Toggle SGML Header (+)


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

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

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  ☒    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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of November 1, 2017, the registrant had 124,070,516 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 NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

     3  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

     4  

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER  30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

     5  

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

     6  

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     7  

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

     43  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     66  

ITEM 4. CONTROLS AND PROCEDURES

     66  

PART II - OTHER INFORMATION

     67  

ITEM 1. LEGAL PROCEEDINGS

     67  

ITEM 1A. RISK FACTORS

     67  

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

     67  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     67  

ITEM 4. MINE SAFETY DISCLOSURES

     67  

ITEM 5. OTHER INFORMATION

     67  

ITEM 6. EXHIBITS

     68  

SIGNATURES

     69  

 

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 NINE MONTHS ENDED

SEPTEMBER 30, 2017 AND 2016

(In thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2017
    September 30,
2016
    September 30,
2017
    September 30,
2016
 

Revenues

   $ 566,759     $ 554,376     $ 1,694,443     $ 1,612,911  

Operating expenses

     423,134       415,659       1,276,286       1,221,002  

Depreciation and amortization

     31,649       28,783       92,464       85,886  

General and administrative expenses

     49,074       37,483       143,866       108,448  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     62,902       72,451       181,827       197,575  

Interest income

     14,648       7,928       38,971       18,387  

Interest expense

     (38,719     (33,428     (109,702     (93,864

Loss on extinguishment of debt

     —         —         —         (15,885
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     38,831       46,951       111,096       106,213  

Provision for income taxes

     1,720       4,970       5,590       12,000  

Equity in earnings of affiliates, net of income tax provision of $577, $650, $1,785 and $1,850, respectively

     1,342       1,693       4,255       4,943  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     38,453       43,674       109,761       99,156  

Net loss attributable to noncontrolling interests

     36       46       123       123  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 38,489     $ 43,720     $ 109,884     $ 99,279  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     122,251       111,162       119,356       111,015  

Diluted

     122,887       111,504       120,114       111,425  

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     $ 0.39     $ 0.92     $ 0.89  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

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

   $ 0.31     $ 0.39     $ 0.91     $ 0.89  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.47     $ 0.43     $ 1.41     $ 1.30  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2017 AND 2016

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2017
    September 30,
2016
    September 30,
2017
     September 30,
2016
 

Net income

   $ 38,453     $ 43,674     $ 109,761      $ 99,156  

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments

     (179     970       2,030        2,081  

Pension liability adjustment, net of tax provision of $25, $21, $76 and $63, respectively

     64       33       175        98  

Unrealized gain (loss) on derivative instrument classified as cash flow hedge, net of tax (provision) benefit of $(307), $81, $(451) and $893, respectively

     1,740       (520     2,556        (5,162
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     1,625       483       4,761        (2,983
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income

     40,078       44,157       114,522        96,173  

Comprehensive loss attributable to noncontrolling interests

     34       36       119        104  
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 40,112     $ 44,193     $ 114,641      $ 96,277  
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

4


Table of Contents

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

(In thousands, except share data)

 

     September 30, 2017     December 31, 2016  
     (Unaudited)        
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 51,526     $ 68,038  

Restricted cash and investments

     12,452       17,133  

Accounts receivable, less allowance for doubtful accounts of $4,199 and $3,664, respectively

     386,898       356,255  

Contract receivable, current portion

     243,531       224,033  

Prepaid expenses and other current assets

     36,073       32,210  
  

 

 

   

 

 

 

Total current assets

     730,480       697,669  
  

 

 

   

 

 

 

Restricted Cash and Investments

     31,032       20,848  

Property and Equipment, Net

     2,055,982       1,897,241  

Non-Current Contract Receivable

     405,780       219,783  

Deferred Income Tax Assets

     31,831       30,039  

Goodwill

     781,972       615,433  

Intangible Assets, Net

     261,790       203,884  

Other Non-Current Assets

     70,474       64,512  
  

 

 

   

 

 

 

Total Assets

   $ 4,369,341     $ 3,749,409  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 91,617     $ 79,637  

Accrued payroll and related taxes

     48,780       55,260  

Accrued expenses and other current liabilities

     174,321       131,096  

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

     260,046       238,065  
  

 

 

   

 

 

 

Total current liabilities

     574,764       504,058  
  

 

 

   

 

 

 

Other Non-Current Liabilities

     92,804       88,656  

Capital Lease Obligations

     6,412       7,431  

Long-Term Debt

     2,157,882       1,935,465  

Non-Recourse Debt

     323,387       238,842  

Commitments, Contingencies and Other (Note 11)

    

Shareholders’ Equity

    

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

     —         —    

Common stock, $0.01 par value, 187,500,000 shares authorized, 123,990,529 and 112,547,544 issued and outstanding, respectively

     1,240       1,125  

Additional paid-in capital

     1,185,643       891,993  

Earnings in excess of distributions

     53,495       112,763  

Accumulated other comprehensive loss

     (26,068     (30,825
  

 

 

   

 

 

 

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

     1,214,310       975,056  

Noncontrolling interests

     (218     (99
  

 

 

   

 

 

 

Total shareholders’ equity

     1,214,092       974,957  
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 4,369,341     $ 3,749,409  
  

 

 

   

 

 

 

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

 

5


Table of Contents

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2017 AND 2016

(In thousands)

 

     Nine Months Ended  
     September 30, 2017     September 30, 2016  

Cash Flow from Operating Activities:

    

Net income

   $ 109,761     $ 99,156  

Net loss attributable to noncontrolling interests

     123       123  
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     109,884       99,279  

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

    

Depreciation and amortization expense

     92,464       85,886  

Stock-based compensation

     14,852       9,675  

Loss on extinguishment of debt

     —         15,885  

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

     11,922       8,330  

Provision for doubtful accounts

     1,597       1,783  

Equity in earnings of affiliates, net of tax

     (4,255     (4,943

Dividends received from unconsolidated joint venture

     5,052       1,611  

Income tax deficiency related to equity compensation

     —         844  

Loss on sale/disposal of property and equipment, net

     2,194       764  

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

    

Changes in accounts receivable, prepaid expenses and other assets

     5,527       (33,953

Changes in contract receivable

     (163,083     (205,135

Changes in accounts payable, accrued expenses and other liabilities

     (18,326     8,216  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     57,828       (11,758
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Acquisition of CEC, net of cash acquired

     (353,555     —    

Insurance proceeds - damaged property

     86       4,733  

Proceeds from sale of property and equipment

     856       68  

Change in restricted cash and investments

     (4,820     (97,716

Capital expenditures

     (104,130     (68,015
  

 

 

   

 

 

 

Net cash used in investing activities

     (461,563     (160,930
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Proceeds from long-term debt

     1,324,865       813,077  

Payments on long-term debt

     (1,093,088     (775,256

Payments on non-recourse debt

     (68,887     (1,878

Proceeds from non-recourse debt

     123,785       273,087  

Taxes paid related to net share settlements of equity awards

     (4,122     (2,336

Proceeds from issuance of common stock under prospectus supplement

     275,867       —    

Proceeds from issuance of common stock in connection with ESPP

     382       338  

Debt issuance costs

     (9,470     (20,490

Income tax deficiency related to equity compensation

     —         (844

Proceeds from the exercise of stock options

     6,786       2,367  

Cash dividends paid

     (169,152     (145,991
  

 

 

   

 

 

 

Net cash provided by financing activities

     386,966       142,074  

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     257       1,099  
  

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (16,512     (29,515

Cash and Cash Equivalents, beginning of period

     68,038       59,638  
  

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 51,526     $ 30,123  
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Capital expenditures in accounts payable and accrued expenses

   $ 7,526     $ 2,410  
  

 

 

   

 

 

 

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

 

6


Table of Contents

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 ‘GEO Continuum of Care’ program integrates enhanced in-prison programs, which are evidence-based and include cognitive behavioral treatment and post-release services, provides academic and vocational classes to life skills and treatment programs while helping individuals reintegrate into their communities. 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”). At September 30, 2017, after its acquisition of Community Education Centers (“CEC”) (Refer to Note 2 - Business Combinations), the Company’s worldwide operations include the management and/or ownership of approximately 96,000 beds at 140 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 185,000 offenders and pretrial defendants, including approximately 100,000 individuals through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.

In March 2017, the Company’s Board of Directors declared a 3-for-2 stock split of its common stock. The stock split was completed on April 24, 2017 with respect to shareholders of record on April 10, 2017. Outstanding share and per-share amounts disclosed for all periods presented have been retroactively adjusted to reflect the effects of the stock split. On April 24, 2017, the Company amended its articles of incorporation to increase the number of authorized shares of common stock to take into effect the stock split.

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 27, 2017 for the year ended December 31, 2016. The accompanying December 31, 2016 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, 2016. 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 nine months ended September 30, 2017 are not necessarily indicative of the results for the entire year ending December 31, 2017, or for any other future interim or annual periods.

 

7


Table of Contents

2. BUSINESS COMBINATIONS

Community Education Centers Acquisition

On April 5, 2017, the Company completed its acquisition of CEC, pursuant to a definitive merger agreement entered into on February 12, 2017 between the Company, GEO/DE/MC/01 LLC, and CEC Parent Holdings LLC. CEC is a private provider of rehabilitation services for offenders in reentry and in-prison treatment facilities as well as management services for county, state and federal correctional and detention facilities. CEC’s operations encompass over 12,000 beds nationwide. Under the terms of the merger agreement, the Company acquired 100% of the voting interests in CEC for $353.6 million, net of cash acquired of $3.0 million, in an all cash transaction, excluding transaction related expenses paid at closing of $4.1 million. At the time of the acquisition, approximately $115 million of CEC indebtedness, including accrued interest, was outstanding. All indebtedness of CEC was repaid by the Company with a portion of the $353.6 million merger consideration. The purchase price was reduced by $2.6 million as a result of the final working capital target settlement received by the Company during the third quarter ended September 30, 2017. Additionally, for tax periods ending on or prior to December 31, 2018, the purchase price may be adjusted for any tax benefits realized by the Company attributable to certain transactional tax deductions if such deductions are able to be taken by the Company and will result in an incremental tax benefit. The Company has estimated a maximum potential adjustment of approximately $1.9 million but has preliminarily estimated the fair value of this contingency at zero at the acquisition date. The Company is still reviewing the various tax implications of the acquisition which may impact the ultimate fair value of this contingency.

Purchase price allocation

GEO is identified as the acquiring company for US GAAP accounting purposes. Under the acquisition method of accounting, the purchase price for CEC was allocated to CEC’s net tangible and intangible assets based on their estimated fair values as of April 5, 2017, the date of closing and the date that the Company obtained control of CEC. In order to determine the fair values of certain tangible and intangible assets acquired, the Company engaged a third party independent valuation specialist. For all other assets acquired and liabilities assumed, the recorded fair value was determined by the Company’s management and represents an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The allocation of the purchase price for this transaction as of April 5, 2017 has not been finalized. The primary areas of the preliminary purchase price allocations that are not finalized relate to the fair values of certain tangible and intangible assets and liabilities acquired and income taxes. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be recorded in the reporting period in which the adjustment amounts are determined. During the three months ended September 30, 2017, the Company made measurement period adjustments of approximately $6.0 million to provisional amounts with respect to the CEC acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. These adjustments related to the Company’s valuation of accounts receivable, prepaid expenses and other current assets, accounts payable, other noncurrent liabilities and deferred income tax assets. Of the total measurement period adjustment, approximately $4.6 million related to the valuation of an unfavorable contract liability which had the effect of reducing goodwill and the unfavorable contract liability. The remaining measurement period adjustments were not individually significant. The adjusted purchase price of $353.6 million has been preliminarily allocated to the estimated fair values of the assets acquired and liabilities assumed as of April 5, 2017 as follows (in ‘000’s):

 

Preliminary Purchase Price Allocation  

Accounts Receivable

   $ 29,916  

Prepaid and other current assets

     4,407  

Property and equipment

     126,510  

Intangible assets

     76,000  

Favorable lease assets

     3,110  

Deferred income tax assets

     1,792  

Other non-current assets

     4,327  
  

 

 

 

Total assets acquired

   $ 246,062  
  

 

 

 

Accounts payable and accrued expenses

     52,341  

Unfavorable lease liabilities

     1,299  

Other non-current liabilities

     5,360  
  

 

 

 

Total liabilities assumed

   $ 59,000  
  

 

 

 

Total identifiable net assets

     187,062  

Goodwill

     166,493  
  

 

 

 

Total consideration paid, net of cash acquired

   $ 353,555  
  

 

 

 

 

8


Table of Contents

As shown above, the Company recorded $166.5 million of goodwill related to the purchase of CEC. The strategic benefits of the merger include the Company’s ability to further position itself to meet the demand for increasingly diversified correctional, detention and community reentry facilities and services and the Company’s ability to expand the delivery of enhanced in- prison rehabilitation including evidence-based treatment, integrated with post-release support services through GEO’s Continuum of Care platform. These factors contributed to the goodwill that was recorded upon consummation of the transaction. The Company does not believe that any of the goodwill recorded as a result of the CEC acquisition will be deductible for federal income tax purposes. Identifiable intangible assets purchased in the acquisition and their weighted average amortization periods in total and by major intangible asset class, as applicable, are included in the table below:

 

     Weighted
Average Useful
Life (years)
     Fair Value as of April 5, 2017  

Facility management contracts

     18.3      $ 75,300  

Covenants not to compete

     1        700  
     

 

 

 

Total acquired intangible assets

      $ 76,000  
     

 

 

 

Pro forma financial information

The results of operations of CEC are included in the Company’s results of operations from April 5, 2017. The following unaudited pro forma information combines the consolidated results of operations of the Company and CEC as if the acquisition had occurred at January 1, 2016, which is the beginning of the earliest period presented. The pro forma amounts are included for comparative purposes and may not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2017
     September 30,
2016
     September 30,
2017
     September 30,
2016
 

Pro forma revenues

   $ 566,759      $ 621,565      $ 1,756,320      $ 1,805,064  

Pro forma net income attributable to the GEO Group, Inc.

   $ 42,033      $ 44,525      $ 122,832      $ 100,372  

 

9


Table of Contents

The unaudited pro forma combined financial information presented above is compiled from the financial statements of the combined companies and includes pro forma adjustments for: (i) estimated changes in depreciation expense, interest expense and amortization expense; (ii) adjustments to eliminate intercompany transactions; (iii) adjustments to remove $14.0 million, for the nine months ended September 30, 2017, respectively, of non-recurring transaction and merger related costs directly related to the CEC acquisition that are included in the combined companies’ financial results; and (iv) the income tax impact of the adjustments. The unaudited pro forma financial information does not include any adjustments to reflect the impact of cost savings or other synergies that may result from this acquisition. As noted above, the unaudited pro forma financial information does not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future.

The Company has included revenue and earnings of approximately $114 million and $14 million, respectively, in its

consolidated statements of operations for the nine months ended September 30, 2017 for CEC activity since April 5, 2017, the

date of acquisition.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has recorded goodwill as a result of its various business combinations. On April 5, 2017, the Company completed its acquisition of CEC. Refer to Note 2 - 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, 2016 to September 30, 2017 are as follows (in thousands):

 

     December 31, 2016      Acquisitions      Foreign
Currency
Translation
     September 30,
2017
 

U.S. Corrections & Detention

   $ 277,774      $ 41,604      $ —        $ 319,378  

GEO Care

     337,257        124,889        —          462,146  

International Services

     402        —          46        448  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Goodwill

   $ 615,433        166,493      $ 46      $ 781,972  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has also recorded other finite and indefinite-lived intangible assets as a result of its various business combinations. Refer to Note 2 - Business Combinations for a discussion of the Company’s recent acquisition of CEC. The Company’s intangible assets include facility management contracts, covenants not to compete, trade names and technology, as follows (in thousands):

 

     September 30, 2017      December 31, 2016  
     Weighted Average
Useful Life (years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Facility management contracts

     16.3      $ 308,446      $ (101,537   $ 206,909      $ 233,136      $ (87,256   $ 145,880  

Covenants not to compete

     1        700        (342     358        —          —         —    

Technology

     7.3        33,700        (24,377     9,323        33,700        (20,896     12,804  

Trade name (Indefinite lived)

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 388,046      $ (126,256   $ 261,790      $ 312,036      $ (108,152   $ 203,884  
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

10


Table of Contents

Amortization expense was $6.5 million and $18.1 million for the three and nine months ended September 30, 2017, respectively. Amortization expense was $5.1 million and $15.3 million for the three and nine months ended September 30, 2016, respectively. Amortization expense was primarily related to the U.S. Corrections & Detention and GEO Care segments’ amortization of acquired facility management contracts. As of September 30, 2017, 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 2017 through 2021 and thereafter is as follows (in thousands):

 

Fiscal Year

   Total Amortization
Expense
 

Remainder of 2017

   $ 6,525  

2018

     22,821  

2019

     22,310  

2020

     22,310  

2021

     20,090  

Thereafter

     122,534  
  

 

 

 
   $ 216,590  
  

 

 

 

4. 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 September 30, 2017 and December 31, 2016 (in thousands):

 

            Fair Value Measurements at September 30, 2017  
     Carrying Value at
September 30,
2017
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Restricted investment:

           

Rabbi Trust

   $ 19,472      $ —        $ 19,472      $ —    

Fixed income securities

     1,917        —          1,917        —    

Liabilities:

           

Interest rate swap derivatives

   $ 15,673      $ —        $ 15,673      $ —    
            Fair Value Measurements at December 31, 2016  
     Carrying Value at
December 31,
2016
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Restricted investments:

           

Rabbi Trust

   $ 15,662      $ —        $ 15,662      $ —    

Fixed income securities

     1,782        —          1,782        —    

Interest rate cap derivatives

     15        —          15        —    

Liabilities:

           

Interest rate swap derivatives

   $ 18,679      $ —        $ 18,679      $ —    

The Company’s Level 2 financial instruments included in the tables above as of September 30, 2017 and December 31, 2016 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 balance of the interest rate cap derivative assets at September 30, 2017 was not significant.

 

11


Table of Contents

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.

 

12


Table of Contents

5. 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 September 30, 2017 and December 31, 2016 (in thousands):

 

            Estimated Fair Value Measurements at September 30, 2017  
     Carrying Value as
of September 30,

2017
     Total Fair Value      Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 51,526      $ 51,526      $ 51,526      $ —        $ —    

Restricted cash and investments

     24,012        24,012        20,592        3,420        —    

Liabilities:

              

Borrowings under senior credit facility

   $ 1,041,874      $ 1,047,844      $ —        $ 1,047,844      $ —    

5.875% Senior Notes due 2024

     250,000        260,943        —          260,943        —    

5.125% Senior Notes

     300,000        305,418        —          305,418        —    

5.875% Senior Notes due 2022

     250,000        260,985        —          260,985        —    

6.00% Senior Notes

     350,000        368,571        —          368,571        —    

Non-recourse debt, Australian subsidiary

     549,926        549,926        —          549,926        —    

Other non-recourse debt, including current portion

     36,381        37,465        —          37,465        —    
            Estimated Fair Value Measurements at December 31, 2016  
     Carrying Value as
of December 31,
2016
     Total Fair Value      Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 68,038      $ 68,038      $ 68,038      $ —        $ —    

Restricted cash and investments

     22,319        22,319        19,614        2,705        —    

Liabilities:

              

Borrowings under senior credit facility

   $ 804,500      $ 795,008      $ —        $ 795,008      $ —    

5.875% Senior Notes due 2024

     250,000        247,813        —          247,813        —    

5.125% Senior Notes

     300,000        292,125        —          292,125        —    

5.875% Senior Notes due 2022

     250,000        254,688        —          254,688        —    

6.00% Senior Notes

     350,000        346,938        —          346,938        —    

Non-recourse debt, Australian subsidiary

     454,222        454,185        —          454,185        —    

Other non-recourse debt, including current portion

     36,280        37,550        —          37,550        —    

The fair values of the Company’s cash and cash equivalents, and restricted cash approximates the carrying values of these assets at September 30, 2017 and December 31, 2016. Restricted cash consists of money market funds, bank deposits, commercial paper and time deposits used for 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).

 

13


Table of Contents

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”), 6.00% 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. 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 based on market prices of 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.

6. 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, January 1, 2017

     112,548     $ 1,125     $ 891,993     $ 112,763     $ (30,825   $ (99   $ 974,957  

Proceeds from exercise of stock options

     348       3       6,783       —         —         —         6,786  

Stock-based compensation expense

     —         —         14,852       —         —         —         14,852  

Restricted stock granted

     927       9       (9     —         —         —         —    

Restricted stock canceled

     (60     —         —         —         —         —         —    

Dividends paid

     —         —         —         (169,152     —         —         (169,152

Issuance of common stock - prospectus supplement

     10,350       104       275,763       —         —         —         275,867  

Shares withheld for net settlements of share-based awards

     (135     (1     (4,121     —         —         —         (4,122

Issuance of common stock - ESPP

     13       —         382       —         —         —         382  

Net income (loss)

     —         —         —         109,884       —         (123     109,761  

Other comprehensive income

     —         —         —         —         4,757       4       4,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2017

     123,991     $ 1,240     $ 1,185,643     $ 53,495     $ (26,068   $ (218   $ 1,214,092  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ended September 30, 2017, the Company withheld shares through net share settlements to satisfy statutory tax withholding requirements upon vesting of shares of restricted stock held by employees.

Outstanding share and per-share amounts disclosed for all periods presented have been retroactively adjusted to reflect the effects of the stock split. Refer to Note 1 - Basis of Presentation.

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.

 

14


Table of Contents

During the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively, GEO declared and paid the following regular cash distributions to its shareholders as follows:

 

Declaration Date

   Record Date    Payment Date    Distribution Per Share      Aggregate
Payment Amount
(in millions)
 

February 3, 2016

   February 16, 2016    February 26, 2016    $ 0.43      $ 48.5  

April 20, 2016

   May 2, 2016    May 12, 2016    $ 0.43      $ 48.7  

July 20, 2016

   August 1, 2016    August 12, 2016    $ 0.43      $ 48.7  

October 18, 2016

   October 31, 2016    November 10, 2016    $ 0.43      $ 48.8  

February 6, 2017

   February 17, 2017    February 27, 2017    $ 0.47      $ 52.5  

April 25, 2017

   May 9, 2017    May 19, 2017    $ 0.47      $ 58.4  

July 10, 2017

   July 21, 2017    July 28, 2017    $ 0.47      $ 58.3  

Distributions per share above have been adjusted to reflect the effects of the stock split.

Common Stock Offering

On March 7, 2017, the Company entered into an underwriting agreement related to the issuance and sale of 9,000,000 shares of common stock, par value $.01 per share, of the Company. The offering price to the public was $27.80 per share and the underwriters agreed to purchase the shares from the Company pursuant to the underwriting agreement at a price of $26.70 per share. In addition, under the terms of the underwriting agreement, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,350,000 shares of common stock. On March 8, 2017, the underwriters exercised in full their option to purchase the additional 1,350,000 shares of common stock. On March 13, 2017, the Company announced that it had completed the sale of 10,350,000 shares of common stock with its previously announced underwritten public offering. GEO received gross proceeds (before underwriting discounts and estimated offering expenses) of approximately $288.1 million from the offering, including approximately $37.6 million in connection with the sale of the additional shares. Fees paid in connection with the offering were not significant and have been netted against additional paid-in capital. The 10,350,000 shares of common stock were issued under GEO’s previously effective shelf registration filed with the Securities and Exchange Commission. The previously effective registration statement on Form S-3 expired September 12, 2017. On October 20, 2017, GEO filed a new registration statement on Form S-3 that automatically became effective. Refer to Note 16 - Subsequent Events. The net proceeds of this offering were used to repay amounts outstanding under the revolver portion of the Company’s senior credit facility and for general corporate purposes. The number of shares and per-share amounts herein have been adjusted to reflect the effects of the stock split. Refer to Note 1 - Basis of Presentation

Prospectus Supplement

In September 2014, the Company filed with the Securities and Exchange Commission (“SEC”) an automatic shelf registration statement on Form S-3. On November 10, 2014, in connection with the shelf registration, 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 $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 common stock sold under this prospectus supplement during the nine months ended September 30, 2017 or during the year ended December 31, 2016. On September 12, 2017, the shelf registration expired. On October 20, 2017, the Company filed with the SEC a new automatic shelf registration on Form S-3. Under this new shelf registration, the Company may, from time to time, sell any combination of securities described in the prospectus in one or more offerings. Each time that the Company may sell securities, the Company will provide a prospectus supplement that will contain specific information about the terms of that offering and the securities being offered.

 

15


Table of Contents

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:

 

     Nine Months Ended September 30, 2017
(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, January 1, 2017

   $ (11,284    $ (15,877    $ (3,664    $ (30,825

Current-period other comprehensive income

     2,026        2,556        175        4,757  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30, 2017

   $ (9,258    $ (13,321    $ (3,489    $ (26,068
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The foreign currency translation related to noncontrolling interests was not significant at September 30, 2017 or December 31, 2016.

7. 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 4,625,030 shares, which consisted of 3,000,000 new shares of common stock available for issuance and 1,625,030 shares of common stock that were available for issuance under the 2006 Plan prior to the 2014 Plan replacing it adjusted to reflect the effects of the stock split. 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.

Outstanding share and per-share amounts disclosed for all periods presented have been retroactively adjusted to reflect the effects of the stock split. Refer to Note 1 - Basis of Presentation.

 

16


Table of Contents

Stock Options

The Company uses a Black-Scholes option valuation model to estimate the fair value of each time based or performance based option awarded. For options granted during the nine months ended September 30, 2017, the fair value was estimated using the following assumptions: (i) volatility of 35.72%; (ii) expected term of 5.00 years; (iii) risk free interest rate of 1.53%; and (iv) expected dividend yield of 5.79%. A summary of the activity of stock option awards issued and outstanding under Company plans is as follows for the nine months ended September 30, 2017:

 

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

Options outstanding at January 1, 2017

     1,211      $ 20.65        7.14      $ 5,466  

Options granted

     462        32.30        

Options exercised

     (348      19.22        

Options forfeited/canceled/expired

     (59      27.35        
  

 

 

          

Options outstanding at September 30, 2017

     1,266      $ 24.98        7.61      $ 5,200  
  

 

 

          

Options vested and expected to vest at September 30, 2017

     1,186      $ 24.77        7.53      $ 5,025  
  

 

 

          

Options exercisable at September 30, 2017

     538      $ 21.96        6.27      $ 3,352  
  

 

 

          

During the nine months ended September 30, 2017, the Company granted approximately 462,000 options to certain employees which had a weighted-average grant-date fair value of $5.91 per share. For the nine months ended September 30, 2017 and September 30, 2016, the amount of stock-based compensation expense related to stock options was $1.1 million and $0.4 million, respectively. As of September 30, 2017, the Company had $1.9 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.1 years.

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 nine months ended September 30, 2017:

 

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

Restricted stock outstanding at January 1, 2017

     1,346      $ 24.37  

Granted

     927        35.33  

Vested

     (439      23.20  

Forfeited/canceled

     (60      26.76  
  

 

 

    

Restricted stock outstanding at September 30, 2017

     1,774      $ 30.45  
  

 

 

    

During the nine months ended September 30, 2017, the Company granted approximately 927,000 shares of restricted stock to certain employees and executive officers. Of these awards, 295,000 are market and performance-based awards which will be forfeited if the Company does not achieve certain annual metrics during 2018, 2019 and 2020.

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, 2017 to December 31, 2019 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, 2017 to December 31, 2019. 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.

 

17


Table of Contents

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 average key assumptions: (i) volatility of 42.2%; (ii) beta of 1.11; and (iii) risk free rates of 1.46%.

For the nine months ended September 30, 2017 and September 30, 2016, the Company recognized $13.8 million and $9.2 million, respectively, of compensation expense related to its restricted stock awards. As of September 30, 2017, the Company had $36.4 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 2.7 years.

Employee Stock Purchase Plan

The Company previously adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan or “ESPP”) 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 750,000, as split adjusted, 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 nine months ended September 30, 2017, 13,360 shares of the Company’s common stock were issued in connection with the Plan.

 

18


Table of Contents

8. 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 three and nine months ended September 30, 2017 and 2016 as follows (in thousands, except per share data):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2017
     September 30,
2016
     September 30,
2017
     September 30,
2016
 

Net income

   $ 38,453      $ 43,674      $ 109,761      $ 99,156  

Net loss attributable to noncontrolling interests

     36        46        123        123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to The GEO Group, Inc.

     38,489        43,720        109,884        99,279  

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

           

Weighted average shares outstanding

     122,251        111,162        119,356        111,015  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.31      $ 0.39      $ 0.92      $ 0.89  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Weighted average shares outstanding

     122,251        111,162        119,356        111,015  

Dilutive effect of equity incentive plans

     636        342        758        410  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares assuming dilution

     122,887        111,504        120,114        111,425  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.31      $ 0.39      $ 0.91      $ 0.89  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding share and per-share amounts disclosed for all periods presented have been retroactively adjusted to reflect the effects of the stock split.

Three Months

For the three months ended September 30, 2017, 681,007 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 814,800 common stock equivalents from restricted shares that were anti-dilutive.

For the three months ended September 30, 2016, 921,192 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 357,842 common stock equivalents from restricted shares that were anti-dilutive.

Nine Months

For the nine months ended September 30, 2017, 601,453 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 662,126 common stock equivalents from restricted shares that were anti-dilutive.

For the nine months ended September 30, 2016, 849,915 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 333,782 common stock equivalents from restricted shares that were anti-dilutive.

 

19


Table of Contents

9. 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.

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 had determined the swap’s payment and expiration dates, and call provisions that coincided with the terms of the non-recourse debt, to be an effective cash flow hedge. Accordingly, the Company recorded 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 nine months ended September 30, 2017 and 2016. The associated non-recourse debt was paid off during the nine months ended September 30, 2017 and the interest rate swap is no longer in existence as of September 30, 2017.

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 September 30, 2017, the swaps had a notional amount of approximately AUD 703 million, or $551 million, based on exchange rates at September 30, 2017, related to the outstanding draws for the design and construction phase and approximately AUD 466 million, or $365 million, based on exchange rates at September 30, 2017 related to future construction draws. At the onset, the Company had determined that the swaps have payment, expiration dates, and provisions that coincide with the terms of the non-recourse debt scheduled construction draw commitments and were therefore considered to be effective cash flow hedges. During 2017, certain of the critical terms of the swap agreements no longer coincided with the scheduled construction draw commitments. However, the swaps are still considered to be highly effective and the measurement of any ineffectiveness was not significant during the nine months ended September 30, 2017. 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 gain recorded in other comprehensive income, net of tax, related to this cash flow hedge was $2.6 million during the nine months ended September 30, 2017. The total fair value of the swap liability as of September 30, 2017 was $15.7 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 $243 million, based on exchange rates at September 30, 2017, towards a portion of the outstanding principal of the non-recourse debt. The Company’s Australian subsidiary also entered into interest rate cap agreements 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. 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 nine months ended September 30, 2017 or 2016. The total fair value of the interest rate cap assets was not significant as of September 30, 2017 and December 31, 2016, respectively, and is recorded as a component of other non-current assets within the accompanying consolidated balance sheets.

 

20


Table of Contents

10. DEBT

Debt outstanding as of September 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

     September 30, 2017      December 31, 2016  

Senior Credit Facility:

     

Term loan

   $ 796,000      $ 289,500  

Unamortized discount on term loan

     (3,660      (375

Unamortized debt issuance costs on term loan

     (7,961      —    

Revolver

     245,874        515,000  
  

 

 

    

 

 

 

Total Senior Credit Facility

   $ 1,030,253      $ 804,125  

6.00% Senior Notes:

     

Notes Due in 2026

     350,000        350,000  

Unamortized debt issuance costs

     (5,447      (5,770
  

 

 

    

 

 

 

Total 6.00% Senior Notes Due in 2026

     344,553        344,230  

5.875% Senior Notes:

     

Notes Due in 2024

     250,000        250,000  

Unamortized debt issuance costs

     (3,485      (3,773
  

 

 

    

 

 

 

Total 5.875% Senior Notes Due in 2024

     246,515        246,227  

5.125% Senior Notes:

     

Notes Due in 2023

     300,000        300,000  

Unamortized debt issuance costs

     (4,339      (4,786
  

 

 

    

 

 

 

Total 5.125% Senior Notes Due in 2023

     295,661        295,214  

5.875% Senior Notes

     

Notes Due in 2022

     250,000        250,000  

Unamortized debt issuance costs

     (3,417      (3,923
  

 

 

    

 

 

 

Total 5.875% Senior Notes Due in 2022

     246,583        246,077  
  

 

 

    

 

 

 

Non-Recourse Debt

     586,606        490,902  

Unamortized debt issuance costs on non-recourse debt

     (12,689      (18,295

Unamortized discount on non-recourse debt

     (299      (400
  

 

 

    

 

 

 

Total Non-Recourse Debt

     573,618        472,207  

Capital Lease Obligations

     7,757        8,693  

Other debt

     2,787        3,030  
  

 

 

    

 

 

 

Total debt

     2,747,727        2,419,803  

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

     (260,046      (238,065

Capital Lease Obligations, long-term portion

     (6,412      (7,431

Non-Recourse Debt, long-term portion

     (323,387      (238,842
  

 

 

    

 

 

 

Long-Term Debt

   $ 2,157,882      $ 1,935,465  
  

 

 

    

 

 

 

 

21


Table of Contents

Amended and Restated Credit Agreement

On March 23, 2017, the Company executed a third amended and restated credit agreement by and among The GEO Group, Inc. and GEO Corrections Holdings, Inc., (“Corrections” and, together with The GEO Group, Inc., the “Borrowers”), the Australian Borrowers named therein, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto (the “Credit Agreement”). The Credit Agreement refinances GEO’s prior $291.0 million term loan, reestablishes GEO’s ability to implement at a later date an Australian Dollar Letter of Credit Facility (the “Australian LC Facility”) providing for the issuance of financial letters of credit and performance letters of credit, in each case denominated in Australian Dollars up to AUD275 million, an increase from the prior AUD225 million Australian Dollar letter of credit facility, and certain other modifications to the prior credit agreement. Loan costs of approximately $7.0 million were incurred and capitalized in connection with the transaction.

The Credit Agreement evidences a credit facility (the “Credit Facility”) consisting of an $800 million term loan (the “Term Loan”) bearing interest at LIBOR plus 2.25% (with a LIBOR floor of 0.75%), and a $900 million revolving credit facility (the “Revolver”) initially bearing interest at LIBOR plus 2.25% (with no LIBOR floor) together with AUD275 million available solely for the issuance of financial letters of credit and performance letters of credit, in each case denominated in Australian Dollars under the Australian LC Facility. As of September 30, 2017, there were no letters of credit issued under the Australian LC Facility. Amounts to be borrowed by GEO under the Credit Agreement are subject to the satisfaction of customary conditions to borrowing. The Term Loan component is scheduled to mature on March 23, 2024. The revolving credit commitment component is scheduled to mature on 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 a date that is 5 12 years after March 23, 2017 or a later date, and the senior secured leverage ratio exceeds 2.50 to 1.00, then the termination date will be October 3, 2019. The 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 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 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) alter the business GEO conducts, and (xi) materially impair GEO’s lenders’ security interests in the collateral for its loans.

Events of default under the Credit Agreement include, but are not limited to, (i) GEO’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 asserted against GEO, and (viii) a change in control.

All of the obligations under the Credit Agreement are unconditionally guaranteed by certain domestic subsidiaries of GEO and the 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. GEO has designated each of the Australian Borrowers as restricted subsidiaries under the Credit Agreement. However, the Australian Borrowers are not obligated to pay or perform any obligations under the Credit Agreement other than their own obligations as Australian Borrowers under the Credit Agreement. The Australian Borrowers do not pledge any of their assets to secure any obligations under the Credit Agreement.

On August 18, 2016, the Company executed a Letter of Offer by and among GEO and HSBC Bank Australia Limited (the “Letter of Offer”) providing for a bank guarantee line and bank guarantee/standby sub-facility in an aggregate amount of AUD100 million, or $78.3 million, based on exchange rates in effect as of September 30, 2017 (collectively, the “Bank Guarantee Facility”). The Bank Guarantee Facility allows GEO to provide letters of credit to assure performance of certain obligations of its wholly owned subsidiary relating to its prison project in Ravenhall, located near Melbourne, Australia. The Bank Guarantee Facility is unsecured. The issuance of letters of credit under the Bank Guarantee Facility is subject to the satisfaction of the conditions precedent specified in the Letter of Offer. Letters of credit issued under the bank guarantee lines are due on demand and letters of credit issued under the bank guarantee/standby sub-facility cannot have a duration exceeding twelve months. The Bank Guarantee Facility may be terminated by HSBC Bank Australia Limited on 90 days written notice. As of September 30, 2017, there was AUD100 million in letters of credit issued under the Bank Guarantee Facility.

 

22


Table of Contents

As of September 30, 2017, the Company had approximately $796 million in aggregate borrowings outstanding under the Term Loan, approximately $246 million in borrowings under the Revolver, and approximately $65 million in letters of credit which left approximately $589 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Credit Agreement as of September 30, 2017 was 3.5%.

6.00% Senior Notes due 2026

Interest on the 6.00% Senior Notes due 2026 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 April 15, 2019, the Company may, at its option, redeem all or part of the 6.00% Senior Notes due 2026 at the redemption prices set forth in the indenture governing the 6.00% Senior Notes due 2026. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 15-Condensed Consolidating Financial Information.

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 15-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 15-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 15-Condensed Consolidating Financial Information.

 

23


Table of Contents

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 $36.7 million, of which $6.7 million is classified as current in the accompanying consolidated balance sheet as of September 30, 2017. The payment of principal and interest on the 2011 Revenue Bonds issued by WEDFA is non-recourse to GEO.

As of September 30, 2017, included in 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

At December 31, 2016, the non-recourse obligation of the Company totaled $2.6 million (AUD 3.6 million), based on the exchange rates in effect at December 31, 2016. The term of the non-recourse debt was through 2017 and it bore interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary were matched by a similar or corresponding commitment from the government of the State of Victoria. During the nine months ended September 30, 2017, the remaining balance was paid in full.

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 $619.7 million, based on exchange rates as of September 30, 2017. Construction draws are 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. The project is being developed under a public-private partnership financing structure with a capital contribution from the Company, which was made in January 2017, of approximately AUD115 million, or $90.1 million, based on exchange rates as of September 30, 2017. 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 AUD310 million, or approximately $243 million, based on exchange rates as of September 30, 2017, towards a portion of the outstanding principal. The remaining outstanding principal balance will be repaid over the term of the operating agreement. As of September 30, 2017, approximately $550 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 9 - 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 100.0 million, or $78.3 million, based on exchange rates as of September 30, 2017. These guarantees are secured by outstanding letters of credit under the Company’s Revolver as of September 30, 2017.

At September 30, 2017, the Company also had ten other letters of credit outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $15.9 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 September 30, 2017, the Company guaranteed obligations amounting to 2.4 million South African Rand, or $0.2 million based on exchange rates as of September 30, 2017. 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 2.4 million South African Rand is secured by outstanding letters of credit under the Company’s Revolver as of September 30, 2017.

 

24


Table of Contents

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 $1.5 million based on exchange rates as of September 30, 2017, 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 as trustee guaranteed certain potential tax obligations of an unrelated trust that owns the faciltiy. The potential estimated exposure of these obligations was Canadian Dollar 1.4 million as of June 30, 2017. During the third quarter of 2017, the Company, with the assistance of Canadian tax counsel, completed an analysis and determined that any future tax exposure would be remote and therefore, the liability was derecognized as of September 30, 2017. The Company maintains the facility but does not currently operate or manage it.

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 September 30, 2017, of which £2.5 million, or $3.4 million, based on exchange rates as of September 30, 2017, was outstanding as of September 30, 2017 to each joint venture partner. The Company’s maximum exposure relative to the joint venture is its note receivable of approximately $3.4 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.

11. COMMITMENTS, CONTINGENCIES AND OTHER

Litigation, Claims and Assessments

On August 25, 2016, a purported shareholder class action lawsuit was filed against the Company, its Chief Executive Officer, George C. Zoley (“Mr. Zoley”), and its Chief Financial Officer, Brian R. Evans (“Mr. Evans”), in the United States District Court for the Southern District of Florida. The complaint alleged that the Company and Messrs. Zoley and Evans made false and misleading statements regarding the Company’s business, operational and compliance policies. The lawsuit alleged that it was brought by John J. Mulvaney individually and on behalf of a class consisting of all persons other than the defendants who purchased or otherwise acquired the Company’s securities during the alleged class period between March 1, 2012 through and including August 17, 2016. The complaint alleged that the Company and Messrs. Zoley and Evans violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and alleged that Messrs. Zoley and Evans violated Section 20(a) of the Exchange Act. On December 21, 2016, the appointed lead plaintiffs filed an Amended Class Action Complaint, which reasserted the claims against the Company and Messrs. Zoley and Evans, and asserted new claims for alleged false and misleading statements in violation of Section 20(a) of the Exchange Act against the Company’s former Senior Vice President, GEO Detention & Corrections Services, John Hurley (“Mr. Hurley”) and the Company’s Senior Vice President and President, GEO Corrections & Detention, David Donahue (“Mr. Donahue”). The amended complaint sought damages, interest, attorneys’ fees, expert fees, other costs, and such other relief as the court may deem proper. On February 23, 2017, the Court entered an order granting the Company’s motion to dismiss the Amended Class Action Complaint. On March 17, 2017, the case was dismissed with prejudice and resulted in no liability to the Company.

 

25


Table of Contents

On February 8, 2017, the Attorney General of the State of Mississippi filed a lawsuit in the Circuit Court for the First Judicial District of Hinds County, Mississippi against the Company, Cornell Companies, Inc., a subsidiary of the Company, Christopher B. Epps, the former Commissioner of the Mississippi Department of Corrections, and Cecil McCrory, a former consultant of the Company. The complaint alleges several statutory and common law claims, including violations of various public servant statutes, racketeering activity, antitrust law, civil conspiracy, unjust enrichment and fraud. The complaint seeks compensatory damages, punitive damages, exemplary damages, forfeiture of all money received by the defendants, restitution, interest, attorneys’ fees, other costs, and such other expenses or damages as the court may deem proper. The complaint claims that between 2007 and 2014, the Company and Cornell Companies, Inc. received approximately $256 million in proceeds from public contracts paid for by the State of Mississippi. The Company intends to take all necessary steps to vigorously defend itself and Cornell Companies, Inc. The Company has not recorded an accrual relating to this matter at this time, as a loss is not considered probable nor reasonably estimable at this preliminary stage of the lawsuit.

On October 22, 2014, nine current and former civil immigration detainees who were detained at the Aurora Immigration Detention Center filed a purported class action lawsuit against the Company in the United States District Court for the District of Colorado (the “Court”). The complaint alleged that the Company was in violation of the Colorado Minimum Wages of Workers Act and the Trafficking Victims Protection Act, and claimed that the Company was unjustly enriched as a result of the level of payment that the detainees received for work performed at the facility, even though the voluntary work program as well as the wage rates and standards associated with the program that are at issue in this case are authorized by the Federal government under guidelines approved by the United States Congress. On July 6, 2015, the Court granted the Company’s motion to dismiss the claim against the Company under the Colorado Minimum Wages of Workers Act but otherwise denied the Company’s motion to dismiss. On February 27, 2017, the Court granted the plaintiffs’ motion for class certification. The Court ordered the parties to file a revised Proposed Stipulated Scheduling and Discovery Order by March 27, 2017 to proceed with the case. On March 13, 2017, GEO filed for permission to appeal this class certification order directly to the 10th Circuit Court of Appeal. On April 11, 2017, the 10th Circuit Court of Appeal granted GEO’s petition to hear the case. As a result, GEO has filed a motion to stay the proceedings in the trial court. Fact discovery in the case has not yet begun. The plaintiffs seek actual damages, compensatory damages, exemplary damages, punitive damages, restitution, attorneys’ fees and costs, and such other relief as the Court may deem proper. The Company intends to take all necessary steps to vigorously defend itself and has consistently refuted the allegations and claims in the lawsuit. The Company has not recorded an accrual relating to this matter at this time, as a loss is not considered probable nor reasonably estimable at this stage of the lawsuit. If the Company had to change the level of compensation under the voluntary work program, or to substitute employee work for voluntary work, this could increase costs of operating these facilities.

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.

 

26


Table of Contents

Other Assessment

A state non-income tax audit completed in 2016 included tax periods for which the state tax authority had a number of years ago processed a substantial tax refund. At the completion of the audit fieldwork, the Company received a notice of audit findings disallowing deductions that were previously claimed by the Company, approved by the state tax authority and served as the basis for the approved refund claim. In early January 2017, the Company received a formal Notice of Assessment of Taxes and Demand for Payment from the taxing authority disallowing the deductions. The total tax, penalty and interest assessed is approximately $19.6 million. The Company has filed an administrative protest and disagrees with the assessment and intends to take all necessary steps to vigorously defend its position. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of outside counsel in connection with this matter.

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 $243.9 million of which $82.6 million was spent through the first nine months of 2017. The Company estimates the remaining capital requirements related to these capital projects will be $161.3 million which will be spent through 2018.

Idle Facilities

As of September 30, 2017, the Company is marketing approximately 5,400 vacant beds at five 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 $137.3 million as of September 30, 2017, excluding equipment and other assets that can be easily transferred for use at other facilities. There was no indication of impairment related to the Company’s idle facilities at September 30, 2017.

 

27


Table of Contents

12. 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      Nine Months Ended  
     September 30,
2017
     September 30,
2016
     September 30,
2017
     September 30,
2016
 

Revenues:

           

U.S. Corrections & Detention

   $ 365,071      $ 344,452      $ 1,073,840      $ 1,024,395  

GEO Care

     134,610        99,779        377,740        289,722  

International Services

     45,641        40,416        130,261        116,468  

Facility Construction & Design (1)

     21,437        69,729        112,602        182,326  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 566,759      $ 554,376      $ 1,694,443      $ 1,612,911  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) from segments:

           

U.S. Corrections & Detention

   $ 77,551      $ 77,865      $ 224,838      $ 220,292  

GEO Care

     31,293        30,007        94,062        80,558  

International Services

     3,410        1,866        8,413        4,702  

Facility Construction & Design (1)

     (278      196        (1,620      471  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income from segments

   $ 111,976      $ 109,934      $ 325,693      $ 306,023  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. During the nine months ended September 30, 2017, the Company became aware of certain claims by its construction subcontractor for unanticipated additional costs which are in excess of the agreed contract price. The Company has agreed in principle with the subcontractor to pay approximately $1.9 million related to these overruns and has recorded a provision for loss related to these claims during the nine months ended September 30, 2017.

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      Nine Months Ended  
     September 30,
2017
     September 30,
2016
     September 30,
2017
     September 30,
2016
 

Total operating income from segments

   $ 111,976      $ 109,934      $ 325,693      $ 306,023  

Unallocated amounts:

           

General and Administrative Expenses

     (49,074      (37,483      (143,866      (108,448

Net Interest Expense

     (24,071      (25,500      (70,731      (75,477

Loss on Extinguishment of Debt

     —          —          —          (15,885
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes and equity in earnings of affiliates

   $ 38,831      $ 46,951      $ 111,096      $ 106,213  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

28


Table of Contents

The Company has recorded $1.1 million and $3.4 million in earnings, net of tax, for SACS operations during the three and nine months ended September 30, 2017, and $1.1 million and $2.9 million in earnings, net of tax, for SACS operations during the three and nine months ended September 30, 2016, respectively, which are included in equity in earnings of affiliates, net of income tax provision in the accompanying consolidated statements of operations. As of September 30, 2017 and December 31, 2016, the Company’s investment in SACS was $10.4 million and $11.8 million, respectively.

The Company has recorded $0.2 million and $0.8 million in earnings, net of tax, for GEO Amey’s operation during the the three and nine months ended September 30, 2017, and $0.7 million and $2.1 million in earnings, net of tax, during the three and nine months ended September 30, 2016, respectively, in the accompanying consolidated statements of operations. As of September 30, 2017 and December 31, 2016, the Company’s investment in GEOAmey was $2.3 million and $1.3 million, respectively, and represents its share of cumulative reported earnings.

13. BENEFIT PLANS

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

 

     Nine Months Ended
September 30, 2017
     Year Ended
December 31, 2016
 

Change in Projected Benefit Obligation

     

Projected benefit obligation, beginning of period

   $ 28,624      $ 25,935  

Service cost

     751        995  

Interest cost

     921        1,155  

Actuarial loss

     —          1,031  

Benefits paid

     (426      (492
  

 

 

    

 

 

 

Projected benefit obligation, end of period

   $ 29,870      $ 28,624  
  

 

 

    

 

 

 

Change in Plan Assets

     

Plan assets at fair value, beginning of period

   $ —        $ —    

Company contributions

     426        492  

Benefits paid

     (426      (492
  

 

 

    

 

 

 

Plan assets at fair value, end of period

   $ —        $ —    
  

 

 

    

 

 

 

Unfunded Status of the Plan

   $ (29,870    $ (28,624
  

 

 

    

 

 

 

 

     Three Months Ended      Nine Months Ended  
     September 30,
2017
     September 30,
2016
     September 30,
2017
     September 30,
2016
 

Components of Net Periodic Benefit Cost

           

Service cost

   $ 250      $ 249      $ 751        746  

Interest cost

     307        289      $ 921      $ 866  

Net loss

     73        53        218        160  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 630      $ 591      $ 1,890      $ 1,772  
  

 

 

    

 

 

    

 

 

    

 

 

 

The long-term portion of the pension liability as of September 30, 2017 and December 31, 2016 was $29.6 million and $28.3 million, respectively, and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheets.

 

29


Table of Contents

14. RECENT ACCOUNTING PRONOUNCEMENTS

The Company implemented the following accounting standards during the nine months ended September 30, 2017:

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, “Compensation - Stock Compensation (Topic 718), as a part of its simplification initiative. The Company adopted this ASU during the nine months ended September 30, 2017. Key areas of the amendments in this standard are (i) all excess tax benefits (deficiencies) 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 guidance also provides clarification of the presentation of certain components of share-based awards in the statement of cash flows. The Company has elected to continue estimating forfeitures expected to occur in order to determine the amount of compensation cost to be recognized each period and to apply the cash flow classification guidance prospectively. As a result, excess tax benefits are now classified as an operating activity rather than a financing activity and the Company has recorded $1.5 million of excess tax benefits from stock plan transactions as a component of income tax expense in the consolidated statement of operations for the nine months ended September 30, 2017. The Company has excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of its diluted earnings per share for the nine months ended September 30, 2017.

In March 2016, the 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 a 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 Company adopted this ASU during the nine months ended September 30, 2017 and elected to apply the amendments in this standard on a prospective basis. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2016, the 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 Company adopted this ASU during the nine months ended September 30, 2017 and elected to apply the amendments in this standard on a prospective basis. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2016, the FASB issued ASU No. 2016-17,Consolidation - Interest Held through Related Parties that are Under Common Control,” which amends the current consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE, and therefore consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The Company adopted this ASU during the nine months ended September 30, 2017. The implementation of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

30


Table of Contents

The following accounting standards will be adopted in future periods:

In August 2017, the FASB issued ASU No. 2017-11Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities”. The objective of this guidance is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. Certain of the amendments in this update as they relate to cash flow hedges, eliminate the requirement to separately record hedge ineffectiveness currently in earnings. Instead, the entire change in the fair value of the hedging instrument is recorded in other comprehensive income. Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. The new standard is effective for the Company beginning January 1, 2019. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2017, the FASB issued ASU No. 2017-10Service Concession Arrangements - Determining the Customer of the Operation Services”. The objective of this guidance is to reduce diversity in practice and provide clarification on how an operating entity determines the customer of the operation services for transactions within the scope of Topic 853, Service Concessions Arrangements. The amendments in this update clarify that the grantor is the customer of the operation services in all cases for such arrangements. The new standard is effective for the Company beginning on January 1, 2018. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2017, the FASB issued ASU No. 2017-09Compensation - Stock Compensation”. The objective of this guidance is to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying modification accounting for changes in the terms or conditions of share-based payment awards. An entity should account for the effects of a modification unless all of the following factors are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before the award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard will be effective for all entities for fiscal years beginning after December 15, 2017 with early adoption permitted for public companies for reporting periods for which financial statements have not yet been issued. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption 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 2017, the FASB issued ASU No. 2017-07Compensation - Retirement Benefits (Topic 715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This guidance revises how employers that sponsor defined benefit pension and other postretirement plans present the net periodic benefit cost in their income statement and requires that the service cost component of net periodic benefit cost be presented in the same income statement line items as other employee compensation costs from services rendered during the period. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. The other components of the net periodic benefit cost must be presented separately from the line items that include the service cost and outside of any subtotal of operating income on the income statement. The new standard will be effective for public companies for fiscal years beginning after December 15, 2017 on a retroactive basis. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2016, the FASB issued ASU No. 2016-16,Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory,” as a part of its simplification initiative. The amendments in this standard require entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Under prior generally accepted accounting principles, the recognition of current and deferred income taxes for an intra-entity asset transfer was prohibited until the asset has been sold to an outside party. The new standard will be effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods with early adoption permitted under certain circumstances. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

31


Table of Contents

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 has implemented a lease management software application tool and is currently assessing the impact that the adoption of ASU 2016-02 will have on its consolidated financial position or results of operations, but expects that it will result in a significant increase in its long-term assets and liabilities given the significant number of leases the Company is a party to.

In May 2014, the FASB issued a new standard related to revenue recognition (ASU 2014-09,Revenue from Contracts with Customers”.) Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective transition method). The new standard is effective for the Company beginning on January 1, 2018. The Company is currently in the final stages of evaluating whether these standards would have a material impact on the Company’s financial position, results of operations or cash flows. However, upon its preliminary assessment, the Company believes that the timing of revenue recognition could potentially be affected as it relates to certain variable consideration arrangements with certain of its customers and also certain identified performance obligations related to construction activities. Additionally, certain reclassifications may be necessary with respect to payments made to certain of its customers. However, at this time, the Company does not believe that any such potential adjustments or however, that election, as well as its analysis of any impacts related to variable consideration arrangements, construction performance obligations and payments made to customers, may change once the Company’s final assessment is completed during the fourth quarter of 2017. The Company has determined that it will use the modified retrospective transition method to implement this standard.

 

32


Table of Contents

15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of September 30, 2017, the Company’s 6.00% Senior Notes, 5.125% Senior Notes, the 5.875% Senior Notes due 2022 and the 5.875% Senior Notes due 2024 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.

 

33


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Three Months Ended September 30, 2017  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 171,553     $ 464,140     $ 69,698     $ (138,632   $ 566,759  

Operating expenses

     139,165       364,834       57,767       (138,632     423,134  

Depreciation and amortization

     6,104       24,623       922       —         31,649  

General and administrative expenses

     14,699       28,066       6,309       —         49,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     11,585       46,617       4,700       —         62,902  

Interest income

     2,688       1,629       14,871       (4,540     14,648  

Interest expense

     (18,148     (13,093     (12,018     4,540       (38,719
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (3,875     35,153       7,553       —         38,831  

Income tax provision

     147       811       762       —         1,720  

Equity in earnings of affiliates, net of income tax provision

     —         —         1,342       —         1,342  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of consolidated subsidiaries

     (4,022     34,342       8,133       —         38,453  

Income from consolidated subsidiaries, net of income tax provision

     42,475       —         —         (42,475     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     38,453       34,342       8,133       (42,475     38,453  

Net loss attributable to noncontrolling interests

     —         —         36       —         36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 38,453     $ 34,342     $ 8,169     $ (42,475   $ 38,489  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 38,453     $ 34,342     $ 8,133     $ (42,475   $ 38,453  

Other comprehensive income, net of tax

     —         64       1,561       —         1,625  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 38,453     $ 34,406     $ 9,694     $ (42,475   $ 40,078  

Comprehensive loss attributable to noncontrolling interests

     —         —         34       —         34  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 38,453     $ 34,406     $ 9,728     $ (42,475   $ 40,112  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

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

Revenues

   $ 173,920     $ 410,329     $ 112,708     $ (142,581   $ 554,376  

Operating expenses

     144,748       314,009       99,483       (142,581     415,659  

Depreciation and amortization

     6,339       21,502       942       —         28,783  

General and administrative expenses

     11,727       18,180       7,576       —         37,483  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     11,106       56,638       4,707       —         72,451  

Interest income

     4,765       422       8,029       (5,288     7,928  

Interest expense

     (16,324     (13,525     (8,867     5,288       (33,428
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (453     43,535       3,869       —         46,951  

Income tax provision (benefit)

     (9     4,032       947       —         4,970  

Equity in earnings of affiliates, net of income tax provision

     —         —         1,693       —         1,693  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of consolidated subsidiaries

     (444     39,503       4,615       —         43,674  

Income from consolidated subsidiaries, net of income tax provision

     44,118       —         —         (44,118     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     43,674       39,503       4,615       (44,118     43,674  

Net loss attributable to noncontrolling interests

     —         —         46       —         46  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 43,674     $ 39,503     $ 4,661     $ (44,118   $ 43,720  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 43,674     $ 39,503     $ 4,615     $ (44,118   $ 43,674  

Other comprehensive income, net of tax

     —         33       450       —         483  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 43,674     $ 39,536     $ 5,065     $ (44,118   $ 44,157  

Comprehensive loss attributable to noncontrolling interests

     —         —         36       —         36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 43,674     $ 39,536     $ 5,101     $ (44,118   $ 44,193  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents
     For the Nine Months Ended September 30, 2017  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 520,986     $ 1,342,620     $ 250,618     $ (419,781   $ 1,694,443  

Operating expenses

     406,576       1,076,232       213,259       (419,781     1,276,286  

Depreciation and amortization

     18,319       71,404       2,741       —         92,464  

General and administrative expenses

     43,939       78,479       21,448       —         143,866  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     52,152       116,505       13,170       —         181,827  

Interest income

     12,793       2,858       39,175       (15,855     38,971  

Interest expense

     (51,391     (41,353     (32,813     15,855       (109,702

Income before income taxes and equity in earnings of affiliates

     13,554       78,010       19,532       —         111,096  

Income tax provision

     441       3,058       2,091       —         5,590  

Equity in earnings of affiliates, net of income tax provision

     —         —         4,255       —         4,255  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in income of consolidated subsidiaries

     13,113       74,952       21,696       —         109,761  

Income from consolidated subsidiaries, net of income tax provision

     96,648       —         —         (96,648     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     109,761       74,952       21,696       (96,648     109,761  

Net loss attributable to noncontrolling interests

     —         —         123       —         123  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 109,761     $ 74,952     $ 21,819     $ (96,648   $ 109,884  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 109,761     $ 74,952     $ 21,696     $ (96,648   $ 109,761  

Other comprehensive income, net of tax

     —         175       4,586       —         4,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 109,761     $ 75,127     $ 26,282     $ (96,648   $ 114,522  

Comprehensive loss attributable to noncontrolling interests

     —         —         119       —         119  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 109,761     $ 75,127     $ 26,401     $ (96,648   $ 114,641  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents
     For the Nine Months Ended September 30, 2016  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 515,971     $ 1,215,469     $ 306,484     $ (425,013   $ 1,612,911  

Operating expenses

     418,261       957,704       270,050       (425,013     1,221,002  

Depreciation and amortization

     18,866       64,159       2,861       —         85,886  

General and administrative expenses

     34,548       53,396       20,504       —         108,448  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     44,296       140,210       13,069       —         197,575  

Interest income

     15,646       1,440       18,699       (17,398     18,387  

Interest expense

     (49,031     (41,401     (20,830     17,398       (93,864

Loss on early extinguishment of debt

     (15,885     —         —         —         (15,885
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (4,974     100,249       10,938       —         106,213  

Income tax provision (benefit)

     (101     9,323       2,778       —         12,000  

Equity in earnings of affiliates, net of income tax provision

     —         —         4,943       —         4,943  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of consolidated subsidiaries

     (4,873     90,926       13,103       —         99,156  

Income from consolidated subsidiaries, net of income tax provision

     104,029       —         —         (104,029     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     99,156       90,926       13,103       (104,029     99,156  

Net loss attributable to noncontrolling interests

     —         —         123       —         123  

Net income attributable to The GEO Group, Inc.

   $ 99,156     $ 90,926     $ 13,226     $ (104,029   $ 99,279  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 99,156     $ 90,926     $ 13,103     $ (104,029   $ 99,156  

Other comprehensive income (loss), net of tax

     —         98       (3,081     —         (2,983
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     99,156       91,024       10,022       (104,029     96,173  

Comprehensive loss attributable to noncontrolling interests

     —         —         104       —         104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 99,156     $ 91,024     $ 10,126     $ (104,029   $ 96,277  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of September 30, 2017  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
ASSETS  

Cash and cash equivalents

   $ 6,191      $ 13,853      $ 31,482     $ —       $ 51,526  

Restricted cash and investments

     —          —          12,452       —         12,452  

Accounts receivable, less allowance for doubtful accounts

     129,730        241,031        16,137       —         386,898  

Contract receivable, current portion

     —          —          243,531       —         243,531  

Prepaid expenses and other current assets

     2,921        28,033        5,119       —         36,073  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     138,842        282,917        308,721       —         730,480  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Restricted Cash and Investments

     —          24,387        6,645       —         31,032  

Property and Equipment, Net

     751,374        1,213,614        90,994       —         2,055,982  

Non-Current Contract Receivable

     —          —          405,780       —         405,780  

Intercompany Receivable

     1,128,469        104,226        24,654       (1,257,349     —    

Non-Current Deferred Income Tax Assets

     763        19,254        11,814       —         31,831  

Goodwill

     79        781,444        449       —         781,972  

Intangible Assets, Net

     —          261,053        737       —         261,790  

Investment in Subsidiaries

     1,332,393        456,075        2,191       (1,790,659     —    

Other Non-Current Assets

     12,714        118,579        18,708       (79,527     70,474  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,364,634      $ 3,261,549      $ 870,693     $ (3,127,535   $ 4,369,341  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY  

Accounts payable

   $ 8,573      $ 66,848      $ 16,196     $ —       $ 91,617  

Accrued payroll and related taxes

     —          30,190        18,590       —         48,780  

Accrued expenses and other current liabilities

     48,090        106,056        20,175       —         174,321  

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

     8,000        1,815        250,231       —         260,046  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     64,663        204,909        305,192       —         574,764  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Intercompany Payable

     14,535        1,211,260        31,554       (1,257,349     —    

Other Non-Current Liabilities

     4,120        151,405        16,806       (79,527     92,804  

Capital Lease Obligations

     —          6,412        —         —         6,412  

Long-Term Debt

     2,067,008        —          90,874       —         2,157,882  

Non-Recourse Debt

     —          —          323,387       —         323,387  

Commitments & Contingencies and Other

            

Shareholders’ Equity:

            

The GEO Group, Inc. Shareholders’ Equity

     1,214,308        1,687,563        103,098       (1,790,659     1,214,310  

Noncontrolling Interests

     —          —          (218     —         (218
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

     1,214,308        1,687,563        102,880       (1,790,659     1,214,092  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 3,364,634      $ 3,261,549      $ 870,693     $ (3,127,535   $ 4,369,341  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 

     As of December 31, 2016  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
ASSETS  

Cash and cash equivalents

   $ 45,566      $ 842      $ 21,630     $ —       $ 68,038  

Restricted cash and investments

     —          —          17,133       —         17,133  

Accounts receivable, less allowance for doubtful accounts

     139,571        200,239        16,445       —         356,255  

Contract receivable, current portion

     —          —          224,033       —         224,033  

Prepaid expenses and other current assets

     677        24,096        7,437       —         32,210  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     185,814        225,177        286,678       —         697,669  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Restricted Cash and Investments

     170        19,742        936       —         20,848  

Property and Equipment, Net

     735,104        1,078,220        83,917       —         1,897,241  

Non-Current Contract Receivable

     —          —          219,783         219,783  

Intercompany Receivable

     918,527        141,987        27,290       (1,087,804     —    

Non-Current Deferred Income Tax Assets

     764        17,918        11,357       —         30,039  

Goodwill

     79        614,941        413       —         615,433  

Intangible Assets, Net

     —          203,138        746       —         203,884  

Investment in Subsidiaries

     1,238,772        453,635        2,190       (1,694,597     —    

Other Non-Current Assets

     15,011        108,434        20,933       (79,866     64,512  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,094,241      $ 2,863,192      $ 654,243     $ (2,862,267   $ 3,749,409  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY  

Accounts payable

   $ 8,402      $ 50,200      $ 21,035     $ —       $ 79,637  

Accrued payroll and related taxes

     —          41,230        14,030       —         55,260  

Accrued expenses and other current liabilities

     36,792        83,906        10,398       —         131,096  

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

     3,000        1,700        233,365       —         238,065  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     48,194        177,036        278,828       —         504,058  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Intercompany Payable

     133,039        920,825        33,940       (1,087,804     —    

Other Non-Current Liabilities

     2,487        144,383        21,652       (79,866     88,656  

Capital Lease Obligations

     —          7,431        —         —         7,431  

Long-Term Debt

     1,935,465        —          —         —         1,935,465  

Non-Recourse Debt

     —          —          238,842       —         238,842  

Commitments & Contingencies and Other

            

Shareholders’ Equity:

            

The GEO Group, Inc. Shareholders’ Equity

     975,056        1,613,517        81,080       (1,694,597     975,056  

Noncontrolling Interests

     —          —          (99     —         (99
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

     975,056        1,613,517        80,981       (1,694,597     974,957  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 3,094,241      $ 2,863,192      $ 654,243     $ (2,862,267   $ 3,749,409  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Nine Months Ended September 30, 2017  
     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

   $ 15,473     $ 79,088     $ (36,733   $ 57,828  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Acquisition of CEC, net of cash acquired

     (353,555     —         —         (353,555

Proceeds from sale of property and equipment

     845       —         11       856  

Insurance proceeds-damaged property

     86       —         —         86  

Change in restricted cash and investments

     —         (4,645     (175     (4,820

Capital expenditures

     (34,679     (61,432     (8,019     (104,130
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (387,303     (66,077     (8,183     (461,563
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Proceeds from long-term debt

     1,324,865       —         —         1,324,865  

Payments on long-term debt

     (1,093,088     —         —         (1,093,088

Payments on non-recourse debt

     —         —         (68,887     (68,887

Proceeds from non-recourse debt

     —         —         123,785       123,785  

Taxes paid related to net share settlements of equity awards

     (4,122     —         —         (4,122

Proceeds from issuance of common stock in connection with ESPP

     —         —         382       382  

Proceeds from issuance of common stock under prospectus supplement

     275,867       —         —         275,867  

Debt issuance costs

     (8,701     —         (769     (9,470

Proceeds from stock options exercised

     6,786       —         —         6,786  

Dividends paid

     (169,152       —         (169,152
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     332,455       —         54,511       386,966  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —         —         257       257  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (39,375     13,011       9,852       (16,512

Cash and Cash Equivalents, beginning of period

     45,566       842       21,630       68,038  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 6,191     $ 13,853     $ 31,482     $ 51,526  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Nine Months Ended September 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

   $ 99,124     $ 57,187     $ (168,069   $ (11,758
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Proceeds from sale of property and equipment

     68       —         —         68  

Insurance proceeds - damaged property

     4,733       —         —         4,733  

Change in restricted cash and investments

     (24     (2,635     (95,057     (97,716

Capital expenditures

     (9,879     (54,552     (3,584     (68,015
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (5,102     (57,187     (98,641     (160,930
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Taxes paid related to net share settlements of equity awards

     (2,336     —         —         (2,336

Proceeds from long-term debt

     813,077       —         —         813,077  

Payments on long-term debt

     (775,256       —         (775,256

Payments on non-recourse debt

     —         —         (1,878     (1,878

Proceeds from non-recourse debt

     —         —         273,087       273,087  

Proceeds from issuance of common stock in connection with ESPP

     —         —         338       338  

Debt issuance costs

     (16,980     —         (3,510     (20,490

Tax deficiency related to equity compensation

     (844     —         —         (844

Proceeds from stock options exercised

     2,367       —         —         2,367  

Dividends paid

     (145,991     —         —         (145,991
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (125,963     —         268,037       142,074  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —         —         1,099       1,099  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (31,941     —         2,426       (29,515

Cash and Cash Equivalents, beginning of period

     37,077       —         22,561       59,638  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 5,136     $ —       $ 24,987     $ 30,123  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

41


Table of Contents

16. SUBSEQUENT EVENTS

Dividend

On October 12, 2017, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock which was paid on October 30, 2017 to shareholders of record as of the close of business on October 23, 2017.

Automatic Shelf Registration on Form S-3

On October 20, 2017, the Company filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission. The shelf registration statement is automatically effective and is valid for three years. Pursuant to the shelf registration statement, the Company may offer common stock, preferred stock, debt securities, guarantees of debt securities, warrants and units from time to time in amounts, at prices and on terms that will be determined at the time of any such offering.

Asset Sale

On November 1, 2017, the Company signed and closed on an Asset Purchase Agreement (the “Agreement”) with an unrelated entity for the sale of substantially all of the assets of one of the acquired CEC entities for approximately $5 million. The operations of this entity were not significant to the Company.

 

42


Table of Contents

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 exposure to potential penalties and/or liquidated damages if our prison project in Ravenhall, a locality near Melbourne, Australia, is not completed on time;

 

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

 

    our ability to estimate the government’s level of utilization of public-private partnerships for correctional services and the impact of any modifications or reductions by our government customers of their utilization of public-private partnerships;

 

    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 any challenges or concerns that our government customers may raise regarding their use of public-private partnerships for correctional services;

 

    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 activate the inactive beds at our idle facilities;

 

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

 

    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;

 

    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 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;

 

    the risks related to the integration of the CEC acquisition, that expected increased revenue and Adjusted EBITDA from CEC may not be fully realized or may take longer than expected to realize and that synergies from the CEC transaction may not be fully realized or may take longer than expected to realize;

 

    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;

 

43


Table of Contents
    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, 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;

 

    an increase in unreimbursed labor rates;

 

    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;

 

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

 

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

 

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

 

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

 

    the risk that a number of factors could adversely affect the market price of our common stock; 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, 2016 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.

 

44


Table of Contents

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, 2016. 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 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. 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 we 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.

At September 30, 2017, after our acquisition of CEC, our worldwide operations include the management and/or ownership of approximately 96,000 beds at 140 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 185,000 offenders and pre-trial defendants, including approximately 100,000 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;

 

    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.

 

45


Table of Contents

For the nine months ended September 30, 2017 and September 30, 2016, we had consolidated revenues of $1,694.4 million and $1,612.9 million, respectively. We maintained an average company wide facility occupancy rate of 91.0% including 87,823 active beds and excluding 8,272 idle beds (including those being marketed to potential customers) and beds under development for the nine months ended September 30, 2017, and 92.8% including 82,531 active beds and excluding 4,838 idle beds (including those being marketed to potential customers) and beds under development for the nine months ended September 30, 2016.

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 nine months ended September 30, 2017 and the year ended December 31, 2016, respectively, we declared and paid the following regular cash distributions to our shareholders as follows:

 

Declaration Date

  

Record Date

  

Payment Date

   Distribution Per Share      Aggregate
Payment Amount
(in millions)
 

February 3, 2016

  

February 16, 2016

  

February 26, 2016

   $ 0.43      $ 48.5  

April 20, 2016

  

May 2, 2016

  

May 12, 2016

   $ 0.43      $ 48.7  

July 20, 2016

  

August 1, 2016

  

August 12, 2016

   $ 0.43      $ 48.7  

October 18, 2016

  

October 31, 2016

  

November 10, 2016

   $ 0.43      $ 48.8  

February 6, 2017

  

February 17, 2017

  

February 27, 2017

   $ 0.47      $ 52.5  

April 25, 2017

  

May 9, 2017

  

May 19, 2017

   $ 0.47      $ 58.4  

July 10, 2017

  

July 21, 2017

  

July 28, 2017

   $ 0.47      $ 58.3  

On October 12, 2017, the Board declared a quarterly cash dividend of $0.47 per share of common stock which was paid on October 30, 2017 to shareholders of record as of the close of business on October 23, 2017.

Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 27, 2017, 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, 2016.

Fiscal 2017 Developments

Stock Split

In March 2017, our Board declared a 3-for-2 stock split of our common stock. The stock split was effective on April 24, 2017 with respect to shareholders of record on April 10, 2017. Outstanding share and per-share amounts disclosed for all periods presented have been retroactively adjusted to reflect the effects of the stock split. On April 24, 2017, the Company amended its articles of incorporation to increase the number of authorized shares of common stock to take into effect the stock split.

 

46


Table of Contents

Offering of Common Stock

On March 7, 2017, we entered into an underwriting agreement related to the issuance and sale of 9,000,000 shares of our common stock, par value $.01 per share. The offering price to the public was $27.80 per share and the underwriters agreed to purchase the shares from us pursuant to the underwriting agreement at a price of $26.70 per share. In addition, under the terms of the underwriting agreement, we granted the underwriters an option, exercisable for thirty days, to purchase up to an additional 1,350,000 shares of common stock. On March 8, 2017, the underwriters exercised in full their option to purchase the additional 1,350,000 shares of common stock. On March 13, 2017, we completed the sale of 10,350,000 shares of common stock pursuant to our underwritten public offering. We received gross proceeds (before underwriting discounts and estimated offering expenses) of approximately $288.1 million from the offering, including approximately $37.6 million in connection with the sale of the additional shares. The 10,350,000 shares of common stock were issued under our previously effective shelf registration filed with the Securities and Exchange Commission. The net proceeds of this offering were used to repay amounts outstanding under our revolver portion of our senior credit facility and for general corporate purposes. The number of shares and per-share amounts herein have been adjusted to reflect the effects of the stock split.

Community Education Centers Acquisition

On April 5, 2017, we closed on our previously announced acquisition of Community Education Centers (“CEC”), a leading private provider of rehabilitation services for offenders in reentry and in-prison treatment facilities as well as management services for county, state and federal correctional and detention facilities. We acquired CEC for $360 million in an all cash transaction, excluding transaction related expenses. CEC’s operations encompass over 12,000 beds nationwide. Refer to Note 2 -Business Combinations in the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Contract Awards

On April 13, 2017, we announced that we have been awarded a contract by U.S. Immigration and Customs Enforcement (“ICE”) for the development and operation of a new company-owned 1,000-bed detention facility to be located in Conroe, Texas. We expect to design, finance, build and operate the facility under a ten-year contract with ICE, inclusive of renewal option periods. The facility is scheduled for completion in the fourth quarter of 2018 and is expected to generate approximately $44 million in annual revenues and returns on investment consistent with our company-owned facilities.

On May 26, 2017, we announced that we were awarded two ten-year contracts, inclusive of renewal option periods, by the Federal Bureau of Prisons (“BOP”) for the continued housing of criminal aliens under the custody of the BOP at the company- owned 1,800-bed Big Spring Facility and the company-owned 1,732-bed Flight Line Facility, which on a combined basis were previously referred to as the Big Spring Correctional Center in Texas. The two ten-year contracts were awarded to GEO under a long-standing procurement commonly referred to as Criminal Alien Requirement (CAR) 16, which was issued by the BOP in 2015. The contracts are expected to generate total combined revenues of approximately $664 million over their full ten-year terms. Additionally, only one of the two contracts held by Reeves County, Texas was extended by the BOP for one year.

Idle Facilities

As of September 30, 2017, we are marketing approximately 5,400 vacant beds at five of our idle facilities to potential customers. The carrying values of these idle facilities totaled approximately $137.3 million as of September 30, 2017, excluding equipment and other assets that can be easily transferred for use at other facilities.

Asset Purchase

On March 6, 2017, we acquired the 688-bed Maverick County Detention Center in Texas for approximately $15 million. The center, which is currently idle, was originally built by Maverick County and previously provided services for the U.S. Marshals Service.

 

47


Table of Contents

Automatic Shelf Registration on Form S-3

On October 20, 2017, we filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission. The shelf registration statement is automatically effective and is valid for three years. Pursuant to the shelf registration statement, we may offer common stock, preferred stock, debt securities, guarantees of debt securities, warrants and units from time to time in amounts, at prices and on terms that will be determined at the time of any such offering.

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 nine months ended September 30, 2017, 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, 2016.

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.

Comparison of Third Quarter 2017 and Third Quarter 2016

Revenues

 

     2017      % of Revenue     2016      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 365,071        64.4   $ 344,452        62.1   $ 20,619       6.0

GEO Care

     134,610        23.8     99,779        18.0     34,831       34.9

International Services

     45,641        8.1     40,416        7.3     5,225       12.9

Facility Construction & Design

     21,437        3.8     69,729        12.6     (48,292     (69.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 566,759        100.0   $ 554,376        100.0   $ 12,383       2.2
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

Revenues increased in Third Quarter 2017 compared to Third Quarter 2016 primarily due to aggregate increases of $25.1 million as a result of our acquisition of CEC on April 5, 2017 as well as the activation and intake of detainees related to our new contract at our company-owned Folkston ICE Processing Center in January 2017. Refer to Note 2- Business Combinations 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 our acquisition of CEC. These increases were partially offset by net decreases of $4.5 million at certain of our facilities due to aggregate net decreases in population, transportation services and/or rates.

 

48


Table of Contents

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 5.7 million in Third Quarter 2017 and 5.6 million in Third Quarter 2016. We experienced an aggregate net increase of approximately 103,000 mandays as a result of our acquisition of CEC and contract activation discussed above. 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 93.0% and 94.0% of capacity in the Third Quarter 2017 and Third Quarter 2016, respectively, excluding idle facilities.

GEO Care

Revenues increased in Third Quarter 2017 compared to Third Quarter 2016 primarily due to aggregate increases of $36.9 million from our acquisition of CEC on April 5, 2017. We also experienced increases of $2.3 million primarily due to increases in average client and participant counts under our ISAP and electronic monitoring services. These increases were partially offset by $4.4 million related to net decreases in census levels at certain of our community-based and reentry centers as well as contract terminations.

International Services

Revenues for International Services in Third Quarter 2017 compared to Third Quarter 2016 increased by $5.2 million We experienced a net increase of $5.0 million primarily attributable to the expansion of our Fulham facility and net population increases at our Australian subsidiary. Additionally, we had an increase due to foreign exchange rate fluctuations of $0.2 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 Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The decrease is due to decreased construction activity during 2017 as the project gets closer to completion. Our margin on this construction activity is not significant.

Operating Expenses

 

     2017      % of Segment
Revenues
    2016      % of Segment
Revenues
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 268,718        73.6   $ 248,024        72.0   $ 20,694       8.3

GEO Care

     90,949        67.6     60,051        60.2     30,898       51.5

International Services

     41,752        91.5     38,051        94.1     3,701       9.7

Facility Construction & Design

     21,715        101.3     69,533        99.7     (47,818     (68.8 )% 
  

 

 

      

 

 

      

 

 

   

Total

   $ 423,134        74.7   $ 415,659        75.0   $ 7,475       1.8
  

 

 

      

 

 

      

 

 

   

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 $20.2 million resulting from our acquisition of CEC on April 5, 2017 as well as the activation and intake of detainees related to our new contract at our company-owned Folkston ICE Processing Center in January 2017. We also had aggregate net increases in operating expenses of $0.4 million at certain of our facilities primarily due to net increases in population, transportation services and the variable costs associated with those increases. Operating expenses as a percentage of revenues have increased during Third Quarter 2017 which is primarily related to our acquisition of CEC. As we continue to integrate CEC into our operations, we expect to realize cost savings and other synergies in line with our other domestic correctional facilities.

 

49


Table of Contents

GEO Care

Operating expenses for GEO Care increased by $30.9 million during Third Quarter 2017 from Third Quarter 2016 primarily due to $29.3 million from our acquisition of CEC on April 5, 2017. We also experienced net increases of $1.6 million primarily due to increases in average client and participant counts under our ISAP and electronic monitoring services and program growth at our community-based and reentry centers. Operating expenses as a percentage of revenues have increased during Third Quarter 2017 which is primarily related to our acquisition of CEC. As we continue to integrate CEC into our operations, we expect to realize cost savings and other synergies in line with our other community-based and reentry centers.

International Services

Operating expenses for International Services in Third Quarter 2017 compared to Third Quarter 2016 increased by $3.7 million. We experienced a net increase of $2.5 million primarily attributable to the expansion of our Fulham facility and net population increases at our Australian subsidiary. Additionally, we had an increase due to foreign exchange rate fluctuations of $1.2 million resulting from the weakening of the U.S. dollar against certain international currencies. Operating expenses have decreased as a percentage of revenue primarily due to certain nonrecurring labor related issues at our South African subsidiary in Third Quarter 2016.

Facility Construction & Design

Operating expenses for our Facility Construction & Design services relate to the commencement of design and construction activity for our Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The decrease is due to decreased construction activity during 2017 as the project gets closer to completion.

Depreciation and Amortization

 

     2017      % of Segment
Revenue
    2016      % of Segment
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 18,802        5.2   $ 18,563        5.4   $ 239       1.3

GEO Care

     12,368        9.2     9,721        9.7     2,647       27.2

International Services

     479        1.0     499        1.2     (20     (4.0 )% 
  

 

 

      

 

 

      

 

 

   

Total

   $ 31,649        5.6   $ 28,783        5.2   $ 2,866       10.0
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased slightly in Third Quarter 2017 compared to Third Quarter 2016 primarily due to renovations made at several of our facilities as well as our acquisition of CEC on April 5, 2017.

GEO Care

GEO Care depreciation and amortization expense increased in Third Quarter 2017 compared to Third Quarter 2016 primarily due to new facilities and intangible assets acquired in our acquisition of CEC on April 5, 2017.

International Services

Depreciation and amortization expense remained relatively consistent in Third Quarter 2017 compared to Third Quarter 2016 as a result of certain assets becoming fully depreciated and there were no significant additions or renovations during 2016 or 2017 at our international subsidiaries.

 

50


Table of Contents

Other Unallocated Operating Expenses

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

General and Administrative Expenses

   $ 49,074        8.7   $ 37,483        6.8   $ 11,591        30.9

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 Third Quarter 2017 compared to Third Quarter 2016 was primarily attributable to (i) merger and acquisition expenses (which include certain transition expenses) of $5.0 million related to our acquisition of CEC; (ii) higher non-cash stock-based compensation expense of $1.7 million compared to the prior year and (iii) increases related to normal personnel and compensation adjustments, professional, consulting, business development and other administrative fees in the aggregate of $4.9 million.

Non Operating Expenses

Interest Income and Interest Expense

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Interest Income

   $ 14,648        2.6   $ 7,928        1.4   $ 6,720        84.8

Interest Expense

   $ 38,719        6.8   $ 33,428        6.0   $ 5,291        15.8

Interest income increased in the Third Quarter 2017 compared to Third Quarter 2016 primarily due to interest income earned on our contract receivable related to our prison project in Ravenhall, Australia. Refer to Note 12 - 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 Third Quarter 2017 compared to Third Quarter 2016 primarily due to additional interest incurred on higher debt balances resulting from our acquisition of CEC on April 5, 2017. Also contributing to the increase was the construction loan interest related to our prison project in Ravenhall, Australia due to a higher loan balance compared to the prior period. These increases were partially offset by a reduction of debt as a result of the proceeds used from our common stock offering. Refer to Note 10 - Debt and Note 6 - Shareholders’ Equity 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

 

     2017      Effective Rate     2016      Effective Rate     $ Change     % Change  
     (Dollars in thousands)  

Income Taxes

   $ 1,720        4.4   $ 4,970        10.6   $ (3,250     (65.4 )% 

The provision for income taxes during Third Quarter 2017 decreased compared to Third Quarter 2016 along with the effective tax rate. The decrease is primarily due to a change in the composition of income which reduced the income of our taxable subsidiaries and favorable non-recurring items which lowered the effective rate in the quarter. 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 6% to 8% exclusive of any discrete items.

Equity in Earnings of Affiliates, net of Income Tax Provision

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 1,342        0.2   $ 1,693        0.3   $ (351     (20.7 )% 

 

51


Table of Contents

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 Third Quarter 2017 compared to Third Quarter 2016 decreased due to nonrecurring favorable contract adjustments received in Third Quarter 2016 by GEOAmey.

Comparison of Nine Months 2017 and Nine Months 2016

Revenues

 

     2017      % of Revenue     2016      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 1,073,840        63.4   $ 1,024,395        63.5   $ 49,445       4.8

GEO Care

     377,740        22.3     289,722        18.0     88,018       30.4

International Services

     130,261        7.7     116,468        7.2     13,793       11.8

Facility Construction & Design

     112,602        6.6     182,326        11.3     (69,724     (38.2 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 1,694,443        100.0   $ 1,612,911        100.0   $ 81,532       5.1
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

Revenues increased in Nine Months 2017 compared to Nine Months 2016 primarily due to aggregate increases of $54.4 million as a result of our acquisition of CEC on April 5, 2017 as well as the activation and intake of detainees related to our new contract at our company-owned Folkston ICE Processing Center in January 2017. These increases were partially offset by net decreases of $5.0 million at certain of our facilities due to aggregate net decreases in population, transportation services and/or rates.

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 16.6 million in Nine Months 2017 and 16.5 million in Nine Months 2016. We experienced an aggregate net increase of approximately 130,000 mandays as a result of our acquisition of CEC and contract activation discussed above. 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 Nine Months 2017 and Nine Months 2016, respectively, excluding idle facilities.

GEO Care

Revenues increased in Nine Months 2017 compared to Nine Months 2016 primarily due to aggregate increases of $73.2 million from our acquisition of CEC on April 5, 2017. We also experienced increases of $19.9 million primarily due to increases in average client and participant counts under our ISAP and electronic monitoring services. These increases were partially offset by $5.1 million related to net decreases in census levels at certain of our community-based and reentry centers as well as terminated contracts.

International Services

Revenues for International Services in Nine Months 2017 compared to Nine Months 2016 increased by $13.8 million We experienced a net increase of $10.8 million primarily attributable to the expansion of our Fulham facility and net population increases at our Australian subsidiary. Additionally, we had an increase due to foreign exchange rate fluctuations of $3.0 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 Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The decrease is due to decreased construction activity during 2017 as the project gets closer to completion. Our margin on this construction activity is not significant.

 

52


Table of Contents

Operating Expenses

 

     2017      % of Segment
Revenues
    2016      % of Segment
Revenues
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 792,727        73.8   $ 748,383        73.1   $ 44,344       5.9

GEO Care

     248,934        65.9     180,529        62.3     68,405       37.9

International Services

     120,403        92.4     110,235        94.6     10,168       9.2

Facility Construction & Design

     114,222        101.4     181,855        99.7     (67,633     (37.2 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 1,276,286        75.3   $ 1,221,002        75.7   $ 55,284       4.5
  

 

 

      

 

 

      

 

 

   

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 $45.6 million resulting from our acquisition of CEC on April 5, 2017 as well as the activation and intake of detainees related to our new contract at our company-owned Folkston ICE Processing Center in January 2017. These increases were partially offset by aggregate decreases in operating expenses of $1.3 million at certain of our facilities primarily due to net decreases in population, transportation services and the variable costs associated with those decreases.

GEO Care

Operating expenses for GEO Care increased by $68.4 million during Nine Months 2017 from Nine Months 2016 primarily due to $57.0 million from our acquisition of CEC on April 5, 2017. We also experienced increases of $11.4 million primarily due to increases in average client and participant counts under our ISAP and electronic monitoring services and program growth at our community-based and reentry centers. Operating expenses as a percentage of revenues have increased during Nine Months 2017 which is primarily related to our acquisition of CEC. As we continue to integrate CEC into our operations, we expect to realize cost savings and other synergies in line with our other community-based and reentry centers.

International Services

Operating expenses for International Services in Nine Months 2017 compared to Nine Months 2016 increased by $10.2 million. We experienced a net increase of $5.6 million primarily attributable to the expansion of our Fulham facility and net population increases at our Australian subsidiary. Additionally, we had an increase due to foreign exchange rate fluctuations of $4.6 million resulting from the weakening of the U.S. dollar against certain international currencies. Operating expenses have decreased as a percentage of revenue primarily due to certain nonrecurring labor related issues at our South African subsidiary in Nine Months 2016.

Facility Construction & Design

Operating expenses for our Facility Construction & Design services relate to the commencement of design and construction activity for our Ravenhall Prison Contract executed in September 2014 with the Department of Justice in the State of Victoria, Australia. The decrease is due to decreased construction activity during 2017 as the project nears completion.

 

53


Table of Contents

Depreciation and Amortization

 

     2017      % of Segment
Revenue
    2016      % of Segment
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 56,275        5.2   $ 55,720        5.4   $ 555       1.0

GEO Care

     34,744        9.2     28,635        9.9     6,109       21.3

International Services

     1,445        1.1     1,531        1.3     (86     (5.6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 92,464        5.5   $ 85,886        5.3   $ 6,578       7.7
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased slightly in Nine Months 2017 compared to Nine Months 2016 primarily due to renovations made at several of our facilities as well as our acquisition of CEC on April 5, 2017.

GEO Care

GEO Care depreciation and amortization expense increased in Nine Months 2017 compared to Nine Months 2016 primarily due to new facilities and intangible assets acquired in our acquisition of CEC on April 5, 2017.

International Services

Depreciation and amortization expense decreased slightly in Nine Months 2017 compared to Nine Months 2016 as a result of certain assets becoming fully depreciated and there were no significant additions or renovations during 2016 or 2017 at our international subsidiaries.

Other Unallocated Operating Expenses

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

General and Administrative Expenses

   $ 143,866        8.5   $ 108,448        6.7   $ 35,418        32.7

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 Nine Months 2017 compared to Nine Months 2016 was primarily attributable to (i) merger and acquisition expenses (which include certain transition expenses) of $17.9 million related to our acquisition of CEC; (ii) higher non-cash stock-based compensation expense of $5.2 million and (iii) increases related to normal personnel and compensation adjustments, professional, consulting, business development and other administrative fees in the aggregate of $12.3 million.

Non Operating Expenses

Interest Income and Interest Expense

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Interest Income

   $ 38,971        2.3   $ 18,387        1.1   $ 20,584        111.9

Interest Expense

   $ 109,702        6.5   $ 93,864        5.8   $ 15,838        16.9

Interest income increased in the Nine Months 2017 compared to Nine Months 2016 primarily due to interest income earned on our contract receivable related to our prison project in Ravenhall, Australia. Refer to Note 12 - 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.

 

54


Table of Contents

Interest expense increased in Nine Months 2017 compared to Nine Months 2016 primarily due to additional interest incurred on higher debt balances resulting from our acquisition of CEC on April 5, 2017. Also contributing to the increase was the construction loan interest related to our prison project in Ravenhall, Australia due to a higher loan balance compared to the prior period. These increases were partially offset by a reduction of debt as a result of the proceeds used from our common stock offering. Refer to Note 10 - Debt and Note 6 - Shareholders’ Equity 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

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

Loss on Extinguishment of Debt

   $ —          —     $ 15,885        1.0   $ (15,885     (100.0 )% 

During Nine Months 2016, we completed a tender offer and redemption of our 6.625% Senior Notes due 2021 which resulted in a loss of $15.9 million related to the tender premium and deferred costs associated with the 6.625% Senior Notes due 2021.

Income Tax Provision

 

     2017      Effective Rate     2016      Effective Rate     $ Change     % Change  
     (Dollars in thousands)  

Income Taxes

   $ 5,590        5.0   $ 12,000        11.3   $ (6,410     (53.4 )% 

The provision for income taxes during Nine Months 2017 decreased compared to Nine Months 2016 along with the effective tax rate. The decrease is primarily due to the tax benefit on the merger and acquisition expenses of $17.9 million related to our acquisition of CEC incurred in Nine Months 2017 contrasted with the debt extinguishment costs incurred by the REIT in Nine Months 2016 which carried no tax benefit but had the result of increasing the effective rate in that nine month period. Furthermore, a change in the composition of income which reduced the income of our taxable subsidiaries also contributed to a lower rate during Nine Months 2017. Additionally, we had a $1.5 million discrete tax benefit in 2017 as provided under ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). Refer to Note 14 - Recent Accounting Pronouncements of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 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 6% to 8% exclusive of any discrete items.

Equity in Earnings of Affiliates, net of Income Tax Provision

 

     2017      % of
Revenue
    2016      % of
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 4,255        0.3   $ 4,943        0.3   $ (688     (13.9 )% 

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 Nine Months 2017 compared to Nine Months 2016 decreased primarily due to nonrecurring favorable contract adjustments received in Nine Months 2016 by GEOAmey.

 

55


Table of Contents

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 September 30, 2017, for GEOAmey’s operations. As of September 30, 2017, $3.4 million was outstanding to each of the joint ventures.

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 $243.9 million of which $82.6 million was spent through September 30, 2017. We estimate that the remaining capital requirements related to these capital projects will be $161.3 million which will be spent through 2018. 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 $619.7 million, based on exchange rates as of September 30, 2017.

Liquidity and Capital Resources

Indebtedness

On March 23, 2017, we executed a third amended and restated credit agreement by and among The GEO Group, Inc. and GEO Corrections Holdings, Inc., (“Corrections” and, together with GEO, the “Borrowers”), the Australian Borrowers named therein, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto (the “Credit Agreement”). The Credit Agreement refinances our prior $291.0 million term loan, reestablishes our ability to implement at a later date an Australian Dollar Letter of Credit Facility (the “Australian LC Facility”) providing for the issuance of financial letters of credit and performance letters of credit, in each case denominated in Australian Dollars up to AUD275 million, an increase from the prior AUD225 million Australian Dollar letter of credit facility, and certain other modifications to the prior credit agreement. Loan costs of approximately $7.0 million were incurred and capitalized in connection with the transaction.

The Credit Agreement evidences a credit facility (the “Credit Facility”) consisting of an $800 million term loan (the “Term Loan”) bearing interest at LIBOR plus 2.25% (with a LIBOR floor of 0.75%), and a $900 million revolving credit facility (the “Revolver”) initially bearing interest at LIBOR plus 2.25% (with no LIBOR floor) together with AUD275 million under the Australian LC Facility. As of September 30, 2017, there were no letters of credit issued under the Australian LC Facility. Amounts to be borrowed by GEO under the Credit Agreement are subject to the satisfaction of customary conditions to borrowing. The Term Loan component is scheduled to mature on March 23, 2024. The revolving credit commitment component is scheduled to mature on 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 a date that is 5 12 years after March 23, 2017 or a later date, and the senior secured leverage ratio exceeds 2.50 to 1.00, then the termination date will be October 3, 2019. The 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 Credit Agreement contains certain customary representations and warranties, and certain customary covenants that restrict our 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 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) alter the business we conduct, and (xi) materially impair our lenders’ security interests in the collateral for its loans.

 

56


Table of Contents

Events of default under the Credit Agreement include, but are not limited to, (i) our failure to pay principal or interest when due, (ii) our 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 us, and (viii) a change in control.

All of the obligations under the Credit Agreement are unconditionally guaranteed by certain domestic subsidiaries of GEO and the Credit Agreement and the related guarantees are secured by a perfected first-priority pledge of substantially all of our 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 us and each guarantor in our domestic subsidiaries.

The Australian Borrowers are wholly owned foreign subsidiaries of GEO. We have designated each of the Australian Borrowers as restricted subsidiaries under the Credit Agreement. However, the Australian Borrowers are not obligated to pay or perform any obligations under the Credit Agreement other than their own obligations as Australian Borrowers under the Credit Agreement. The Australian Borrowers do not pledge any of their assets to secure any obligations under the Credit Agreement.

On August 18, 2016, the Company executed a Letter of Offer by and among GEO and HSBC Bank Australia Limited (the “Letter of Offer”) providing for a bank guarant