10-Q 1 d431569d10q.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 September 30, 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 November 6, 2012, the registrant had 61,593,137 shares of common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     3   

ITEM 1.

 

FINANCIAL STATEMENTS

     3   

CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2012 AND OCTOBER 2, 2011

     3   

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2012 (UNAUDITED) AND JANUARY 1, 2012

     4   

CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2012 AND OCTOBER 2, 2011

     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

     48   

ITEM 4.

 

CONTROLS AND PROCEDURES

     49   

PART II - OTHER INFORMATION

     50   

ITEM 1.

 

LEGAL PROCEEDINGS

     50   

ITEM 1A.

 

RISK FACTORS

     50   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     50   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     50   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     50   

ITEM 5.

 

OTHER INFORMATION

     50   

ITEM 6.

 

EXHIBITS

     50   

SIGNATURES

     52   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED

SEPTEMBER 30, 2012 AND OCTOBER 2, 2011

(In thousands, except per share data)

(Unaudited)

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 

Revenues

   $ 411,524      $ 395,683      $ 1,225,129      $ 1,172,831   

Operating expenses

     305,832        297,700        919,127        885,957   

Depreciation and amortization

     23,761        21,850        70,643        61,496   

General and administrative expenses

     27,228        25,922        81,712        86,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     54,703        50,211        153,647        138,958   

Interest income

     1,651        1,767        5,219        4,965   

Interest expense

     (20,606     (19,327     (62,030     (55,700

Loss on early extinguishment of debt

     (8,462     —          (8,462     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     27,286        32,651        88,374        88,223   

Provision for income taxes

     11,304        12,255        35,512        33,929   

Equity in earnings of affiliates, net of income tax provision of $234, $118, $858 and $1,705, respectively

     474        272        1,652        2,352   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     16,456        20,668        54,514        56,646   

Income (loss) from discontinued operations, net of income tax provision (benefit) of $(1,088), $394, $(1,418) and $1,379, respectively

     (1,729     625        (2,252     2,190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     14,727        21,293        52,262        58,836   

Net loss attributable to noncontrolling interests

     890        225        881        1,050   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 15,617      $ 21,518      $ 53,143      $ 59,886   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     60,906        63,340        60,838        64,028   

Diluted

     61,302        63,555        61,083        64,388   

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

        

Basic:

        

Income from continuing operations

   $ 0.28      $ 0.33      $ 0.91      $ 0.90   

Income (loss) from discontinued operations

     (0.03     0.01        (0.04     0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.26      $ 0.34      $ 0.87      $ 0.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations

   $ 0.28      $ 0.33      $ 0.91      $ 0.90   

Income (loss) from discontinued operations

     (0.03     0.01        (0.04     0.03   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.25      $ 0.34      $ 0.87      $ 0.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Foreign currency translation adjustments, net of tax benefit of $364, $1,714, $239 and $1,151, respectively

   $ 187      $ (6,858   $ 33      $ (5,718

Pension liability adjustment, net of tax benefit of $19, $5, $56, and $18, respectively

     30        9        89        28   

Loss on derivative instrument classified as cash flow hedge, net of tax benefit of $56, $99, $276 and $196, respectively

     (102     (672     (502     (1,029
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     115        (7,521     (380     (6,719

Total comprehensive income

     14,842        13,772        51,882        52,117   

Comprehensive loss attributable to noncontrolling interests

     903        325        900        1,160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 15,745      $ 14,097      $ 52,782      $ 53,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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

SEPTEMBER 30, 2012 AND JANUARY 1, 2012

(In thousands, except share data)

 

     September 30,
2012
    January 1,
2012
 
     (Unaudited)        
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 69,085      $ 44,753   

Restricted cash and investments (including VIEs1 of $6,182 and $35,435, respectively)

     15,530        42,535   

Accounts receivable, less allowance for doubtful accounts of $2,294 and $2,453, respectively

     251,459        285,810   

Deferred income tax assets, net

     31,199        28,726   

Prepaid expenses and other current assets

     25,046        50,346   

Current assets of discontinued operations

     6,328        7,159   
  

 

 

   

 

 

 

Total current assets

     398,647        459,329   
  

 

 

   

 

 

 

Restricted Cash and Investments (including VIEs of $20,765 and $38,930, respectively)

     44,284        57,912   

Property and Equipment, Net (including VIEs of $25,988 and $162,665, respectively)

     1,709,628        1,705,306   

Assets Held for Sale

     6,590        4,363   

Direct Finance Lease Receivable

     28,128        32,146   

Deferred Income Tax Assets, Net

     1,711        1,711   

Goodwill

     508,078        508,066   

Intangible Assets, Net

     186,229        200,342   

Other Non-Current Assets

     84,274        79,576   

Non-Current Assets of Discontinued Operations

     —          865   
  

 

 

   

 

 

 

Total Assets

   $ 2,967,569      $ 3,049,616   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 53,643      $ 69,632   

Accrued payroll and related taxes

     50,416        38,130   

Accrued expenses

     134,606        126,682   

Current portion of capital lease obligations, long-term debt and non-recourse debt (including VIEs of $5,200 and $20,770, respectively)

     47,840        53,666   

Current liabilities of discontinued operations

     319        708   
  

 

 

   

 

 

 

Total current liabilities

     286,824        288,818   
  

 

 

   

 

 

 

Deferred Income Tax Liabilities

     119,470        125,209   

Other Non-Current Liabilities

     59,206        56,381   

Capital Lease Obligations

     12,192        13,087   

Long-Term Debt

     1,324,902        1,319,068   

Non-Recourse Debt (including VIEs of $16,972 and $108,335, respectively)

     113,136        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, 85,578,493 and 85,185,158 issued and 61,592,212 and 61,181,172 outstanding, respectively

     856        852   

Additional paid-in capital

     714,961        727,297   

Retained earnings

     547,602        507,170   

Accumulated other comprehensive income

     1,569        1,930   

Treasury stock, 23,986,281 and 24,003,986 shares, at cost, respectively

     (213,709     (214,031
  

 

 

   

 

 

 

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

     1,051,279        1,023,218   

Noncontrolling interests

     560        15,303   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,051,839        1,038,521   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,967,569      $ 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 THIRTY-NINE WEEKS ENDED

SEPTEMBER 30, 2012 AND OCTOBER 2, 2011

(In thousands)

(Unaudited)

 

     Thirty-nine Weeks Ended  
     September 30,
2012
    October 2,
2011
 

Cash Flow from Operating Activities:

    

Net Income

   $ 52,262      $ 58,836   

Net loss attributable to noncontrolling interests

     881        1,050   
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     53,143        59,886   

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

    

Depreciation and amortization expense

     70,643        61,496   

Amortization of debt issuance costs, discount and/or premium

     2,341        1,148   

Restricted stock expense

     3,195        2,642   

Stock option expense

     1,918        2,201   

Loss on early extinguishment of debt

     8,462        —     

Provision for doubtful accounts

     478        1,235   

Equity in earnings of affiliates, net of tax

     (1,652     (2,352

Income tax benefit of equity compensation

     (241     (536

Loss on sale of property and equipment

     1,059        205   

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

     56,550        25,896   

Changes in accounts payable, accrued expenses and other liabilities

     29,386        4,138   
  

 

 

   

 

 

 

Cash provided by operating activities - continuing operations

     225,282        161,361   

Cash provided by operating activities - discontinued operations

     1,113        2,763   
  

 

 

   

 

 

 

Net cash provided by operating activities

     226,395        164,124   
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Acquisition of BI, cash consideration, net of cash acquired

     —          (409,607

Acquisition of ownership interests in MCF

     (35,154     —     

Proceeds from sale of property and equipment

     608        795   

Proceeds from sale of assets held for sale

     5,641        7,121   

Change in restricted cash and investments

     40,778        (4,126

Capital expenditures

     (92,356     (177,656
  

 

 

   

 

 

 

Net cash used in investing activities

     (80,483     (583,473
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Payments on long-term debt

     (352,131     (127,544

Proceeds from long-term debt

     263,000        617,247   

Distribution to noncontrolling interests

     (5,758     (4,012

Proceeds from the exercise of stock options

     1,846        2,446   

Debt issuance costs

     (917     (11,192

Payment of make-whole provision and other fees for early extinguishment of debt

     (14,861     —     

Payments for purchase of treasury shares

     (48     (49,987

Income tax benefit of equity compensation

     241        536   

Payments for retirement of common stock

     (1,035     —     

Proceeds from reissuance of treasury stock in connection with ESPP

     373        —     

Cash dividends paid

     (12,304     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (121,594     427,494   

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     14        (3,853
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     24,332        4,292   

Cash and Cash Equivalents, beginning of period

     44,753        39,664   
  

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 69,085      $ 43,956   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Deferred tax assets recorded in equity in connection with MCF transaction

   $ 8,213      $ —     
  

 

 

   

 

 

 

Capital expenditures in accounts payable and accrued expenses

   $ 2,818      $ 21,886   
  

 

 

   

 

 

 

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 September 30, 2012, the Company’s worldwide operations included the management and/or ownership of approximately 75,000 beds at 108 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 thirty-nine weeks ended September 30, 2012 are not necessarily indicative of the results for the entire fiscal year or the thirteen weeks ending December 30, 2012, or for any other future interim or annual periods.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has recorded goodwill as a result of its business combinations. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets, other intangible assets acquired and liabilities assumed, including noncontrolling interests. Changes in goodwill from January 1, 2012 to September 30, 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. Changes in gross carrying amount from January 1, 2012 to September 30, 2012 are related to fluctuations in foreign currency exchange rates. The Company’s intangible assets include facility management contracts, non-compete agreements and the trade name and technology of B.I. Incorporated, which the Company refers to as BI, as follows (in thousands):

 

     September 30, 2012      January 1, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Facility management contracts

   $ 158,548       $ (32,798   $ 125,750       $ 158,604       $ (22,985   $ 135,619   

Covenants not to compete

     8,570         (8,319     251         8,570         (6,347     2,223   

Technology

     21,200         (4,972     16,228         21,200         (2,700     18,500   

Trade name (Indefinite lived)

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

   $ 232,318       $ (46,089   $ 186,229       $ 232,374       $ (32,032   $ 200,342   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense relative to the Company’s finite lived intangible assets was $4.5 million and $14.1 million, respectively, for the thirteen and thirty-nine weeks ended September 30, 2012. Amortization expense relative to the Company’s finite lived intangible assets was $5.0 million and $14.1 million respectively, for the thirteen and thirty-nine weeks ended October 2, 2011. As of September 30, 2012, the weighted average period before the next contract renewal or extension for all of the facility management contracts was approximately 1.4 years.

 

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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

   $ 4,051   

2013

     15,192   

2014

     14,977   

2015

     14,947   

2016

     14,854   

Thereafter

     78,208   
  

 

 

 
   $ 142,229   
  

 

 

 

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 September 30, 2012 and January 1, 2012 (in thousands):

 

            Fair Value Measurements at September 30, 2012  
     Total
Carrying
Value at
September 30,
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

   $   6,997       $ —         $   6,997       $ —     

Restricted investments:

           

Guaranteed Investment Contract

     5,742         —           5,742         —     

Rabbi Trust

     9,341         9,341         —           —     

Fixed income securities

     2,172         —           2,172         —     

Liabilities:

           

Interest rate swap derivative liabilities

   $ 747       $ —         $ 747       $ —     

 

                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 September 30, 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 September 30, 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

 

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Municipal Correctional Finance, L.P. (“MCF”), the Company’s formerly consolidated VIE. On August 31, 2012, the Company closed on the purchase of MCF and in connection with the transaction, redeemed the MCF bonds and the Repo Agreement was terminated. Refer to Note 10-Variable Interest Entities and Note 11-Debt. 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. As of January 1, 2012, the Company’s Level 2 financial instruments included a portion of the Company’s rabbi trust which was invested in interest bearing assets, such as long-term bonds, which were valued using market interest rates for 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 September 30, 2012 and January 1, 2012 (in thousands):

 

            Estimated Fair Value Measurements at
September 30, 2012
 
     Carrying
Value as of
September 30,
2012
     Total Fair
Value
     Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 69,085       $ 69,085       $ 69,085       $ —         $ —     

Restricted cash

     44,731         44,731         44,731         —           —     

Liabilities:

              

Borrowings under Senior Credit Facility

   $ 798,468       $ 804,268       $ —         $ 804,268       $ —     

7 3/4% Senior Notes

     247,439         270,938         —           270,938         —     

6.625% Senior Notes

     300,000         322,314         —           322,314         —     

Non-recourse debt, Australian subsidiary

     36,411         37,331         —           37,331         —     

Other non-recourse debt, including current portion

     94,837         97,371         —           97,371         —     

 

                Estimated Fair Value Measurements at    
January 1, 2012
 
     Carrying
Value as of
   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 September 30, 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

 

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based on market prices for similar instruments. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of borrowings under the Senior Credit Facility is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.

5. SHAREHOLDERS’ EQUITY

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

 

    Common shares     Additional
Paid-In
    Retained     Accumulated
Other
Comprehensive
    Treasury shares     Noncontrolling    

Total

Shareholders’

 
    Shares     Amount     Capital     Earnings     Income (Loss)     Shares     Amount     Interests     Equity  

Balance at 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

    479        5        1,841        —          —          —          —          —          1,846   

Tax benefit related to equity compensation

    —          —          241        —          —          —          —          —          241   

Stock-based compensation expense

    —          —          5,113        —          —          —          —          —          5,113   

Dividends paid

    —          —          —          (12,304     —          —          —          —          (12,304

Cancellation of restricted stock

    (28     —          —          —          —          —          —          —          —     

Retirement of common stock

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

Purchase of treasury shares

    (2     —          —          —          —          2        (48     —          (48

Reissuance of treasury stock in connection with the ESPP

    20        —          4        (1     —          (20     370        —          373   

Acquisition of ownership interests in MCF

    —          —          (18,856     —          —          —          —          (8,085     (26,941

Other adjustments to additional paid-in capital

    —          —          (51     —          —          —          —          —          (51

Distribution to noncontrolling interests

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

Total comprehensive income

    —          —          —          53,143        (361     —          —          (900     51,882   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    61,592      $ 856      $ 714,961      $ 547,602      $ 1,569        23,986      $ (213,709   $ 560      $ 1,051,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In February 2012, the Board of Directors adopted a dividend policy. In May 2012, the Board of Directors determined to accelerate the implementation of the dividend policy to Third Quarter 2012. On August 7, 2012, the Board of Directors declared a dividend of $.20 per share to stockholders of record on August 21, 2012 which was paid on September 7, 2012 for a total of $12.3 million.

6. EQUITY INCENTIVE PLANS

As of September 30, 2012, under the 2006 Stock Incentive Plan (“2006 Plan”), the Company had 1,396,954 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 651,804 shares were available for the issuance of awards other than stock options. During the thirty-nine weeks ended September 30, 2012, the Company repurchased and retired 57,457 shares of fully vested employee equity awards.

 

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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 thirty-nine weeks ended September 30, 2012:

 

     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

     96        25.78         

Options exercised

     (164     11.27         

Options forfeited/canceled/expired

     (64     22.77         
  

 

 

         

Options outstanding at September 30, 2012

     1,469      $ 20.62         6.51       $ 10,200   
  

 

 

         

Options exercisable at September 30, 2012

     933      $ 18.98         5.56       $ 8,111   
  

 

 

         

There were 96,000 stock options granted by the Company during the thirty-nine weeks ended September 30, 2012 with an aggregate fair value of $0.7 million and a weighted average exercise price of $25.78. For the thirty-nine weeks ended September 30, 2012 and October 2, 2011, the amount of stock-based compensation expense related to stock options was $1.9 million and $2.2 million, respectively. As of September 30, 2012, the Company had $3.2 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.4 years.

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. The Company has issued share-based awards with non-performance and performance-based vesting criteria. For share-based awards that are performance-based, achievement of the milestones must be “probable” before share-based compensation expense is recorded. At each reporting date, the Company reviews the likelihood that these awards will vest and if the vesting is deemed probable, compensation expense is recorded at that time. If ultimately performance goals are not met, for any awards where vesting was previously deemed probable, previously recognized compensation cost will be reversed.

A summary of the activity of restricted stock outstanding is as follows for the thirty-nine weeks ended September 30, 2012:

 

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

Restricted stock outstanding at January 1, 2012

     442      $ 23.32   

Granted

     315        18.39   

Vested

     (139     23.26   

Forfeited/canceled

     (23     22.52   
  

 

 

   

Restricted stock outstanding at September 30, 2012

     595      $ 20.98   
  

 

 

   

During the thirty-nine weeks ended September 30, 2012, the Company granted 315,000 shares of restricted stock 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 annual metrics during fiscal years 2012, 2013 and 2014. These performance based awards, which were previously granted on March 12, 2012 to certain executive officers and senior employees, were canceled and new performance based awards were granted on July 20, 2012 in connection with a resolution by the Compensation Committee of the Board of Directors to revise the performance metrics used from targeted revenues to multiple metrics, which include earnings-per-share performance and return on capital employed results. These new restricted awards granted on July 20, 2012 were to the same executive officers and senior employees 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, there was no incremental compensation cost related to the modified awards.

 

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For performance based awards granted prior to July 20, 2012, these grants vested over a three year period from the date of the award if the previous metric, targeted revenue, was achieved. The aggregate fair value of the awards issued during the thirty-nine weeks ended September 30, 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 $5.8 million and $9.3 million, respectively.

For the thirty-nine weeks ended September 30, 2012 and October 2, 2011, the Company recognized $3.2 million and $2.6 million, respectively, of compensation expense related to its restricted stock awards. As of September 30, 2012, the Company had $9.6 million of unrecognized compensation costs related to non-vested restricted stock awards, including non-vested restricted stock awards with performance-based vesting, 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 pre-shareholder approval period began on July 9, 2011 with shares being purchased 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 periods, the Plan no longer contains an option feature and therefore is considered to be non-compensatory. As such, no compensation expense has been recorded during the post-shareholder approval periods. Share purchases for the post-shareholder approval offering periods begin on the last day of each month. During the thirty-nine weeks ended September 30, 2012, 19,487 shares were issued out of the Company’s treasury stock in connection with the Plan. The Company will offer up to 500,000 shares of its common stock, which were registered with the Securities and Exchange Commission on May 4, 2012, for sale to eligible employees.

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. Repurchases of common stock under the stock repurchase program during the thirty-nine weeks ended September 30, 2012 were not significant.

 

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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”) from continuing operations were calculated for the thirteen and thirty-nine weeks ended September 30, 2012 and October 2, 2011 as follows (in thousands, except per share data):

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 

Income from continuing operations

   $ 16,456       $ 20,668       $ 54,514       $ 56,646   

Net loss attributable to noncontrolling interests

     890         225         881         1,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     17,346         20,893         55,395         57,696   

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

           

Weighted average shares outstanding

     60,906         63,340         60,838         64,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount from continuing operations

   $ 0.28       $ 0.33       $ 0.91       $ 0.90   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Weighted average shares outstanding

     60,906         63,340         60,838         64,028   

Effect of dilutive securities: Stock options and restricted stock

     396         215         245         360   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares assuming dilution

     61,302         63,555         61,083         64,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amount from continuing operations

   $ 0.28       $ 0.33       $ 0.91       $ 0.90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Thirteen Weeks

For the thirteen weeks ended September 30, 2012, 24,303 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.

For the thirteen weeks ended October 2, 2011, 123,738 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. 106 shares of restricted stock were anti-dilutive.

Thirty-nine Weeks

For the thirty-nine weeks ended September 30, 2012, 59,915 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. 538 shares of restricted stock were anti-dilutive.

For the thirty-nine weeks ended October 2, 2011, 79,466 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.

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 thirty-nine weeks ended September 30, 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 through their respective disposition dates, were $2.4 million and $11.2 million, for the thirteen weeks ended September 30, 2012 and October 2, 2011, respectively and $24.7 million and $33.6 million for the thirty-nine weeks ended September 30, 2012 and October 2, 2011, respectively. Loss from discontinued operations includes a charge of $1.1 million of insurance liability claims for the thirteen weeks and thirty-nine weeks ended September 30, 2012 which are directly related to these discontinued operations. All income (loss) from discontinued operations included in the consolidated statements of comprehensive income is attributable to The Geo Group, Inc.

 

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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 September 30, 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 value, as defined in the swap agreements, 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 , 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 $0.3 million and $0.4 million during the thirteen and thirty-nine weeks ended September 30, 2012, respectively. As of September 30, 2012 and January 1, 2012, the swap assets’ fair values were $7.0 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 September 30, 2012 or October 2, 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 $0.1 million and $0.5 million for the thirteen and thirty-nine weeks ended September 30, 2012 respectively. The total fair value of the swap (liability) asset as of September 30, 2012 and January 1, 2012 was $(0.7) 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).

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 September 30, 2012 and January 1, 2012 was $26.0 million and $26.4 million, respectively and is included in Property and Equipment in the accompanying consolidated balance sheets.

 

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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 (the “MCF bonds”). Under the terms of the Lease, the Company would lease the assets for the remainder of the 20-year base term, which ends in 2021, and had options at its sole discretion to renew the Lease for up to approximately 25 additional years. Prior to the transaction discussed below, MCF’s sole source of revenue was from the Company and as such the Company had the power to direct the activities of the VIE that most significantly impacted its performance. The Company’s risk was generally limited to the rental obligations under the operating leases. This entity was included in the accompanying consolidated financial statements as a VIE. Upon the purchase of the ownership interests in MCF as discussed below, MCF is no longer a VIE but is still included in the accompanying consolidated financial statements and all intercompany transactions are eliminated in consolidation.

On April 24, 2012, the Company signed a definitive agreement to purchase 100% of the partnership interests of MCF from the third party holders of these interests for a total net consideration of $35.2 million. The transaction closed on August 31, 2012. After the purchase, the Company redeemed the MCF bonds. Refer to Note 11 - Debt. As the transaction increased GEO’s ownership interest in MCF, from zero to 100%, and GEO retained its controlling interest in MCF, the purchase of the partnership interests has been accounted for as an equity transaction with additional paid-in capital adjusted for the difference between the cumulative balance of the non-controlling interest in MCF of $8.1 million and the $35.2 million consideration paid, net of MCF deferred tax assets of $8.2 million, with no gain or loss recorded in consolidated net income or comprehensive income. Refer to Note 5 - Shareholders’ Equity. The Company incurred costs related to the purchase of the ownership interests of MCF of $0.4 million and $1.2 million for the thirteen and thirty-nine weeks ended September 30, 2012, respectively. These costs were expensed as incurred and included in general and administrative expenses in the accompanying consolidated statements of comprehensive income.

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 (an independent third party); 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 $9.3 million at September 30, 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 (an independent third party) 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 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 $19.4 million, based on exchange rates in effect as of September 30, 2012, to ensure that GEOAmey can comply with future contractual commitments related to the performance of its operations. As of September 30, 2012, $19.8 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 $2.3 million losses, net of tax impact, for GEOAmey’s operations during the thirteen and thirty-nine weeks ended September 30, 2012, respectively, which is included in equity in earnings of affiliates, net of income tax provision, in the accompanying consolidated statements of comprehensive income.

 

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11. DEBT

Debt outstanding as of September 30, 2012 and January 1, 2012 consisted of the following (in thousands):

 

     September 30,
2012
    January 1,
2012
 

Capital Lease Obligations

   $ 13,350      $ 14,171   

Senior Credit Facility:

    

Term loans

     569,750        482,500   

Unamortized discount on term loan

     (1,282     (1,538

Revolver

     230,000        302,000   
  

 

 

   

 

 

 

Total Senior Credit Facility

     798,468        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   

Unamortized discount on Notes

     (2,561     (2,859

Swap on Notes

     6,997        7,411   
  

 

 

   

 

 

 

Total 7 3/4% Senior Notes

     254,436        254,552   

Non-Recourse Debt :

    

Non-Recourse Debt

     132,826        235,430   

Unamortized premium on Non-Recourse Debt

     —          8,304   

Unamortized discount on Non-Recourse Debt

     (1,578     (1,936
  

 

 

   

 

 

 

Total Non-Recourse Debt

     131,248        241,798   

Other debt

     568        870   
  

 

 

   

 

 

 

Total debt

     1,498,070        1,594,353   

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

     (47,840     (53,666

Capital Lease Obligations, long-term portion

     (12,192     (13,087

Non-Recourse Debt

     (113,136     (208,532
  

 

 

   

 

 

 

Long-Term Debt

   $ 1,324,902      $ 1,319,068   
  

 

 

   

 

 

 

Senior Credit Facility

As of September 30, 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 2.75% and maturing August 4, 2015, (ii) a $150.0 million Term Loan A-2 (“Term Loan A-2”), currently bearing interest at LIBOR plus 2.75% and maturing August 4, 2015, (iii) a $100.0 million Term Loan A-3 (“Term Loan A-3”), currently bearing interest at LIBOR plus 2.75% and maturing August 4, 2015, (iv) 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 (v) a $500.0 million Revolving Credit Facility (“Revolver”) currently bearing interest at LIBOR plus 2.75% and maturing August 4, 2015.

As of September 30, 2012, the Company had $568.5 million in aggregate borrowings outstanding, net of discount, under the Term Loan A, Term Loan A-2, Term Loan A-3 and Term Loan B, $230.0 million in borrowings under the Revolver, and approximately $56.4 million in letters of credit which leaves $213.6 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Senior Credit Facility as of September 30, 2012 was 3.2%.

 

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Indebtedness under the Revolver, the Term Loan A, Term Loan A-2 and Term Loan A-3 bears interest based on the Total Leverage Ratio, as defined in the Senior Credit Facility, 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, Term Loan A-2 and Term Loan A-3

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, as these terms are defined in the Senior Credit Facility. The Company believes it was in compliance with all of the covenants of the Senior Credit Facility as of September 30, 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 subsidiary guarantors (Refer to Note 17-Condensed Consolidating Financial Information.) The Company believes it was in compliance with all of the covenants of the indenture governing the 7 3/4% Senior Notes as of September 30, 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 of each year. 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 subsidiary guarantors (Refer to Note 17-Condensed Consolidating Financial Information.) The Company believes it was in compliance with all of the covenants of the indenture governing the 6.625% Senior Notes as of September 30, 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 Correctional Services Corporation (“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 September 30, 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 September 30, 2012, included in current restricted cash and non-current restricted cash is $6.2 million and $20.8 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.

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

 

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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 thirty-nine weeks ended September 30, 2012. As of September 30, 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 September 30, 2012, included in current restricted cash and non-current restricted cash is $9.3 million and $7.4 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.

MCF

MCF was obligated for the outstanding balance of the MCF Bonds. The bonds bore interest at a rate of 8.47% per annum and were payable in semi-annual installments of interest and annual installments of principal. All unpaid principal and accrued interest on the bonds was due on the earlier of August 1, 2016 (maturity) or as noted under the bond documents. The bonds were limited, non-recourse obligations of MCF and were 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 were not guaranteed by the Company or its subsidiaries. As of January 1, 2012, the aggregate principal amount of these bonds was $93.7 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.

On April 24, 2012, the Company signed a definitive agreement to purchase 100% of the partnership interests of MCF from the third party holders of these interests for a total net consideration of $35.2 million. The transaction closed on August 31, 2012. Subsequent to the acquisition, the indenture relating to the MCF bonds was discharged and the remaining principal balance as of August 31, 2012 of $77.9 million was redeemed, with an effective date of September 4, 2012. GEO financed the acquisition of the partnership interests in MCF and the redemption of the MCF bonds with the proceeds from the above described Term Loan A-3.

The Company incurred a one-time loss on early extinguishment of debt in connection with the early redemption of the MCF bonds of $8.5 million which consisted of a make-whole premium of $14.9 million which includes $0.1 million of bond redemption costs, offset by the effect of the unamortized bond premium of $6.4 million.

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 $36.4 million (AUD 35.1 million) and $40.3 million (AUD 39.5 million), based on the exchange rates in effect at September 30, 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, based on exchange rates as of September 30, 2012, was $5.2 million. This amount is included in restricted cash and the annual maturities of the future debt obligation are included in Non-Recourse Debt.

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 $4.2 million based on exchange rates as of September 30, 2012. Additionally, SACS

 

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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 September 30, 2012.

In addition to the above, the Company has also agreed to provide a loan, of up to 20 million South African Rand, or $2.4 million based on exchange rates as of September 30, 2012, 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 September 30, 2012, commencing in 2017. The Company has a liability of $2.2 million and $2.0 million related to this exposure included in Other Non-Current Liabilities as of September 30, 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 value of those securities included in Other Non-Current Assets as of September 30, 2012 and January 1, 2012, respectively, on its consolidated balance sheets. The Company does not currently operate or manage this facility.

At September 30, 2012, the Company also had seven letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $10.6 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 £12.3 million, or $19.8 million based on exchange rates as of September 30, 2012, was outstanding as of September 30, 2012. The Company’s maximum exposure relative to the joint venture is its note receivable of $19.8 million, including accrued interest of $0.4 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-2007-84. 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

 

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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 $18.7 million based on exchange rates as of September 30, 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 $60.7 million, of which $19.2 million was spent through the third quarter of 2012. The Company estimates the remaining capital requirements related to these capital projects to be $41.5 million, which will be spent through fiscal year 2014. 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 through 2014, 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 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 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 Facility 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.

The Company is currently marketing approximately 6,000 vacant beds at seven of its idle facilities to potential customers. The carrying values of these idle facilities, which are included in Property and Equipment, Net and Assets Held for Sale in the consolidated balance sheets, totaled $241.6 million as of September 30, 2012, excluding equipment and other assets that can be easily transferred for use at other facilities.

 

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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 U.S. Corrections and Detention segment has been retroactively reclassified for the results of discontinued operations. Refer to Note 8-Discontinued Operations. The Company’s segment revenues from external customers and a measure of segment profit are as follows (in thousands):

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     September 30,
2012
     October 2,
2011
    September 30,
2012
     October 2,
2011
 

Revenues:

          

U.S. Corrections & Detention

   $ 244,102       $ 232,788      $ 725,196       $ 693,657   

GEO Care

     110,186         109,729        330,199         317,475   

International Services

     57,236         53,166        169,734         161,580   

Facility Construction & Design

     —           —          —           119   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 411,524       $ 395,683      $ 1,225,129       $ 1,172,831   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income (loss):

          

U.S. Corrections & Detention

   $ 58,795       $ 53,187      $ 165,755       $ 160,786   

GEO Care

     19,945         18,326        59,772         53,616   

International Services

     3,191         4,663        9,832         10,939   

Facility Construction & Design

     —           (43     —           37   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income from segments

   $ 81,931       $ 76,133      $ 235,359       $ 225,378   
  

 

 

    

 

 

   

 

 

    

 

 

 

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     Thirty-nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 

Total operating income from segments

   $ 81,931      $ 76,133      $ 235,359      $ 225,378   

Unallocated amounts:

        

General and Administrative Expenses

     (27,228     (25,922     (81,712     (86,420

Net Interest Expense

     (18,955     (17,560     (56,811     (50,735

Loss on Early Extinguishment of Debt

     (8,462     —          (8,462     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of affiliates

   $ 27,286      $ 32,651      $ 88,374      $ 88,223   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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As of September 30, 2012 and January 1, 2012 and for the thirteen and thirty-nine weeks ended September 30, 2012 and October 2, 2011, SACS was considered to be a significant subsidiary and as such, summarized financial data is included below as follows (in thousands):

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 

Statement of Operations Data

           

Revenues

   $ 11,775       $ 12,580       $ 35,271       $ 37,581   

Operating income

     4,764         4,994         14,238         15,123   

Net income

     2,708         2,688         7,940         6,848   

 

     September 30,
2012
     January 1,
2012
 

Balance Sheet Data

     

Current assets

   $ 23,113       $ 21,068   

Non-current assets

     35,821         39,110   

Current liabilities

     4,252         3,645   

Non-current liabilities

     36,084         45,237   

Shareholders’ equity

     18,598         11,296   

The Company has recorded $1.4 million and $4.0 million in earnings, net of tax impact, for SACS operations during the thirteen and thirty-nine weeks ended September 30, 2012, respectively, and $1.3 million and $3.4 million in earnings, net of tax impact, for SACS operations during the thirteen and thirty-nine weeks ended October 2, 2011, respectively, which are included in equity in earnings of affiliates, net of income tax provision in the accompanying consolidated statements of comprehensive income. As of September 30, 2012 and January 1, 2012, the Company’s investment in SACS was $9.3 million and $5.6 million, respectively.

The Company has recorded $0.9 million and $2.3 million in losses, net of tax impact, for GEOAmey’s operations during the thirteen and thirty-nine weeks ended September 30, 2012, respectively, and $1.1 million and $1.1 million in losses, net of tax impact, during the thirteen and thirty-nine weeks ended October 2, 2011, respectively, which are included in equity in earnings of affiliates, net of income tax provision, in the accompanying consolidated statements of comprehensive income. As of September 30, 2012 and January 1, 2012, the Company’s investment in GEOAmey was $(4.7) million and $(2.4) million, respectively, and represents its share of cumulative reported losses. Losses in excess of the Company’s investment have been recognized as the Company has provided certain loans and guarantees to provide financial support to GEOAmey (Refer to Note 11-Debt.)

 

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14. BENEFIT PLANS

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

 

     Thirty-nine weeks ended
September 30, 2012
    Fiscal Year Ended
January 1, 2012
 

Change in Projected Benefit Obligation

    

Projected benefit obligation, beginning of period

   $ 16,879      $ 13,830   

Service cost

     580        645   

Interest cost

     590        667   

Actuarial gain

     —          1,922   

Benefits paid

     (154     (185
  

 

 

   

 

 

 

Projected benefit obligation, end of period

   $ 17,895      $ 16,879   
  

 

 

   

 

 

 

Change in Plan Assets

    

Plan assets at fair value, beginning of period

   $ —        $ —     

Company contributions

     154        185   

Benefits paid

     (154     (185
  

 

 

   

 

 

 

Plan assets at fair value, end of period

   $ —        $ —     
  

 

 

   

 

 

 

Unfunded Status of the Plan

   $ (17,895   $ (16,879
  

 

 

   

 

 

 

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 

Components of Net Periodic Benefit Cost

           

Service cost

   $ 193       $ 161       $ 580       $ 483   

Interest cost

     197         167         590         501   

Amortization of prior service cost

     —           —           —           —     

Net loss

     48         16         145         48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 438       $ 344       $ 1,315       $ 1,032   
  

 

 

    

 

 

    

 

 

    

 

 

 

The long-term portion of the pension liability as of September 30, 2012 and January 1, 2012 was $17.7 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 thirty-nine weeks ended September 30, 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 thirty-nine weeks ended September 30, 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 thirty-nine weeks ended September 30, 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 thirty-nine weeks ended September 30, 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.

The following accounting standard will be adopted in future periods:

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

Benefit Plans

In October 2012, the Company began funding its two non-contributory defined benefit pension plans with Company owned life insurance policies. The premium payments in connection with the policies will be reflected as plan assets reducing the unfunded status of the plans.

Contract Awards

On October 2, 2012, the Company signed a ten-year contract with the United States Marshals Service for the housing of up to 320 federal detainees at the Company-owned Aurora Detention Facility in Colorado.

On October 18, 2012, the Company signed a contract extension with the California Department of Corrections and Rehabilitation for the continued management of the 625-bed Golden State Correctional Facility through June 30, 2016.

On October 30, 2012, the Company announced that the State of Florida extended our contract for the 2,000-bed Blackwater River Correctional Facility through October 2015.

Dividends

On November 5, 2012, the Company announced that on October 31, 2012, its Board of Directors declared a quarterly cash dividend of $.20 per share which will be paid on November 30, 2012 to shareholders of record as of the close of business on November 16, 2012.

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;

 

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

 

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

 

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

 

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

 

24


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of September 30, 2012  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS              

Cash and cash equivalents

   $ 45,827       $ 4,402       $ 18,856       $ —        $ 69,085   

Restricted cash and investments

     —           —           15,530         —          15,530   

Accounts receivable, less allowance for doubtful accounts

     117,313         113,123         21,023         —          251,459   

Deferred income tax assets, net

     14,063         13,348         3,788         —          31,199   

Prepaid expenses and other current assets

     5,781         6,425         13,994         (1,154     25,046   

Current assets of discontinued operations

     5,346         982         —           —          6,328   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     188,330         138,280         73,191         (1,154     398,647   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     9,460         —           34,824         —          44,284   

Property and Equipment, Net

     633,794         961,568         114,266         —          1,709,628   

Assets Held for Sale

     3,083         3,507         —           —          6,590   

Direct Finance Lease Receivable

     —           —           28,128         —          28,128   

Intercompany Receivable

     475,241         14,212         9,866         (499,319     —     

Deferred Income Tax Assets, Net

     —           —           1,711         —          1,711   

Goodwill

     34         507,272         772         —          508,078   

Intangible Assets, Net

     —           184,513         1,716         —          186,229   

Investment in Subsidiaries

     1,264,286         38,702         —           (1,302,988     —     

Other Non-Current Assets

     38,329         86,930         37,995         (78,980     84,274   

Non-Current Assets of Discontinued Operations

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,612,557       $ 1,934,984       $ 302,469       $ (1,882,441   $ 2,967,569   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY              

Accounts payable

   $ 12,846       $ 37,950       $ 2,847       $ —        $ 53,643   

Accrued payroll and related taxes

     20,218         11,039         19,159         —          50,416   

Accrued expenses

     89,808         23,645         22,307         (1,154     134,606   

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

     28,328         1,400         18,112         —          47,840   

Current liabilities of discontinued operations

     315         4         —           —          319   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     151,515         74,038         62,425         (1,154     286,824   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred Income Tax Liabilities

     42,879         76,557         34         —          119,470   

Intercompany Payable

     9,866         472,038         17,415         (499,319     —     

Other Non-Current Liabilities

     32,365         103,393         2,428         (78,980     59,206   

Capital Lease Obligations

     —           12,192         —           —          12,192   

Long-Term Debt

     1,324,653         249         —           —          1,324,902   

Non-Recourse Debt

     —           —           113,136         —          113,136   

Commitments & Contingencies

             

Shareholders’ Equity:

             

The GEO Group, Inc. Shareholders’ Equity

     1,051,279         1,196,510         106,478         (1,302,988     1,051,279   

Noncontrolling Interests

     —           7         553         —          560   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Shareholders’ Equity

     1,051,279         1,196,517         107,031         (1,302,988     1,051,839   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,612,557       $ 1,934,984       $ 302,469       $ (1,882,441   $ 2,967,569   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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  
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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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

     For the Thirteen Weeks Ended September 30, 2012  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 152,627      $ 217,333      $ 61,846      $ (20,282   $ 411,524   

Operating expenses

     129,012        144,573        52,529        (20,282     305,832   

Depreciation and amortization

     7,328        14,465        1,968        —          23,761   

General and administrative expenses

     9,625        13,703        3,900        —          27,228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,662        44,592        3,449        —          54,703   

Interest income

     8,178        385        1,640        (8,552     1,651   

Interest expense

     (17,289     (8,433     (3,436     8,552        (20,606

Loss on early extinguishment of debt

     —          (8,462     —          —          (8,462
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (2,449     28,082        1,653        —          27,286   

Provision (benefit) for income taxes

     (993     10,981        1,316        —          11,304   

Equity in earnings of affiliates, net of income tax provision

     —          —          474        —          474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,456     17,101        811        —          16,456   

Income from consolidated subsidiaries, net of income tax provision

     17,912        —          —          (17,912     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     16,456        17,101        811        (17,912     16,456   

Net income (loss) from discontinued operations

     (1,729     (36     —          36        (1,729
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     14,727        17,065        811        (17,876     14,727   

Net loss attributable to noncontrolling interests

     —          —          890        —          890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 14,727      $ 17,065      $ 1,701      $ (17,876   $ 15,617   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 14,727      $ 17,065      $ 811      $ (17,876   $ 14,727   

Other comprehensive income, net of tax

     30        —          85        —          115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 14,757      $ 17,065      $ 896      $ (17,876   $ 14,842   

Comprehensive loss attributable to noncontrolling interests

     —            903        —          903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 14,757      $ 17,065      $ 1,799      $ (17,876   $ 15,745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

     For the Thirteen Weeks Ended October 2, 2011  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 141,084      $ 218,972      $ 55,389      $ (19,762   $ 395,683   

Operating expenses

     126,613        148,313        42,536        (19,762     297,700   

Depreciation and amortization

     5,420        14,574        1,856        —          21,850   

General and administrative expenses

     9,091        13,483        3,348        —          25,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (40     42,602        7,649        —          50,211   

Interest income

     7,754        405        1,648        (8,040     1,767   

Interest expense

     (15,805     (8,065     (3,497     8,040        (19,327
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (8,091     34,942        5,800        —          32,651   

Provision (benefit) for income taxes

     (3,127     13,502        1,880        —          12,255   

Equity in earnings of affiliates, net of income tax provision

     —          —          272        —          272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (4,964     21,440        4,192        —          20,668   

Income from consolidated subsidiaries, net of income tax provision

     25,632        —          —          (25,632     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     20,668        21,440        4,192        (25,632     20,668   

Net income from discontinued operations

     625        207        —          (207     625   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,293        21,647        4,192        (25,839     21,293   

Net loss attributable to noncontrolling interests

     —          (1     226        —          225   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 21,293      $ 21,646      $ 4,418      $ (25,839   $ 21,518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 21,293      $ 21,647      $ 4,192      $ (25,839   $ 21,293   

Other comprehensive income (loss), net of tax

     9        —          (7,530     —          (7,521
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 21,302      $ 21,647      $ (3,338   $ (25,839   $ 13,772   

Comprehensive loss attributable to noncontrolling interests

     —          —          325        —          325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 21,302      $ 21,647      $ (3,013   $ (25,839   $ 14,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended September 30, 2012  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 446,997      $ 653,809      $ 185,020      $ (60,697   $ 1,225,129   

Operating expenses

     390,472        439,448        149,904        (60,697     919,127   

Depreciation and amortization

     21,572        42,783        6,288        —          70,643   

General and administrative expenses

     28,405        41,549        11,758        —          81,712   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,548        130,029        17,070        —          153,647   

Interest income

     23,833        1,271        4,902        (24,787     5,219   

Interest expense

     (51,043     (24,270     (11,504     24,787        (62,030

Loss on early extinguishment of debt

     —          (8,462     —          —          (8,462
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (20,662     98,568        10,468        —          88,374   

Provision (benefit) for income taxes

     (7,316     37,974        4,854        —          35,512   

Equity in earnings of affiliates, net of income tax provision

     —          —          1,652        —          1,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (13,346     60,594        7,266        —          54,514   

Income from consolidated subsidiaries, net of income tax provision

     67,860        —          —          (67,860     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     54,514        60,594        7,266        (67,860     54,514   

Net income (loss) from discontinued operations

     (2,252     187        —          (187     (2,252
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     52,262        60,781        7,266        (68,047     52,262   

Net loss attributable to noncontrolling interests

     —          —          881        —          881   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 52,262      $ 60,781      $ 8,147      $ (68,047   $ 53,143   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 52,262      $ 60,781      $ 7,266      $ (68,047   $ 52,262   

Other comprehensive income (loss), net of tax

     89        —          (469     —          (380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 52,351      $ 60,781      $ 6,797      $ (68,047   $ 51,882   

Comprehensive loss attributable to noncontrolling interests

     —          —          900        —          900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 52,351      $ 60,781      $ 7,697      $ (68,047   $ 52,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended October 2, 2011  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 414,896      $ 646,942      $ 168,404      $ (57,411   $ 1,172,831   

Operating expenses

     377,637        434,589        131,142        (57,411     885,957   

Depreciation and amortization

     14,275        41,633        5,588        —          61,496   

General and administrative expenses

     30,055        44,850        11,515        —          86,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,071     125,870        20,159        —          138,958   

Interest income

     21,258        1,142        4,673        (22,108     4,965   

Interest expense

     (45,044     (21,987     (10,777     22,108        (55,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (30,857     105,025        14,055        —          88,223   

Provision (benefit) for income taxes

     (11,836     40,582        5,183        —          33,929   

Equity in earnings of affiliates, net of income tax provision

     —          —          2,352        —          2,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (19,021     64,443        11,224        —          56,646   

Income from consolidated subsidiaries, net of income tax provision

     75,667        —          —          (75,667     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     56,646        64,443        11,224        (75,667     56,646   

Net income from discontinued operations

     2,190        710        —          (710     2,190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     58,836        65,153        11,224        (76,377     58,836   

Net loss attributable to noncontrolling interests

     —          1        1,049        —          1,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 58,836      $ 65,154      $ 12,273      $ (76,377   $ 59,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 58,836      $ 65,153      $ 11,224      $ (76,377   $ 58,836   

Other comprehensive income (loss), net of tax

     28        —          (6,747     —          (6,719
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     58,864        65,153        4,477        (76,377     52,117   

Comprehensive loss attributable to noncontrolling interests

     —          —          1,160        —          1,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 58,864      $ 65,153      $ 5,637      $ (76,377   $ 53,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended September 30, 2012  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        

Net cash provided by operating activities

   $ 85,762      $ 76,993      $ 63,640      $ 226,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Acquisition of ownership interests in MCF

     —          (35,154     —          (35,154

Proceeds from sale of property and equipment

     302        203        103        608   

Proceeds from sale of assets held for sale

     —          5,641        —          5,641   

Change in restricted cash and investments

     119        —          40,659        40,778   

Capital expenditures

     (58,800     (30,537     (3,019     (92,356
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (58,379     (59,847     37,743        (80,483
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Payments on long-term debt

     (247,834     (1,038     (103,259     (352,131

Proceeds from long-term debt

     263,000        —          —          263,000   

Distribution to noncontrolling interests

     —          —          (5,758     (5,758

Proceeds from the exercise of stock options

     1,846        —          —          1,846   

Debt issuance costs

     (880     —          (37     (917

Payment of make-whole provision and other fees for early extinguishment of debt

     —          (14,861     —          (14,861

Payments for purchase of treasury shares

     (48     —          —          (48

Income tax provision of equity compensation

     241        —          —          241   

Payments for retirement of common stock

     (1,035     —          —          (1,035

Proceeds from reissuance of treasury stock in connection with ESPP

     373        —          —          373   

Cash dividends paid

     (12,304     —          —          (12,304
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     3,359        (15,899     (109,054     (121,594
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          14        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     30,742        1,247        (7,657     24,332   

Cash and Cash Equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 45,827      $ 4,402      $ 18,856      $ 69,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Thirty-nine Weeks Ended October 2, 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

   $ 118,955      $ 7,802      $ 37,367      $ 164,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Acquisition of BI, cash consideration, net of cash acquired

     (409,607     —          —          (409,607

Proceeds from sale of property and equipment

     —          781        14        795   

Proceeds from assets held for sale

     —          7,121        —          7,121   

Change in restricted cash and investments

     —          —          (4,126     (4,126

Capital expenditures

     (164,926     (11,196</