There were no shares of the Company’s common stock sold under the prospectus supplement during the year ended December 31, 2015 nor the six months ended June 30, 2016.

In September 2014, the Company filed with the Securities and Exchange Commission a new automatic shelf registration statement on Form S-3. On November 10, 2014, in connection with the new shelf registration, the Company filed with the Securities and Exchange Commission a new prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $150.0 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and the equity distribution agreements entered into with the sales agents, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933. There were no shares of the Company’s stock issued under this prospectus supplement during the year ended December 31, 2015 nor the six months ended June 30, 2016.

As a REIT, we are subject to a number of organizational and operational requirements, including a requirement that we annually distribute to our shareholders an amount equal to at least 90% of our REIT taxable income (determined before the deduction for dividends paid and by excluding any net capital gain). Generally, we expect to distribute all or substantially all of our REIT taxable income so as not to be subject to the income or excise tax on undistributed REIT taxable income. The amount, timing and frequency of distributions will be at the sole discretion of our Board of Directors and will be based upon various factors.

We plan to fund all of our capital needs, including distributions of our REIT taxable income in order to maintain our REIT qualification, and capital expenditures, from cash on hand, cash from operations, borrowings under our Credit Facility and any

 

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other financings which our management and Board of Directors, in their discretion, may consummate. Currently, our primary source of liquidity to meet these requirements is cash flow from operations and borrowings under the $700.0 million Revolver. Our management believes that cash on hand, cash flows from operations and availability under our Credit Facility will be adequate to support our capital requirements for 2016 through 2017 as disclosed under “Capital Requirements” above.

Executive Retirement Agreement

We have a non-qualified deferred compensation agreement with our Chief Executive Officer (“CEO”). The current agreement, as amended, provides for a lump sum payment upon retirement, no sooner than age 55. As of January 1, 2013, our CEO had reached age 55 and was eligible to receive the payment upon retirement. If our CEO had retired as of June 30, 2016, we would have had to pay him $7.7 million. Based on our current capitalization, we do not believe that making this payment would materially adversely impact our liquidity.

Off-Balance Sheet Arrangements

Except as discussed above, and in the notes to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q, we do not have any off-balance sheet arrangements.

Cash Flow

Cash and cash equivalents as of June 30, 2016 was $38.9 million, compared to $59.6 million as of December 31, 2015.

Operating Activities

Cash provided by operating activities amounted to $38.3 million for the six months ended June 30, 2016 versus cash provided by operating activities of $79.8 million for the six months ended June 30, 2015. Cash provided by operating activities during the six months ended June 30, 2016 was positively impacted by net income attributable to GEO, non-cash expenses such as depreciation and amortization, loss on extinguishment of debt, amortization of debt issuance costs, and stock-based compensation expense. Equity in earnings of affiliates negatively impacted cash. Changes in accounts receivable, prepaid expenses and other assets decreased in total by $14.0 million, representing a positive impact on cash. The decrease was primarily driven by the timing of billings and collections. Changes in accounts payable, accrued expenses and other liabilities increased by $9.6 million which positively impacted cash. The increase was primarily driven by the timing of payments.

Additionally, cash provided by operating activities for the six months ended June 30, 2016 was negatively impacted by an increase in changes in contract receivable of $124.3 million. This increase relates to costs incurred and estimated earnings in excess of billings related to the prison project in Ravenhall, Australia. The contract receivable is expected to grow as construction services are performed and will continue to have a negative impact on cash from operating activities until the balance is ultimately settled with the State. In accordance with the contract, the project will not be billed out until completion and commercial acceptance of the facility by the State.

Cash provided by operating activities during the six months ended June 30, 2015 was positively impacted by net income attributable to GEO, non-cash expenses such as depreciation and amortization, amortization of debt issuance costs, and stock-based compensation expense. Equity in earnings of affiliates negatively impacted cash. Changes in accounts receivable, prepaid expenses and other assets decreased in total by $14.0 million, representing a positive impact on cash. The decrease was primarily driven by the timing of billings and collections. Changes in accounts payable, accrued expenses and other liabilities decreased by $1.2 million which negatively impacted cash. The decrease was primarily driven by the timing of payments.

Additionally, cash provided by operating activities for the six months ended June 30, 2015 was negatively impacted by an increase in changes in contract receivable of $46.6 million. This increase relates to costs incurred and estimated earnings in excess of billings related to the prison project in Ravenhall, Australia. The contract receivable is expected to grow as

 

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construction services are performed and will continue to have a negative impact on cash from operating activities until the balance is ultimately settled with the State. In accordance with the contract, the project will not be billed out until completion and commercial acceptance of the facility by the State.

Investing Activities

Cash used in investing activities of $111.3 million during the six months ended June 30, 2016 was primarily the result of capital expenditures of $46.0 million and changes in restricted cash of $65.9 million. Cash used in investing activities of $407.9 million during the six months ended June 30, 2015 was primarily the result of our business acquisitions of the LCS Facilities and Soberlink in the amount of $307.4 million and $24.4 million, respectively, and capital expenditures of $71.7 million.

Financing Activities

Cash provided by financing activities during the six months ended June 30, 2016 amounted to $52.0 million compared to cash provided by financing activities of $334.9 million during the six months ended June 30, 2015. Cash provided by financing activities during the six months ended June 30, 2016 was primarily the result of proceeds from long-term debt of $641.0 million which included the issuance of our 6.00% Senior Notes. Additionally, we had proceeds from non-recourse debt of $159.1 million related to construction draws for our prison project in Ravenhall, Australia. These increases were partially offset by a decrease for dividends paid of $97.2 million and payments on long-term debt of $627.5 million which included the redemption of our 6.625% Senior Notes. Cash provided by financing activities during the six months ended June 30, 2015 was primarily the result of proceeds from long-term debt of $518.0 million under our Revolver which was primarily used to fund the acquisition of the LCS Facilities. Additionally, we had proceeds from non-recourse debt of $49.7 million related to construction draws for our prison project in Ravenhall, Australia. These increases were partially offset by a decrease for dividends paid of $92.3 million and payments on long-term debt of $134.7 million.

Non-GAAP Measures

Funds from Operations (“FFO”) is a widely accepted supplemental non-GAAP measure utilized to evaluate the operating performance of real estate investment trusts. It is defined in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) attributable to common shareholders (computed in accordance with Generally Accepted Accounting Principles), excluding real estate related depreciation and amortization, excluding gains and losses from the cumulative effects of accounting changes, extraordinary items and sales of properties, and including adjustments for unconsolidated partnerships and joint ventures.

We also present Normalized Funds From Operations, or Normalized FFO, and Adjusted Funds from Operations, or AFFO, supplemental non-GAAP financial measures of real estate investment trusts’ operating performances.

Normalized FFO is defined as FFO adjusted for certain items which by their nature are not comparable from period to period or that tend to obscure the Company’s actual operating performance, including for the periods presented start-up expenses, net of tax, mergers and acquisitions (“M&A”) related expenses, net of tax and loss on extinguishment of debt, net of tax.

AFFO is defined as Normalized FFO adjusted by adding non-cash expenses such as non-real estate related depreciation and amortization, stock based compensation expense, the amortization of debt issuance costs, discount and/or premium and other non-cash interest, and by subtracting recurring consolidated maintenance capital expenditures.

Because of the unique design, structure and use of our correctional facilities, we believe that assessing the performance of our correctional facilities without the impact of depreciation or amortization is useful and meaningful to investors. Although NAREIT has published its definition of FFO, companies often modify this definition as they seek to provide financial measures that meaningfully reflect their distinctive operations. We have modified FFO to derive Normalized FFO and AFFO that meaningfully reflect our operations. Our assessment of our operations is focused on long-term sustainability. The adjustments

 

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we make to derive the non-GAAP measures of Normalized FFO and AFFO exclude items which may cause short-term fluctuations in income from continuing operations but have no impact on our cash flows, or we do not consider them to be fundamental attributes or the primary drivers of our business plan and they do not affect our overall long-term operating performance.

We may make adjustments to FFO from time to time for certain other income and expenses that do not reflect a necessary component of our operational performance on the basis discussed above, even though such items may require cash settlement. Because FFO, Normalized FFO and AFFO exclude depreciation and amortization unique to real estate as well as non-operational items and certain other charges that are highly variable from year to year, they provide our investors with performance measures that reflect the impact to operations from trends in occupancy rates, per diem rates, operating costs and interest costs, providing a perspective not immediately apparent from income from continuing operations. We believe the presentation of FFO, Normalized FFO and AFFO provide useful information to investors as they provide an indication of our ability to fund capital expenditures and expand our business. FFO, Normalized FFO and AFFO provide disclosure on the same basis as that used by our management and provide consistency in our financial reporting, facilitate internal and external comparisons of our historical operating performance and our business units and provide continuity to investors for comparability purposes. Additionally, FFO, Normalized FFO and AFFO are widely recognized measures in our industry as a real estate investment trust.

Our reconciliation of net income attributable to The GEO Group, Inc. to FFO, Normalized FFO and AFFO for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands):

 

     Three Months Ended     Six Months Ended  
     June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  

Funds From Operations

        

Net income attributable to The GEO Group, Inc.

   $ 23,209      $ 28,291      $ 55,559      $ 57,068   

Real estate related depreciation and amortization

     15,221        14,492        30,363        28,377   
  

 

 

   

 

 

   

 

 

   

 

 

 

NAREIT Defined FFO

     38,430        42,783        85,922        85,445   

Loss on extinguishment of debt, net of tax

     15,866        —          15,866     

Start-up expenses, net of tax

     —          2,912        1,190        2,912   

M&A related expenses, net of tax

     —          673        —          2,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Normalized Funds from Operations

   $ 54,296      $ 46,368      $ 102,978      $ 90,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-real estate related depreciation and amortization

     13,431        12,068        26,740        23,124   

Consolidated maintenance capital expenditures

     (5,954     (5,425     (11,194     (12,086

Stock-based compensation expense

     3,248        2,956        6,489        5,578   

Amortization of debt issuance costs, discount and/or premium and other non-cash interest

     2,661        1,521        5,027        3,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Funds from Operations

   $ 67,682      $ 57,488      $ 130,040      $ 110,421   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Outlook

The following discussion contains statements that are not historical statements and, therefore, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied in the forward-looking statements. Please refer to “Part I - Item 1A. Risk Factors” and the “Forward Looking Statements - Safe Harbor” sections in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as well as the “Forward-Looking Statements - Safe Harbor” section and other disclosures contained in this Form 10-Q for further discussion on forward-looking statements and the risks and other factors that could prevent us from achieving our goals and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements.

Revenue

Domestically, we continue to pursue a number of opportunities for corrections and detention facilities. Continued need for corrections facilities in various states and the need for bed space at the federal level are two of the factors that have contributed to these opportunities.

During the first quarter of 2016, we completed the activation of the 3,400-bed Arizona State Prison in Kingman, Arizona under an assignment, from the previous operator, of the existing managed-only contract with the State of Arizona.

We continue to be encouraged by the current landscape of growth opportunities; however any positive trends may, to some extent, be adversely impacted by government budgetary constraints in the future. While state finances overall are stable, future budgetary pressures may cause state correctional agencies to pursue a number of cost savings initiatives which may include reductions in per diem rates and/or the scope of services provided by private operators. These potential cost savings initiatives could have a material adverse impact on our current operations and/or our ability to pursue new business opportunities. Additionally, if state budgetary constraints, as discussed above, persist or intensify, our state customers’ ability to pay us may be impaired and/or we may be forced to renegotiate our management contracts on less favorable terms and our financial condition, results of operations or cash flows could be materially adversely impacted. We plan to actively bid on any new projects that fit our target profile for profitability and operational risk. Although we are pleased with the overall industry outlook, positive trends in the industry may be offset by several factors, including budgetary constraints, unanticipated contract terminations, contract non-renewals, and/or contract re-bids. Although we have historically had a relatively high contract renewal rate, there can be no assurance that we will be able to renew our expiring management contracts on favorable terms, or at all. Also, while we are pleased with our track record in re-bid situations, we cannot assure that we will prevail in any such future situations.

Internationally, we are exploring a number of opportunities in our current markets and will continue to actively bid on any opportunities that fit our target profile for profitability and operational risk. In September 2014, we announced that a consortium led by us and comprised of The GEO Group Australia Pty. Ltd., John Holland Construction and Honeywell signed a contract with the Department of Justice in the State of Victoria for the development and operation of a 1,300-bed capacity prison in Ravenhall, Australia. The Ravenhall facility will be developed under a public-private partnership financing structure with a capital contribution from us of approximately AUD 115 million, or $85.6 million, based on exchange rates as of June 30, 2016, and we anticipate returns on investment consistent with our company-owned facilities.

With res