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Section 1: 10-Q (10-Q)

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, 2018

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 every Interactive Data File required to be submitted 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 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      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 6, 2018, the registrant had 121,796,397 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, 2018 AND 2017

     3  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

     4  

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER  30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

     5  

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

     6  

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     7  

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

     46  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     68  

ITEM 4. CONTROLS AND PROCEDURES

     68  

PART II – OTHER INFORMATION

     69  

ITEM 1. LEGAL PROCEEDINGS

     69  

ITEM 1A. RISK FACTORS

     69  

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

     69  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     70  

ITEM 4. MINE SAFETY DISCLOSURES

     70  

ITEM 5. OTHER INFORMATION

     70  

ITEM 6. EXHIBITS

     70  

SIGNATURES

     71  

 

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, 2018 AND 2017

(In thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2018
    September 30,
2017
    September 30,
2018
    September 30,
2017
 

Revenues

   $ 583,530     $ 566,759     $ 1,731,956     $ 1,694,443  

Operating expenses

     434,806       423,134       1,299,312       1,276,286  

Depreciation and amortization

     31,297       31,649       94,536       92,464  

General and administrative expenses

     47,647       49,074       136,927       143,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     69,780       62,902       201,181       181,827  

Interest income

     8,428       14,648       26,194       38,971  

Interest expense

     (37,991     (38,719     (110,779     (109,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     40,217       38,831       116,596       111,096  

Provision for income taxes

     3,723       1,720       12,193       5,590  

Equity in earnings of affiliates, net of income tax provision of $200, $77, $636 and $1,785, respectively

     2,735       1,342       7,071       4,255  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     39,229       38,453       111,474       109,761  

Net loss attributable to noncontrolling interests

     60       36       223       123  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 39,289     $ 38,489     $ 111,697     $ 109,884  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     119,681       122,251       120,567       119,356  

Diluted

     120,302       122,887       121,055       120,114  

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

        

Basic:

        

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

   $ 0.33     $ 0.31     $ 0.93     $ 0.92  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

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

   $ 0.33     $ 0.31     $ 0.92     $ 0.91  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.47     $ 0.47     $ 1.41     $ 1.41  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2018 AND 2017

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2018
    September 30,
2017
    September 30,
2018
    September 30,
2017
 

Net income

   $ 39,229     $ 38,453     $ 111,474     $ 109,761  

Other comprehensive income, net of tax:

        

Foreign currency translation adjustments

     (1,331     (179     (5,882     2,030  

Pension liability adjustment, net of tax provision (benefit) of $(894), $25, $(430) and $76, respectively

     (761     64       (31     175  

Change in fair value of derivative instrument classified as cash flow hedge, net of tax provision of $271, $307, $803 and $451, respectively

     1,536       1,740       4,550       2,556  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (556     1,625       (1,363     4,761  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     38,673       40,078       110,111       114,522  

Comprehensive loss attributable to noncontrolling interests

     72       34       247       119  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 38,745     $ 40,112     $ 110,358     $ 114,641  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2018 AND DECEMBER 31, 2017

(In thousands, except share data)

 

     September 30,
2018
    December 31,
2017
 
     (Unaudited)        
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 66,007     $ 81,377  

Restricted cash and cash equivalents

     54,931       44,932  

Accounts receivable, less allowance for doubtful accounts of $4,261 and $4,574, respectively

     403,610       389,916  

Contract receivable, current portion

     9,420       18,142  

Prepaid expenses and other current assets

     37,587       45,342  
  

 

 

   

 

 

 

Total current assets

     571,555       579,709  
  

 

 

   

 

 

 

Restricted Cash and Investments

     28,939       27,999  

Property and Equipment, Net

     2,148,005       2,078,123  

Assets Held for Sale

     2,634       3,915  

Non-Current Contract Receivable

     384,794       404,309  

Deferred Income Tax Assets

     26,277       26,277  

Goodwill

     776,368       778,951  

Intangible Assets, Net

     237,947       255,339  

Other Non-Current Assets

     65,820       72,286  
  

 

 

   

 

 

 

Total Assets

   $ 4,242,339     $ 4,226,908  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 82,284     $ 92,587  

Accrued payroll and related taxes

     53,597       71,732  

Accrued expenses and other current liabilities

     197,459       176,324  

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

     340,143       28,920  
  

 

 

   

 

 

 

Total current liabilities

     673,483       369,563  
  

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

     8,757       8,757  

Other Non-Current Liabilities

     89,214       96,702  

Capital Lease Obligations

     4,954       6,059  

Long-Term Debt

     2,363,318       2,181,544  

Non-Recourse Debt

     22,201       365,364  

Commitments, Contingencies and Other (Note 13)

    

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, 124,803,502 and 124,008,303 issued and 121,686,019 and 124,008,303 outstanding, respectively

     1,248       1,240  

Additional paid-in capital

     1,204,982       1,190,906  

(Distributions) in excess of earnings/earnings in excess of distributions

     (29,018     31,541  

Accumulated other comprehensive loss

     (25,785     (24,446

Treasury stock, 3,117,483 and 0 shares, at cost, respectively

     (70,446     —    
  

 

 

   

 

 

 

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

     1,080,981       1,199,241  

Noncontrolling interests

     (569     (322
  

 

 

   

 

 

 

Total shareholders’ equity

     1,080,412       1,198,919  
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 4,242,339     $ 4,226,908  
  

 

 

   

 

 

 

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

 

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2018 AND 2017

(In thousands)

 

     Nine Months Ended  
     September 30,
2018
    September 30,
2017
 

Cash Flow from Operating Activities:

    

Net income

   $ 111,474     $ 109,761  

Net loss attributable to noncontrolling interests

     223       123  
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     111,697       109,884  

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

    

Depreciation and amortization expense

     94,536       92,464  

Stock-based compensation

     16,351       14,852  

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

     5,860       11,922  

Provision for doubtful accounts

     806       1,597  

Equity in earnings of affiliates, net of tax

     (7,071     (4,255

Dividends received from unconsolidated joint venture

     8,710       5,052  

(Gain) loss on sale/disposal of property and equipment, net

     3,652       2,194  

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

    

Changes in accounts receivable, prepaid expenses and other assets

     (13,955     5,604  

Changes in contract receivable

     (3,412     (163,083

Changes in accounts payable, accrued expenses and other liabilities

     3,049       (18,326
  

 

 

   

 

 

 

Net cash provided by operating activities

     220,223       57,905  
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Acquisition of CEC, net of cash acquired

     —         (353,555

Insurance proceeds – damaged property

     5,998       86  

Proceeds from sale of property and equipment

     2,061       856  

Proceeds from sale of assets held for sale

     3,797       —    

Change in restricted investments

     (2,413     (3,810

Capital expenditures

     (161,490     (104,130
  

 

 

   

 

 

 

Net cash used in investing activities

     (152,047     (460,553
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Proceeds from long-term debt

     372,000       1,324,865  

Payments on long-term debt

     (186,033     (1,093,088

Payments on non-recourse debt

     (9,636     (68,887

Proceeds from non-recourse debt

     —         123,785  

Taxes paid related to net share settlements of equity awards

     (4,452     (4,122

Proceeds from issuance of common stock under prospectus supplement

     —         275,867  

Proceeds from issuance of common stock in connection with ESPP

     404       382  

Payment for repurchases of common stock

     (70,446     —    

Debt issuance costs

     (990     (9,470

Proceeds from the exercise of stock options

     1,781       6,786  

Cash dividends paid

     (172,256     (169,152
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (69,628     386,966  

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash and Cash Equivalents

     (5,392     863  
  

 

 

   

 

 

 

Net Decrease in Cash, Cash Equivalents and Restricted Cash and Cash Equivalents

     (6,844     (14,819

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, beginning of period

     133,545       90,357  
  

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period

   $ 126,701     $ 75,538  
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Capital expenditures in accounts payable and accrued expenses

   $ 4,152     $ 7,526  
  

 

 

   

 

 

 

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

 

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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, and provides academic and vocational classes in 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, 2018, the Company’s worldwide operations include the management and/or ownership of approximately 96,000 beds at 136 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 192,000 offenders and pretrial defendants, including approximately 100,000 individuals through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.

The Company’s unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2018 for the year ended December 31, 2017. The accompanying December 31, 2017 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, 2017. 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, 2018 are not necessarily indicative of the results for the entire year ending December 31, 2018, or for any other future interim or annual periods.

2. REVENUE RECOGNITION

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. The adoption of this standard did not result in a significant change to the Company’s historical revenue recognition policies and there were no significant adjustments that required a cumulative adjustment to retained earnings upon transition.

Revenue is recognized when control of the promised goods or services is transferred to GEO’s customers, in an amount that reflects the consideration GEO expects to be entitled to in exchange for those goods or services. Sales, value added and other taxes GEO collects concurrent with revenue producing activities and that are subsequently remitted to governmental authorities are excluded from revenues. The guidance distinguishes between goods and services. The definition of services under the guidance includes everything other than goods. As such, in the case of GEO, this guidance views the provision of housing as a service.

 

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When a contract includes variable consideration, GEO determines an estimate of the variable consideration and evaluates whether the estimate needs to be constrained; therefore, GEO includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at each reporting date. A limited number of GEO’s domestic contracts have provisions upon which a small portion of the revenue for the contract is based on the performance of certain targets. Domestically, revenue based on the performance of certain targets is less than 1% of the Company’s consolidated domestic revenues and was not significant during the periods presented. One of GEO’s international contracts, related to its Ravenhall correctional facility project (discussed further below), contains a provision where a significant portion of the revenue for the contract is based on the performance of certain targets. These performance targets are based on specific criteria to be met over specific periods of time. Such criteria includes the Company’s ability to achieve certain contractual benchmarks relative to the quality of service it provides, non-occurrence of certain disruptive events, effectiveness of its quality control programs and its responsiveness to customer requirements. The performance of these targets are measured quarterly and there was no significant constraint on the estimate of such variable consideration for this contract during the nine months ended September 30, 2018.

GEO does not disclose the value of unsatisfied performance obligations for (i) contracts with an expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which GEO has the right to invoice for services performed, which is generally the case for all of GEO’s contracts. Incidental items that are immaterial in the context of the contract are recognized as expense. GEO generally does not incur incremental costs of obtaining a contract with its customers that would meet the requirement for capitalization. There were no assets recognized from costs to obtain a contract with a customer at September 30, 2018 or December 31, 2017.

The timing of revenue recognition may differ from the timing of invoicing to customers. GEO records a receivable when services are performed which are due from its customers based on the passage of time. GEO records a contract liability if consideration is received in advance of the performance of services. Generally, GEO’s customers do not provide payment in advance of the performance of services. Therefore, any contract liability is not significant at September 30, 2018 or December 31, 2017 and revenue recognized during the nine months ended September 30, 2018 that was included in the opening balance of unearned revenue was not significant. There have been no significant amounts of revenue recorded in the periods presented from performance obligations either wholly or partially satisfied in prior periods.

The right to consideration under GEO’s contracts is only dependent on the passage of time and is therefore considered to be unconditional. Payment terms and conditions vary by contract type, although, with the exception of the contract receivable related to GEO’s Ravenhall correctional facility (further discussed below), terms generally include a requirement of payment within 30 days after performance obligations are satisfied and generally do not include a significant financing component. There have been no significant changes in receivable or unearned revenue balances during the period other than regular invoicing and collection activity.

 

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The following table disaggregates GEO’s revenue by major source and also provides a reconciliation with revenue information disclosed for reportable segments in Note 14 – Business Segments and Geographic Information:

 

     Nine Months Ended September 30, 2018
(in thousands)
 
     U.S.
Corrections &
Detention
     GEO Care      International      Facility
Construction
and Design
     Total  

Owned and Leased: Corrections & Detention

   $ 817,666      $ —        $ —        $ —        $ 817,666  

Owned and Leased: Community-based

     —          127,615        —          —          127,615  

Owned and Leased: Youth Services

     —          68,590        —          —          68,590  

Managed Only

     289,350        3,724        193,121        —          486,195  

Facility Construction and Design

     —          —          —          —          —    

Non-residential Services and Other

     —          231,890        —          —          231,890  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenues

   $ 1,107,016      $ 431,819      $ 193,121      $ —        $ 1,731,956  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2017
(in thousands)
 
     U.S.
Corrections &
Detention
     GEO Care      International      Facility
Construction
and Design
     Total  

Owned and Leased – Corrections & Detention

   $ 789,230      $ —        $ —        $ —        $ 789,230  

Owned and Leased – Community-based

     —          106,996        —          —          106,996  

Owned and Leased – Youth Services

     —          65,408        —          —          65,408  

Managed Only

     284,610        2,278        130,261        —          417,149  

Facility Construction and Design

     —          —          —          112,602        112,602  

Non-residential Services and Other

     —          203,058        —          —          203,058  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenues

   $ 1,073,840      $ 377,740      $ 130,261      $ 112,602      $ 1,694,443  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Owned and Leased – Corrections & Detention

GEO recognizes revenue for corrections & detention housing services where GEO owns or leases the facility as services are performed. GEO provides for the safe and secure housing and care of incarcerated individuals under public-private partnerships with federal, state and local government agencies. This includes providing 24-hour care and supervision, including but not limited to, such services as medical, transportation, food service, laundry services and various programming activities. These tasks are considered to be activities to fulfill the safe and secure housing performance obligation and are not considered to be individually separate promises in the contract. Each of these activities is highly interrelated and GEO performs a significant level of integration of these activities. GEO has identified these activities as a bundle of services and determined that each day of the promised service is distinct. The services provided are part of a series of distinct services that are substantially the same and are measured using the same measure of progress (time-based output method). GEO has determined that revenue for these services are recognized over time as it’s customers simultaneously receive and consume the benefits as the services are performed, which is on a continual daily basis, and GEO has a right to payment for performance completed to date. Time-based output methods of revenue recognition are considered to be a faithful depiction of GEO’s efforts to fulfill its obligations under its contracts and therefore reflect the transfer of services to its customers. GEO’s customers generally pay for these services based on a net rate per day per individual or on a fixed monthly rate.

 

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Owned and Leased – Community-based

GEO recognizes revenue for community-based reentry services where GEO owns or leases the facility in a manner similar to its corrections and detention services discussed above. GEO provides individuals nearing the end of their sentence with the resources necessary to productively transition back into society. Through its residential reentry centers, GEO provides federal and state parolees and probationers with temporary housing, rehabilitation, substance abuse counseling and vocational and educational programs. These activities are considered to be a bundle of services which are a part of a series of distinct services recognized over time based on the same criteria as discussed above for corrections and detention revenues. GEO’s customers also generally pay for these services based on a net rate per day per individual or on a fixed monthly rate.

Owned and Leased – Youth Services

GEO recognizes revenues for youth services where GEO owns or leases the facility in the same manner as discussed above for the housing, supervision, care and rehabilitation of troubled youth residents. The activities to house and care for troubled youth residents are also considered to be a bundle of services which are part of a series of distinct services recognized over time based on the same criteria discussed for the previous two revenue streams. GEO’s customers generally pay for these services based on a net rate per day per individual.

Managed Only

GEO recognizes revenue for its managed only contracts in the same manner as its Owned and Leased Corrections & Detention and Owned and Leased Community-based contracts as discussed above. The primary exception is that GEO does not own or lease the facility. The facility is owned by the customer. In certain circumstances, GEO’s customers may request that GEO make certain capital improvements to the facility or make other payments related to the facility. These payments are amortized as a reduction of revenues over the life of the contract. GEO’s customers generally pay for these services based on a net rate per day per individual or a fixed monthly rate.

Facility Construction and Design

Facility Construction and Design revenues during the nine months ended September 30, 2017 consisted of one contract with the Department of Justice in the State of Victoria (the “State”) for the development and operation of a new 1,300-bed correctional facility (the “Facility”) in Ravenhall, a locality near Melbourne, Australia. The Facility was completed during the fourth quarter of 2017 and GEO is currently managing the Facility under a 25-year management contract. There were no facility construction and design revenues during the nine months ended September 30, 2018. GEO’s promise to design and construct the Facility was considered to be a separate and distinct performance obligation from the management obligation which includes the safe and secure housing, care and programming activities for incarcerated individuals similar to the correction & detention services discussed above. For the obligation to manage the Facility, GEO determined revenue should be recorded over time using a time-based output method based on the same criteria as discussed above for correction and detention services. Fees included and priced in the contract for managing the Facility are considered to be stated at their individual estimated stand-alone selling prices using the adjusted market assessment approach. These services are regularly provided by GEO on a stand-alone basis to similar customers within a similar range of amounts. GEO used the expected cost plus margin approach to allocate the transaction price to the construction obligation. GEO was entitled under the contract to receive consideration in the amount of its costs plus a margin.

During the design and construction phase, GEO determined that revenue should be recorded over time and applied cost based input methods using the actual costs incurred relative to the total estimated costs (percentage of completion basis) to determine progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. Cost

 

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based input methods of revenue recognition are considered to be a faithful depiction of GEO’s efforts to satisfy long-term construction contracts and therefore reflect the transfer of goods to the customer as the customer controls the work in progress as the Facility is constructed. Cost based input methods of revenue recognition also require GEO to make estimates of net contract revenues and costs to complete the project. Significant judgment was required to evaluate the costs to complete the project, including materials, labor, contingencies and other costs. If estimated total costs on the contract are greater than the net contract revenues, the entire estimated loss on the contract is recognized in the period the loss becomes known. The cumulative effect of revisions to estimates related to net contract revenues or costs to complete are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Typically, the Company enters into fixed price contracts and does not perform additional work unless approved change orders are in place. Costs attributable to unapproved change orders are expensed in the period in which the costs are incurred if the Company believes that it is not probable that the costs will be recovered through a change in the contract price. If the Company believes that it is probable that the costs will be recovered through a change in the contract price, costs related to unapproved change orders are expensed in the period in which they are incurred, and contract revenue is recognized to the extent of the costs incurred. Revenue in excess of the costs attributable to unapproved change orders is not recognized until the change order is approved. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. For the periods presented, there were no changes in job performance, job conditions and estimated profitability that required a revision to the estimated costs and income recorded.

GEO was the primary developer of the project and subcontracted with a bonded international design and build contractor to design and construct the Facility. As the primary contractor for the project, GEO determined that it was primarily responsible for fulfilling the promise to develop and provide the Facility to the State, including overall responsibility for the acceptability of the project in meeting the State’s specifications. Therefore, GEO was considered to be a principal in the transaction and construction revenues and construction costs were recorded on a gross basis.

The cost of the project during the design and construction phase was funded by debt financing along with a capital contribution by GEO which was made in January 2017. GEO’s promise to provide the equity contribution was considered to be a separate and distinct performance obligation that is separate from the construction and facility management obligations. The contribution represents a significant financing element which provided a benefit to the State. Costs incurred and estimated earnings in excess of billings are classified as contract receivable in the accompanying consolidated balance sheets. The contract receivable will be satisfied through a State contribution, which was made in November 2017 upon commercial acceptance of the Facility, and by quarterly payments to be made over the 25-year operating phase. The timing of these payments provide the State with a significant benefit of financing for the Facility as the payments by the State occur significantly after performance (construction of the Facility). Therefore, the contract receivable has been recorded at net present value based on the timing of expected future settlement. Interest income is calculated using an effective interest rate of 8.97% and has been presented separately from facility design and construction revenue. Interest income also includes an equity return for GEO’s capital contribution.

Non-residential Services and Other

Non-residential Services and Other revenue consists of the Company’s contracts with federal and various state and local governments to provide location, alcohol and drug detecting electronic monitoring and case management services to individuals on an as needed or as requested basis. This category also includes the Company’s day reporting centers.

GEO recognizes revenues for electronic monitoring and case management services as the services are performed. Services provided consist of community-based supervision (home visits), in-person reporting, telephonic reporting and GPS and other electonic monitoring as well as overall contract management services. The rates for the various services are considered to be stated at their individual stand-alone selling prices. GEO has determined that the services to be provided are recognized over time based on the unit of occurrence of the various services as its customer simultaneously receives and consumes the benefits as the services are performed and GEO has a right to payment for performance completed to date. Generally, these services are paid based on a net rate per occurrence and a monthly fee for management services.

 

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Certain of the Company’s electronic monitoring contracts include providing monitoring equipment and related monitoring services activities (using internal proprietary software platforms) to its customers. These tasks are considered to be activities to fulfill the promise to provide electronic monitoring services to individuals and are not considered to be individually separate promises in the contract. In the context of the contract, the equipment and monitoring service is not considered to be capable of being distinct as the customer typically cannot benefit from the equipment or monitoring service on its own or with other readily available resources. Management has identified these activities as a bundle of services and determined that each day or unit of the promised service is distinct. These services are part of a series of distinct services that are substantially the same and are measured using the same measure of progress (time-based output method) and are therefore accounted for as a single performance obligation. GEO has determined that services are recognized over time as the customer simultaneously receives and consumes the benefits as the services are performed and GEO has a right to payment for performance completed to date.

Services provided for GEO’s day reporting centers are similar to its Owned and Leased Community-based services discussed above with the exception of temporary housing.

3. BUSINESS COMBINATIONS

Community Education Centers Acquisition

On April 5, 2017, the Company completed its acquisition of Community Education Centers (“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. Under the terms of the merger agreement, the Company acquired 100% of the voting interests in CEC for an aggregate consideration of $353.6 million. 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.

The allocation of the purchase price was complete as of March 31, 2018. During the three months ended March 31, 2018, the Company made measurement period adjustments 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 payable and accrued expenses. Of the total measurement period adjustments, accounts payable and accrued expenses decreased by $1.0 million related to an accrual for a legal settlement that was funded out of cash held in escrow and by $1.4 million related to a contingency for unclaimed property. The remaining measurement period adjustments were not individually significant. The final purchase price allocation and adjustments made to the estimated acquisition date fair values during the three months ended March 31, 2018 are as follows (in thousands):

 

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     Acquisition
Date
Estimated
Fair Value as
of
December 31,
2017
     Measurement
Period
Adjustments
     Final
Acquisition
Date Fair
Value as of
March 31,
2018
 

Accounts Receivable

   $ 32,869      $ —        $ 32,869  

Prepaid and other current assets

     4,397        —          4,397  

Property and equipment

     126,510        —          126,510  

Intangible assets

     76,000        —          76,000  

Favorable lease assets

     3,110        —          3,110  

Deferred income tax assets

     4,116        44        4,160  

Other non-current assets

     4,327        —          4,327  
  

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 251,329      $ 44      $ 251,373  
  

 

 

    

 

 

    

 

 

 

Accounts payable and accrued expenses

     51,651        (1,339      50,312  

Unfavorable lease liabilities

     1,299        —          1,299  

Other non-current liabilities

     10,479        (1,166      9,313  
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

   $ 63,429      $ (2,505    $ 60,924  
  

 

 

    

 

 

    

 

 

 

Total identifiable net assets

     187,900        2,549        190,449  

Goodwill

     165,656        (2,549      163,107  
  

 

 

    

 

 

    

 

 

 

Total consideration paid, net of cash acquired

   $ 353,556      $ —        $ 353,556  
  

 

 

    

 

 

    

 

 

 

The Company recognized a reduction of operating expenses of $2.3 million related to CEC during the nine months ended

September 30, 2018 as a result of a recovery of funds held in escrow after the measurement period had ended.

4. 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 3 – 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, 2017 to September 30, 2018 are as follows (in thousands):

 

     December 31,
2017
     Acquisition
Adjustments
     Foreign
Currency
Translation
     September 30,
2018
 

U.S. Corrections & Detention

   $ 317,005      $ (639    $ —        $ 316,366  

GEO Care

     461,499        (1,910      —          459,589  

International Services

     447        —          (34      413  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Goodwill

   $ 778,951      $ (2,549    $ (34    $ 776,368  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company has also recorded other finite and indefinite-lived intangible assets as a result of its various business combinations. Refer to Note 3 – 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, 2018      December 31, 2017  
     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      $ 308,431      $ (122,309   $ 186,122      $ 308,518      $ (106,724   $ 201,794  

Covenants not to compete

     1        700        (700     —          700        (517     183  

Technology

     7.3        33,700        (27,075     6,625        33,700        (25,538     8,162  

Trade name (Indefinite lived)

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 388,031      $ (150,084   $ 237,947      $ 388,118      $ (132,779   $ 255,339  
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense was $17.3 million and $18.1 million for the nine months ended September 30, 2018 and 2017, 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, 2018, the weighted average period before the next contract renewal or extension for the acquired facility management contracts was approximately 1.5 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 2018 through 2022 and thereafter is as follows (in thousands):

 

Fiscal Year

   Total
Amortization
Expense
 

Remainder of 2018

   $ 5,647  

2019

     22,305  

2020

     22,305  

2021

     19,782  

2022

     18,103  

Thereafter

     104,605  
  

 

 

 
   $ 192,747  
  

 

 

 

5. 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, 2018 and December 31, 2017 (in thousands):

 

            Fair Value Measurements at
September 30, 2018
 
     Carrying
Value at
September 30,
2018
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Restricted investment:

           

Rabbi Trust

   $ 23,176      $ —        $ 23,176      $ —    

Fixed income securities

     1,871        —          1,871        —    

Liabilities:

           

Interest rate swap derivatives

   $ 8,638      $ —        $ 8,638      $ —    

 

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            Fair Value Measurements at
December 31, 2017
 
     Carrying
Value at
December 31,
2017
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Restricted investments:

           

Rabbi Trust

   $ 20,763      $ —        $ 20,763      $ —    

Fixed income securities

     1,902        —          1,902        —    

Liabilities:

           

Interest rate swap derivatives

   $ 13,992      $ —        $ 13,992      $ —    

The Company’s Level 2 financial instruments included in the tables above as of September 30, 2018 and December 31, 2017 consist of interest rate swap derivative liabilities held by the Company’s Australian subsidiary, the Company’s rabbi trust established for GEO employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and an investment in Canadian dollar denominated fixed income securities.

The Australian subsidiary’s interest rate swap derivative liabilities 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.

During the nine months ended September 30, 2018, the Company transferred certain accounts receivable balances that had a carrying value of approximately $6.9 million to an unrelated third party. The transfer was accounted for as a sale and the Company has no continuing involvement with the transferred assets. The Company received cash proceeds in connection with the sale of approximately $6.9 million, and as such, there was no gain or loss in connection with the transaction.

 

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6. 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, 2018 and December 31, 2017 (in thousands):

 

            Estimated Fair Value Measurements at
September 30, 2018
 
     Carrying
Value as of
September 30,
2018
     Total Fair
Value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 66,007      $ 66,007      $ 66,007      $ —        $ —    

Restricted cash and investments

     60,694        60,694        58,241        2,453        —    

Liabilities:

              

Borrowings under senior credit facility

   $ 1,243,919      $ 1,242,560      $ —        $ 1,242,560      $ —    

5.875% Senior Notes due 2024

     250,000        240,523        —          240,523        —    

5.125% Senior Notes

     300,000        289,731        —          289,731        —    

5.875% Senior Notes due 2022

     250,000        252,878        —          252,878        —    

6.00% Senior Notes

     350,000        336,872        —          336,872        —    

Non-recourse debt

     357,506        357,736        —          357,736        —    

 

            Estimated Fair Value Measurements at
December 31, 2017
 
     Carrying
Value as of
December 31,
2017
     Total Fair
Value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 81,377      $ 81,377      $ 81,377      $ —        $ —    

Restricted cash and investments

     52,168        52,168        49,884        2,284        —    

Liabilities:

              

Borrowings under senior credit facility

   $ 1,064,599      $ 1,070,514      $ —        $ 1,070,514      $ —    

5.875% Senior Notes due 2024

     250,000        262,095        —          262,095        —    

5.125% Senior Notes

     300,000        303,918        —          303,918        —    

5.875% Senior Notes due 2022

     250,000        258,338        —          258,338        —    

6.00% Senior Notes

     350,000        362,835        —          362,835        —    

Non-recourse debt

     393,737        394,671        —          394,671        —    

The fair values of the Company’s cash and cash equivalents, and restricted cash approximates the carrying values of these assets at September 30, 2018 and December 31, 2017. Restricted cash consists of money market funds, bank deposits, commercial paper and time deposits used for asset replacement funds and other funds contractually required to be maintained at the Company’s Australian subsidiary. 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).

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”) and the Company’s Australian subsidiary are 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.

 

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7. RESTRICTED CASH AND CASH EQUIVALENTS

The following table provides a reconciliation of cash, cash equivalents and restricted cash and cash equivalents reported on the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

 

     September 30,
2018
     September 30,
2017
 

Cash and Cash Equivalents

   $ 66,007      $ 51,526  

Restricted cash and cash equivalents – current

     54,931        12,452  

Restricted cash and investments – non-current

     28,939        31,032  

Less Restricted investments – non-current

     (23,176      (19,472
  

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash and cash equivalents shown in the statement of cash flows

   $ 126,701      $ 75,538  
  

 

 

    

 

 

 

Amounts included in restricted cash and cash equivalents are attributable to certain contractual cash restriction requirements at the Company’s wholly owned Australian subsidiary related to non-recourse debt and asset replacement funds contractually required to be maintained and other guarantees. Restricted investments – non-current (included in Restricted Cash and Investments in the accompanying consolidated balance sheets) consists of the Company’s rabbi trust established for employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and is not considered to be a restricted cash equivalent. Refer to Note 5 – Financial Instruments.

 

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8. 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
Capital
    Earnings in
Excess of
Distributions/
(Distributions)
in Excess of

Earnings
    Accumulated
Other
Comprehensive
Loss
   

 

Treasury shares

    Noncontrolling
Interests
    Total
Shareholders’
Equity
 
     Shares     Amount     Shares      Amount  

Balance, January 1, 2018

     124,008     $ 1,240     $ 1,190,906     $ 31,541     $ (24,446     —        $ —       $ (322   $ 1,198,919  

Proceeds from exercise of stock options

     97       1       1,780       —         —         —          —         —         1,781  

Stock-based compensation expense

     —         —         16,351       —         —         —          —         —         16,351  

Restricted stock granted

     905       9       (9     —         —            —         —         —    

Restricted stock canceled

     (52     —         —         —         —         —          —         —         —    

Dividends paid

     —         —         —         (172,256     —         —          —         —         (172,256

Shares withheld for net settlements of share-based awards [1]

     (173     (2     (4,450     —         —         —          —         —         (4,452

Issuance of common stock – ESPP

     18       —         404       —         —         —          —         —         404  

Repurchases of common stock

     (3,117     —         —         —         —         3,117        (70,446     —         (70,446

Net income (loss)

     —         —         —         111,697       —         —          —         (223     111,474  

Other comprehensive loss

     —         —         —         —         (1,339     —          —         (24     (1,363
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2018

     121,686     $ 1,248     $ 1,204,982     $ (29,018   $ (25,785     3,117      $ (70,446   $ (569   $ 1,080,412  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

[1]

During the nine months ended September 30, 2018, the Company withheld shares through net share settlements to satisfy statutory tax withholding requirements upon vesting of shares of restricted stock held by employees.

REIT Distributions

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

During the nine months ended September 30, 2018 and the year ended December 31, 2017 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 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  

October 12, 2017

  

October 23, 2017

  

October 30, 2017

   $ 0.47      $ 58.3  

February 5, 2018

  

February 16, 2018

  

February 27, 2018

   $ 0.47      $ 58.3  

April 11, 2018

  

April 23, 2018

  

May 3, 2018

   $ 0.47      $ 57.4  

July 10, 2018

  

July 20, 2018

  

July 27, 2018

   $ 0.47      $ 57.2  

 

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Stock Buyback Program

On February14, 2018, the Company announced that its Board of Directors authorized a stock buyback program authorizing the Company to repurchase up to a maximum of $200.0 million of its shares of common stock. The stock buyback program will be funded primarily with cash on hand, free cash flow and borrowings under the Company’s $900 million revolving credit facility (the “Revolver”). The program is effective through October 20, 2020. The stock buyback program is intended to be implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission (“SEC”) requirements. The stock buyback program does not obligate the Company to purchase any specific amount of our common stock and may be suspended or extended at any time at the discretion of the Company’s Board of Directors. During the nine months ended September 30, 2018, the Company purchased 3,117,483 shares of its common stock at a cost of $70.4 million primarily purchased with proceeds from the Company’s Revolver. The Company believes it has the ability to continue to fund the stock buyback program, its debt service requirements and its maintenance and growth capital expenditure requirements, while maintaining sufficient liquidity for other corporate purposes.

Prospectus Supplement

On October 20, 2017, the Company filed with the SEC an automatic shelf registration on Form S-3. Under this 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. On November 9, 2017, in connection with the shelf registration, the Company filed with the SEC 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 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, 2018.

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, 2018
(In thousands)
 
     Foreign currency
translation adjustments,
net of tax attributable to
The GEO Group, Inc. (1)
    Change in fair value of
derivatives, net of tax
    Pension
adjustments,
net of tax
    Total  

Balance, January 1, 2018

   $ (7,470   $ (11,892   $ (5,084   $ (24,446

Current-period other comprehensive (loss) income

     (5,858     4,550       (31     (1,339
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2018

   $ (13,328   $ (7,342   $ (5,115   $ (25,785
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The foreign currency translation related to noncontrolling interests was not significant at September 30, 2018 or December 31, 2017.

 

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9. EQUITY INCENTIVE PLANS

The Board has adopted The GEO Group, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), which was approved by the Company’s shareholders on April 24, 2018. The 2018 Plan replaced the 2014 Stock Incentive Plan (the “2014 Plan”). As of the date the 2018 Plan was adopted, it provided for a reserve of 4,600,000 shares of common stock that may be issued pursuant to awards granted under the 2018 Plan. The Company filed a Form S-8 registration statement related to the 2018 Plan on May 11, 2018.

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, 2018, the fair value was estimated using the following assumptions: (i) volatility of 39.69%; (ii) expected term of 5.0 years; (iii) risk free interest rate of 2.84%; and (iv) expected dividend yield of 8.70%. A summary of the activity of stock option awards issued and outstanding under Company plans was as follows for the nine months ended September 30, 2018:

 

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

Options outstanding at January 1, 2018

     1,230      $ 25.02        7.33      $ 3,117  

Options granted

     475        21.60        

Options exercised

     (97      19.13        

Options forfeited/canceled/expired

     (108      25.24        
  

 

 

          

Options outstanding at September 30, 2018

     1,500      $ 24.30        7.50      $ 4,849  
  

 

 

          

Options vested and expected to vest at September 30, 2018

     1,404      $ 24.31        7.39      $ 4,580  
  

 

 

          

Options exercisable at September 30, 2018

     656      $ 23.80        5.93      $ 2,601  
  

 

 

          

On April 24, 2018, the Company granted approximately 475,000 options to certain employees which had a grant date fair value of $3.64. For the nine months ended September 30, 2018 and September 30, 2017, the amount of stock-based compensation expense related to stock options was $0.7 million and $1.1 million, respectively. As of September 30, 2018, the Company had $2.4 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.0 years.

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 historically issued share-based awards with service-based, performance-based and market-based vesting criteria.

 

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A summary of the activity of restricted stock outstanding is as follows for the nine months ended September 30, 2018:

 

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

Restricted stock outstanding at January 1, 2018

     1,770      $ 30.47  

Granted

     905        22.70  

Vested

     (577      28.52  

Forfeited/canceled

     (52      25.00  
  

 

 

    

Restricted stock outstanding at September 30, 2018

     2,046      $ 27.54  
  

 

 

    

During the nine months ended September 30, 2018, the Company granted approximately 905,000 shares of restricted stock to certain employees and executive officers. Of these awards, 352,500 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, 2018 to December 31, 2020 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, 2018 to December 31, 2020. These market and performance awards can vest at between 0% and 200% of the target awards for both metrics. The number of shares shown for the performance-based awards is based on the target awards for both metrics.

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

The metric related to TSR is considered to be a market condition. For share-based awards that contain a market condition, the probability of satisfying the market condition must be considered in the estimate of grant-date fair value and previously recorded compensation expense is not reversed if the market condition is never met. The fair value of these awards was determined based on a Monte Carlo simulation, which calculates a range of possible outcomes and the probabilities that they will occur, using the following key assumptions: (i) volatility of 44.5%; (ii) beta of 1.05; and (iii) risk free rate of 2.58%.

For the nine months ended September 30, 2018 and September 30, 2017, the Company recognized $15.6 million and $13.8 million, respectively, of compensation expense related to its restricted stock awards. As of September 30, 2018, the Company had $40.0 million of unrecognized compensation costs related to non-vested restricted stock awards, including non-vested restricted stock awards with performance-based and market-based vesting, that are expected to be recognized over a weighted average period of 2.4 years.

 

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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 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, 2018, 17,751 shares of the Company’s common stock were issued in connection with the Plan.

 

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10. EARNINGS PER SHARE

Basic earnings per share of common stock is computed by dividing the net income 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, 2018 and 2017 as follows (in thousands, except per share data):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2018
     September 30,
2017
     September 30,
2018
     September 30,
2017
 

Net income

   $ 39,229      $ 38,453      $ 111,474      $ 109,761  

Net loss attributable to noncontrolling interests

     60        36        223        123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to The GEO Group, Inc.

     39,289        38,489        111,697        109,884  

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

           

Weighted average shares outstanding

     119,681        122,251        120,567        119,356  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.33      $ 0.31      $ 0.93      $ 0.92  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Weighted average shares outstanding

     119,681        122,251        120,567        119,356  

Dilutive effect of equity incentive plans

     621        636        488        758  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares assuming dilution

     120,302        122,887        121,055        120,114  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount

   $ 0.33      $ 0.31      $ 0.92      $ 0.91  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months

For the three months ended September 30, 2018, 613,224 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 477,941 common stock equivalents from restricted shares that were anti-dilutive.

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 EPS because the effect would be anti-dilutive. There were 818,400 common stock equivalents from restricted shares that were anti-dilutive.

Nine Months

For the nine months ended September 30, 2018, 904,375 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 671,149 common stock equivalents from restricted shares that were anti-dilutive.

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.

 

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11. 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 – 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 correctional facility project in Ravenhall, a locality near Melbourne, Australia to 4.2% during the project’s operating phase. The swaps’ notional amounts coincide with outstanding draws under the project. At September 30, 2018, the swaps had a notional amount of approximately AUD 457 million, or $330.2 million, based on exchange rates at September 30, 2018. The Company has determined that the swaps have payment, expiration dates, and provisions that coincide with the terms of the non-recourse debt and are therefore considered to be effective cash flow hedges. Accordingly, the Company records the change in the fair value of the interest rate swaps in accumulated other comprehensive income, net of applicable income taxes. Total unrealized gain recorded in other comprehensive income, net of tax, related to this cash flow hedge was $4.6 million during the nine months ended September 30, 2018. The total fair value of the swap liability as of September 30, 2018 was $8.6 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).

 

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12. DEBT

Debt outstanding as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

     September 30,
2018
    December 31,
2017
 

Senior Credit Facility:

    

Term loan

   $ 788,000     $ 794,000  

Unamortized discount on term loan

     (7,192     (3,499

Unamortized debt issuance costs on term loan

     (3,032     (7,612

Revolver

     455,919       270,559  
  

 

 

   

 

 

 

Total Senior Credit Facility

     1,233,695       1,053,448  

6.00% Senior Notes:

    

Notes Due in 2026

     350,000       350,000  

Unamortized debt issuance costs

     (4,950     (5,325
  

 

 

   

 

 

 

Total 6.00% Senior Notes Due in 2026

     345,050       344,675  

5.875% Senior Notes:

    

Notes Due in 2024

     250,000       250,000  

Unamortized debt issuance costs

     (3,078     (3,385
  

 

 

   

 

 

 

Total 5.875% Senior Notes Due in 2024

     246,922       246,615  

5.125% Senior Notes:

    

Notes Due in 2023

     300,000       300,000  

Unamortized debt issuance costs

     (3,712     (4,184
  

 

 

   

 

 

 

Total 5.125% Senior Notes Due in 2023

     296,288       295,816  

5.875% Senior Notes:

    

Notes Due in 2022

     250,000       250,000  

Unamortized debt issuance costs

     (2,702     (3,241
  

 

 

   

 

 

 

Total 5.875% Senior Notes Due in 2022

     247,298       246,759  

Non-Recourse Debt

     357,692       394,008  

Unamortized debt issuance costs on non-recourse debt

     (5,159     (9,322

Unamortized discount on non-recourse debt

     (186     (271
  

 

 

   

 

 

 

Total Non-Recourse Debt

     352,347       384,415  

Capital Lease Obligations

     6,412       7,431  

Other debt

     2,604       2,728  
  

 

 

   

 

 

 

Total debt

     2,730,616       2,581,887  

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

     (340,143     (28,920

Capital Lease Obligations, long-term portion

     (4,954     (6,059

Non-Recourse Debt, long-term portion

     (22,201     (365,364
  

 

 

   

 

 

 

Long-Term Debt

   $ 2,363,318     $ 2,181,544  
  

 

 

   

 

 

 

Amended and Restated Credit Agreement

On April 30, 2018, GEO entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (the “Credit Agreement”) by and among the Refinancing Lenders party thereto, the other lenders party thereto, GEO and GEO Corrections Holdings, Inc. and BNP Paribas, as Administrative Agent. The amendment, among other things, provides for the refinancing of all of GEO’s existing senior secured term loans with refinancing term loans in the aggregate principal amount of $792.0 million and makes certain other modifications to GEO’s senior secured credit agreement. The interest rate applicable to the refinancing term loans is equal to LIBOR plus 2.00% (with a LIBOR floor of 0.75%). The amendment was considered to be a modification and loan costs of approximately $1.0 million were incurred and capitalized in connection with the transaction.

 

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Table of Contents

The Credit Agreement evidences a credit facility (the “Credit Facility”) consisting of the $792.0 million term loan discussed above (the “Term Loan”) bearing interest at LIBOR plus 2.00% (with a LIBOR floor of 0.75%), and a $900.0 million 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 Dollar Letter of Credit Facility (the “Australian LC Facility”). As of September 30, 2018, 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. 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.

GEO Australasia Holdings Pty Ltd, GEO Australasia Finance Holdings Pty Ltd as trustee for the GEO Australasia Finance Holding Trust, and together with GEO Australasia Holdings, collectively (“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 approximately AUD100 million, or $72.2 million, based on exchange rates in effect as of September 30, 2018 (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 correctional facility 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, 2018, there was AUD100 million in letters of credit issued under the Bank Guarantee Facility.

 

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Table of Contents

As of September 30, 2018, the Company had approximately $788 million in aggregate borrowings outstanding under the Term Loan, approximately $456 million in borrowings under the Revolver, and approximately $70 million in letters of credit which left approximately $374 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Credit Agreement as of September 30, 2018 was 4.3%.

6.00% Senior Notes due 2026

Interest on the 6.00% Senior Notes 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 at the redemption prices set forth in the indenture governing the 6.00% Senior Notes. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 17- 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 17- 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 17- 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 17- Condensed Consolidating Financial Information.

Non-Recourse Debt

Northwest Detention Center

The remaining balance of the original debt service requirement under the $54.4 million note payable (“2011 Revenue Bonds”) to WEDFA is $30.0 million, of which $7.0 million is classified as current in the accompanying consolidated balance sheet as of September 30, 2018. The payment of principal and interest on the 2011 Revenue Bonds issued by WEDFA is non-recourse to GEO. The 2011 Revenue Bonds will mature in October 2021 with fixed coupon rates of 5.25%.

 

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As of September 30, 2018, included in current restricted cash and cash equivalents is $8.3 million of funds held in trust for debt service and other reserves with respect to the above mentioned note payable to WEDFA.

Australia – Ravenhall

In connection with a design and build correctional facility 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 provided for non-recourse funding up to AUD 791.0 million, or approximately $571.5 million, based on exchange rates as of September 30, 2018. Construction draws were funded throughout the project according to a fixed utilization schedule as defined in the Construction Facility. The term of the Construction Facility is through September 2019 and bears interest at a variable rate quoted by certain Australian banks plus 200 basis points. The project was 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 $83.1 million, based on exchange rates as of September 30, 2018. The Company has begun negotiations for a refinancing transaction and anticipates completion of the refinancing transaction in the first quarter of 2019. As the Company currently does not yet have a financing agreement in place, the balance has been presented as current in the accompanying consolidated balance sheet as of September 30, 2018. In accordance with the terms of the Construction Facility, upon completion and commercial acceptance of the correctional facility in the fourth quarter of 2017, in accordance with the contract, the State made a lump sum payment of AUD310 million, or approximately $224 million, based on exchange rates as of September 30, 2018, 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, 2018, approximately $328 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 11 – Derivative Financial Instruments.

Guarantees

Australia

The Company has entered into a guarantee in connection with the operating performance of a facility in Australia. The obligation amounted to approximately AUD 100.0 million, or $72.2 million, based on exchange rates as of September 30, 2018. The guarantee is secured by outstanding letters of credit under the Company’s Revolver as of September 30, 2018.

At September 30, 2018, the Company also had ten other letters of credit outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $14.7 million.

South Africa

In connection with the creation of South African Custodial Services Pty. Limited (“SACS”), the Company had entered into certain guarantees related to the financing, construction and operation of the prison. The Company had guaranteed certain obligations of SACS under its debt agreements to SACS’ senior lenders through the issuance of letters of credit under the Company’s Revolver. In July 2018, SACS settled all amounts due under the debt facilities and has therefore discharged the guaranteed obligations, therefore the guarantees related to these obligations were no longer necessary and the letters of credit were not renewed. Additionally, SACS is required to maintain funding in a rectification account maintained for the payment of certain costs in the event of contract termination. SACS has met the required funding obligation and there is no further requirement to maintain the required funding amount.

In addition to the above, the Company had 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, 2018, referred to as the shareholder’s standby facility, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the shareholder’s standby facility. The Company’s obligations under the shareholder’s standby facility expire upon the earlier of full funding or SACS’s release from its obligations under the common terms agreement. SACS’ obligations in terms of the common terms agreements will expire in February 2019 with the final payment of the facility management fees when the Company’s obligations under the shareholder’s standby facility have expired.

 

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The Company had 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 will expire in February 2019 when all SACS obligation in terms of the finance agreements have been settled.

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 had each extended a £12 million line of credit, or $15.6 million, based on exchange rates as of September 30, 2018, of which £1.3 million, or $1.7 million, based on exchange rates as of September 30, 2018, was outstanding as of September 30, 2018 to each joint venture partner. The Company’s maximum exposure relative to the joint venture is its note receivable of approximately $1.7 million, which is included in Other Non-Current Assets in the accompanying consolidated balance sheets, and any future financial support necessary to guarantee performance under the contract. In October 2018, the note receivable to each joint venture partner was paid off in full.

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

13. COMMITMENTS, CONTINGENCIES AND OTHER

Litigation, Claims and Assessments

As previously reported and described in our prior periodic reports, including most recently in our Form 10-Q for the quarter ended June 30, 2018, 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, alleging several statutory and common law claims. On July 16, 2018, the Company entered into a negotiated settlement and release agreement and the case was dismissed with no admission of liability by the Company. The negotiated settlement included a monetary payment to the State of Mississippi and such payment did not have a material effect on our results of operations, financial condition or cash flows.

On October 22, 2014, former civil immigration detainees at the Aurora Immigration Detention Center filed a class action lawsuit against the Company in the United States District Court for the District of Colorado (the “Court”). The complaint alleges that the Company was in violation of the Colorado Minimum Wages of Workers Act and the federal Trafficking Victims Protection Act (“TVPA”). The plaintiff class claims that the Company was unjustly enriched as a result of the level of payment 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 the case are authorized by the Federal government under guidelines approved by the United States Congress. On July 6, 2015, the Court found that detainees were not employees under the Colorado Minimum Wage Order and dismissed this claim. In February 2017, the Court granted the plaintiff-class’ motion for class certification which the Company appealed to the 10th Circuit Court of Appeals. On February 9, 2018, a three-judge panel of the appellate court affirmed the class-certification order. A petition for rehearing en banc was denied on March 7, 2018. On October 2, 2018, the U.S. Supreme Court denied the Company’s petition for a writ of certiorari on the class certification order. The plaintiff class seeks actual damages, compensatory damages, exemplary damages, punitive damages, restitution, attorneys’ fees and costs, and such other relief as the Court may deem proper. In the time since the Colorado suit was initially filed, three similar lawsuits have been filed – two in Washington and one in California. In Washington, one of the two lawsuits was filed on September 9, 2017 by immigration detainees against the Company in the U.S. District Court for the Western District of Washington. The second was filed on September 20, 2017 by the State Attorney General against the Company in the Superior Court of the State of Washington for Pierce County, which the Company removed to the U.S. District Court for the Western

 

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District of Washington on October 9, 2017. In California, a class-action lawsuit was filed on December 19, 2017 by immigration detainees against the Company in the U.S. District Court Eastern Division of the Central District of California. All three lawsuits allege violations of the respective state’s minimum wage laws. However, the California lawsuit, like the Colorado suit, also includes claims based that the Company violated the TVPA and California’s equivalent state statute. The Company intends to take all necessary steps to vigorously defend itself and has consistently refuted the allegations and claims in these lawsuits. The Company has not recorded an accrual relating to these matters at this time, as a loss is not considered probable nor reasonably estimable at this stage of the lawsuit.

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. However, the results of these claims or proceedings cannot be predicted with certainty, and an unfavorable resolution of one or more of these claims or proceedings could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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 $229.4 million of which $188.7 million was spent through the first nine months of 2018. The Company estimates the remaining capital requirements related to these capital projects will be $40.7 million which will be spent through 2019.

Idle Facilities

As of September 30, 2018, the Company is marketing approximately 4,700 vacant beds at four of its U.S. Corrections & Detention 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 $124.1 million as of September 30, 2018, 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, 2018.

 

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14. 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,
2018
     September 30,
2017
     September 30,
2018
     September 30,
2017
 

Revenues:

           

U.S. Corrections & Detention

   $ 379,351      $ 365,071      $ 1,107,016      $ 1,073,840  

GEO Care

     141,808        134,610        431,819        377,740  

International Services

     62,371        45,641        193,121        130,261  

Facility Construction & Design [1]

     —          21,437        —          112,602  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 583,530      $ 566,759      $ 1,731,956      $ 1,694,443  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) from segments:

           

U.S. Corrections & Detention

   $ 77,885      $ 77,551      $ 224,386      $ 224,838  

GEO Care

     35,959        31,293        102,795        94,062  

International Services

     3,583        3,410        10,927        8,413  

Facility Construction & Design [1]

     —          (278      —          (1,620
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income from segments

   $ 117,427      $ 111,976      $ 338,108      $ 325,693  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[1]

Facility Construction & Design activity related to the Company’s Ravenhall correctional facility project which was completed during the fourth quarter of 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,
2018
     September 30,
2017
     September 30,
2018
     September 30,
2017
 

Total operating income from segments

   $ 117,427      $ 111,976      $ 338,108      $ 325,693  

Unallocated amounts:

           

General and Administrative Expenses

     (47,647      (49,074      (136,927      (143,866

Net Interest Expense

     (29,563      (24,071      (84,585      (70,731
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes and equity in earnings of affiliates

   $ 40,217      $ 38,831      $ 116,596      $ 111,096  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Equity in Earnings of Affiliates

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

The Company has recorded $2.2 million and $5.9 million in earnings, net of tax, for SACS operations during the three and nine months ended September 30, 2018, and $1.1 million and $3.4 million in earnings, net of tax, for SACS operations during the three months and nine months ended September 30, 2017, 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, 2018 and December 31, 2017, the Company’s investment in SACS was $12.8 million and $18.1 million, respectively, and represents its share of cumulative reported earnings.

The Company has recorded $0.6 million and $1.2 million in earnings, net of tax, for GEO Amey’s operations during the three and nine months ended September 30, 2018, and $0.2 million and $0.8 million for the three and nine months ended September 30, 2017, 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, 2018 and December 31, 2017, the Company’s investment in GEOAmey was $3.9 million and $2.7 million, respectively, and represents its share of cumulative reported earnings.

15. 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,
2018
     Year Ended
December 31,
2017
 

Change in Projected Benefit Obligation

     

Projected benefit obligation, beginning of period

   $ 32,820      $ 28,624  

Service cost

     900        1,001  

Interest cost

     931        1,228  

Actuarial loss

     —          2,474  

Benefits paid

     (396      (507
  

 

 

    

 

 

 

Projected benefit obligation, end of period

   $ 34,255      $ 32,820  
  

 

 

    

 

 

 

Change in Plan Assets

     

Plan assets at fair value, beginning of period

   $ —        $ —    

Company contributions

     396        507  

Benefits paid

     (396      (507
  

 

 

    

 

 

 

Plan assets at fair value, end of period

   $ —        $ —    
  

 

 

    

 

 

 

Unfunded Status of the Plan

   $ (34,255    $ (32,820
  

 

 

    

 

 

 

 

     Three Months Ended      Nine Months Ended  
     September 30,
2018
     September 30,
2017
     September 30,
2018
     September 30,
2017
 

Components of Net Periodic Benefit Cost

           

Service cost

   $ 300      $ 250      $ 900      $ 751  

Interest cost

     310        307        931        921  

Net loss

     133        73        399        218  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 743      $ 630      $ 2,230      $ 1,890  
  

 

 

    

 

 

    

 

 

    

 

 

 

The long-term portion of the pension liability as of September 30, 2018 and December 31, 2017 was $33.9 million and $32.4 million, respectively, and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheets.

 

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16. RECENT ACCOUNTING PRONOUNCEMENTS

The Company implemented the following accounting standards during the nine months ended September 30, 2018:

In May 2014, the Financial Accounting Standards Board (“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 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 became effective for the Company beginning on January 1, 2018 and the Company used the modified retrospective transition method to implement this standard. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows. Disclosures related to the nature, amount and timing of revenue and cash flows arising from contracts with customers are included in Note 2 – Revenue Recognition.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows,” which clarified the presentation and classification in the statement of cash flows for eight specific cash flow issues with the objective of reducing diversity in practice. These cash flow issues include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions and also addresses separately identified cash flows and the application of the predominance principle. The amendments in ASU No. 2016-15 became effective for the Company on January 1, 2018. The Company elected to apply the cumulative earnings approach to classify distributions received from its equity method investees and determined that the distributions are a return on investment and are therefore classified as cash inflows from operating activities. 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. 2016-16,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 became effective for the Company on January 1, 2018. 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 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows – Restricted Cash,” which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard became effective for the Company on January 1, 2018 and was applied using a retrospective transition method to each period presented. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows. As a result of the adoption of this standard, the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 has been retrospectively adjusted. Refer to Note 7 – Restricted Cash and Cash Equivalents for additional disclosures required under the standard.

 

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In January 2017, the FASB issued ASU No. 2017-01,Business Combinations,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this update became effective for the Company on January 1, 2018. 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 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 became effective for the Company on January 1, 2018. The adoption of this standard did not 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 was effective for the Company beginning on January 1, 2018. The adoption of this standard did not 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 became effective for the Company on January 1, 2018. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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The following accounting standards will be adopted in future periods:

In August 2018, the FASB issued ASU No. 2018-14Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715.20)” as a part of its disclosure framework project. The amendments in this update remove, modify and add certain disclosures primarily related to amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, explanations for reasons for significant gains and losses related to changes in the benefit obligation for the period, and projected and accumulated benefit obligations. The new standard is effective for the Company beginning January 1, 2021. 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 August 2018, the FASB issued ASU No. 2018-13Fair Value Measurement (Topic 820)” as a part of its disclosure framework project. The amendments in this update remove, modify and add certain disclosures primarily related to transfers between Level 1 and Level 2 of the fair value hierarchy, various disclosures related to Level 3 fair value measurements and investments in certain entities that calculate net asset value. The new standard is effective for the Company beginning January 1, 2020. 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 June 2018, the FASB issued ASU No. 2018-07Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting” as a part of its Simplification Initiative. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the period of time over which share-based payment awards vest and the pattern of cost recognition over that period. The amendment specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606-”Revenue from Contracts with Customers.” 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 February 2018, the FASB issued ASU No. 2018-02Income Statement-Reporting Comprehensive Income-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments in this update allow an entity to elect to reclassify the income tax effects resulting from the Tax Cuts and Jobs Act on items within accumulated other comprehensive income to retained earnings. The new standard is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. 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 August 2017, the FASB issued ASU No. 2017-12Derivatives 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.

 

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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 FASB has recently issued several amendments to the standard, including accounting for land easements. 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 July 2018, the FASB issued ASU 2018-11 which provides for an optional transition method where an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current generally accepted accounting principles (Topic 940, “Leases”). Alternatively, lessees and lessors can elect to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company has elected to apply the new lease standard at the adoption date on January 1, 2019 under the optional transition method as outlined in ASU 2018-11. There are also several practical expedients that entities may elect upon transition relating to short-term leases (twelve-month terms or less), non-lease components, reassessing certain lease decision points for existing leases, using hindsight in determining the lease term and land easements. With regard to these practical expedients, the Company has elected not to apply the recognition requirements to lease arrangements that have terms of twelve months or less. The Company has also elected to not reassess the major lease decision points for existing leases (whether a contract contains a lease, how a lease should be classified and whether previously capitalized initial direct costs meet the new standard definition). 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 as disclosed in Note 17 – Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company’s results of operations or financial position.

17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of September 30, 2018, 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.

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Three Months Ended September 30, 2018  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 208,607     $ 479,175     $ 65,028     $ (169,280   $ 583,530  

Operating expenses

     171,038       379,892       53,156       (169,280     434,806  

Depreciation and amortization

     6,742       23,621       934       —         31,297  

General and administrative expenses

     16,878       25,568       5,201       —         47,647  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     13,949       50,094       5,737       —         69,780  

Interest income

     3,415       1,159       8,660       (4,806     8,428  

Interest expense

     (20,765     (13,714     (8,318     4,806       (37,991
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (3,401     37,539       6,079       —         40,217  

Income tax provision

     162       2,446       1,115       —         3,723  

Equity in earnings of affiliates, net of income tax provision

     —         —         2,735       —         2,735  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of consolidated subsidiaries

     (3,563     35,093       7,699       —         39,229  

Income from consolidated subsidiaries, net of income tax provision

     42,792       —         —         (42,792     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     39,229       35,093       7,699       (42,792     39,229  

Net loss attributable to noncontrolling interests

     —         —         60       —         60  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 39,229     $ 35,093     $ 7,759     $ (42,792   $ 39,289  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 39,229     $ 35,093     $ 7,699     $ (42,792   $ 39,229  

Other comprehensive income (loss), net of tax

     —         (761     205       —         (556
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 39,229     $ 34,332     $ 7,904     $ (42,792   $ 38,673  

Comprehensive loss attributable to noncontrolling interests

     —         —         72       —         72  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 39,229     $ 34,332     $ 7,976     $ (42,792   $ 38,745  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Nine Months Ended September 30, 2018  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 606,424     $ 1,412,868     $ 201,090     $ (488,426   $ 1,731,956  

Operating expenses

     483,982       1,138,897       164,859       (488,426     1,299,312  

Depreciation and amortization

     19,766       71,759       3,011       —         94,536  

General and administrative expenses

     47,499       73,753       15,675       —         136,927  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     55,177       128,459       17,545       —         201,181  

Interest income

     10,998       4,023       26,951       (15,778     26,194  

Interest expense

     (59,034     (42,133     (25,390     15,778       (110,779
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

     7,141       90,349       19,106       —         116,596  

Income tax provision

     1,055       6,188       4,950       —         12,193  

Equity in earnings of affiliates, net of income tax provision

     —         —         7,071       —         7,071  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in income of consolidated subsidiaries

     6,086       84,161       21,227       —         111,474  

Income from consolidated subsidiaries, net of income tax provision

     105,388       —         —         (105,388     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     111,474       84,161       21,227       (105,388     111,474  

Net loss attributable to noncontrolling interests

     —         —         223       —         223  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 111,474     $ 84,161     $ 21,450     $ (105,388   $ 111,697  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 111,474     $ 84,161     $ 21,227     $ (105,388   $ 111,474  

Other comprehensive income (loss), net of tax

     —         (31     (1,332     —         (1,363
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 111,474     $ 84,130     $ 19,895     $ (105,388   $ 110,111  

Comprehensive loss attributable to noncontrolling interests

     —         —       247       —       247  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 111,474     $ 84,130     $ 20,142     $ (105,388   $ 110,358  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of September 30, 2018  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
ASSETS

 

Cash and cash equivalents

   $ 9,193      $ 18,059      $ 38,755     $ —       $ 66,007  

Restricted cash and cash equivalents

     5,652        —          49,279       —         54,931  

Accounts receivable, less allowance for doubtful accounts

     178,579        187,231        33,695       4,105       403,610  

Contract receivable, current portion

     —          —          9,420       —         9,420  

Prepaid expenses and other current assets

     2,153        26,183        11,037       (1,786     37,587  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     195,577        231,473        142,186       2,319       571,555  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Restricted Cash and Investments

     —          23,476        5,463       —         28,939  

Property and Equipment, Net

     843,558        1,217,597        86,850       —         2,148,005  

Non-Current Contract Receivable

     —          —          384,794       —         384,794  

Assets Held for Sale

     705        1,929        —         —         2,634  

Intercompany Receivable

     980,555        126,525        24,460       (1,131,540     —    

Non-Current Deferred Income Tax Assets

     863        23,913        1,501       —         26,277  

Goodwill

     —          775,955        413       —         776,368  

Intangible Assets, Net

     —          237,345        602       —         237,947  

Investment in Subsidiaries

     1,516,564        458,229        2,190       (1,976,983     —    

Other Non-Current Assets

     8,711        115,759        20,245       (78,895     65,820  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,546,533      $ 3,212,201      $ 668,704     $ (3,185,099   $ 4,242,339  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Accounts payable

   $ 11,967      $ 64,568      $ 5,749     $ —       $ 82,284  

Accrued payroll and related taxes

     —          33,424        20,173       —         53,597  

Accrued expenses and other current liabilities

     43,371        121,258        30,511       2,319       197,459  

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

     8,000        1,998        330,145       —         340,143  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     63,338        221,248        386,578       2,319       673,483  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

     —          —          8,757       —         8,757  

Intercompany Payable

     118,478        979,528        33,534       (1,131,540     —    

Other Non-Current Liabilities

     1,337        157,333        9,439       (78,895     89,214  

Capital Lease Obligations

     —          4,954        —         —         4,954  

Long-Term Debt

     2,282,399        —          80,919       —         2,363,318  

Non-Recourse Debt

     —          —          22,201       —         22,201  

Commitments & Contingencies and Other

            

Shareholders’ Equity:

            

The GEO Group, Inc. Shareholders’ Equity

     1,080,981        1,849,138        127,845       (1,976,983     1,080,981  

Noncontrolling Interests

     —          —          (569     —         (569
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

     1,080,981        1,849,138        127,276       (1,976,983     1,080,412  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 3,546,533      $ 3,212,201      $ 668,704     $ (3,185,099   $ 4,242,339  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 

     As of December 31, 2017  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
ASSETS

 

Cash and cash equivalents

   $ 54,666      $ —        $ 26,711     $ —       $ 81,377  

Restricted cash and cash equivalents

     —          —          44,932       —         44,932  

Accounts receivable, less allowance for doubtful accounts

     130,354        225,029        34,533       —         389,916  

Contract receivable, current portion

     —          —          18,142       —         18,142  

Prepaid expenses and other current assets

     2,589        24,163        18,590       —         45,342  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     187,609        249,192        142,908       —         579,709  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Restricted Cash and Investments

     —          25,715        2,284       —         27,999  

Property and Equipment, Net

     777,404        1,209,816        90,903       —         2,078,123  

Assets Held for Sale

     —          3,915        —         —         3,915  

Non-Current Contract Receivable

     —          —          404,309         404,309  

Intercompany Receivable

     1,130,189        88,534        28,218       (1,246,941     —    

Non-Current Deferred Income Tax Assets

     863        23,913        1,501       —         26,277  

Goodwill

     —          778,504        447       —         778,951  

Intangible Assets, Net

     —          254,531        808       —         255,339  

Investment in Subsidiaries

     1,336,665        456,076        2,190       (1,794,931     —    

Other Non-Current Assets

     11,141        115,330        25,210       (79,395     72,286  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,443,871      $ 3,205,526      $ 698,778     $ (3,121,267   $ 4,226,908  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Accounts payable

   $ 20,643      $ 65,475      $ 6,469     $ —       $ 92,587  

Accrued payroll and related taxes

     —          51,780        19,952       —         71,732  

Accrued expenses and other current liabilities

     40,344        115,636        20,344       —         176,324  

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

     8,000        1,870        19,050       —         28,920  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     68,987        234,761        65,815       —         369,563  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

     —          —          8,757       —         8,757  

Intercompany Payable

     79,984        1,129,590        37,367       (1,246,941     —    

Other Non-Current Liabilities

     4,674        157,200        14,223       (79,395     96,702  

Capital Lease Obligations

     —          6,059        —         —         6,059  

Long-Term Debt

     2,090,985        —          90,559       —         2,181,544  

Non-Recourse Debt

     —          —          365,364       —         365,364  

Commitments & Contingencies and Other

            

Shareholders’ Equity:

            

The GEO Group, Inc. Shareholders’ Equity

     1,199,241        1,677,916        117,015       (1,794,931     1,199,241  

Noncontrolling Interests

     —          —          (322     —         (322
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

     1,199,241        1,677,916        116,693       (1,794,931     1,198,919  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 3,443,871      $ 3,205,526      $ 698,778     $ (3,121,267   $ 4,226,908  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Nine Months Ended September 30, 2018  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 112,599     $ 70,040     $ 37,584     $ 220,223  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Insurance proceeds – damaged property

     —         5,998       —         5,998  

Proceeds from sale of property and equipment

     —         —         2,061       2,061  

Proceeds from sale of assets held for sale

     —         3,797       —         3,797  

Change in restricted investments

     —         (2,413     —         (2,413

Capital expenditures

     (95,461     (64,015     (2,014     (161,490
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (95,461     (56,633     47       (152,047
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Proceeds from long-term debt

     372,000       —         —         372,000  

Payments on long-term debt

     (183,000     —         (3,033     (186,033

Payments on non-recourse debt

     —         —         (9,636     (9,636

Taxes paid related to net share settlements of equity awards

     (4,452     —         —         (4,452

Proceeds from issuance of common stock in connection with ESPP

     404       —         —         404  

Payment for repurchases of common stock

     (70,446     —         —         (70,446

Debt issuance costs

     (990     —         —         (990

Proceeds from stock options exercised

     1,781       —         —         1,781  

Dividends paid

     (172,256     —         —         (172,256
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (56,959     —         (12,669     (69,628

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash and Cash Equivalents

     —         —         (5,392     (5,392
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash. Cash Equivalents and Restricted Cash and Cash Equivalents

     (39,821     13,407       19,570       (6,844

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, beginning of period

     54,666       4,952       73,927       133,545  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period

   $ 14,845     $ 18,359     $ 93,497     $ 126,701  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

   $ 15,303     $ 79,088     $ (36,486   $ 57,905  
  

 

 

   

 

 

   

 

 

   

 

 

 

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 investments

     —         (3,810     —         (3,810

Capital expenditures

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

 

 

   

 

 

   

 

 

   

 

 

 

Cash used in by investing activities

     (387,303     (65,242     (8,008     (460,553
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

        

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

Issuance of common stock under prospectus supplement

     275,867       —         —         275,867  

Proceeds from issuance of common stock in connection with ESPP

     —         —         382       382  

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, Cash Equivalents and Restricted Cash and Cash Equivalents

     —         —         863       863  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash and Cash Equivalents

     (39,545     13,846       10,880       (14,819

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, beginning of period

     45,736       4,922       39,699       90,357  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period

   $ 6,191     $ 18,768     $ 50,579     $ 75,538  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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18. SUBSEQUENT EVENTS

Dividend

On October 15, 2018, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock which was paid on November 2, 2018 to shareholders of record as of the close of business on October 26, 2018.

Hurricane Michael

On October 10, 2018, Hurricane Michael impacted the Florida Panhandle, which resulted in widespread damage to the area. As a result, the Company’s managed-only Bay Correctional Facility was impacted and incurred significant property damage. As a result, inmates housed in that facility have been temporarily re-located to other facilities. The Company is continuing to make a full assessment of the extent of the impact.

The Company maintains property and business interruption insurance, subject to certain deductibles, and is currently assessing claims under such policies; however, the timing and amount of insurance proceeds are uncertain and may not be sufficient to cover all losses. Timing differences are likely to exist between the capital expenditures made to repair or restore the property and recognition and receipt of insurance proceeds reflected in our financial statements. The Company expects that its results of operations related to the facility will be adversely impacted in the near term.

 

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

Forward-Looking Information

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

 

   

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

 

   

our ability to 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, to enhance occupancy levels and the financial performance of assets acquired and estimate the synergies to be achieved as a result of such acquisitions;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the instability of foreign exchange rates, exposing us to currency risks in Australia, 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;

 

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Table of Contents
   

our exposure to rising general insurance costs;

 

   

an increase in unreimbursed labor rates;

 

   

our exposure to federal, state and foreign income tax law changes, including changes to the REIT provisions and the recently enacted Tax Cuts and Jobs Act and our exposure as a result of federal, state 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;

 

   

our ability to fully implement our stock buyback program and the timing and amounts of any future stock repurchases; 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, 2017 and our Current Reports on Form 8-K filed with the SEC.

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

Introduction

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under “Forward-Looking Information”, those described below under “Part II – Item 1A. Risk Factors” and under “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. 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.

 

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We are a real estate investment trust (“REIT”) specializing in the ownership, leasing and management of correctional, detention and reentry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, and the United Kingdom. We own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, and community-based reentry facilities and 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, 2018, our worldwide operations include the management and/or ownership of approximately 96,000 beds at 136 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 192,000 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.

For the nine months ended September 30, 2018 and September 30, 2017, we had consolidated revenues of $1,732.0 million and $1,694.4 million, respectively. We maintained an average company wide facility occupancy rate of 93.2% including 88,480 active beds and excluding 7,068 idle beds which includes those being marketed to potential customers for the nine months ended September 30, 2018, and 91.0% including 87,823 active beds and excluding 8,272 idle beds which includes those being marketed to potential customers and beds under development for the nine months ended September 30, 2017.

 

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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, 2018 and the year ended December 31, 2017, 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 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  

October 12, 2017

  

October 23, 2017

  

October 30, 2017

   $ 0.47      $ 58.3  

February 5, 2018

  

February 16, 2018

  

February 27, 2018

   $ 0.47      $ 58.3  

April 11, 2018

  

April 23, 2018

  

May 3, 2018

   $ 0.47      $ 57.4  

July 10, 2018

  

July 20, 2018

  

July 27, 2018

   $ 0.47      $ 57.2  

On October 15, 2018, the Board declared a quarterly cash dividend of $0.47 per share of common stock which was paid on November 2, 2018 to shareholders of record as of the close of business on October 26, 2018.

Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 26, 2018, 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, 2017.

Fiscal 2018 Developments

Stock Buyback Program

On February14, 2018, we announced that our Board of Directors authorized a stock buyback program authorizing us to repurchase up to a maximum of $200.0 million of our shares of common stock. The stock buyback program will be funded primarily with cash on hand, free cash flow and borrowings under our Revolver. The program is effective through October 20, 2020. The stock buyback program is intended to be implemented through purchases made from time to time in the open market or in privately

 

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negotiated transactions, in accordance with applicable Securities and Exchange Commission requirements. The stock buyback program does not obligate us to purchase any specific amount of our common stock and may be suspended or extended at any time at the discretion of our Board of Directors. During the nine months ended September 30, 2018, we purchased 3,117,483 shares of our common stock at a cost of $70.4 million primarily purchased with proceeds from our Revolver. We believe that we have the ability to continue to fund the stock buyback program, our debt service requirements and our maintenance and growth capital expenditure requirements, while maintaining sufficient liquidity for other corporate purposes.

Contract Awards/Terminations

On June 26, 2018, we announced that we have signed a contract with the Idaho Department of Correction for the housing, management and supervision of approximately 670 medium-custody inmates at the company-owned Eagle Pass Detention Facility in Eagle Pass, Texas and the company-owned Karnes Correctional Center in Karnes City, Texas. The contract will have a term of two years effective October 1, 2018 and is expected to generate approximately $17 million in annualized revenues.

On March 29, 2018, we announced that our transportation joint venture in the United Kingdom, GEO Amey, has signed a contract with Scottish Prison Service for the provision of court custody and prisoner escort services in Scotland. The contract will have a base term of eight years effective January 26, 2019 with a renewal option of four years and is expected to have an average annual revenue of approximately $39 million.

With respect to the Parklea Centre in Australia, we were unfortunately unsuccessful during the current competitive rebid process and we expect to transition the management contract in March of 2019. Upon transition, due to the requirements under the labor and employment laws in Australia, we may incur certain transition costs related to employee compensation and benefits. Any such costs are not expected to be material to our results of operations, financial condition or cash flows.

Effective in April 2018, our contract for the management of the 1,576-bed Allen Correctional Center in Kinder, Louisiana, terminated.

Idle Facilities

As of September 30, 2018, we are marketing approximately 4,700 vacant beds at four of our idle facilities to potential customers. The carrying values of these idle facilities totaled approximately $124.1 million as of September 30, 2018, excluding equipment and other assets that can be easily transferred for use at other facilities.

Critical Accounting Policies

The accompanying unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management

 

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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, 2018, 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, 2017. With respect to the adoption of ASC Topic 606, “Revenue from Contracts with Customers” on January 1, 2018, refer to Note 2 – Revenue Recognition of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional disclosures related to our revenue recognition policies.

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 2018 and Third Quarter 2017

Revenues

 

     2018      % of Revenue     2017      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 379,351        65.0   $ 365,071        64.3   $ 14,280       3.9

GEO Care

     141,808        24.3     134,610        23.8     7,198       5.3

International Services

     62,371        10.7     45,641        8.1     16,730       36.7

Facility Construction & Design

     —          —       21,437        3.8     (21,437     (100.0 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 583,530        100.0   $ 566,759        100.0   $ 16,771       3.0
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

Revenues increased in Third Quarter 2018 compared to Third Quarter 2017 primarily due to aggregate increases of $16.8 million due to aggregate net increases in population with our federal clients, transportation services and/or rates. We also had increases of $1.6 million resulting from the activation of our contracts at our company-owned Eagle Pass Detention Facility in Eagle Pass, Texas and our company-owned Montgomery Processing Center in Conroe, Texas. These increases were partially offset by net decreases of $4.1 million at certain of our facilities due to contract terminations.

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 5.8 million in Third Quarter 2018 and 5.7 million in Third Quarter 2017. We experienced an aggregate net increase of approximately 100,000 mandays as a result of population increases with our federal clients and our contract activations discussed above, offset by contract terminations. 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 96.0% and 93.0% of capacity in the Third Quarter 2018 and Third Quarter 2017, respectively, excluding idle facilities.

GEO Care

Revenues increased in Third Quarter 2018 compared to Third Quarter 2017 primarily due to aggregate increases of $12.5 million primarily due to increases in average client and participant counts under our ISAP and electronic monitoring services as well as census levels at certain of our community-based and reentry centers. These increases were partially offset by $5.3 million related to contract terminations/closures of underutilized facilities.

International Services

Revenues for International Services in Third Quarter 2018 compared to Third Quarter 2017 increased by $16.7 million. We experienced a net increase of $21.4 million in performance which was primarily attributable to our Australian subsidiary’s Ravenhall correctional facility project which began operations during the fourth quarter of 2017. Additionally, we had a decrease due to foreign exchange rate fluctuations of $4.7 million resulting from the strengthening of the U.S. dollar against certain international currencies.

 

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Facility Construction & Design

Revenues for our Facility Construction & Design services during Third Quarter 2017 relate to the design and construction activity for our Ravenhall correctional facility contract with the Department of Justice in the State of Victoria, Australia which was completed during the fourth quarter of 2017.

Operating Expenses

 

     2018      % of Segment
Revenues
    2017      % of Segment
Revenues
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 282,332        74.4   $ 268,718        73.6   $ 13,614       5.1

GEO Care

     94,169        66.4     90,949        67.6     3,220       3.5

International Services

     58,305        93.5     41,752        91.5     16,553       39.6

Facility Construction & Design

     —          —       21,715        101.3     (21,715     (100.0 )% 
  

 

 

      

 

 

      

 

 

   

Total

   $ 434,806        74.5   $ 423,134        74.7   $ 11,672       2.8
  

 

 

      

 

 

      

 

 

   

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

U.S. Corrections & Detention

Operating expenses for U.S. Corrections & Detention increased by $13.6 million in Third Quarter 2018 compared to Third Quarter 2017. The increase was primarily due to aggregate net increases in population, transportation services and the variable costs associated with those services of $12.2 million. We also experienced increases of $5.1 million resulting from the activation of our contracts at our company-owned Eagle Pass Detention Facility in Eagle Pass, Texas and our company-owned Montgomery Processing Center in Conroe, Texas. These increases were partially offset by decreases of $3.7 million at certain of our facilities primarily due to contract terminations.

GEO Care

Operating expenses for GEO Care increased by $3.2 million during Third Quarter 2018 from Third Quarter 2017 primarily due to $4.5 million of increases in average client and participant counts under our ISAP and electronic monitoring services. These increases were partially offset by decreases of $1.3 million due to net decreases in census levels at certain of our community-based and reentry centers as well as contract terminations/closures of underutilized facilities.

International Services

Operating expenses for International Services in Third Quarter 2018 compared to Third Quarter 2017 increased by $16.6 million. We experienced a net increase of $20.3 million primarily attributable to our Australian subsidiary’s Ravenhall correctional facility project which began operations during the fourth quarter of 2017. Additionally, we had a decrease due to foreign exchange rate fluctuations of $3.7 million resulting from the strengthening of the U.S. dollar against certain international currencies.

 

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Facility Construction & Design

Operating expenses for our Facility Construction & Design services during Third Quarter 2017 relate to the design and construction activity for our Ravenhall correctional facility contract with the Department of Justice in the State of Victoria, Australia which was completed during the fourth quarter of 2017.

Depreciation and Amortization

 

     2018      % of Segment
Revenue
    2017      % of Segment
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 19,134        5.0   $ 18,802        5.2   $ 332       1.8

GEO Care

     11,680        8.2     12,368        9.2     (688     (5.6 )% 

International Services

     483        0.8     479        1.0     4       0.8
  

 

 

      

 

 

      

 

 

   

Total

   $ 31,297        5.4   $ 31,649        5.6   $ (352     (1.1 )% 
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased slightly in Third Quarter 2018 compared to Third Quarter 2017 primarily due to net increases related to assets written off related to contract terminations at certain of our facilities.

GEO Care

GEO Care depreciation and amortization expense decreased in Third Quarter 2018 compared to Third Quarter 2017 primarily due to certain assets becoming fully depreciated and/or amortized. These decreases were partially offset by assets written off related to contract terminations at certain of our facilities.

International Services

Depreciation and amortization expense remained relatively consistent in Third Quarter 2018 compared to Third Quarter 2017 as a result of certain assets becoming fully depreciated and there were no significant expansions or renovations during 2017 or 2018 at our international subsidiaries.

Other Unallocated Operating Expenses

 

     2018      % of
Revenue
    2017      % of
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

General and Administrative Expenses

   $ 47,647        8.2   $ 49,074        9.0   $ (1,427     (2.9 )% 

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. General and administrative expenses decreased in Third Quarter 2018 compared to Third Quarter 2017. The decrease is primarily due to merger and acquisition related expenses of $5.0 million incurred in Third Quarter 2017 related to our acquisition of CEC. This decrease was partially offset by increases related to higher non-cash stock-based compensation expense of $0.6 million as well as normal personnel and compensation adjustments, professional, consulting, business development and other administrative expenses in the aggregate of $3.0 million.

 

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Non Operating Expenses

Interest Income and Interest Expense

 

     2018      % of
Revenue
    2017      % of
Revenue
    $ Change     % Change  
     (Dollars in thousands)  

Interest Income

   $ 8,428        1.4   $ 14,648        2.6   $ (6,220     (42.5 )% 

Interest Expense

   $ 37,991        6.5   $ 38,719        6.8   $ (728     (1.9 )% 

Interest income decreased in the Third Quarter 2018 compared to Third Quarter 2017 primarily due to a lower balance on our contract receivable related to our correctional facility project in Ravenhall, Australia. When the facility was completed during the fourth quarter 2017, the State of Victoria made a principal payment towards the balance of approximately $224 million.

Interest expense decreased slightly in Third Quarter 2018 compared to Third Quarter 2017 primarily due to less construction loan interest related to our correctional facility project in Ravenhall, Australia due to a lower loan balance compared to the prior period. Upon completion of the facility in fourth quarter 2017, the State of Victoria made a payment towards the loan balance of approximately $224 million. Also contributing to the decrease was the effect of Amendment No. 1 to Third Amended and Restated Credit Agreement executed on April 30, 2018 which reduced the interest rate on our term loans from LIBOR plus 2.5% to LIBOR plus 2.00%. Partially offsetting these decreases were additional interest incurred on higher debt balances resulting from our acquisition of CEC on April 5, 2017. Refer to Note 12- Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

Income Tax Provision

 

     2018      Effective Rate     2017      Effective Rate     $ Change      % Change  
     (Dollars in thousands)  

Income Taxes

   $ 3,723        9.3   $ 1,720        4.4   $ 2,003        116.5

The provision for income taxes during Third Quarter 2018 increased compared to Third Quarter 2017 along with the effective tax rate. The increase is primarily due to a change in the composition of our income. In Third Quarter 2018 more income was earned by our taxable REIT subsidiaries, which are fully subject to tax and which increased our effective tax rate. This increase was partially offset by favorable non-recurring items. As a REIT, we are required to distribute at least 90% of our taxable income to shareholders and in turn are allowed a deduction for the distribution at the REIT level. Our wholly-owned taxable REIT subsidiaries continue to be fully subject to federal, state and foreign income taxes, as applicable. We estimate our annual effective tax rate to be in the range of approximately 10% to 12% exclusive of any discrete items.

Equity in Earnings of Affiliates, net of Income Tax Provision

 

     2018      % of
Revenue
    2017      % of
Revenue
    $ Change      % Change  
     (Dollars in thousands)  

Equity in Earnings of Affiliates

   $ 2,735        0.5   $ 1,342        0.2   $ 1,393        103.8

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 2018 compared to Third Quarter 2017 increased primarily due to interest income received related to favorable tax settlements at SACS.

 

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Comparison of Nine Months 2018 and Nine Months 2017

Revenues

 

     2018      % of Revenue     2017      % of Revenue     $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 1,107,016        63.9   $ 1,073,840        63.4   $ 33,176       3.1

GEO Care

     431,819        24.9     377,740        22.3     54,079       14.3

International Services

     193,121        11.2     130,261        7.7     62,860       48.3

Facility Construction & Design

     —          —       112,602        6.6     (112,602     (100.0 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 1,731,956        100.0   $ 1,694,443        100.0   $ 37,513       2.2
  

 

 

      

 

 

      

 

 

   

U.S. Corrections & Detention

Revenues increased in Nine Months 2018 compared to Nine Months 2017 by $33.2 million primarily due to aggregate net increases of $46.0 million due to our acquisition of CEC on April 5, 2017 and net increases in population with our federal clients, transportation services and/or rates. We also had increases of $1.6 million resulting from the activation of our contracts at our company-owned Eagle Pass Detention Facility in Eagle Pass, Texas and our company-owned Montgomery Processing Center in Conroe, Texas. These increases were partially offset by net decreases of $14.4 million at certain of our facilities primarily due to contract terminations.

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 17.1 million in Nine Months 2018 and 16.6 million in Nine Months 2017. We experienced an aggregate net increase of approximately 500,000 mandays primarily as a result of our acquisition of CEC, activation of new contracts and net increases in population with our federal clients 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 95.1% and 93.3% of capacity in the Nine Months 2018 and Nine Months 2017, respectively, excluding idle facilities.

GEO Care

Revenues increased in Nine Months 2018 compared to Nine Months 2017 primarily due to aggregate increases of $40.2 million from our acquisition of CEC on April 5, 2017. We also experienced increases of $21.0 million primarily due to increases in average client and participant counts under our ISAP and electronic monitoring services. These increases were partially offset by $7.1 million related to net decreases in census levels at certain of our community-based and reentry centers as well as contract terminations/closures of underutilized facilities.

International Services

Revenues for International Services in Nine Months 2018 compared to Nine Months 2017 increased by $62.9 million. We experienced a net increase of $64.0 million in performance which was primarily attributable to our Australian subsidiary’s Ravenhall correctional facility project which began operations during the fourth quarter of 2017. Additionally, we had a decrease due to foreign exchange rate fluctuations of $1.1 million resulting from the strengthening of the U.S. dollar against certain international currencies.

Facility Construction & Design

Revenues for our Facility Construction & Design services during Nine Months 2017 relate to the design and construction activity for our Ravenhall correctional facility contract with the Department of Justice in the State of Victoria, Australia which was completed during the fourth quarter of 2017.

 

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Operating Expenses

 

     2018      % of Segment
Revenues
    2017      % of Segment
Revenues
    $ Change     % Change  
     (Dollars in thousands)  

U.S. Corrections & Detention

   $ 825,475        74.6   $ 792,727        73.8   $ 32,748       4.1

GEO Care

     293,299        67.9     248,934        65.9     44,365       17.8

International Services

     180,538        93.5     120,403        92.4     60,135       49.9

Facility Construction & Design

     —          —  <