10-Q 1 d393868d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended July 1, 2012

OR

 

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

For the transition period from                      to                     

Commission file number 1-14260

 

 

The GEO Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Florida   65-0043078

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

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

Boca Raton, Florida

  33487
(Address of Principal Executive Offices)   (Zip Code)

(561) 893-0101

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

As of August 6, 2012, the registrant had 61,460,069 shares of common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 1, 2012 AND JULY 3, 2011 (UNAUDITED)

     3   

CONSOLIDATED BALANCE SHEETS AS OF JULY 1, 2012 (UNAUDITED) AND JANUARY 1, 2012

     4   

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2012 AND JULY 3, 2011 (UNAUDITED)

     5   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     6   

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

     33   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     47   

ITEM 4. CONTROLS AND PROCEDURES

     48   

PART II - OTHER INFORMATION

     49   

ITEM 1. LEGAL PROCEEDINGS

     49   

ITEM 1A. RISK FACTORS

     49   

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

     49   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     49   

ITEM 4. MINE SAFETY DISCLOSURES

     49   

ITEM 5. OTHER INFORMATION

     49   

ITEM 6. EXHIBITS

     49   

SIGNATURES

     50   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED

JULY 1, 2012 AND JULY 3, 2011

(In thousands, except per share data)

(Unaudited)

 

     Thirteen Weeks Ended     Twenty-six Weeks
Ended
 
      July 1,
2012
    July 3,
2011
    July 1,
2012
    July 3,
2011
 

Revenues

   $ 412,348      $ 396,804      $ 813,605      $ 777,148   

Operating expenses

     305,035        299,236        613,295        588,257   

Depreciation and amortization

     23,807        20,945        46,882        39,646   

General and administrative expenses

     27,043        27,710        54,484        60,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     56,463        48,913        98,944        88,747   

Interest income

     1,761        1,629        3,568        3,198   

Interest expense

     (20,617     (19,412     (41,424     (36,373
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes, equity in earnings of affiliates and discontinued operations

     37,607        31,130        61,088        55,572   

Provision for income taxes

     14,991        12,302        24,208        21,674   

Equity in earnings of affiliates, net of income tax provision of $303, $563, $624 and $1,587, respectively

     430        1,418        1,178        2,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     23,046        20,246        38,058        35,978   

Income (loss) from discontinued operations, net of tax provision (benefit) of $(359), $577, $(330) and $985, respectively

     (570     917        (523     1,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     22,476        21,163        37,535        37,543   

Net (income) loss attributable to noncontrolling interests

     25        415        (9     825   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 22,501      $ 21,578      $ 37,526      $ 38,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     60,839        64,455        60,803        64,373   

Diluted

     61,066        64,858        60,984        64,787   

Income per Common Share Attributable to The GEO Group, Inc.(1):

        

Basic:

        

Income from continuing operations

   $ 0.38      $ 0.32      $ 0.63      $ 0.57   

Income (loss) from discontinued operations

     (0.01     0.01        (0.01     0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.37      $ 0.33      $ 0.62      $ 0.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations

   $ 0.38      $ 0.32      $ 0.62      $ 0.57   

Income (loss) from discontinued operations

     (0.01     0.01        (0.01     0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.37      $ 0.33      $ 0.62      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Foreign currency translation adjustments, net of tax (benefit) provision of $(195), $411, $125, and $563, respectively

   $ (2,068   $ 669      $ (142   $ 1,140   

Pension liability adjustment, net of tax benefit of $19, $6, $38, and $13, respectively

     29        10        59        19   

Loss on derivative instrument classified as cash flow hedge, net of tax benefit of $203, $99, $220 and $196, respectively

     (430     (180     (399     (357
        

Total other comprehensive income (loss), net of tax

     (2,469     499        (482     802   

Total comprehensive income

     20,007        21,662        37,053        38,345   

Comprehensive (income) loss attributable to noncontrolling interests

     58        418        (4     835   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 20,065      $ 22,080      $ 37,049      $ 39,180   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Note that earnings per share tables may contain slight summation differences due to rounding.

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

 

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THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

JULY 1, 2012 AND JANUARY 1, 2012

(In thousands, except share data)

 

     July 1, 2012     January 1,
2012
 
     (Unaudited)        

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 68,538      $ 44,753   

Restricted cash and investment (including VIEs1 of $29,373 and $35,435, respectively)

     40,071        42,535   

Accounts receivable, less allowance for doubtful accounts of $2,779 and $2,453, respectively

     284,431        285,810   

Deferred income tax assets, net

     28,726        28,726   

Prepaid expenses and other current assets

     23,383        50,346   

Current assets of discontinued operations

     6,713        7,159   
  

 

 

   

 

 

 

Total current assets

     451,862        459,329   
  

 

 

   

 

 

 

Restricted Cash and Investments (including VIEs of $41,270 and $38,930, respectively)

     60,070        57,912   

Property and Equipment, Net (including VIEs of $160,284 and $162,665, respectively)

     1,718,392        1,705,306   

Assets Held for Sale

     5,390        4,363   

Direct Finance Lease Receivable

     29,253        32,146   

Deferred Income Tax Assets, Net

     1,711        1,711   

Goodwill

     508,068        508,066   

Intangible Assets, Net

     190,743        200,342   

Other Non-Current Assets

     83,163        79,576   

Non-Current Assets of Discontinued Operations

     576        865   
  

 

 

   

 

 

 

Total Assets

   $ 3,049,228      $ 3,049,616   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current Liabilities

    

Accounts payable

   $ 63,681      $ 69,632   

Accrued payroll and related taxes

     37,209        38,130   

Accrued expenses

     121,604        126,682   

Current portion of capital lease obligations, long-term debt and non-recourse debt (including VIEs of $21,000 and $20,770, respectively)

     59,758        53,666   

Current liabilities of discontinued operations

     702        708   
  

 

 

   

 

 

 

Total current liabilities

     282,954        288,818   
  

 

 

   

 

 

 

Deferred Income Tax Liabilities

     125,209        125,209   

Other Non-Current Liabilities

     58,938        56,381   

Capital Lease Obligations

     12,456        13,087   

Long-Term Debt

     1,298,030        1,319,068   

Non-Recourse Debt (including VIEs of $101,730 and $108,335, respectively)

     198,995        208,532   

Commitments and Contingencies (Note 12)

    

Shareholders’ Equity

    

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

     —          —     

Common stock, $0.01 par value, 90,000,000 shares authorized, 85,447,378 and 85,185,158 issued and 61,459,663 and 61,181,172 outstanding, respectively

     854        852   

Additional paid-in capital

     730,235        727,297   

Retained earnings

     544,290        507,170   

Accumulated other comprehensive income

     1,453        1,930   

Treasury stock, 23,987,715 and 24,003,986 shares, at cost, at July 1, 2012 and January 1, 2012, respectively

     (213,735     (214,031
  

 

 

   

 

 

 

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

     1,063,097        1,023,218   

Noncontrolling interests

     9,549        15,303   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,072,646        1,038,521   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 3,049,228      $ 3,049,616   
  

 

 

   

 

 

 

 

1 

Variable interest entities or “VIEs”

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

FOR THE TWENTY-SIX WEEKS ENDED

JULY 1, 2012 AND JULY 3, 2011

(In thousands)

(Unaudited)

 

     Twenty-six Weeks Ended  
      July 1, 2012     July 3, 2011  

Cash Flow from Operating Activities:

    

Net Income

   $ 37,535      $ 37,543   

Net (income) loss attributable to noncontrolling interests

     (9     825   
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     37,526        38,368   

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

    

Depreciation and amortization expense

     46,882        39,646   

Amortization of debt issuance costs, discount and/or premium

     1,369        640   

Restricted stock expense

     2,061        1,785   

Stock option expense

     1,433        1,813   

Provision for doubtful accounts

     517        999   

Equity in earnings of affiliates, net of tax

     (1,178     (2,080

Income tax (benefit) provision of equity compensation

     270        (392

Loss on sale of property and equipment

     915        52   

Dividends received from unconsolidated joint venture

     —          5,402   

Changes in assets and liabilities, net of acquisition:

    

Changes in accounts receivable, prepaid expenses and other assets

     27,137        16,176   

Changes in accounts payable, accrued expenses and other liabilities

     7,820        (11,124
  

 

 

   

 

 

 

Cash provided by operating activities - continuing operations

     124,752        91,285   

Cash provided by operating activities - discontinued operations

     1,061        3,977   
  

 

 

   

 

 

 

Net cash provided by operating activities

     125,813        95,262   
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Acquisition, cash consideration, net of cash acquired

     —          (409,607

Proceeds from sale of property and equipment

     231        619   

Proceeds from sale of assets held for sale

     297        6,640   

Change in restricted cash and investments

     333        (11,478

Capital expenditures

     (71,853     (87,362
  

 

 

   

 

 

 

Net cash used in investing activities

     (70,992     (501,188
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Payments on long-term debt

     (169,282     (46,832

Proceeds from long-term debt

     145,000        482,260   

Distribution to noncontrolling interests

     (5,758     (4,012

Proceeds from the exercise of stock options

     396        2,209   

Payments for retirement of common stock

     (1,035     —     

Income tax (provision) benefit of equity compensation

     (270     392   

Debt issuance costs

     (44     (10,771
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (30,993     423,246   

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (43     469   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     23,785        17,789   

Cash and Cash Equivalents, beginning of period

     44,753        39,664   
  

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 68,538      $ 57,453   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Capital expenditures in accounts payable and accrued expenses

   $ 6,801      $ 30,870   
  

 

 

   

 

 

 

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

 

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THE GEO GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company”, or “GEO”), is a leading provider of government-outsourced services specializing in the management of correctional, detention, mental health, residential treatment and re-entry facilities, and the provision of community based services and youth services domestically and internationally. 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. GEO 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”). As of July 1, 2012, the Company’s worldwide operations included the management and/or ownership of approximately 75,000 beds at 109 correctional, detention and residential treatment facilities, including projects under development, and also included the provision of monitoring of more than 70,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

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 March 1, 2012 for the fiscal year ended January 1, 2012. The accompanying January 1, 2012 consolidated balance sheet, which has been retrospectively reclassified to reflect the assets and liabilities of discontinued operations (Refer to Note 8), has been derived from those audited financial statements. Additional information may be obtained by referring to the Company’s Form 10-K (File No. 001-14260). 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 Form 10-Q have been made. Results of operations for the thirteen and twenty-six weeks ended July 1, 2012 are not necessarily indicative of the results for the entire fiscal year ending December 30, 2012.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has recorded goodwill as a result of its business combinations. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets, other intangible assets acquired and liabilities assumed. Changes in goodwill from January 1, 2012 to July 1, 2012 are related to fluctuations in foreign currency exchange rates.

The Company has also recorded other finite and indefinite lived intangible assets as a result of business combinations and also in connection with the previous purchase of additional shares in the Company’s consolidated South African joint venture. Changes in gross carrying amount from January 1, 2012 to July 1, 2012 are related to fluctuations in foreign currency exchange rates. The Company’s intangible assets include facility management contracts, non-compete agreements, the BI trade name and technology as follows (in thousands):

 

     July 1, 2012      January 1, 2012  
      Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Facility management contracts

   $ 158,588       $ (29,528   $ 129,060       $ 158,604       $ (22,985   $ 135,619   

Covenants not to compete

     8,570         (7,872     698         8,570         (6,347     2,223   

Technology

     21,200         (4,215     16,985         21,200         (2,700     18,500   

Trade name

     44,000         —          44,000         44,000         —          44,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

   $ 232,358       $ (41,615   $ 190,743       $ 232,374       $ (32,032   $ 200,342   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Amortization expense relative to the Company’s finite lived intangible assets was $4.8 million and $9.6 million, respectively, for the thirteen and twenty-six weeks ended July 1, 2012. Amortization expense relative to the Company’s finite lived intangible assets was $5.0 million and $9.1 million respectively, for the thirteen and twenty-six weeks ended July 3, 2011. As of July 1, 2012, the weighted average period before the next contract renewal or extension for all of the facility management contracts was approximately 1.7 years.

Estimated amortization expense related to the Company’s finite-lived intangible assets for the remainder of fiscal year 2012 through fiscal year 2016 and thereafter is as follows (in thousands):

 

Fiscal Year

   Total
Amortization
Expense
 

Remainder of 2012

   $ 8,525   

2013

     15,195   

2014

     14,979   

2015

     14,949   

2016

     14,856   

Thereafter

     78,239   
  

 

 

 
   $ 146,743   
  

 

 

 

3. FINANCIAL INSTRUMENTS

The following tables provide a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis as of July 1, 2012 and January 1, 2012 (in thousands):

 

            Fair Value Measurements at July 1, 2012  
      Total Carrying
Value at
July 1, 2012
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Interest rate swap derivative assets

   $ 7,256       $ —         $ 7,256       $ —     

Restricted investments:

           

Guaranteed Investment Contract

   $ 5,742       $ —         $ 5,742       $ —     

Guaranteed Repurchase Agreements

   $ 41,590       $ —         $ 41,590       $ —     

Rabbi Trust

   $ 8,941       $ 8,941       $ —         $ —     

Fixed income securities

   $ 2,081       $ —         $ 2,081       $ —     

Liabilities:

           

Interest rate swap derivative liabilities

   $ 589       $ —         $ 589       $ —     

 

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            Fair Value Measurements at January 1, 2012  
      Total Carrying
Value at
January 1,
2012
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Interest rate swap derivative assets

   $ 7,440       $ —         $ 7,440       $ —     

Restricted investments:

           

Guaranteed Investment Contract

   $ 5,742       $ —         $ 5,742       $ —     

Guaranteed Repurchase Agreements

   $ 33,821       $ —         $ 33,821       $ —     

Rabbi Trust

   $ 8,016       $ 5,898       $ 2,118       $ —     

Fixed income securities

   $ 2,013       $ —         $ 2,013       $ —     

The Company’s Level 1 investment included in the tables above as of July 1, 2012 and January 1, 2012 relates to the Company’s rabbi trust established for GEO employee and employer contributions to The GEO Group Inc. Non-qualified Deferred Compensation Plan. These contributions are invested in mutual funds for which quoted market prices in active markets are available.

The Company’s Level 2 financial instruments included in the tables above as of July 1, 2012 and January 1, 2012 consist of an interest rate swap asset held by the Company’s Australian subsidiary, other interest rate swap assets of the Company, an investment in Canadian dollar denominated fixed income securities, a guaranteed investment contract which is a restricted investment related to CSC of Tacoma LLC and an Investment Repurchase Agreement (“Repo Agreement”) related to Municipal Correctional Finance, L.P. (“MCF”), the Company’s consolidated VIE. As of July 1, 2012, the Repo Agreement consisted of guaranteed investments of $23.8 million and $17.8 million for the debt service reserve fund and the bond fund payment account, respectively. As of January 1, 2012 the Repo Agreement consisted of guaranteed investments of $23.9 million and $9.9 million for the debt service reserve fund and the bond fund payment account, respectively. The Repo Agreement is considered a Level 2 restricted investment since its fair value is estimated by using market interest rates for similar securities. The Australian subsidiary’s interest rate swap asset is valued using a discounted cash flow model based on projected Australian borrowing rates. The Company’s other interest rate swap assets and liabilities are based on pricing models which consider prevailing interest rates, credit risk and similar instruments. The Canadian dollar denominated securities, not actively traded, are valued using quoted rates for these and similar securities. The restricted investment in the guaranteed investment contract is valued using quoted rates for these and similar securities.

4. FAIR VALUE OF ASSETS AND LIABILITIES

The Company’s consolidated balance sheets reflect certain financial assets and liabilities at carrying value. The following tables present the carrying values of those financial instruments and the estimated corresponding fair values at July 1, 2012 and January 1, 2012 (in thousands):

 

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     Carrying
Value as of
July 1,
2012
     Estimated Fair Value Measurements at July 1, 2012  
         Total Fair
Value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 68,538       $ 68,538       $ 68,538       $ —         $ —     

Restricted cash

     43,868         43,868         43,868         —           —     

Liabilities:

              

Borrowings under Senior Credit Facility

   $ 767,632       $ 770,000       $ —         $ 770,000       $ —     

7 3/4% Senior Notes

     247,337         267,975         —           267,975         —     

6.625% Senior Notes

     300,000         310,320         —           310,320         —     

Non-recourse debt, Australian subsidiary

     37,434         39,135         —           39,135         —     

Other non-recourse debt, including current portion

     195,289         201,624         —           201,624         —     

 

     Carrying
Value as of
January 1,
2012
     Estimated Fair Value Measurements at January 1, 2012  
         Total Fair
Value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 44,753       $ 44,753       $ 44,753       $ —         $ —     

Restricted cash

     52,868         52,868         52,868         —           —     

Liabilities:

              

Borrowings under Senior Credit Facility

   $ 782,962       $ 785,917       $ —         $ 785,917       $ —     

7 3/4% Senior Notes

     247,141         262,033         —           262,033         —     

6.625% Senior Notes

     300,000         300,375         —           300,375         —     

Non-recourse debt, Australian subsidiary

     40,345         41,347         —           41,347         —     

Other non-recourse debt, including current portion

     201,453         206,712         —           206,712         —     

The fair values of the Company’s cash and cash equivalents, and restricted cash approximates the carrying values of these assets at July 1, 2012 and January 1, 2012. Restricted cash consists of debt service funds used for payments on the Company’s non-recourse debt. The fair values of the Company’s 7 3/4% senior unsecured notes due 2017 (“7 3/4% Senior Notes”) and the 6.625% senior unsecured notes due 2021 (“6.625% 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 South Texas Local Development Corporation (“STLDC”) and Washington Economic Development Finance Authority (“WEDFA”) are based on market prices for similar instruments. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of the non-recourse debt related to MCF is estimated using a discounted cash flow model based on the Company’s current borrowing rates for similar instruments. The fair value of borrowings under the Senior Credit Facility is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.

5. SHAREHOLDERS’ EQUITY

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

 

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     Common shares     Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury shares     Noncontrolling
Interests
    Total
Shareholders’
Equity
 
                
     Shares     Amount           Shares     Amount      

Balance January 1, 2012

     61,181      $ 852      $ 727,297      $ 507,170      $ 1,930        24,004      $ (214,031   $ 15,303      $ 1,038,521   

Stock option and restricted stock award transactions

     347        3        393        —          —          —          —          —          396   

Tax provision related to equity compensation

     —          —          (270     —          —          —          —          —          (270

Stock-based compensation expense

     —          —          3,494        —          —          —          —          —          3,494   

Cancellation of restricted stock

     (26     —          —          —          —          —          —          —          —     

Retirement of common stock

     (58     (1     (628     (406     —          —          —          —          (1,035

Reissuance of treasury stock in connection with ESPP

     16        —          —          —          —          (16     296        —          296   

Other adjustments to additional paid-in capital

     —          —          (51     —          —          —          —          —          (51

Distribution to non-controlling interests

     —          —          —          —          —          —          —          (5,758     (5,758

Total comprehensive income

     —          —          —          37,526        (477     —          —          4        37,053   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance July 1, 2012

     61,460      $ 854      $ 730,235      $ 544,290      $ 1,453        23,988      $ (213,735   $ 9,549      $ 1,072,646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

6. EQUITY INCENTIVE PLANS

As of July 1, 2012, under the 2006 Stock Incentive Plan (“2006 Plan”), the Company had 1,509,454 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 681,054 shares were available for the issuance of awards other than stock options. During the twenty-six weeks ended July 1, 2012, the Company repurchased and retired 57,457 shares of fully vested employee equity awards.

Stock Options

The Company uses a Black-Scholes option valuation model to estimate the fair value of each option awarded. A summary of the activity of stock option awards issued and outstanding under Company Plans is as follows for the twenty-six weeks ended July 1, 2012:

 

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

Options outstanding at January 1, 2012

     1,601      $ 19.44         6.73       $ 2,778   

Options granted

     —          —           

Options exercised

     (62     6.41         

Options forfeited/canceled/expired

     (51     22.47         
  

 

 

         

Options outstanding at July 1, 2012

     1,488      $ 19.88         6.36       $ 5,228   
  

 

 

         

Options exercisable at July 1, 2012

     1,017      $ 18.38         5.53       $ 4,828   

No stock options were granted by the Company during the twenty-six weeks ended July 1, 2012. During the fiscal year ended January 1, 2012, the Company granted 554,350 stock options to its employees with an aggregate fair value of $5.4 million and a weighted average exercise price of $24.71. During the fiscal year ended January 1, 2012, 297,406 shares of common stock were issued to employees as a result of option exercises. For the twenty-six weeks ended July 1, 2012 and July 3, 2011, the amount of stock-based compensation expense related to stock options was $1.4 million and $1.8 million, respectively. As of July 1, 2012, the Company had $3.1 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.3 years.

 

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Restricted Stock

Shares of restricted stock become unrestricted shares of common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the closing price of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period. Generally, the restricted stock awards vest in equal increments over either a three or four year period. A summary of the activity of restricted stock outstanding is as follows for the twenty-six weeks ended July 1, 2012:

 

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

Restricted stock outstanding at January 1, 2012

     442      $ 23.32   

Granted

     285        17.62   

Vested

     (108     24.60   

Forfeited/canceled

     (22     22.45   
  

 

 

   

Restricted stock outstanding at July 1, 2012

     597      $ 20.62   
  

 

 

   

During the twenty-six weeks ended July 1, 2012, the Company issued 285,000 restricted stock awards to its Directors and to certain senior employees. Of these awards, 205,000 are performance based awards which will be forfeited if the Company does not achieve certain targeted revenue in its fiscal year ending December 30, 2012. These performance based awards were canceled and new performance awards were granted on July 20, 2012 with revised performance targets. See Note 16 Subsequent Events for further discussion. During the fiscal year ended January 1, 2012, the Company issued 381,010 restricted stock awards to its Directors and certain senior employees. Of these awards, 205,000 were performance based awards for which the targeted revenue was achieved for the fiscal year ended January 1, 2012. For performance based awards granted prior to July 20, 2012, these grants vest over a three year period from the date of the award if the targeted revenue is achieved. The aggregate fair value of the awards issued during the twenty-six weeks ended July 1, 2012 and the fiscal year ended January 1, 2012, based on the closing price of the Company’s common stock on the respective grant dates, was $5.0 million and $9.3 million, respectively.

During the fiscal year ended January 1, 2012, 94,530 shares of common stock were issued to employees as a result of the satisfaction of vesting requirements. For the twenty-six weeks ended July 1, 2012 and July 3, 2011, the Company recognized $2.1 million and $1.8 million, respectively, of compensation expense related to its restricted stock awards. As of July 1, 2012, the Company had $9.9 million of unrecognized compensation costs related to non-vested restricted stock awards that are expected to be recognized over a weighted average period of 2.5 years.

Employee Stock Purchase Plan

On July 9, 2011, the Company adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan”), subject to obtaining shareholder approval. The Plan was approved by the Company’s Compensation Committee and its Board of Directors on May 4, 2011. 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 Plan, which was approved by the Company’s shareholders on May 4, 2012, specifies that the share purchases for the pre-shareholder approval periods began on June 29, 2012. During the pre-shareholder approval periods, which ended on June 29, 2012, the Plan was considered to be compensatory due to an option feature contained in the Plan during that period. Stock-based compensation recorded during the pre-shareholder period was not significant. During the post-shareholder approval period the Plan no longer contains an option feature and therefore is considered to be non-compensatory. As such, no compensation expense will be recorded during the post-shareholder approval period. Share purchases for the post-shareholder approval offering periods will begin on the last day of each month. On June 29, 2012, 16,271 shares were issued out of the Company’s treasury stock in connection with the pre-shareholder approval periods. The Company will offer up to 500,000 shares of its common stock for sale to eligible employees.

 

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7. EARNINGS PER SHARE

Stock Repurchase Program

On July 14, 2011, the Company announced that its Board of Directors approved a stock repurchase program of up to $100.0 million of the Company’s common stock effective through December 31, 2012. The stock repurchase program will be funded primarily with cash on hand, free cash flow, and borrowings under the Company’s Revolving Credit Facility. The stock repurchase 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 stock exchange requirements. The program may also include repurchases from time to time from executive officers or directors of vested restricted stock and/or vested stock options. The stock repurchase program does not obligate the Company to purchase any specific amount of its common stock and may be suspended or extended at any time at the Company’s discretion. During the fiscal year ended January 1, 2012, the Company purchased 3.9 million shares of its common stock at a cost of $75.0 million primarily purchased with proceeds from the Company’s Revolving Credit Facility. There were no repurchases of common stock under the stock repurchase program during the twenty-six weeks ended July 1, 2012.

Earnings per share

Basic earnings per share is computed by dividing the net income attributable to The GEO Group, Inc. shareholders 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 (“EPS”) were calculated for the thirteen and twenty-six weeks ended July 1, 2012 and July 3, 2011 as follows (in thousands, except per share data):

 

     Thirteen Weeks Ended      Twenty-six Weeks
Ended
 
      July 1,
2012
     July 3,
2011
     July 1,
2012
    July 3,
2011
 

Income from continuing operations

   $ 23,046       $ 20,246       $ 38,058      $ 35,978   

Net (income) loss attributable to noncontrolling interests

     25         415         (9     825   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income from continuing operations attributable to The GEO Group, Inc.

     23,071         20,661         38,049        36,803   

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

          

Weighted average shares outstanding

     60,839         64,455         60,803        64,373   
  

 

 

    

 

 

    

 

 

   

 

 

 

Per share amount

   $ 0.38       $ 0.32       $ 0.63      $ 0.57   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

          

Weighted average shares outstanding

     60,839         64,455         60,803        64,373   

Effect of dilutive securities: Stock options and restricted stock

     227         403         181        414   
          

Weighted average shares assuming dilution

     61,066         64,858         60,984        64,787   
  

 

 

    

 

 

    

 

 

   

 

 

 

Per share amount

   $ 0.38       $ 0.32       $ 0.62      $ 0.57   
  

 

 

    

 

 

    

 

 

   

 

 

 

Thirteen Weeks

For the thirteen weeks ended July 1, 2012, 57,934 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. 1,642 shares of restricted stock were anti-dilutive.

For the thirteen weeks ended July 3, 2011, 77,472 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. No shares of restricted stock were anti-dilutive.

Twenty-six Weeks

For the twenty-six weeks ended July 1, 2012, 112,428 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. 1,584 shares of restricted stock were anti-dilutive.

For the twenty-six weeks ended July 3, 2011, 56,094 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. No shares of restricted stock were anti-dilutive.

 

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8. DISCONTINUED OPERATIONS

The termination of any of the Company’s management contracts by expiration or otherwise, may result in the classification of the assets, liabilities and cash flows associated with, and operating results of such management contracts, net of taxes, as a discontinued operation. The Company presents such events as discontinued operations so long as the financial results can be clearly identified, the operations and cash flows are completely eliminated from ongoing operations, and so long as the Company does not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. Historically, the Company has classified operations as discontinued in the period they are announced as normally all continuing cash flows cease within three to six months of that date. During the thirteen weeks ended July 1, 2012, the Company discontinued operations at certain of its domestic facilities. The results of operations, net of taxes, and the assets and liabilities of these operations, each as further described below, have been retrospectively reflected in the accompanying consolidated financial statements as discontinued operations for all prior periods presented. Assets, primarily consisting of accounts receivable, and liabilities have been presented separately in the accompanying consolidated balance sheets for all prior periods presented.

U.S. Corrections & Detention: On April 19, 2012, the Company announced its discontinuation of its managed-only contract with the State of Mississippi, Department of Corrections for the 1,500-bed East Mississippi Correctional Facility (“East Mississippi”) effective July 19, 2012. In connection with the discontinuation of East Mississippi, the Company has also discontinued its managed-only contracts with the State of Mississippi, Department of Corrections for the 1,000-bed Marshall County Correctional Facility effective August 13, 2012, and the 1,450-bed Walnut Grove Youth Correctional Facility effective July 1, 2012. Revenues related to the discontinued operations were $11.2 million and $11.0 million, for the thirteen weeks ended July 1, 2012 and July 3, 2011, respectively and $22.3 million and $22.4 million for the twenty-six weeks ended July 1, 2012 and July 3, 2011, respectively.

9. DERIVATIVE FINANCIAL INSTRUMENTS

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

As of July 1, 2012, the Company had four interest rate swap agreements in the aggregate notional amount of $100.0 million. The Company has designated these interest rate swaps as hedges against changes in the fair value of a designated portion of the 7 3/4% Senior Notes due 2017 (“7 3/4% Senior Notes”) due to changes in underlying interest rates. These swap agreements, which have payment, expiration dates and call provisions that mirror the terms of the 7 3/4% Senior Notes, effectively convert $100.0 million of the 7 3/4% Senior Notes into variable rate obligations. Each of the swaps has a termination clause that gives the counterparty the right to terminate the interest rate swaps at fair market value, under certain circumstances. In addition to the termination clause, the Agreements also have call provisions which specify that the lender can elect to settle the swap for the call option price. Under the agreements, the Company receives a fixed interest rate payment from the financial counterparties to the agreements equal to 7 3/4% per year calculated on the notional $100.0 million amount, while it makes a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.16% and 4.29%, also calculated on the notional $100.0 million amount. Changes in the fair value of the interest rate swaps are recorded in earnings along with related designated changes in the value of the 7 3/4% Senior Notes. Total net gain (loss), entirely offset by a corresponding increase in the fair value of the variable rate portion of the 7 3/4% Senior Notes, recognized and recorded in earnings related to these fair value hedges was $(0.1) million and $0.2 million during the thirteen and twenty-six weeks ended July 1, 2012, respectively. As of July 1, 2012 and January 1, 2012, the swap assets’ fair values were $7.3 million and $7.4 million, respectively and are included as Other Non-Current Assets in the accompanying consolidated balance sheets. There was no material ineffectiveness of these interest rate swaps during the fiscal periods ended July 1, 2012 or July 3, 2011.

The Company’s Australian subsidiary is a party to an interest rate swap agreement to fix the interest rate on its variable rate non-recourse debt to 9.7%. The Company has determined the swap, which has a notional amount of AUD 50.9 million, payment and expiration dates, and call provisions that coincide with the terms of the non-recourse debt to be an effective cash flow hedge. Accordingly, the Company records the change in the value of the interest rate swap in accumulated other comprehensive income, net of applicable income taxes. Total unrealized losses, net of tax, recognized in the periods and recorded in accumulated other comprehensive income, net of tax, related to this cash flow hedge was $0.4 million and $0.4 million for the thirteen and twenty-six weeks ended July 1, 2012 respectively. The total fair value of the swap (liability) asset as of July 1, 2012 and January 1, 2012 was $(0.6) million and $0.0 million, respectively, and is recorded as a component of other (liabilities) assets within the accompanying consolidated balance sheets. There was no material ineffectiveness of this interest rate swap for the periods presented. The Company does not expect to enter into any transactions during the next twelve months which would result in the reclassification into earnings or losses associated with this swap currently reported in accumulated other comprehensive income (loss).

 

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10. VARIABLE INTEREST ENTITIES

The Company evaluates its joint ventures and other entities in which it has a variable interest (a “VIE”), generally in the form of investments, loans, guarantees, or equity in order to determine if it has a controlling financial interest and is required to consolidate the entity as a result. The reporting entity with a variable interest that provides the entity with a controlling financial interest in the VIE will have both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company consolidates South Texas Local Development Corporation (“STLDC”), a VIE. STLDC was created to finance construction for the development of a 1,904-bed facility in Frio County, Texas. STLDC, the owner of the complex, issued $49.5 million in taxable revenue bonds and has an operating agreement with the Company, which provides the Company with the sole and exclusive right to operate and manage the detention center. The operating agreement and bond indenture require the revenue from the contract to be used to fund the periodic debt service requirements as they become due. The net revenues, if any, after various expenses such as trustee fees, property taxes and insurance premiums are distributed to the Company to cover operating expenses and management fees. The Company is responsible for the entire operations of the facility including the payment of all operating expenses whether or not there are sufficient revenues. The bonds have a ten-year term and are non-recourse to the Company. At the end of the ten-year term of the bonds, title and ownership of the facility transfers from STLDC to the Company. The carrying value of the facility as of July 1, 2012 and January 1, 2012 was $26.1 million and $26.4 million, respectively and is included in Property and Equipment in the accompanying consolidated balance sheets.

MCF was created in August 2001 as a special limited partnership for the purpose of acquiring, owning, leasing and operating low to medium security adult and juvenile correction and treatment facilities. At its inception, MCF purchased assets representing eleven facilities from certain wholly owned subsidiaries of Cornell Companies, Inc. (“Cornell”), a wholly owned GEO subsidiary, and leased those assets back to Cornell under a Master Lease Agreement (the “Lease”). These assets were purchased from Cornell using proceeds from the 8.47% Revenue Bonds due 2016. Under the terms of the Lease, the Company will lease the assets for the remainder of the 20-year base term, which ends in 2021, and has options at its sole discretion to renew the Lease for up to approximately 25 additional years. MCF’s sole source of revenue is from the Company and as such the Company has the power to direct the activities of the VIE that most significantly impact its performance. The Company’s risk is generally limited to the rental obligations under the operating leases. This entity is included in the accompanying consolidated financial statements and all intercompany transactions are eliminated in consolidation. MCF maintains separate financial statements and all of the assets to which MCF has title are included therein. It should be noted that even though the Company consolidates MCF for accounting purposes, this VIE is a separate entity owned by unrelated third parties. MCF’s assets and credit are not available to satisfy the debts and other obligations of the Company. On April 24, 2012, the Company signed a definitive agreement to purchase 100% of the partnership interests of MCF for approximately $27 million in cash plus the release of approximately $10 million in cash held in escrow for the benefit of MCF. In addition, in connection with the transaction, the Company will pay approximately $67 million, net of bond cash reserves and inclusive of a net make-whole premium of approximately $15 million, to redeem the MCF bonds. The Company expects to incur a one-time loss on extinguishment of debt in connection with the redemption of the bonds of approximately $8 million. Closing of the transaction is conditional on the Company redeeming the outstanding MCF bonds. The Company expects to close the transaction during its third fiscal quarter of 2012.

The Company does not consolidate its 50% owned South African joint venture interest in South African Custodial Services Pty. Limited (“SACS”), a VIE. SACS joint venture investors are GEO and Kensani Corrections, Pty. Ltd; each partner owns a 50% share. The Company has determined it is not the primary beneficiary of SACS since it does not have the power to direct the activities of SACS that most significantly impact its performance. As such, the Company’s investment in this entity is accounted for under the equity method of accounting. SACS was established and subsequently, in 2001, was awarded a 25-year contract to design, finance and build the Kutama Sinthumule Correctional Centre in Louis Trichardt, South Africa. To fund the construction of the prison, SACS obtained long-term financing from its equity partners and lenders, the repayment of which is fully guaranteed by the South African government, except in the event of default, in which case the government guarantee is reduced to 80%. The Company’s maximum exposure for loss under this contract is limited to its investment in the joint venture of $8.1 million at July 1, 2012 and its guarantees related to SACS discussed in Note 11 - Debt.

The Company does not consolidate its 50% owned joint venture in the United Kingdom. In February 2011, The GEO Group Limited, the Company’s wholly-owned subsidiary in the United Kingdom (“GEO UK”), executed a Shareholders Agreement (the “Shareholders Agreement”) with Amey Community Limited (“Amey”) and Amey UK PLC (“Amey Guarantor”) to form GEO Amey PECS Limited (“GEOAmey”), a private company limited by shares incorporated in England and Wales. GEOAmey was formed by GEO UK and Amey for the purpose of performing prisoner escort and related custody services in England and Wales. In order to form this private company, GEOAmey issued share capital of £100 divided into 100 shares of £1 each and allocated the shares 50/50 to GEO UK and Amey. GEO UK and Amey each have three directors appointed to the Board of Directors and neither party has the power to direct the activities that most significantly impact the performance of

 

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GEOAmey. As such, the Company’s investment in this entity is accounted for under the equity method of accounting. Both parties provide lines of credit of £12 million, or $18.9 million as of July 1, 2012, to ensure that GEOAmey can comply with future contractual commitments related to the performance of its operations. As of July 1, 2012, $19.1 million, including accrued interest, was owed to the Company by GEOAmey under the line of credit. GEOAmey commenced operations on August 29, 2011. The Company has recorded $0.9 million and $1.4 million losses, net of tax impact, for GEOAmey’s operations during the thirteen and twenty-six weeks ended July 1, 2012, respectively, which is included in Equity in earnings of affiliates in the accompanying consolidated statement of comprehensive income.

11. DEBT

Debt outstanding as of July 1, 2012 and January 1, 2012 consisted of the following (in thousands):

 

     July 1, 2012     January 1,
2012
 

Capital Lease Obligations

   $ 13,627      $ 14,171   

Senior Credit Facility:

    

Term loans

     474,000        482,500   

Discount on term loan

     (1,368     (1,538

Revolver

     295,000        302,000   
  

 

 

   

 

 

 

Total Senior Credit Facility

     767,632        782,962   

6.625% Senior Notes:

    

Notes due in 2021

     300,000        300,000   

7  3/4% Senior Notes:

    

Notes due in 2017

     250,000        250,000   

Discount on Notes

     (2,663     (2,859

Swap on Notes

     7,256        7,411   
  

 

 

   

 

 

 

Total 7  3/4% Senior Notes

     254,593        254,552   

Non-Recourse Debt :

    

Non-Recourse Debt

     227,549        235,430   

Premium on Non-Recourse Debt

     6,846        8,304   

Discount on Non-Recourse Debt

     (1,672     (1,936
  

 

 

   

 

 

 

Total Non-Recourse Debt

     232,723        241,798   

Other debt

     664        870   
  

 

 

   

 

 

 

Total debt

     1,569,239        1,594,353   

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

     (59,758     (53,666

Capital Lease Obligations, long-term portion

     (12,456     (13,087

Non-Recourse Debt

     (198,995     (208,532
  

 

 

   

 

 

 

Long-Term Debt

   $ 1,298,030      $ 1,319,068   
  

 

 

   

 

 

 

Senior Credit Facility

As of July 1, 2012, the Senior Credit Facility, as amended, was comprised of: (i) a $150.0 million Term Loan A (“Term Loan A”), currently bearing interest at LIBOR plus 3.00% and maturing August 4, 2015, (ii) a $150.0 million Term Loan A-2 (“Term Loan A-2”), currently bearing interest at LIBOR plus 3.00% and maturing August 4, 2015, (iii) a $200.0 million Term Loan B (“Term Loan B”) currently bearing interest at LIBOR plus 2.75% with a LIBOR floor of 1.00% and maturing August 4, 2016, and (iv) a $500.0 million Revolving Credit Facility (“Revolver”) currently bearing interest at LIBOR plus 3.00% and maturing August 4, 2015.

As of July 1, 2012, the Company had $472.6 million in aggregate borrowings outstanding, net of discount, under the Term Loan A, Term Loan A-2 and Term Loan B, $295.0 million in borrowings under the Revolver, and approximately $56.5 million in letters of credit which leaves $148.5 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Senior Credit Facility as of July 1, 2012 was 3.4%.

 

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Indebtedness under the Revolver, the Term Loan A and the Term Loan A-2 bears interest based on the Total Leverage Ratio as of the most recent determination date, as defined, in each of the instances below at the stated rate:

 

    

Interest Rate under the Revolver, Term Loan A and

Term Loan A-2

LIBOR borrowings

  

LIBOR plus 2.00% to 3.00%.

Base rate borrowings

  

Prime Rate plus 1.00% to 2.00%.

Letters of credit

  

2.00% to 3.00%.

Unused Revolver

  

0.375% to 0.50%.

The Senior Credit Facility requires the Company to meet certain financial covenants, including a maximum Total Leverage Ratio, a maximum Senior Secured Leverage Ratio and an Interest Coverage Ratio. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of July 1, 2012.

7  3/4% Senior Notes

Interest on the 7 3/4% 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 October 15, 2013, the Company may, at its option, redeem all or a part of the 7 3/4% Senior Notes at the redemption prices set forth in the indenture governing the 7 3/4% Senior Notes. The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company and its restricted subsidiaries. The Company believes it was in compliance with all of the covenants of the indenture governing the 7 3/4% Senior Notes as of July 1, 2012.

6.625% Senior Notes

Interest on the 6.625% Senior Notes accrues at the stated rate. The Company pays interest semi-annually in arrears on February 15 and August 15. On or after February 15, 2016, the Company may, at its option, redeem all or part of the 6.625% Senior Notes at the redemption prices set forth in the indenture governing the 6.625% Senior Notes. The indenture governing the notes contains certain covenants, including limitations and restrictions on the Company and its restricted subsidiaries. The Company believes it was in compliance with all of the covenants of the indenture governing the 6.625% Senior Notes as of July 1, 2012.

Non-Recourse Debt

South Texas Detention Complex

The Company has a debt service requirement related to the development of the South Texas Detention Complex, a 1,904-bed detention complex in Frio County, Texas. In order to finance the construction of the complex, STLDC was created and issued $49.5 million in taxable revenue bonds. These bonds mature in February 2016 and have fixed coupon rates between 4.76% and 5.07%. Additionally, the Company is owed $5.0 million in the form of subordinated notes by STLDC which represents the principal amount of financing provided to STLDC by CSC for initial development.

On February 1, 2012, STLDC made a payment from its restricted cash account of $5.0 million for the current principal portion of its periodic debt service requirement in relation to the STLDC operating agreement and bond indenture. As of July 1, 2012, the remaining balance of the debt service requirement under the STLDC financing agreement is $22.4 million, of which $5.2 million is due within the next twelve months. Also, as of July 1, 2012, included in current restricted cash and non-current restricted cash is $6.3 million and $12.3 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.

Northwest Detention Center

On June 30, 2003, CSC arranged financing for the construction of a detention center in Tacoma, Washington, known as the Northwest Detention Center, which was completed and opened for operation in April 2004. The Company began to operate this facility following its acquisition of CSC in November 2005. In connection with this financing, CSC formed a special purpose entity, CSC of Tacoma LLC, of which CSC is the only member, the sole purposes of which are to own, operate, mortgage, lease, finance, refinance and otherwise deal with this facility. CSC of Tacoma LLC owns the facility, as well as all of its other assets; the Company provides detention, transportation and related services for the United States Government from this facility pursuant to a Use Agreement between the Company and CSC of Tacoma LLC. The assets of CSC of Tacoma LLC are owned by CSC of Tacoma LLC. They are included in the consolidated financial statements of the Company in accordance with generally accepted accounting principles. The assets and liabilities of CSC of Tacoma LLC are recognized on the CSC of Tacoma LLC balance sheet.

 

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In connection with the original financing, CSC of Tacoma LLC, a wholly-owned subsidiary of CSC, issued a $57.0 million note payable to the Washington Economic Development Finance Authority, referred to as WEDFA, an instrumentality of the State of Washington, which issued revenue bonds and subsequently loaned the proceeds of the bond issuance back to CSC for the purposes of constructing the Northwest Detention Center. The bonds are non-recourse to the Company and the loan from WEDFA to CSC is also non-recourse to the Company. These bonds mature in October 2014 and have fixed coupon rates between 4.00% and 4.10%. The proceeds of the loan were disbursed into escrow accounts held in trust to be used to pay the issuance costs for the revenue bonds, to construct the Northwest Detention Center and to establish debt service and other reserves. No principal payments were made during the twenty-six weeks ended July 1, 2012. As of July 1, 2012, the remaining balance of the debt service requirement is $19.7 million, of which $6.3 million is classified as current in the accompanying consolidated balance sheet.

On December 9, 2011, WEDFA issued $54.4 million of its Washington Economic Development Finance Authority Taxable Economic Development Revenue Bonds, series 2011 (“2011 Revenue Bonds”). The 2011 Revenue Bonds were rated AA- by Standard & Poor’s Ratings Services and the scheduled payment of principal and interest is guaranteed by municipal bond insurance issued by Assured Guaranty Municipal Corp. The 2011 Revenue Bonds have an average all-in cost of approximately 6.4%, including debt issuance costs and the bond discount, and maturity dates ranging from October 1, 2014 through October 1, 2021. The 2011 Revenue Bonds were issued to provide funds to make a loan to CSC of Tacoma, LLC for purposes of reimbursing GEO for costs incurred by GEO for the 2009 expansion of the Northwest Detention Facility and paying the costs of issuing the 2011 Revenue Bonds. The payment of principal and interest on the bonds is non-recourse to GEO. None of the bonds nor CSC’s obligations under the loan are obligations of GEO nor are they guaranteed by GEO.

As of July 1, 2012, included in current restricted cash and non-current restricted cash is $9.3 million and $3.3 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.

MCF

MCF is obligated for the outstanding balance of the 8.47% Revenue Bonds. The bonds bear interest at a rate of 8.47% per annum and are payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds are limited, non-recourse obligations of MCF and are collateralized by the property and equipment, bond reserves, assignment of subleases and substantially all assets related to the eleven facilities owned by MCF. The bonds are not guaranteed by the Company or its subsidiaries. As of July 1, 2012, the aggregate principal amount of these bonds was $77.9 million, excluding the effect of the unamortized premium of $6.8 million and net of the current portion of $15.8 million. As of January 1, 2012, the aggregate principal amount of these bonds was $77.9 million, excluding the effect of the unamortized premium of $8.3 million and net of the current portion of $15.8 million. These balances are included as Non-Recourse Debt on the accompanying consolidated balance sheets.

The 8.47% Revenue Bond indenture provides for the establishment and maintenance by MCF for the benefit of the trustee under the indenture of a debt service reserve fund. As of July 1, 2012, the debt service reserve fund has a balance of $23.8 million. The debt service reserve fund is available to the trustee to pay debt service on the 8.47% Revenue Bonds when needed, and to pay final debt service on the 8.47% Revenue Bonds. If MCF were to default in its obligation under the 8.47% Revenue Bonds indenture, the trustee may declare the principal outstanding and accrued interest immediately due and payable. MCF has the right to cure a default of non-payment obligations. The 8.47% Revenue Bonds are subject to extraordinary mandatory redemption in certain instances upon casualty or condemnation. The 8.47% Revenue Bonds may be redeemed at the option of MCF prior to their final scheduled payment dates at par plus accrued interest plus a make-whole premium. On April 24, 2012, the Company signed a definitive agreement to purchase 100% of the partnership interests of MCF for approximately $27 million in cash plus the release of approximately $10 million in cash held in escrow for the benefit of MCF. In addition, in connection with the transaction, the Company will pay approximately $67 million, net of bond cash reserves and inclusive of a net make-whole premium of approximately $15 million, to redeem the MCF bonds. The Company expects to incur a one-time loss on extinguishment of debt in connection with the redemption of the bonds of approximately $8 million. Closing of the transaction is conditional on the Company redeeming the outstanding MCF bonds. The Company expects to close the transaction during its third fiscal quarter of 2012.

Australia

The Company’s wholly-owned Australian subsidiary financed the development of a facility and subsequent expansion in 2003 with long-term debt obligations. These obligations are non-recourse to the Company and total $37.4 million (AUD 36.5 million) and $40.3 million (AUD 39.5 million), at July 1, 2012 and January 1, 2012, respectively. The term of the non-recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of the subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. As a condition of the loan, the Company is required to maintain a restricted cash balance of AUD 5.0 million, which, at July 1, 2012, was $5.1 million. This amount is included in restricted cash and the annual maturities of the future debt obligation are included in Non-Recourse Debt.

 

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Guarantees

In connection with the creation of SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. The Company guaranteed certain obligations of SACS under its debt agreements to SACS’ senior lenders through the issuance of letters of credit for 60.0 million South African Rand. During the fiscal year ended January 1, 2012, the Company was notified by SACS’ lenders that these guarantees were reduced from 60.0 million South African Rand to 34.8 million South African Rand, or $4.3 million based on exchange rates as of July 1, 2012. Additionally, SACS was required to fund a restricted account for the payment of certain costs in the event of contract termination. As such, the Company had guaranteed the payment of 60% of amounts which may be payable by SACS into the restricted account by providing a standby letter of credit of 8.4 million South African Rand as security for this guarantee. During the fiscal year ended January 1, 2012, SACS met its obligation for the funding of the Rectification Account and the letter of credit for 8.4 million South African Rand relative to this guarantee was not renewed. In the event SACS is unable to maintain the required funding in the Rectification Account, the guarantee for the shortfall will need to be re-instated. No amounts were drawn against these letters of credit. The remaining guarantee of 34.8 million South African Rand is included as part of the value of Company’s outstanding letters of credit under its Revolver as of July 1, 2012.

In addition to the above, the Company has also agreed to provide a loan, of up to 20 million South African Rand, or $2.5 million, referred to as the Shareholder’s Loan, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the Standby Facility, and the Company does not currently anticipate that such funding will be required by SACS in the future. The Company’s obligations under the Shareholder’s Loan expire upon the earlier of full funding or SACS’s release from its obligations under its debt agreements. The lenders’ ability to draw on the Shareholder’s Loan is limited to certain circumstances, including termination of the contract.

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

In connection with a design, build, finance and maintenance contract for a facility in Canada, the Company guaranteed certain potential tax obligations of a trust. The potential estimated exposure of these obligations is Canadian Dollar (“CAD”) 2.5 million, or $2.5 million, based on exchange rates as of July 1, 2012, commencing in 2017. The Company has a liability of $2.1 million and $2.0 million related to this exposure included in Other Non-Current Liabilities as of July 1, 2012 and January 1, 2012, respectively. To secure this guarantee, the Company purchased Canadian dollar denominated securities with maturities matched to the estimated tax obligations in 2017 to 2021. The Company has recorded an asset equal to the current fair market value of those securities included in Other Non-Current Assets as of July 1, 2012 and January 1, 2012, respectively, on its consolidated balance sheets. The Company does not currently operate or manage this facility.

At July 1, 2012, the Company also had eight letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $10.9 million.

In connection with the creation of GEOAmey, the Company and its joint venture partner guarantee the availability of working capital in equal proportion to ensure that GEOAmey can comply with current and future contractual commitments related to the performance of its operations. The Company and the 50% joint venture partner have each extended a £12 million line of credit of which £12.1 million, or $19.1 million based on exchange rates as of July 1, 2012, was outstanding as of July 1, 2012. The Company’s maximum exposure relative to the joint venture is its note receivable of $19.1 million, including accrued interest of $0.2 million, and future financial support necessary to guarantee performance under the contract.

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

12. COMMITMENTS AND CONTINGENCIES

Litigation, Claims and Assessments

On June 22, 2011, a jury verdict for $6.5 million was returned against the Company in a wrongful death action brought by the Personal Representative of the Estate of Ronald Sites, a former inmate at the Company’s Lawton Oklahoma Correctional Facility. On August 22, 2011, the court entered judgment against GEO in the amount of $8.4 million, which includes pre judgment interest on the amount of the verdict from January 26, 2007, the date of the filing of the lawsuit, through the date of the jury verdict. The lawsuit, Ronald L. Sites, as the administrator of the Estate of Ronald S. Sites, deceased v. The GEO Group, Inc. was filed on January 28, 2007 in the District Court of Comanche County, State of Oklahoma, Case No. CJ-2007-

 

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84. It was alleged that on January 29, 2005, Mr. Sites was harmed by his cellmate as a result of the Company’s negligence. The Company disagrees with the judgment and is pursuing an appeal. A supersedeas bond in the amount of $10.0 million was posted on August 29, 2011 by the insurance company of the State of Pennsylvania, one of the Company’s insurers. The Company intends to vigorously defend its rights and believes its accrual relative to this judgment is adequate. Under its insurance plan, the Company is responsible for the first $3.0 million of liability. Aside from this amount, which the Company would pay directly from general corporate funds, the Company believes it has insurance coverage for this matter.

In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities formerly operated by its Australian subsidiary. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, a lawsuit (Commonwealth of Australia v. Australasian Correctional Services PTY, Limited No. SC 656) was filed against the Company in the Supreme Court of the Australian Capital Territory seeking damages of up to approximately AUD 18 million or $18.4 million based on exchange rates as of July 1, 2012, plus interest. The Company believes that it has several defenses to the allegations underlying the litigation and the amounts sought and intends to vigorously defend its rights with respect to this matter. 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 legal counsel in connection with this matter. Although the outcome of this matter cannot be predicted with certainty, based on information known to date and the Company’s preliminary review of the claim and related reserve for loss, the Company believes that, if settled unfavorably, this matter could have a material adverse effect on its future financial condition, results of operations or cash flows. The Company is uninsured for any damages or costs that it may incur as a result of this claim, including the expenses of defending the claim.

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. Except as otherwise disclosed above, 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.

Construction Commitments

The Company is currently developing a number of projects using company financing. The Company’s management estimates that these existing capital projects will cost $125.6 million, of which $73.4 million was spent through the second quarter of 2012. The Company estimates the remaining capital requirements related to these capital projects to be $52.2 million, which will be spent through fiscal years 2012 and 2013. Capital expenditures related to facility maintenance costs are expected to range between $30.0 million and $35.0 million for fiscal year 2012. In addition to these current estimated capital requirements for 2012 and 2013, the Company is currently in the process of bidding on, or evaluating potential bids for the design, construction and management of a number of new projects. In the event that the Company wins bids for these projects and decides to self-finance their construction, its capital requirements in 2012 and/or 2013 could materially increase.

Contract Terminations

On March 31, 2012, the Company’s contract for the management of the 130-bed Migrant Operations Center at Guantanamo Bay NAS, Cuba terminated and was transferred to another operator. The termination of this contract did not have a material impact on its financial position, results of operations and/ or cash flows.

On April 10, 2012, the Company announced that the California Department of Corrections and Rehabilitation (“CFCR”) notified the Company that it had rescinded the previous notice of termination regarding GEO’s management contract for the 625-bed Golden State Correctional Facility (“Golden State”). Golden State, which was previously scheduled to close on June 30, 2012, will remain in operation under the Company’s current contract which is effective through December 14, 2012.

On April 19, 2012, the Company announced the discontinuation of its managed-only contract with the State of Mississippi, Department of Corrections for the 1,500-bed East Mississippi Correctional Facility (“East Mississippi”) effective July 19, 2012. In connection with the discontinuation of East Mississippi, the Company has also discontinued its managed-only contracts with the State of Mississippi, Department of Corrections for the 1,000-bed Marshall County Correctional Facility effective August 13, 2012, and the 1,450-bed Walnut Grove Youth Correctional Facility effective July 1, 2012. Refer to Note 8 - Discontinued Operations.

 

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The Company is currently marketing approximately 7,000 vacant beds at eight of its idle facilities to potential customers. The carrying values of these idle facilities totaled $266.7 million as of July 1, 2012 , excluding equipment and other assets that can be easily transferred for use at other facilities.

13. 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):

 

     Thirteen Weeks Ended     Twenty-six Weeks Ended  
      July 1,
2012
     July 3,
2011
    July 1,
2012
     July 3,
2011
 

Revenues:

          

U.S. Corrections & Detention

   $ 246,060       $ 230,662      $ 481,094       $ 460,870   

GEO Care

     110,320         110,857        220,013         207,746   

International Services

     55,968         55,285        112,498         108,413   

Facility Construction & Design

     —           —          —           119   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 412,348       $ 396,804      $ 813,605       $ 777,148   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income:

          

U.S. Corrections & Detention

   $ 59,849       $ 52,881      $ 106,960       $ 107,598   

GEO Care

     21,203         21,443        39,827         35,293   

International Services

     2,454         2,322        6,641         6,274   

Facility Construction & Design

     —           (23     —           80   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income from segments

   $ 83,506       $ 76,623      $ 153,428       $ 149,245   
  

 

 

    

 

 

   

 

 

    

 

 

 

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):

 

     Thirteen Weeks Ended     Twenty-six Weeks Ended  
      July 1,
2012
    July 3,
2011
    July 1,
2012
    July 3,
2011
 

Total operating income from segments

   $ 83,506      $ 76,623      $ 153,428      $ 149,245   

Unallocated amounts:

        

General and Administrative Expenses

     (27,043     (27,710     (54,484     (60,498

Net interest expense

     (18,856     (17,783     (37,856     (33,175
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

   $ 37,607      $ 31,130      $ 61,088      $ 55,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

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. Our 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.

As of July 1, 2012 and January 1, 2012 and for the thirteen and twenty-six weeks ended July 1, 2012 and July 3, 2011, SACS was considered to be a significant subsidiary and as such, summarized financial data is included below as follows (in thousands):

 

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     Thirteen Weeks Ended      Twenty-six Weeks
Ended
 
      July 1,
2012
     July 3,
2011
     July 1,
2012
     July 3,
2011
 

Statement of Operations Data

           

Revenues

   $ 11,651       $ 12,830       $ 23,496       $ 25,001   

Operating income

     4,706         5,369         9,474         10,129   

Net income

     2,641         2,837         5,232         4,160   
      July 1, 2012      January 1, 2012  

Balance Sheet Data

     

Current assets

     $22,774         $21,068   

Non-current assets

     37,317         39,110   

Current liabilities

     3,331         3,645   

Non-current liabilities

     40,473         45,237   

Shareholders’ equity

     16,287         11,296   

As of July 1, 2012 and January 1, 2012, the Company’s investment in SACS was $8.1 million and $5.6 million, respectively.

The Company has recorded $0.9 million and $1.4 million in losses, net of tax impact, for GEOAmey’s operations during the thirteen and twenty-six weeks ended July 1, 2012, which is included in Equity in earnings of affiliates in the accompanying consolidated statement of comprehensive income. As of July 1, 2012, the Company’s investment in GEOAmey was $(3.8) million, and represents its share of reported losses.

14. BENEFIT PLANS

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

 

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     Twenty-six Weeks
Ended July 1, 2012
    Fiscal Year Ended
January 1, 2012
 

Change in Projected Benefit Obligation

    

Projected benefit obligation, beginning of period

   $ 16,879      $ 13,830   

Service cost

     387        645   

Interest cost

     393        667   

Actuarial gain

     —          1,922   

Benefits paid

     (79     (185
  

 

 

   

 

 

 

Projected benefit obligation, end of period

   $ 17,580      $ 16,879   
  

 

 

   

 

 

 

Change in Plan Assets

    

Plan assets at fair value, beginning of period

   $ —        $ —     

Company contributions

     79        185   

Benefits paid

     (79     (185

Plan assets at fair value, end of period

   $ —        $ —     
  

 

 

   

 

 

 

Unfunded Status of the Plan

   $ (17,580   $ (16,879
  

 

 

   

 

 

 

 

     Thirteen Weeks
Ended
     Twenty-six
Weeks Ended
 
      July 1,
2012
     July 3,
2011
     July 1,
2012
     July 3,
2011
 

Components of Net Periodic Benefit Cost

           

Service cost

   $ 193       $ 161       $ 387       $ 322   

Interest cost

     197         167         393         334   

Amortization of prior service cost

     —           —           —           —     

Net loss

     48         16         97         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 438       $ 344       $ 877       $ 688   
  

 

 

    

 

 

    

 

 

    

 

 

 

The long-term portion of the pension liability as of July 1, 2012 and January 1, 2012 was $17.4 million and $16.7 million, respectively, and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheets.

15. RECENT ACCOUNTING STANDARDS

The Company implemented the following accounting standards in the twenty-six weeks ended July 1, 2012:

In May 2011, the FASB issued ASU No. 2011-04 which provides a consistent definition of fair value in US GAAP and International Financial Reporting Standards (“IFRS”) and ensures that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The amendments change certain fair value measurement principles and enhance the disclosure requirements particularly for level 3 fair value measurements. The standard became effective for the Company during interim and annual periods beginning after December 15, 2011 and has been applied prospectively, where applicable. The implementation of this standard in the twenty-six weeks ended July 1, 2012 did not have a material impact on its financial position, results of operation and cash flows.

In June 2011, the FASB issued ASU No. 2011-05 which requires an entity to present all non-owner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This standard became effective for the Company in fiscal years, and interim periods within those years, beginning after December 15, 2011 and was applied retrospectively. The implementation of this standard in the twenty-six weeks ended July 1, 2012 did not have a material impact on its financial position, results of operation and cash flows.

In December 2011, the FASB issued ASU 2011-12 in order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments. No other requirements in ASU 2011-05 were affected by this ASU, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but

 

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consecutive financial statements. ASU 2011-12 is effective for the Company in fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s implementation of ASU 2011-12 in the twenty-six weeks ended July 1, 2012 did not have a material impact on the Company’s financial position, results of operation or cash flows. The Company does not expect the future impact of this standard, once the deferral period is over, to have a material impact on the Company’s financial position, results of operation or cash flows.

In July 2012, the FASB issued ASU 2012-02 which is intended to simplify how an entity tests indefinite-lived intangible assets for impairment. Under the revised guidance, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of facts and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value with the carrying amount in accordance with Subtopic 350-30. Under the amendments in this update, an entity has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not believe that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

16. SUBSEQUENT EVENTS

Restricted Stock Awards

On July 20, 2012, the Compensation Committee of the Board of Directors adopted resolutions providing that all future performance-based equity grants under GEO’s equity incentive plans will be subject to multiple annual performance metrics. Such annual metrics for performance-based awards will include earnings-per-share performance and return on capital employed results. Such metrics will not include revenue for future performance-based awards (Refer to Note 6 - Equity Incentive Plans). In connection with the resolution, the Compensation Committee canceled the restricted stock awards previously granted on March 12, 2012 to certain executive officers. In lieu of the canceled awards, the Compensation Committee granted new restricted stock awards on July 20, 2012 to these same executive officers covering the same number of shares of restricted stock as were granted in March 2012. The vesting of these new restricted stock grants will be subject to the achievement by GEO of two annual performance metrics as follows: (i) up to 75% of the shares of restricted stock in each award can vest annually or cumulatively if GEO meets certain earnings per share performance targets during years 2012, 2013 and 2014; and (ii) up to 25% of the shares of restricted stock in each award can vest annually if GEO meets certain return on capital performance targets in 2012, 2013 and 2014. Based on the terms of the agreement, the Company does not expect there to be any incremental compensation cost related to the modified awards.

Dividends

On August 7, 2012, the Board of Directors declared a dividend of $.20 per share to shareholders of record on August 21, 2012 to be paid out on September 7, 2012.

Operating Tax Refund

In the Third Quarter 2012, the Company received net refunds in the amount of $6.0 million, not related to income taxes, for certain previously disputed tax claims in various jurisdictions.

17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Company’s 6.625% Senior Notes and 7 3/4% Senior Notes are 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;

 

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

 

  (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 BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of July 1, 2012  
      The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (Dollars in thousands)  

ASSETS

  

Cash and cash equivalents

     43,081       $ 4,550       $ 20,907       $ —        $ 68,538   

Restricted cash and investments

     —           1,350         38,721         —          40,071   

Accounts receivable, less allowance for doubtful accounts

     122,746         138,653         23,032         —          284,431   

Deferred income tax assets, net

     13,891         11,047         3,788         —          28,726   

Prepaid expenses and other current assets

     6,878         7,094         10,565         (1,154     23,383   

Current assets of discontinued operations

     4,740         1,973         —           —          6,713   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     191,336         164,667         97,013         (1,154     451,862   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     8,941         —           51,129         —          60,070   

Property and Equipment, Net

     638,967         830,739         248,686         —          1,718,392   

Assets Held for Sale

     3,083         2,307         —           —          5,390   

Direct Finance Lease Receivable

     —           —           29,253         —          29,253   

Intercompany Receivable

     378,861         14,380         12,708         (405,949     —     

Deferred Income Tax Assets, Net

     —           —           1,711         —          1,711   

Goodwill

     34         507,272         762         —          508,068   

Intangible Assets, Net

     —           188,957         1,786         —          190,743   

Investment in Subsidiaries

     1,317,002         16,615         —           (1,333,617     —     

Other Non-Current Assets

     38,680         81,700         37,104         (74,321     83,163   

Non-Current Assets of Discontinued Operations

   $ 541       $ 35       $ —         $ —        $ 576   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,577,445       $ 1,806,672       $ 480,152       $ (1,815,041   $ 3,049,228   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Accounts payable

   $ 27,396       $ 33,154       $ 3,131       $ —        $ 63,681   

Accrued payroll and related taxes

     2,829         16,911         17,469         —          37,209   

Accrued expenses

     73,968         21,626         27,164         (1,154     121,604   

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

     24,606         1,424         33,728         —          59,758   

Current liabilities of discontinued operations

     546         156         —           —          702   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     129,345         73,271         81,492         (1,154     282,954   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred Income Tax Liabilities

     42,879         82,296         34         —          125,209   

Intercompany Payable

     12,708         375,695         17,546         (405,949     —     

Other Non-Current Liabilities

     31,692         26,798         74,769         (74,321     58,938   

Capital Lease Obligations

     —           12,456         —           —          12,456   

Long-Term Debt

     1,297,724         306         —           —          1,298,030   

Non-Recourse Debt

     —           —           198,995         —          198,995   

Commitments & Contingencies

             

Shareholders’ Equity:

             

The GEO Group, Inc. Shareholders’ Equity

     1,063,097         1,226,841         106,776         (1,333,617     1,063,097   

Noncontrolling Interests

     —           9,009         540         —          9,549   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Shareholders’ Equity

     1,072,646         1,235,850         107,316         (1,343,166     1,072,646   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,577,445       $ 1,806,672       $ 480,152       $ (1,815,041   $ 3,049,228   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of January 1, 2012  
      The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (Dollars in thousands)  

ASSETS

  

Cash and cash equivalents

   $ 15,085       $ 3,155       $ 26,513       $ —        $ 44,753   

Restricted cash and investments

     —           —           42,535         —          42,535   

Accounts receivable, less allowance for doubtful accounts

     123,426         139,574         22,810         —          285,810   

Deferred income tax assets, net

     14,063         10,875         3,788         —          28,726   

Prepaid expenses and other current assets

     17,170         23,791         10,539         (1,154     50,346   

Current assets of discontinued operations

     5,021         2,138         —           —          7,159   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     174,765         179,533         106,185         (1,154     459,329   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     8,016         —           49,896         —          57,912   

Property and Equipment, Net

     620,124         834,345         250,837         —          1,705,306   

Assets Held for Sale

     3,083         1,280         —           —          4,363   

Direct Finance Lease Receivable

     —           —           32,146         —          32,146   

Intercompany Receivable

     386,026         14,305         14,028         (414,359     —     

Deferred Income Tax Assets, Net

     —           —           1,711         —          1,711   

Goodwill

     34         507,272         760         —          508,066   

Intangible Assets, Net

     —           198,477         1,865         —          200,342   

Investment in Subsidiaries

     1,333,885         9,784         —           (1,343,669     —     

Other Non-Current Assets

     40,695         73,480         31,022         (65,621     79,576   

Non-Current Assets of Discontinued Operations

   $ 697       $ 168       $ —         $ —        $ 865   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,567,325       $ 1,818,644       $ 488,450       $ (1,824,803   $ 3,049,616   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Accounts payable

   $ 47,159       $ 18,531       $ 3,942       $ —        $ 69,632   

Accrued payroll and related taxes

     2,855         18,273         17,002         —          38,130   

Accrued expenses

     69,585         33,500         24,751         (1,154     126,682   

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

     19,037         1,363         33,266         —          53,666   

Current liabilities of discontinued operations

     542         166         —           —          708   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     139,178         71,833         78,961         (1,154     288,818   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred Income Tax Liabilities

     42,879         82,296         34         —          125,209   

Intercompany Payable

     14,027         378,005         22,327         (414,359     —     

Other Non-Current Liabilities

     29,384         28,654         63,964         (65,621     56,381   

Capital Lease Obligations

     —           13,087         —           —          13,087   

Long-Term Debt

     1,318,639         429         —           —          1,319,068   

Non-Recourse Debt

     —           —           208,532         —          208,532   

Commitments & Contingencies

             

Shareholders’ Equity:

             

The GEO Group, Inc. Shareholders’ Equity

     1,023,218         1,229,553         114,116         (1,343,669     1,023,218   

Noncontrolling Interests

     —           14,787         516         —          15,303   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Shareholders’ Equity

     1,023,218         1,244,340         114,632         (1,343,669     1,038,521   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,567,325       $ 1,818,644       $ 488,450       $ (1,824,803   $ 3,049,616   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

     For the Thirteen Weeks Ended July 1, 2012  
      The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 153,754      $ 217,573      $ 61,400      $ (20,379   $ 412,348   

Operating expenses

     130,229        145,784        49,401        (20,379     305,035   

Depreciation and amortization

     7,390        14,255        2,162        —          23,807   

General and administrative expenses

     9,609        13,597        3,837        —          27,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,526        43,937        6,000        —          56,463   

Interest income

     7,848        393        1,661        (8,141     1,761   

Interest expense

     (16,836     (7,926     (3,996     8,141        (20,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (2,462     36,404        3,665        —          37,607   

Provision (benefit) for income taxes

     (663     14,089        1,565        —          14,991   

Equity in earnings of affiliates, net of income tax provision

     —          —          430        —          430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,799     22,315        2,530        —          23,046   

Income from consolidated subsidiaries, net of income tax provision

     24,845        —          —          (24,845     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     23,046        22,315        2,530        (24,845     23,046   

Net income (loss) from discontinued operations

     (570     85        —          (85     (570
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     22,476        22,400        2,530        (24,930     22,476   

Net loss attributable to noncontrolling interests

     —          —          25        —          25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 22,476      $ 22,400      $ 2,555      $ (24,930   $ 22,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,476      $ 22,400      $ 2,530      $ (24,930   $ 22,476   

Other comprehensive income (loss), net of tax

   $ 29      $ —        $ (2,498   $ —        $ (2,469
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 22,505      $ 22,400      $ 32      $ (24,930   $ 20,007   

Comprehensive loss attributable to noncontrolling interests

   $ —          $ 58      $ —        $ 58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 22,505      $ 22,400      $ 90      $ (24,930   $ 20,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

     For the Thirteen Weeks Ended July 3, 2011  
      The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 138,571      $ 220,016      $ 57,514      $ (19,297   $ 396,804   

Operating expenses

     126,590        145,399        46,544        (19,297     299,236   

Depreciation and amortization

     4,668        14,401        1,876        —          20,945   

General and administrative expenses

     9,520        14,459        3,731        —          27,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,207     45,757        5,363        —          48,913   

Interest income

     7,767        413        1,562        (8,113     1,629   

Interest expense

     (15,886     (7,983     (3,656     8,113        (19,412
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (10,326     38,187        3,269        —          31,130   

Provision (benefit) for income taxes

     (3,902     14,756        1,448        —          12,302   

Equity in earnings of affiliates, net of income tax provision

     —          —          1,418        —          1,418   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (6,424     23,431        3,239        —          20,246   

Income from consolidated subsidiaries, net of income tax provision

     26,670        —          —          (26,670     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     20,246        23,431        3,239        (26,670     20,246   

Net income from discontinued operations

     917        236        —          (236     917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,163        23,667        3,239        (26,906     21,163   

Net loss attributable to noncontrolling interests

     —          1        414        —          415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 21,163      $ 23,668      $ 3,653      $ (26,906   $ 21,578   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 21,163      $ 23,667      $ 3,239      $ (26,906   $ 21,163   

Other comprehensive income, net of tax

     10        —          489        —        $ 499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 21,173      $ 23,667      $ 3,728      $ (26,906   $ 21,662   

Comprehensive loss attributable to noncontrolling interests

     —          1        417        —          418   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 21,173      $ 23,668      $ 4,145      $ (26,906   $ 22,080   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the Twenty-six Weeks Ended July 1, 2012  
      The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 294,370      $ 436,476      $ 123,174      $ (40,415   $ 813,605   

Operating expenses

     261,460        294,875        97,375        (40,415     613,295   

Depreciation and amortization

     14,244        28,318        4,320        —          46,882   

General and administrative expenses

     18,780        27,846        7,858        —          54,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     (114     85,437        13,621        —          98,944   

Interest income

     15,655        886        3,262        (16,235     3,568   

Interest expense

     (33,754     (15,837     (8,068     16,235        (41,424
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (18,213     70,486        8,815        —          61,088   

Provision (benefit) for income taxes

     (6,323     26,993        3,538        —          24,208   

Equity in earnings of affiliates, net of income tax provision

     —          —          1,178        —          1,178   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (11,890     43,493        6,455        —          38,058   

Income from consolidated subsidiaries, net of income tax provision

     49,948        —          —          (49,948     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     38,058        43,493        6,455        (49,948     38,058   

Net income (loss) from discontinued operations

     (523     223        —          (223     (523
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     37,535        43,716        6,455        (50,171     37,535   

Net income attributable to noncontrolling interests

     —          —          (9     —          (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 37,535      $ 43,716      $ 6,446      $ (50,171   $ 37,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 37,535      $ 43,716      $ 6,455      $ (50,171   $ 37,535   

Other comprehensive income (loss), net of tax

     59        —          (541     —          (482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 37,594      $ 43,716      $ 5,914      $ (50,171   $ 37,053   

Comprehensive loss attributable to noncontrolling interests

     —          —          (4     —          (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 37,594      $ 43,716      $ 5,910      $ (50,171   $ 37,049   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents
     For the Twenty-six Weeks Ended July 3, 2011  
      The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 273,812      $ 427,970      $ 113,015      $ (37,649   $ 777,148   

Operating expenses

     251,024        286,276        88,606        (37,649     588,257   

Depreciation and amortization

     8,855        27,059        3,732        —          39,646   

General and administrative expenses

     20,964        31,367        8,167        —          60,498   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,031     83,268        12,510        —          88,747   

Interest income

     13,504        737        3,025        (14,068     3,198   

Interest expense

     (29,239     (13,922     (7,280     14,068        (36,373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (22,766     70,083        8,255        —          55,572   

Provision (benefit) for income taxes

     (8,709     27,080        3,303        —          21,674   

Equity in earnings of affiliates, net of income tax provision

     —          —          2,080        —          2,080   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (14,057     43,003        7,032        —          35,978   

Income from consolidated subsidiaries, net of income tax provision

     50,035        —          —          (50,035     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     35,978        43,003        7,032        (50,035     35,978   

Net income from discontinued operations

     1,565        503        —          (503     1,565   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     37,543        43,506        7,032        (50,538     37,543   

Net loss attributable to noncontrolling interests

     —          2        823        —          825   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 37,543      $ 43,508      $ 7,855      $ (50,538   $ 38,368   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 37,543      $ 43,506      $ 7,032      $ (50,538   $ 37,543   

Other comprehensive income

     19        —          783        —          802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     37,562        43,506        7,815        (50,538     38,345   

Comprehensive loss attributable to noncontrolling interests

     —          9        826        —          835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 37,562      $ 43,515      $ 8,641      $ (50,538   $ 39,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Twenty-six Weeks Ended July 1, 2012  
      The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        

Net cash provided by operating activities

   $ 98,491      $ 17,218      $ 10,104      $ 125,813   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Proceeds from sale of property and equipment

     —          162        69        231   

Proceeds from sale of assets held for sale

     —          297        —          297   

Change in restricted cash and investments

     —          —          333        333   

Capital expenditures

     (54,024     (15,589     (2,240     (71,853
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (54,024     (15,130     (1,838     (70,992
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Payments on long-term debt

     (160,556     (693     (8,033     (169,282

Proceeds from long-term debt

     145,000        —          —          145,000   

Distribution to noncontrolling interests

     —          —          (5,758     (5,758

Proceeds from the exercise of stock options

     396        —          —          396   

Income tax provision of equity compensation

     (270     —          —          (270

Payments for retirement of common stock

     (1,035     —          —          (1,035

Debt issuance costs

     (6     —          (38     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (16,471     (693     (13,829     (30,993
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          (43     (43
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     27,996        1,395        (5,606     23,785   

Cash and Cash Equivalents, beginning of period

     15,085        3,155        26,513        44,753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 43,081      $ 4,550      $ 20,907      $ 68,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Twenty-six Weeks Ended July 3, 2011  
      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

   $ 64,488      $ (1,202   $ 31,976      $ 95,262   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Acquisition, cash consideration, net of cash acquired

     (409,607     —          —          (409,607

Proceeds from sale of property and equipment

     —          619        —          619   

Proceeds from assets held for sale

     —          6,640        —          6,640   

Change in restricted cash and investments

     —          —          (11,478     (11,478

Capital expenditures

     (82,994     (3,236     (1,132     (87,362
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (492,601     4,023        (12,610     (501,188
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Payments on long-term debt

     (38,638     (576     (7,618     (46,832

Proceeds from long-term debt

     482,260        —          —          482,260   

Distribution to noncontrolling interests

     —          —          (4,012     (4,012

Proceeds from the exercise of stock options

     2,209        —          —          2,209   

Income tax benefit of equity compensation

     392        —          —          392   

Debt issuance costs

     (10,771     —          —          (10,771
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     435,452        (576     (11,630     423,246   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          469        469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     7,339        2,245        8,205        17,789   

Cash and Cash Equivalents, beginning of period

     2,614        221        36,829        39,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 9,953      $ 2,466      $ 45,034      $ 57,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Forward-Looking Information

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

 

   

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

 

   

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

 

   

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 ability to activate the inactive beds at our idle facilities;

 

   

our ability to maintain occupancy rates at our facilities;

 

   

an increase in unreimbursed labor rates;

 

   

our ability to expand, diversify and grow our correctional, detention, mental health, residential treatment, re-entry, 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 estimate the government’s level of dependency on privatized correctional services;

 

   

our ability to accurately project the size and growth of the U.S. and international privatized corrections industry;

 

   

our ability to successfully respond to delays encountered by states privatizing correctional services and cost savings initiatives implemented by a number of states;

 

   

our ability to develop long-term earnings visibility;

 

   

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

 

   

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