10-Q 1 d581110d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2013

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  þ    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  þ    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.

 

Large accelerated filer   þ    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  þ

As of August 6, 2013, the registrant had 72,000,856 shares of common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS

     3   

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND JULY 1, 2012

     3   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND JULY 1, 2012

     4   

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

     5   

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND JULY 1, 2012

     6   

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     7   

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

     34   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     49   

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

     51   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     51   

ITEM 4. MINE SAFETY DISCLOSURES

     51   

ITEM 5. OTHER INFORMATION

     51   

ITEM 6. EXHIBITS

     52   

SIGNATURES

     53   

 

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2013 AND JULY 1, 2012

(In thousands, except per share data)

 

     Three Months Ended     Six Months Ended  
     June 30, 2013     July 1, 2012     June 30, 2013     July 1, 2012  

Revenues

   $ 381,653      $ 371,173      $ 758,684      $ 731,215   

Operating expenses

     279,246        269,141        560,043        539,861   

Depreciation and amortization

     23,657        22,962        46,592        45,201   

General and administrative expenses

     27,363        26,129        59,403        52,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     51,387        52,941        92,646        93,438   

Interest income

     1,165        1,761        2,349        3,568   

Interest expense

     (21,103     (20,618     (40,444     (41,424

Loss on extinguishment of debt

     (5,527     —          (5,527     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     25,922        34,084        49,024        55,582   

Income tax (benefit) provision

     (7,268     13,660        (6,387     22,150   

Equity in earnings of affiliates, net of income tax provision of $417, $303, $894 and $624, respectively

     1,029        430        2,246        1,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     34,219        20,854        57,657        34,610   

Income from discontinued operations, net of income tax provision of $0, $973, $0 and $1,729, respectively

     —          1,622        —          2,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     34,219        22,476        57,657        37,535   

Net (income) loss attributable to noncontrolling interests

     (12     25        (30     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 34,207      $ 22,501      $ 57,627      $ 37,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     71,083        60,839        70,967        60,803   

Diluted

     71,607        61,066        71,510        60,984   

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

        

Basic:

        

Income from continuing operations

   $ 0.48      $ 0.34      $ 0.81      $ 0.57   

Income from discontinued operations

     —          0.03        —          0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.48      $ 0.37      $ 0.81      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations

   $ 0.48      $ 0.34      $ 0.81      $ 0.57   

Income from discontinued operations

     —          0.03        —          0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.48      $ 0.37      $  0.81      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2013 AND JULY 1, 2012

(In thousands)

 

     Three Months Ended     Six Months Ended  
     June 30, 2013     July 1, 2012     June 30, 2013     July 1, 2012  

Net income

   $ 34,219      $ 22,476      $ 57,657      $ 37,535   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustments, net of tax (benefit) provision of $0, $(195), $0 and $125, respectively

     (5,328     (2,068     (6,661     (142

Pension liability adjustment, net of tax benefit of $25, $19, $51 and $38, respectively

     40        29        81        59   

Unrealized gain (loss) on derivative instrument classified as cash flow hedge, net of tax provision (benefit) of $16, ($203), $77 and ($220), respectively

     28        (430     140        (399
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (5,260     (2,469     (6,440     (482
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     28,959        20,007        51,217        37,053   

Comprehensive (income) loss attributable to noncontrolling interests

     19        58        42        (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 28,978      $ 20,065      $ 51,259      $ 37,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 AND DECEMBER 31, 2012

(In thousands, except share data)

 

     June 30, 2013     December 31, 2012  
     (Unaudited)        

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 38,511      $ 31,755   

Restricted cash and investments (including VIEs1 of $6,308 and $6,182, respectively)

     15,646        15,654   

Accounts receivable, less allowance for doubtful accounts of $2,163 and $2,546, respectively

     239,001        246,635   

Current deferred income tax assets

     18,290        18,290   

Prepaid expenses and other current assets

     25,142        24,849   
  

 

 

   

 

 

 

Total current assets

     336,590        337,183   
  

 

 

   

 

 

 

Restricted Cash and Investments (including VIEs of $16,943 and $15,521, respectively)

     37,748        32,756   

Property and Equipment, Net (including VIEs of $25,544 and $25,840, respectively)

     1,739,986        1,687,159   

Assets Held for Sale

     1,200        3,243   

Direct Finance Lease Receivable

     20,445        26,757   

Non-Current Deferred Income Tax Assets

     2,532        2,532   

Goodwill

     490,216        490,308   

Intangible Assets, Net

     170,743        178,318   

Other Non-Current Assets

     88,742        80,938   
  

 

 

   

 

 

 

Total Assets

   $ 2,888,202      $ 2,839,194   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current Liabilities

    

Accounts payable

   $ 47,391      $ 50,110   

Accrued payroll and related taxes

     34,314        39,322   

Accrued expenses

     109,179        116,557   

Current portion of capital lease obligations, long-term debt and non-recourse debt (including VIEs of $5,450 and $5,200, respectively)

     22,341        53,882   
  

 

 

   

 

 

 

Total current liabilities

     213,225        259,871   
  

 

 

   

 

 

 

Non-Current Deferred Income Tax Liabilities

     15,703        15,703   

Other Non-Current Liabilities

     74,137        82,025   

Capital Lease Obligations

     11,426        11,926   

Long-Term Debt

     1,444,475        1,317,529   

Non-Recourse Debt (including VIEs of $11,588 and $16,997 respectively)

     93,352        104,836   

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, 86,586,630 and 86,007,433 issued and 72,000,856 and 71,417,034 outstanding, respectively

     865        860   

Additional paid-in capital

     841,097        832,230   

Earnings in excess of distributions

     250,767        264,667   

Accumulated other comprehensive income (loss)

     (3,698     2,670   

Treasury stock, 14,585,774 and 14,590,399 shares, at cost, respectively

     (53,597     (53,615
  

 

 

   

 

 

 

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

     1,035,434        1,046,812   

Noncontrolling interests

     450        492   
  

 

 

   

 

 

 

Total shareholders’ equity

     1,035,884        1,047,304   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,888,202      $ 2,839,194   
  

 

 

   

 

 

 

 

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

(Unaudited)

FOR THE SIX MONTHS ENDED

JUNE 30, 2013 AND JULY 1, 2012

(In thousands)

 

     Six Months Ended  
     June 30, 2013     July 1, 2012  

Cash Flow from Operating Activities:

    

Net Income

   $ 57,657      $ 37,535   

Net income attributable to noncontrolling interests

     (30     (9
  

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

     57,627        37,526   

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

    

Stock-based compensation

     705        1,433   

Loss on extinguishment of debt

     5,527        —     

Depreciation and amortization expense

     46,632        45,201   

Amortization of debt issuance costs, discount and/or premium

     3,015        1,369   

Restricted stock expense

     2,640        2,061   

Provision for doubtful accounts

     158        517   

Equity in earnings of affiliates, net of tax

     (2,246     (1,178

Income tax (benefit) provision related to equity compensation

     (1,308     270   

Release of reserve for uncertain tax positions

     (6,356     —     

Loss on sale/disposal of property and equipment

     603        915   

Changes in assets and liabilities:

    

Changes in accounts receivable, prepaid expenses and other assets

     9,501        23,373   

Changes in accounts payable, accrued expenses and other liabilities

     (15,184     5,445   
  

 

 

   

 

 

 

Cash provided by operating activities—continuing operations

     101,314        116,932   

Cash provided by operating activities—discontinued operations

     —          10,034   
  

 

 

   

 

 

 

Net cash provided by operating activities

     101,314        126,966   
  

 

 

   

 

 

 

Cash Flow from Investing Activities:

    

Proceeds from sale of property and equipment

     51        231   

Proceeds from sale of assets held for sale

     1,968        297   

Net working capital adjustment from RTS divestiture

     (996     —     

Change in restricted cash and investments

     (5,910     553   

Capital expenditures

     (89,921     (69,536
  

 

 

   

 

 

 

Cash used in investing activities—continuing operations

     (94,808     (68,455

Cash used in investing activities—discontinued operations

     —          (2,537
  

 

 

   

 

 

 

Net cash used in investing activities

     (94,808     (70,992
  

 

 

   

 

 

 

Cash Flow from Financing Activities:

    

Distribution to noncontrolling interests

     —          (5,758

Proceeds from long term debt

     785,000        145,000   

Payments on long-term debt

     (697,748     (169,282

Payments for retirement of common stock

     —          (1,035

Proceeds from reissuance of treasury stock in connection with ESPP

     155        —     

Debt issuance costs

     (17,017     (44

Income tax benefit (provision) related to equity compensation

     1,308        (270

Proceeds from the exercise of stock options

     4,082        396   

Cash dividends paid

     (71,527     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     4,253        (30,993

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (4,003     (43
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     6,756        24,938   

Cash and Cash Equivalents, beginning of period

     31,755        43,378   
  

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 38,511      $ 68,316   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Non-cash Investing and Financing activities:

    

Capital expenditures in accounts payable and accrued expenses

   $ 2,739      $ 6,801   
  

 

 

   

 

 

 

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 real estate investment trust (“REIT”) specializing in the ownership, leasing and management of correctional, detention and re-entry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. The Company owns, leases and operates a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, as well as community based re-entry facilities. 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 June 30, 2013, the Company’s worldwide operations included the management and/or ownership of approximately 72,000 beds at 95 correctional and detention 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, 2013 for the fiscal year ended December 31, 2012. The accompanying December 31, 2012 consolidated balance sheet has been derived from those audited financial statements. Additional information may be obtained by referring to the Company’s Form 10-K for the year ended December 31, 2012. 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 three and six months ended June 30, 2013 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2013, or for any other future interim or annual periods.

REIT Conversion - GEO began operating as a REIT for federal income tax purposes effective January 1, 2013. As a result of the REIT conversion, GEO reorganized its operations and moved non-real estate components into taxable REIT subsidiaries (“TRS”). Through the TRS structure, the portion of GEO’s businesses which are non-real estate related, such as its managed-only contracts, international operations, electronic monitoring services, and other non-residential and community based facilities, are part of wholly-owned taxable subsidiaries of the REIT. Most of GEO’s business segments, which are real estate related and involve company-owned and company-leased facilities, are part of the REIT. The TRS structure allows the Company to maintain the strategic alignment of almost all of its diversified business segments under one entity. The TRS assets and operations will continue to be subject to federal and state corporate income taxes and to foreign taxes as applicable in the jurisdictions in which those assets and operations are located. As a REIT, GEO is required to make distributions of its REIT taxable income to its shareholders. Refer to Note 5 - Shareholders’ Equity.

Divestiture of Residential Treatment Services - The operating results of Residential Treatment Services (“RTS”), which was divested on December 31, 2012, have been retroactively reclassified to discontinued operations for the three and six months ended July 1, 2012. Refer to Note 8 - Discontinued Operations.

Change of Reporting Segment Name from GEO Care to GEO Community Services - The Company’s GEO Care reporting segment previously consisted of four aggregated operating segments including Residential Treatment Services, Community Based Services, Youth Services and B.I. Incorporated (“BI”). The GEO Care reporting segment was renamed GEO Community Services concurrent with the divestiture of the Company’s Residential Treatment Services operating segment. All current and prior year financial position and results of operations amounts presented for this reporting segment are referred to as GEO Community Services.

Fiscal Year - In connection with the REIT conversion, effective December 31, 2012, the Company changed to a calendar year from a fiscal year that ended on the Sunday closest to the calendar year end and changed its fiscal quarters to coincide with each calendar quarter. The second fiscal quarter of 2013 began on April 1, 2013 and ended on June 30, 2013, and is referred to as the three months ended June 30, 2013. The six month period of 2013 began on January 1, 2013 and ended on June 30, 2013, and is referred to as the six months ended June 30, 2013. The second fiscal quarter of 2012 began on April 2, 2012 and ended on July 1, 2012, and is referred to as the three months ended July 1, 2012. The six month period of 2012 began on January 2, 2012 and ended on July 1, 2012, and is referred to as the six months ended July 1, 2012.

 

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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 December 31, 2012 to June 30, 2013 are related solely 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 completed prior to 2013. Changes in the gross carrying amounts from December 31, 2012 to June 30, 2013 are solely 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 BI, as follows (in thousands):

 

     June 30, 2013      December 31, 2012  
     Weighted Average
Useful Life
(years)
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Facility management contracts

     13.4       $ 151,683       $ (38,897   $ 112,786       $ 151,913       $ (33,141   $ 118,772   

Covenants not to compete

     2.0         8,570         (8,570     —           8,570         (8,495     75   

Technology

     7.0         21,200         (7,243     13,957         21,200         (5,729     15,471   

Trade name (Indefinite lived)

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 225,453       $ (54,710   $ 170,743       $ 225,683       $ (47,365   $ 178,318   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense was $3.6 million and $7.3 million, respectively, for the three months and six months ended June 30, 2013. Amortization expense was $4.6 million and $9.2 million, respectively, for the three months and six months ended July 1, 2012. Amortization expense was primarily related to the U.S. Corrections & Detention and GEO Community Services segments’ amortization of acquired facility management contracts. As of June 30, 2013, the weighted average period before the next contract renewal or extension for the facility management contracts was approximately 1.3 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the contractual periods.

Estimated amortization expense related to the Company’s finite-lived intangible assets for the remainder of fiscal year 2013 through fiscal year 2017 and thereafter is as follows (in thousands):

 

Fiscal Year

   Total Amortization
Expense
 

Remainder of 2013

   $ 7,266   

2014

     14,531   

2015

     14,531   

2016

     14,531   

2017

     14,531   

Thereafter

     61,353   
  

 

 

 
   $ 126,743   
  

 

 

 

 

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3. FINANCIAL INSTRUMENTS

The following tables provide a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):

 

            Fair Value Measurements at June 30, 2013  
     Carrying Value at
June  30, 2013
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

           

Interest rate swap derivative assets

   $ 4,599       $ —         $ 4,599       $ —     

Restricted investments:

           

Guaranteed Investment Contract

     5,742         —           5,742         —     

Rabbi Trust

     8,163         8,163         —           —     

Fixed income securities

     1,996         —           1,996         —     

Liabilities:

           

Interest rate swap derivative liabilities

   $ 490       $ —         $ 490       $ —     
            Fair Value Measurements at December 31, 2012  
     Carrying
Value at
December 31, 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

   $ 6,212       $ —         $ 6,212       $ —     

Restricted investments:

           

Guaranteed Investment Contract

     5,742         —           5,742         —     

Rabbi Trust

     7,718         7,718         —           —     

Fixed income securities

     2,152         —           2,152         —     

Liabilities:

           

Interest rate swap derivative liabilities

   $ 708       $ —         $ 708       $ —     

The Company’s Level 1 investment included in the tables above as of June 30, 2013 and December 31, 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 cash and 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 June 30, 2013 and December 31, 2012 consist of an interest rate swap liability held by the Company’s Australian subsidiary, other interest rate swap assets of the Company, an investment in Canadian dollar denominated fixed income securities, and a guaranteed investment contract which is a restricted investment related to CSC of Tacoma LLC (“CSC”). The Australian subsidiary’s interest rate swap liability is valued using a discounted cash flow model based on projected Australian borrowing rates. The Company’s other interest rate swap assets 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.

 

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4. FAIR VALUE OF ASSETS AND LIABILITIES

The Company’s consolidated balance sheets reflect certain financial assets and liabilities at carrying value. The carrying value of certain debt instruments, if applicable, is net of unamortized discount. The following tables present the carrying values of those financial instruments and the estimated corresponding fair values at June 30, 2013 and December 31, 2012 (in thousands):

 

            Estimated Fair Value Measurements at June 30, 2013  
     Carrying Value
as of  June 30,
2013
     Total Fair Value      Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 38,511       $ 38,511       $ 38,511       $ —         $ —     

Restricted cash

     39,489         39,489         39,489         —           —     

Liabilities:

              

Borrowings under Senior Credit Facility

   $ 595,000       $ 597,250       $ —         $ 597,250       $ —     

7 3/4% Senior Notes

     247,756         262,345         —           262,345         —     

6.625% Senior Notes

     300,000         316,314         —           316,314         —     

5.125% Senior Notes

     300,000         288,375         —           288,375         —     

Non-recourse debt, Australian subsidiary

     27,817         28,531         —           28,531         —     

Other non-recourse debt, including current portion

     83,665         86,639         —           86,639         —     
            Estimated Fair Value Measurements at December 31, 2012  
     Carrying Value
as of  December 31,
2012
     Total Fair Value      Level 1      Level 2      Level 3  

Assets:

              

Cash and cash equivalents

   $ 31,755       $ 31,755       $ 31,755       $ —         $ —     

Restricted cash

     34,949         34,949         34,949         —           —     

Liabilities:

              

Borrowings under Senior Credit Facility

   $ 797,430       $ 803,097       $ —         $ 803,097       $ —     

7 3/4% Senior Notes

     247,543         270,313         —           270,313         —     

6.625% Senior Notes

     300,000         335,814         —           335,814         —     

Non-recourse debt, Australian subsidiary

     34,832         34,973         —           34,973         —     

Other non-recourse debt, including current portion

     88,650         91,345         —           91,345         —     

The fair values of the Company’s cash and cash equivalents, and restricted cash approximates the carrying values of these assets at June 30, 2013 and December 31, 2012. Restricted cash consists of debt service funds used for payments on the Company’s non-recourse debt and rabbi trust funds. The fair values of the Company’s 7 3/4% senior unsecured notes due 2017 (“7 3/4% Senior Notes”), 6.625% senior unsecured notes due 2021 (“6.625% Senior Notes”), and the 5.125% senior unsecured notes due 2023 (“5.125% Senior Notes”), although not actively traded, are based on published financial data for these instruments. The fair values of the Company’s non-recourse debt related to South Texas Local Development Corporation (“STLDC”) and Washington Economic Development Finance Authority (“WEDFA”) are based on market prices for similar instruments. The fair value of the non-recourse debt related to the Company’s Australian subsidiary is estimated using a discounted cash flow model based on current Australian borrowing rates for similar instruments. The fair value of borrowings under the Senior Credit Facility is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.

 

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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
Capital
    Earnings in
Excess of

Distributions
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury shares     Noncontrolling
Interests
    Total
Shareholders’
Equity
 
     Shares      Amount            Shares     Amount      

Balance, December 31, 2012

     71,417       $ 860       $ 832,230      $ 264,667      $ 2,670        14,590      $ (53,615   $ 492      $ 1,047,304   

Proceeds from exercise of stock options

     234         2         4,080        —          —          —          —          —          4,082   

Tax benefit related to equity compensation

     —           —           1,308        —          —          —          —          —          1,308   

Stock based compensation expense

     —           —           705        —          —          —          —          —          705   

Restricted stock granted

     345         3         (3     —          —            —          —          —     

Amortization of restricted stock

     —           —           2,640        —          —          —          —          —          2,640   

Dividends paid

     —           —           —          (71,527     —          —          —          —          (71,527

Re-issuance of treasury shares (ESPP)

     5         —           137        —          —          (5     18        —          155   

Net income

     —           —           —          57,627        —          —          —          30        57,657   

Other comprehensive income (loss)

     —           —           —          —          (6,368     —          —          (72     (6,440
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

     72,001       $ 865       $ 841,097      $ 250,767      $ (3,698     14,585      $ (53,597   $ 450      $ 1,035,884   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

REIT Distributions

As a REIT, GEO is required to distribute annually at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) and began paying regular quarterly REIT dividends in 2013. The amount, timing and frequency of future dividends, however, will be at the sole discretion of GEO’s Board of Directors (“the Board”) and will be declared based upon various factors, many of which are beyond GEO’s control, including, GEO’s financial condition and operating cash flows, the amount required to maintain REIT status and reduce any income taxes that GEO otherwise would be required to pay, limitations on distributions in GEO’s existing and future debt instruments, limitations on GEO’s ability to fund distributions using cash generated through GEO’s TRS and other factors that GEO’s Board may deem relevant. Dividends of $0.50 per share of common stock were paid during the quarter ended March 31, 2013. Dividends of $0.50 per share of common stock were paid during the quarter ended June 30, 2013.

Prospectus Supplement

On May 8, 2013, the Company filed with the Securities and Exchange Commission a prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $100 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and equity distribution agreement entered into with the sales agents, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933. There were no sales of shares of the Company’s common stock under the prospectus supplement during the six months ended June 30, 2013.

Comprehensive Income (Loss)

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

 

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The components of accumulated other comprehensive income (loss) attributable to GEO included in the consolidated statement of shareholders’ equity are as follows:

 

     Six Months Ended June 30, 2013
(In thousands)
 
     Foreign currency
translation
adjustments, net of
tax attributable to  The
GEO Group, Inc. [1]
    Unrealized (loss)/gain
on derivatives, net of
tax
    Pension adjustments,
net of tax
    Total  

Beginning balance

   $ 5,755      $ (457   $ (2,628   $ 2,670   

Current-period other comprehensive (loss) income

     (6,589     140        81        (6,368
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ (834   $ (317   $ (2,547   $ (3,698
  

 

 

   

 

 

   

 

 

   

 

 

 

 

[1]

The foreign currency translation, net of tax, related to noncontrolling interests was not significant at June 30, 2013 or December 31, 2012, respectively.

6. EQUITY INCENTIVE PLANS

As of June 30, 2013, under the 2006 Stock Incentive Plan (“2006 Plan”), the Company had 1,704,344 shares of common stock available for issuance pursuant to future awards that may be granted under the plan of which up to 404,104 shares were available for the issuance of awards other than stock options.

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 six months ended June 30, 2013:

 

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

Options outstanding at December 31, 2012

     1,198      $ 18.92         6.85       $ 11,090   

Options granted

     —          —           

Options exercised

     (234   $ 17.43         

Options forfeited/canceled/expired

     (5   $ 21.34         
  

 

 

         

Options outstanding at June 30, 2013

     959      $ 19.28         6.75       $ 14,074   
  

 

 

         

Options vested and expected to vest at June 30, 2013

     929      $ 19.21         6.71       $ 13,701   
  

 

 

         

Options exercisable at June 30, 2013

     594      $ 18.23         6.13       $ 9,346   
  

 

 

         

The Company did not grant any stock options during the six months ended June 30, 2013. For the six months ended June 30, 2013 and July 1, 2012, the amount of stock-based compensation expense related to stock options was $0.7 million and $1.4 million, respectively. As of June 30, 2013, the Company had $1.8 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 1.8 years.

Restricted Stock

Compensation expense for nonvested stock awards is recorded over the vesting period based on the fair value at the date of grant. Generally, the restricted stock awards vest in equal increments over either a three or four year period. The Company has issued share-based awards with service-based, performance-based and market-based vesting criteria.

 

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A summary of the activity of restricted stock outstanding is as follows for the six months ended June 30, 2013:

 

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

Restricted stock outstanding at December 31, 2012

     670      $ 18.14   

Granted

     345        37.40   

Vested

     (131     21.29   

Forfeited/canceled

     —          —     
  

 

 

   

Restricted stock outstanding at June 30, 2013

     884      $ 23.00   
  

 

 

   

During the six months ended June 30, 2013, the Company granted 345,060 shares of restricted stock to certain employees and executive officers. Of these awards, 92,810 are performance-based awards which will be forfeited if the Company does not achieve certain annual metrics during 2013, 2014 and 2015.

The vesting of these performance-based restricted stock grants are subject to the achievement by GEO of two annual performance metrics as follows: (i) up to 75% of the shares of restricted stock (“Target Award”) can vest at the end of a three-year performance period if GEO meets certain total shareholder return (“TSR”) performance targets, as compared to the total shareholder return of a peer group of companies, during 2013, 2014 and 2015; and (ii) up to 25% of the shares of restricted stock (“Target Award”) can vest at the end of a three-year period if GEO meets certain return on capital employed (“ROCE”) performance targets in 2013, 2014 and 2015. These performance awards can vest at between 0% and 200% of the Target Awards for both metrics. The number of shares shown for the performance-based awards is based on the Target Awards for both metrics.

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

The metric related to TSR is considered to be a market condition. For share-based awards that contain a market condition, the probability of satisfying the market condition must be considered in the estimate of grant-date fair value and previously recorded compensation expense is not reversed if the market condition is never met. The fair value of these awards was determined based on a Monte Carlo simulation, which calculates a range of possible outcomes and the probabilities that they will occur, using the following key assumptions: (i) volatility of 26.6%; (ii) beta of 0.681; and (iii) risk free rate of 0.42%.

For the six months ended June 30, 2013 and July 1, 2012, the Company recognized $2.6 million and $2.1 million, respectively, of compensation expense related to its restricted stock awards. As of June 30, 2013, the Company had $18.2 million of unrecognized compensation costs related to non-vested restricted stock awards, including non-vested restricted stock awards with performance-based and market-based vesting, that are expected to be recognized over a weighted average period of 3.1 years.

Employee Stock Purchase Plan

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

The Plan is considered to be non-compensatory. As such, there is no compensation expense required to be recognized. Share purchases under the Plan are made on the last day of each month. During the six months ended June 30, 2013, 4,625 shares were issued out of the Company’s treasury stock in connection with the Plan.

 

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7. EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Basic earnings per share is computed by dividing the income from continuing operations 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 three and six months ended June 30, 2013 and July 1, 2012 as follows (in thousands, except per share data):

 

     Three Months Ended      Six Months Ended  
     June 30, 2013     July 1, 2012      June 30, 2013     July 1, 2012  

Income from continuing operations

   $ 34,219      $ 20,854       $ 57,657      $ 34,610   

Net (income) loss attributable to noncontrolling interests

     (12     25         (30     (9
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     34,207        20,879         57,627        34,601   

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

         

Weighted average shares outstanding

     71,083        60,839         70,967        60,803   
  

 

 

   

 

 

    

 

 

   

 

 

 

Per share amount from continuing operations

   $ 0.48      $ 0.34       $ 0.81      $ 0.57   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

         

Weighted average shares outstanding

     71,083        60,839         70,967        60,803   

Effect of dilutive securities: Stock options and restricted stock

     524        227         543        181   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares assuming dilution

     71,607        61,066         71,510        60,984   
  

 

 

   

 

 

    

 

 

   

 

 

 

Per share amount from continuing operations

   $ 0.48      $ 0.34       $ 0.81      $ 0.57   
  

 

 

   

 

 

    

 

 

   

 

 

 

Three Months

For the three months ended June 30, 2013 no shares of common stock underlying options or shares of restricted stock were anti-dilutive.

For the three months ended July 1, 2012 57,937 weighted average shares of common stock underlying options and 1,642 shares of restricted stock were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

Six Months

For the six months ended June 30, 2013 no shares of common stock underlying options or shares of restricted stock were anti-dilutive.

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

8. DISCONTINUED OPERATIONS

The Company reports the results of operations of a component of an entity that either has been disposed of or is classified as held for sale or where the management contracts with that component have terminated, either by expiration or otherwise, in discontinued operations. The Company presents such events as discontinued operations so long as the financial results can be clearly identified, the future 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.

When a component of an entity has been disposed of or classified as held for sale or a management contract is terminated, the Company looks at its overall relationship with the customer. If the operations or cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the transaction and the entity will not have significant continuing involvement in the operations of the component after the transaction, the results of operations of the component of an entity are reported in discontinued operations. If the Company will continue to maintain a relationship generating significant cash flows and having continuing involvement with the customer, the disposal, the asset held for sale classification or the loss of the management contract(s) is not treated as discontinued operations. If the disposal, the asset held for sale classification or the loss of the management contract(s) results in a loss in the overall customer relationship as no future significant cash flows will be generated and the Company will have no continuing involvement with the customer, the results are classified in discontinued operations.

 

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Divestiture of RTS Operations

On December 31, 2012, the Company completed the divestiture of its RTS operating component, which was purchased by GEO Care Holdings LLC, an entity owned by certain current and former members of GEO’s management team (the “MBO Group”). Cash proceeds received on December 31, 2012 from the divestiture amounted to $33.3 million, net of an initial working capital adjustment, subject to a final working capital adjustment determined within 105 days of the transaction closing date. The final working capital adjustment resulted in a net cash sale price of $32.3 million In accordance with the purchase agreement, the MBO Group would also be obligated to pay up to an additional $5.0 million in purchase price on a contingent earn-out basis if certain potential future contract awards are received by RTS. In addition, the purchase agreement provides for (i) a purchase price adjustment in favor of the MBO Group in the event certain client consents are not obtained within one year following the divestiture, and (ii) a purchase price adjustment in favor of the MBO Group if certain key contracts (as defined in the Purchase Agreement) are terminated up to one year following the divestiture. There were no amounts recorded under these earn-out provisions during the three or six months ended June 30, 2013.

In connection with the RTS divestiture, the Company and GEO Care Holdings LLC entered into a services agreement pursuant to which the Company will provide accounting support, information systems services, legal support services, risk management services, property management and design services and office space for a five-year term in return for an annual fee of $1.8 million payable in equal monthly installments (the “Services Agreement”). The Company and GEO Care Holdings LLC also executed a license agreement pursuant to which the Company granted to GEO Care Holdings LLC an exclusive license for a five-year term to use the GEO Care service mark and domain name in connection with the RTS business in return for an annual fee of $0.4 million payable in equal monthly installments (the “License Agreement”). In addition, the Company and GEO Care Holdings LLC entered into employment agreements with certain executive officers in order to allocate the services to be provided by the executive officers and related compensation and benefits between the Company and GEO Care Holdings LLC. During the three and six months ended June 30, 2013, the Company earned fees under the above noted Services Agreement and License Agreement amounting to an aggregate of $0.6 million and $1.2 million, respectively, which have been recorded as an offset to operating expenses in the accompanying consolidated statements of operations.

During the three months ended July 1, 2012, RTS had revenue and pre-tax income of $41.2 million and $3.5 million, respectively. During the six months ended July 1, 2012, RTS had revenue and pre-tax income of $82.4 million and $5.5 million, respectively. The operating results and cash flows of RTS for the three and six months ended July 1, 2012 have been retrospectively reflected as discontinued operations in the accompanying consolidated statements of operations and cash flows.

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 all other management contracts with the State of Mississippi Department of Corrections (“MDOC”) including its managed-only contracts 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.

During the three months ended July 1, 2012, revenues and a pre-tax loss relating to the operations of MDOC were $11.2 million and $(0.9) million, respectively. During the six months ended July 1, 2012, RTS had revenue and a pre-tax loss of $22.3 million and $(0.9) million, respectively. The operating results and cash flows relating to the operations of MDOC for the three and six months ended July 1, 2012 are reflected as discontinued operations in the accompanying consolidated statements of operations and cash flows.

All income from discontinued operations included in the consolidated statements of operations is attributable to The GEO Group, Inc.

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.

 

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As of June 30, 2013, 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 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 losses, 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 were $0.9 million and $1.6 million during the three months and six months ended June 30, 2013, respectively. As of June 30, 2013 and December 31, 2012, the swap assets’ fair values were $4.6 million and $6.2 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 quarters ended June 30, 2013 or July 1, 2012.

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 gains recorded in other comprehensive income, net of tax, related to this cash flow hedge was $0.0 million and $0.1 million for the three months and six months ended June 30, 2013, respectively. The total fair value of the swap liability as of June 30, 2013 and December 31, 2012 was $0.5 million and $0.7 million, respectively, and is recorded as a component of other 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 AND INVESTMENT IN AFFILIATES

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 10-year term and are non-recourse to the Company. At the end of the 10-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 June 30, 2013 and December 31, 2012 was $25.7 million and $25.8 million, respectively, and is included in Property and Equipment in the accompanying consolidated balance sheets.

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 a default by SACS, in which case the government guarantee is reduced to 80%. The Company’s maximum exposure for loss under this contract is limited to its investment in the joint venture of $8.3 million at June 30, 2013 and its guarantees related to SACS that are discussed in Note 11 - Debt.

 

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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 $18.3 million, based on exchange rates in effect as of June 30, 2013, to ensure that GEOAmey can comply with future contractual commitments related to the performance of its operations. As of June 30, 2013, $18.4 million, including accrued interest, was owed to the Company by GEOAmey under the line of credit. GEOAmey commenced operations on August 29, 2011. Refer to Note 11—Debt for further discussion of the Company’s maximum exposure for loss relating to GEOAmey.

11. DEBT

Debt outstanding as of June 30, 2013 and December 31, 2012 consisted of the following (in thousands):

 

     June 30, 2013     December 31, 2012  

Credit Facility:

    

Term loan

   $ 300,000      $ 563,625   

Unamortized discount on term loan

     —          (1,195

Revolver

     295,000        235,000   
  

 

 

   

 

 

 

Total Senior Credit Facility

     595,000        797,430   

5.125% Senior Notes:

    

Notes due in 2023

     300,000        —     

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

     (2,244     (2,457

Swap on Notes

     4,599        6,212   
  

 

 

   

 

 

 

Total 7 3/4% Senior Notes

     252,355        253,755   

Non-Recourse Debt :

    

Non-Recourse Debt

     112,732        124,947   

Unamortized discount on Non-Recourse Debt

     (1,250     (1,465
  

 

 

   

 

 

 

Total Non-Recourse Debt

     111,482        123,482   

Capital Lease Obligations

     12,422        12,994   

Other debt

     335        512   
  

 

 

   

 

 

 

Total debt

     1,571,594        1,488,173   

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

     (22,341     (53,882

Capital Lease Obligations, long-term portion

     (11,426     (11,926

Non-Recourse Debt

     (93,352     (104,836
  

 

 

   

 

 

 

Long-Term Debt

   $ 1,444,475      $ 1,317,529   
  

 

 

   

 

 

 

 

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New Credit Agreement

On April 3, 2013, the Company terminated its Forth Amended and Restated Credit Agreement (“Prior Senior Credit Facility”), which consisted of a Term Loan A, Term Loan A-2, Term Loan A-3, Term Loan B (“Prior Term Loans) and a Revolver (“Prior Revolver”), and entered into a new credit agreement by and among GEO and GEO Corrections Holdings, Inc., as Borrowers, BNP Paribas, as Administrative Agent, and the lenders who are, or may from time to time become, a party thereto (the “Credit Agreement”). The Credit Agreement consists of a $300 million Term Loan B (the “Term Loan B”) bearing interest at LIBOR plus 2.50% (with a LIBOR floor of 0.75%), and a $700 million revolving credit facility (the “Revolver”) currently bearing interest at LIBOR plus 2.50% (with no LIBOR floor). The Revolver component is scheduled to mature on April 3, 2018 and the Term Loan B component is scheduled to mature on April 3, 2020. The Term Loan B and Revolver may be prepaid in whole or in part by the Company at any time without premium or penalty, subject to certain conditions.

The Company has accounted for the termination of the Prior Term Loans component of its Prior Senior Credit Facility as an extinguishment of debt and has accounted for the termination of the Prior Revolver component of the Prior Senior Credit Facility based upon the borrowing capacity accounting guidance for modification of revolving credit arrangements. Loan costs of $10.2 million were incurred in connection with the Credit Agreement transaction, of which $1.1 million was expensed as incurred as this amount was associated with the extinguishment of the Prior Term Loan component, and $9.1 million has been capitalized as deferred financing fees and is included in Other Non-Current Assets in the accompanying consolidated balance sheet as of June 30, 2013, and will be amortized to interest expense using an effective interest method throughout the term of the Revolver or Term Loan B as applicable. In addition, the Company wrote off $1.1 million in unamortized debt discount and $3.3 million of unamortized deferred financing costs pertaining to the Prior Term Loans related to the termination of the Prior Senior Credit Facility. The remaining unamortized deferred financing fees pertaining to the Prior Revolver will be amortized to interest expense using an effective interest method throughout the term of the Revolver.

As of June 30, 2013, the Company had $300.0 million in aggregate borrowings outstanding under the Term Loan B, $295.0 million in borrowings under the Revolver, and approximately $58.2 million in letters of credit which left $346.8 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Credit Agreement as of June 30, 2013 was 3.0%.

Indebtedness under the Revolver bears interest based on the Total Leverage Ratio, as defined in the Credit Agreement, as of the most recent determination date, as defined, in each of the instances below at the stated rate:

 

LIBOR borrowings

   LIBOR plus 1.75% to 2.75%.

Base rate borrowings

   Prime Rate plus 0.75% to 1.75%.

Letters of credit

   1.75% to 2.75%.

Unused Revolver

   0.35% to 0.375%.

The Credit Agreement contains certain customary representations and warranties, and certain customary covenants that restrict the Company’s ability to, among other things, (i) create, incur or assume indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio or senior secured leverage ratio to exceed certain maximum ratios or allow the interest coverage ratio to be less than a certain ratio, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, (x) alter the business the Company conducts, and (xi) materially impair the Company’s lenders’ security interests in the collateral for its loans.

The Credit Agreement requires the Company to meet certain financial covenants as follows: (i) the Company must not exceed a Total Leverage Ratio (as defined) of 5.75 to 1.00; (ii) the Company must not exceed a Senior Secured Leverage Ratio (as defined) of 3.50 to 1.00; (iii) there is an Interest Coverage Ratio (as defined) under which the lenders will not permit a ratio of less than 3.00 to 1.00 relative to (a) Adjusted EBITDA for any period of four consecutive fiscal quarters to (b) Interest Expense, less that attributable to non-recourse debt of unrestricted subsidiaries.

Events of default under the Credit Agreement include, but are not limited to, (i) the Company’s failure to pay principal or interest when due, (ii) the Company’s material breach of any representations or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default under certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) material environmental liability claims which have been asserted against the Company, and (viii) a change in control. All of the obligations under the Credit Agreement are unconditionally guaranteed by certain of the Company’s subsidiaries and secured by substantially all of the Company’s present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge of substantially all of the outstanding capital stock owned by the Company and each guarantor, and (ii) perfected first-priority security interests in substantially all of the Company’s, and each guarantors, present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor. The

 

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Company’s failure to comply with any of the covenants under its Credit Agreement could cause an event of default under such documents and result in an acceleration of all outstanding senior secured indebtedness. The Company believes it was in compliance with all of the covenants of the Credit Agreement as of June 30, 2013.

5.125% Senior Notes

On March 19, 2013, the Company completed an offering of $300.0 million aggregate principal amount of senior unsecured notes. The notes will mature on April 1, 2023 and have a coupon rate and yield to maturity of 5.125%. Interest is payable semi-annually on April 1 and October 1 each year, beginning October 1, 2013. The 5.125% Senior Notes are guaranteed on a senior unsecured basis by all of the Company’s restricted subsidiaries that guarantee obligations under the amended and restated Senior Credit Facility, the Company’s 6.625% Senior Notes, and the Company’s 7¾% Senior Notes. The 5.125% Senior Notes and the guarantees are the Company’s general unsecured senior obligations and rank equally in right of payment with all of the Company’s and the guarantors’ existing and future unsecured senior debt, including the Company’s 7¾% Senior Notes and 6.625% Senior Notes. The 5.125% Senior Notes and the guarantees are effectively subordinated to any of the Company’s and the guarantors’ existing and future secured debt to the extent of the value of the assets securing such debt, including all anticipated borrowings under the amended and restated Senior Credit Facility. The 5.125% Senior Notes are structurally subordinated to all existing and future liabilities (including trade payables) of the Company’s subsidiaries that do not guarantee the 5.125% Senior Notes.

At any time on or prior to April 1, 2016, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of outstanding 5.125% Senior Notes issued under the indenture governing the 5.125% Senior Notes (including any additional notes) at a redemption price of 105.125% of their principal amount plus accrued and unpaid interest and Liquidated Damages (as defined in the indenture), if any, to the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided, that: (1) at least 65% of the aggregate principal amount of notes issued under the indenture (including any additional notes) remains outstanding immediately after the occurrence of such redemption (excluding notes held by us and our Subsidiaries); and (2) the redemption occurs within 90 days of the date of the closing of such equity offering.

At any time prior to April 1, 2018, the Company may, at its option, redeem all or a part of the 5.125% Senior Notes upon not less than 30 days nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) the Applicable Premium (as defined in the indenture) as of the date of redemption, plus (iii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. On or after April 1, 2018, the Company may, at its option, redeem all or a part of the 5.125% Senior Notes upon not less than 30 days nor more than 60 days’ notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and Liquidated Damages, if any, on the 5.125% Senior Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on April 1 of the years indicated below:

 

Year

   Percentage  

2018

     102.563   

2019

     101.708   

2020

     100.854   

2021 and thereafter

     100.000   

The indenture 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 as of June 30, 2013.

Under the terms of a registration rights agreement dated as of March 19, 2013 among GEO, the guarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as the representative of the initial purchasers of the 5.125% Senior Notes (the “Registration Rights Agreement”), GEO has agreed to register under the Securities Act notes having terms identical in all material respects to the 5.125% Senior Notes (the “Exchange Notes”) and to make an offer to exchange the Exchange Notes for the 5.125% Senior Notes. Pursuant to the terms of the Registration Rights Agreement GEO has agreed to file a registration statement with respect to an offer to exchange the Exchange Notes for the 5.125% Senior Notes on or prior to 75 days after the closing of the offering of the 5.125% Senior Notes and to use its reasonable best efforts to have the registration statement declared effective on or prior to 180 days after the closing of the offering of the 5.125% Senior Notes. If GEO fails to satisfy certain filing and other obligations described in the Registration Rights Agreement, GEO will be

 

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obligated to pay additional interest of 0.25% per annum for the first 90-day period and an additional 0.25% per annum with respect to each subsequent 90-day period thereafter, until GEO’s registration obligations are fulfilled, up to a maximum of 1.00% per annum. GEO filed the registration statement on May 30, 2013.

A portion of the proceeds received from the 5.125% Senior Notes were used on the date of financing to repay the Revolver loans outstanding under the Senior Credit Facility. As discussed above, on April 3, 2013, the Company’s Senior Credit Facility was refinanced and a portion of the proceeds of the 5.125% Senior Notes were used to pay a portion of the outstanding term loans and a portion of the Revolver credit draws outstanding under the Senior Credit Facility.

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 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 as of June 30, 2013.

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 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 June 30, 2013.

Non-Recourse Debt

South Texas Detention Complex

As of June 30, 2013, the remaining balance of the debt service requirement under the STLDC financing agreement for the $49.5 million taxable revenue bonds maturing in February 2016 with fixed coupon rates between 4.63% and 5.07%, is $17.2 million, of which $5.5 million is due within the next twelve months. Also, as of June 30, 2013, included in current restricted cash and investments and non-current restricted cash and investments is $6.3 million and $16.9 million, respectively, of funds held in trust with respect to the STLDC for debt service and other reserves.

Northwest Detention Center

As of June 30, 2013, the remaining balance of the debt service requirement under the $57.0 million note payable (“2003 Revenue Bonds”) and the $54.4 million note payable (“2011 Revenue Bonds”) to the Washington Economic Finance Authority (“WEDFA”) maturing in October 2014 and October 2021 with fixed coupon rates ranging from 4.10% to 5.25%, respectively, is $67.7 million, of which $6.5 million is classified as current in the accompanying consolidated balance sheet.

The payment of principal and interest on 2011 Revenue Bonds issued by WEDFA is non-recourse to GEO. None of the bonds nor CSC’s obligations under the loan from WEDFA are obligations of GEO nor are they guaranteed by GEO.

As of June 30, 2013, included in current restricted cash and investments and non-current restricted cash and investments is $9.3 million and $4.1 million, respectively, of funds held in trust with respect to the Northwest Detention Center for debt service and other reserves.

Australia

The non-recourse obligations to the Company total $27.8 million (AUD 30.4 million) and $34.8 million (AUD 33.6 million), based on the exchange rates in effect at June 30, 2013 and December 31, 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 June 30, 2013, was $4.6 million. This amount is included in non-current restricted cash and investments and the annual maturities of the future debt obligation are included in Non-Recourse Debt.

 

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Guarantees

In connection with the creation of SACS, the Company entered into certain guarantees related to the financing, construction and operation of the prison. As of June 30, 2013, the Company guaranteed obligations amounting to 34.8 million South African Rand, or $3.5 million based on exchange rates as of June 30, 2013. In the event SACS is unable to maintain the required funding in a rectification account maintained for the payment of certain costs in the event of contract termination, a previously existing guarantee by the Company for the shortfall will need to be re-instated. The remaining guarantee of 34.8 million South African Rand is secured by outstanding letters of credit under the Company’s Revolver as of June 30, 2013.

In addition to the above, the Company has also agreed to provide a loan, if required, of up to 20 million South African Rand, or $2.0 million based on exchange rates as of June 30, 2013, 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 $2.4 million, based on exchange rates as of June 30, 2013, 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 June 30, 2013 and December 31, 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 June 30, 2013 and December 31, 2012, respectively, on its consolidated balance sheets. The Company does not currently operate or manage this facility.

At June 30, 2013, the Company also had eight letters of guarantee outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $11.1 million.

In connection with the creation of GEOAmey, the Company and its joint venture partner guarantee the availability of working capital in equal proportion to ensure that GEOAmey can comply with current and future contractual commitments related to the performance of its operations. The Company and the 50% joint venture partner have each extended a £12 million line of credit of which £12.1 million, or $18.4 million based on exchange rates as of June 30, 2013, was outstanding as of June 30, 2013. The Company’s maximum exposure relative to the joint venture is its note receivable of $18.4 million, including accrued interest of $0.2 million, and future financial support necessary to guarantee performance under the contract.

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

12. COMMITMENTS, CONTINGENCIES AND OTHER TAX MATTERS

Litigation, Claims and Assessments

In June 2004, the Company received notice of a third-party claim for property damage incurred during 2001 and 2002 at several detention facilities formerly operated by its Australian subsidiary. The claim relates to property damage caused by detainees at the detention facilities. The notice was given by the Australian government’s insurance provider and did not specify the amount of damages being sought. In August 2007, a lawsuit (Commonwealth of Australia v. Australasian Correctional Services PTY, Limited No. SC 656) was filed against the Company in the Supreme Court of the Australian Capital Territory seeking damages of up to approximately AUD 18 million or $16.5 million based on exchange rates as of June 30, 2013, plus interest. The pre-judgment interest rate in Australia is currently 7.00%. The Company had 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. In May 2013, the case was settled. The settlement was within the Company’s reserves and did not have a material impact on the Company’s consolidated balance sheet or results of operations as of and for the three and six months ended June 30, 2013.

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

 

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damages resulting from contact with the Company’s facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. The Company does not expect the outcome of any pending claims or legal proceedings to have a material adverse effect on its financial condition, results of operations or cash flows.

Construction Commitments

The Company currently has contractual commitments for a number of projects using Company financing. The Company’s management estimates that the cost of these existing capital projects will range from $31.0 million to $35.0 million of which $24.0 million was spent through the second quarter of 2013. The Company estimates the remaining capital requirements related to these capital projects will range from $7.0 million to $11.0 million which will be spent through fiscal year 2013. Capital expenditures related to facility maintenance costs are expected to range between $30.0 million and $35.0 million for fiscal year 2013.

Facility Purchase

On May 7, 2013, the Company executed a definitive agreement for the purchase of the land, buildings and improvements, and tangible personal property and fixtures of the 1,287 bed Joe Corley Detention Center (the “Center”) located in Montgomery County, Texas for a purchase price of approximately $65.0 million. The Center was previously managed by the Company under a managed-only contract with Montgomery County and will continue to house federal detainees for U.S. Immigration and Customs Enforcement and the U.S. Marshals Service under an Intergovernmental Services Agreement. The transaction closed on June 7, 2013.

Employment Agreement

On April 29, 2013, GEO and Mr. George C. Zoley, the Company’s Chief Executive Officer, entered into the First Amendment to Third Amended and Restated Executive Employment Agreement (the “Amendment”). The Amendment modifies Mr. Zoley’s employment agreement by eliminating the automatic cost of living increase applicable to his annual base salary and instead provides that his annual base salary may be increased in the sole discretion of the Board for cost of living increases to be determined by the Board. Additionally, the Amendment modifies the termination payment Mr. Zoley would receive in the event of a termination of employment other than a termination by GEO for cause (as defined in the Third Amended and Restated Executive Employment Agreement) or a termination by Mr. Zoley without good reason (as defined in the Third Amended and Restated Executive Employment Agreement) from three times the amount of Mr. Zoley’s base salary plus annual bonus to two times the amount of Mr. Zoley’s base salary plus annual bonus.

On May 29, 2013, the Company and the Chief Executive Officer entered into the Second Amendment to Third Amended and Restated Executive Employment Agreement (the “Amendment”). The Amendment modifies the Chief Executive Officer’s employment agreement by decreasing the maximum target annual performance award he may receive from 150% of his annual base salary to 100% of his annual base salary.

Idle Facilities

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 $237.3 million as of June 30, 2013, excluding equipment and other assets that can be easily transferred for use at other facilities.

Other Tax Matters

 

   

As a result of the REIT conversion as more fully discussed in Note 1—Basis of Presentation, the Company reorganized its operations and moved non-real estate components into TRS. The TRS structure requires the provisions of services between affiliated companies which are conducted at arm’s length subject to applicable tax law and promulgated tax regulations. The Company has, with the assistance of its tax advisors, undertaken substantial analysis to determine and document the appropriateness of the arm’s length compensation used in compliance with such tax rules which is reviewed on a periodic basis.

 

   

During 2013 GEO had a tax benefit relating to its REIT conversion as well as a net release of tax reserves primarily due to the settlement of IRS audit years 2010 and 2011, partially offset by an initial reserve for uncertain tax positions relating to the REIT conversion. Together these items had a favorable impact to the effective tax rate and resulted in a tax benefit of $7.3 million and $6.4 million for the three months and six months ended June 30, 2013, respectively.

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 Community Services segment; the International Services segment; and the Facility Construction & Design segment. The Facility Construction & Design segment did not have any operating activity during the 2013 and 2012 periods presented. The GEO Community Services segment was previously referred to as the GEO Care segment but was renamed concurrent with the divestiture of RTS. The U.S. Corrections and Detention and the GEO Community Services segments have been retroactively reclassified during the three and six months ended July 1, 2012 for the results of discontinued operations. Refer to Note 8—Discontinued Operations. In addition, the Company has reclassified the results of it’s operations in Canada to the International Services segment for all periods presented. Canada’s results, which were previously included in the U.S. Corrections &

 

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Detention segment, were not significant during 2013 or 2012. The Company’s segment revenues from external customers and a measure of segment profit are as follows (in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30, 2013      July 1, 2012      June 30, 2013      July 1, 2012  

Revenues:

           

U.S. Corrections & Detention

   $ 254,043       $ 245,916       $ 502,815       $ 480,710   

GEO Community Services

     75,072         72,767         149,013         145,025   

International Services

     52,538         52,490         106,856         105,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 381,653       $ 371,173       $ 758,684       $ 731,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income:

           

U.S. Corrections & Detention

   $ 56,631       $ 59,762       $ 110,723       $ 106,861   

GEO Community Services

     18,854         17,093         36,259         33,342   

International Services

     3,265         2,215         5,067         5,950   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income from segments

   $ 78,750       $ 79,070       $ 152,049       $ 146,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-Tax Income Reconciliation of Segments

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

 

     Three Months Ended     Six Months Ended  
     June 30, 2013     July 1, 2012     June 30, 2013     July 1, 2012  

Total operating income from segments

   $ 78,750      $ 79,070      $ 152,049      $ 146,153   

Unallocated amounts:

        

General and Administrative Expenses

     (27,363     (26,129     (59,403     (52,715

Net Interest Expense

     (19,938     (18,857     (38,095     (37,856

Loss on Extinguishment of Debt

     (5,527     —          (5,527     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 25,922      $ 34,084      $ 49,024      $ 55,582   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

The Company has recorded $1.3 million and $2.5 million in earnings, net of tax, for SACS operations during the three months and six months ended June 30, 2013, respectively, and $1.3 million and $2.6 million in earnings, net of tax, during the three months and six months ended July 1, 2012, respectively. SACS earnings are included in equity in earnings of affiliates, net of income tax provision in the accompanying consolidated statements of operations. As of June 30, 2013 and December 31, 2012, the Company’s investment in SACS was $8.3 million and $7.8 million, respectively.

The Company has recorded $0.2 million and $0.3 million in losses, net of tax, for GEOAmey’s operations during the three months and six months ended June 30, 2013, respectively, and $0.9 million and $1.4 million in losses, net of tax, during both the three months and six months ended July 1, 2012, respectively. GEOAmey’s earnings are included in equity in earnings of affiliates, net of income tax provision, in the accompanying consolidated statements of operations. As of June 30, 2013 and December 31, 2012, the Company’s investment in GEOAmey was $(4.4) million and $(4.1) 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):

 

     Six months ended June 30,
2013
    Fiscal Year Ended
December 31, 2012
 

Change in Projected Benefit Obligation

    

Projected benefit obligation, beginning of period

   $ 19,761      $ 16,879   

Service cost

     462        774   

Interest cost

     415        787   

Plan amendments

     —          569   

Actuarial loss

     —          945   

Benefits paid

     (120     (193
  

 

 

   

 

 

 

Projected benefit obligation, end of period

   $ 20,518      $ 19,761   
  

 

 

   

 

 

 

Change in Plan Assets

    

Plan assets at fair value, beginning of period

   $ —        $ —     

Company contributions

     120        193   

Benefits paid

     (120     (193

Plan assets at fair value, end of period

   $ —        $ —     
  

 

 

   

 

 

 

Unfunded Status of the Plan

   $ (20,518   $ (19,761
  

 

 

   

 

 

 

 

     Three Months Ended      Six Months Ended  
     June 30, 2013      July 1, 2012      June 30, 2013      July 1, 2012  

Components of Net Periodic Benefit Cost

           

Service cost

   $ 231       $ 193       $ 462       $ 387   

Interest cost

     207         197         415         393   

Net loss

     66         48         131         97   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 504       $ 438       $ 1,008       $ 877   
  

 

 

    

 

 

    

 

 

    

 

 

 

The long-term portion of the pension liability as of June 30, 2013 and December 31, 2012 was $20.3 million and $19.5 million, respectively, and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheets.

15. RECENT ACCOUNTING STANDARDS

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”). The objective of ASU 2013-05 is to resolve diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The Company is currently evaluating the potential impact of this ASU on its condensed unaudited consolidated financial statements.

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

16. SUBSEQUENT EVENTS

Dividend

On July 30, 2013 the Board of Directors declared a quarterly cash dividend of $0.50 per share of common stock, which is to be paid on August 29, 2013 to shareholders of record as of the close of business on August 19, 2013.

 

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17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Company’s 6.625% Senior Notes, 7 3/4% Senior Notes, and 5.125% Senior Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Company and certain of its wholly-owned domestic subsidiaries (the “Subsidiary Guarantors”). The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:

 

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

 

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

 

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

 

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

 

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

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Three Months Ended June 30, 2013  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 118,859      $ 314,120      $ 55,585      $ (106,911   $ 381,653   

Operating expenses

     102,108        239,194        44,855        (106,911     279,246   

Depreciation and amortization

     5,875        16,556        1,226        —          23,657   

General and administrative expenses

     8,156        15,420        3,787        —          27,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     2,720        42,950        5,717        —          51,387   

Interest income

     4,029        359        1,123        (4,346     1,165   

Interest expense

     (10,373     (12,708     (2,368     4,346        (21,103

Loss on extinguishment of debt

     (2,600     (2,927     —          —          (5,527
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (6,224     27,674        4,472        —          25,922   

Income tax (benefit) provision

     (8,339     226        845        —          (7,268

Equity in earnings of affiliates, net of income tax provision

     —          —          1,029        —          1,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in income of consolidated subsidiaries

     2,115        27,448        4,656        —          34,219   

Income from consolidated subsidiaries, net of income tax provision

     32,104        —          —          (32,104     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     34,219        27,448        4,656        (32,104     34,219   

Net income (loss) from discontinued operations

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     34,219        27,448        4,656        (32,104     34,219   

Net income attributable to noncontrolling interests

     —          —          (12     —          (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 34,219      $ 27,448      $ 4,644      $ (32,104   $ 34,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 34,219      $ 27,448      $ 4,656      $ (32,104   $ 34,219   

Other comprehensive income (loss), net of tax

     —          40        (5,300     —          (5,260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 34,219      $ 27,488      $ (644   $ (32,104   $ 28,959   

Comprehensive loss attributable to noncontrolling interests

     —          —          19        —          19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 34,219      $ 27,488      $ (625   $ (32,104   $ 28,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

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

Revenues

   $ 153,753      $ 177,301      $ 57,780      $ (17,661   $ 371,173   

Operating expenses

     130,454        110,339        46,009        (17,661     269,141   

Depreciation and amortization

     7,389        13,433        2,140        —          22,962   

General and administrative expenses

     9,384        12,783        3,962        —          26,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,526        40,746        5,669        —          52,941   

Interest income

     7,847        394        1,661        (8,141     1,761   

Interest expense

     (16,837     (7,926     (3,996     8,141        (20,618
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (2,464     33,214        3,334        —          34,084   

Income tax (benefit) provision

     (667     12,860        1,467        —          13,660   

Equity in earnings of affiliates, net of income tax provision

     —          —          430        —          430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,797     20,354        2,297        —          20,854   

Income from consolidated subsidiaries, net of income tax provision

     22,651        —          —          (22,651     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     20,854        20,354        2,297        (22,651     20,854   

Net income from discontinued operations

     1,622        2,046        233        (2,279     1,622   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

Net income attributable to noncontrolling interests

     —          —          25        —          25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

Other comprehensive income (loss), net of tax

     29        —          (2,498     —          (2,469
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

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

Comprehensive income attributable to noncontrolling interests

     —          —          58        —          58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30, 2013  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

   $ 232,348      $ 626,649      $ 112,970      $ (213,283   $ 758,684   

Operating expenses

     201,518        479,671        92,137        (213,283     560,043   

Depreciation and amortization

     11,697        32,438        2,457        —          46,592   

General and administrative expenses

     17,354        33,612        8,437        —          59,403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,779        80,928        9,939        —          92,646   

Interest income

     7,989        909        2,219        (8,768     2,349   

Interest expense

     (20,292     (24,139     (4,781     8,768        (40,444

Loss on extinguishment of debt

     (2,600     (2,927     —          —          (5,527
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (13,124     54,771        7,377        —          49,024   

Income tax (benefit) provision

     (9,006     632        1,987        —          (6,387

Equity in earnings of affiliates, net of income tax provision

     —          —          2,246        —          2,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (4,118     54,139        7,636        —          57,657   

Income from consolidated subsidiaries, net of income tax provision

     61,775        —          —          (61,775     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     57,657        54,139        7,636        (61,775     57,657   

Net income loss from discontinued operations

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     57,657        54,139        7,636        (61,775     57,657   

Net income attributable to noncontrolling interests

     —          —          (30     —          (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

   $ 57,657      $ 54,139      $ 7,606      $ (61,775   $ 57,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 57,657      $ 54,139      $ 7,636      $ (61,775   $ 57,657   

Other comprehensive income (loss), net of tax

     —          80        (6,520     —          (6,440
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     57,657        54,219        1,116        (61,775     51,217   

Comprehensive loss attributable to noncontrolling interests

     —          —          42        —          42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

   $ 57,657      $ 54,219      $ 1,158      $ (61,775   $ 51,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

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

Revenues

   $ 294,370      $ 361,488      $ 115,772      $ (40,415   $ 731,215   

Operating expenses

     261,460        228,005        90,811        (40,415     539,861   

Depreciation and amortization

     14,244        26,685        4,272        —          45,201   

General and administrative expenses

     18,780        26,077        7,858        —          52,715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (114     80,721        12,831        —          93,438   

Interest income

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

Interest expense

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (18,213     65,770        8,025        —          55,582   

Income tax (benefit) provision

     (6,323     25,172        3,301        —          22,150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of affiliates, net of income tax provision

     —          —          1,178        —          1,178   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (11,890     40,598        5,902        —          34,610   

Income from consolidated subsidiaries, net of income tax provision

     46,500        —          —          (46,500     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     34,610        40,598        5,902        (46,500     34,610   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

     2,925        3,118        553        (3,671     2,925   

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interests

     —          —          (9     —          (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The GEO Group, Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

Other comprehensive income (loss), net of tax

     59        —          (541     —          (482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

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

Comprehensive income attributable to noncontrolling interests

     —          —          (4     —          (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to The GEO Group, Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

     As of June 30, 2013  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

  

Cash and cash equivalents

   $ 5,736       $ 1,084       $ 31,691      $ —        $ 38,511   

Restricted cash and investments

     —           —           15,646        —          15,646   

Accounts receivable, less allowance for doubtful accounts

     82,406         137,948         18,647        —          239,001   

Deferred income tax assets, net

     —           14,604         3,686        —          18,290   

Prepaid expenses and other current assets

     1,168         13,253         11,875        (1,154     25,142   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     89,310         166,889         81,545        (1,154     336,590   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Restricted Cash and Investments

     134         9,410         28,204        —          37,748   

Property and Equipment, Net

     654,956         973,246         111,784        —          1,739,986   

Assets Held for Sale

     —           1,200         —          —          1,200   

Direct Finance Lease Receivable

     —           —           20,445        —          20,445   

Intercompany Receivable

     937,073         128,058         (1,300     (1,063,831     —     

Deferred Income Tax Assets, Net

     16,230         —           2,532        (16,230     2,532   

Goodwill

     34         489,502         680        —          490,216   

Intangible Assets, Net

     —           169,375         1,368        —          170,743   

Investment in Subsidiaries

     954,156         442,679         —          (1,396,835     —     

Other Non-Current Assets

     26,815         107,330         34,018        (79,421     88,742   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 2,678,708       $ 2,487,689       $ 279,276      $ (2,557,471   $ 2,888,202   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Accounts payable

   $ 5,290       $ 38,898       $ 3,203      $ —        $ 47,391   

Accrued payroll and related taxes

     1,827         15,868         16,619        —          34,314   

Accrued expenses

     61,014         30,678         18,641        (1,154     109,179   

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

     3,000         1,212         18,129        —          22,341   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     71,131         86,656         56,592        (1,154     213,225   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Deferred Income Tax Liabilities

     —           31,933         —          (16,230     15,703   

Intercompany Payable

     113,567         930,800         19,457        (1,063,824     —     

Other Non-Current Liabilities

     14,101         136,207         3,257        (79,428     74,137   

Capital Lease Obligations

     —           11,426         —          —          11,426   

Long-Term Debt

     1,444,475         —           —          —          1,444,475   

Non-Recourse Debt

     —           —           93,352        —          93,352   

Commitments & Contingencies Shareholders’ Equity:

            

The GEO Group, Inc. Shareholders’ Equity

     1,035,434         1,290,667         106,168        (1,396,835     1,035,434   

Noncontrolling Interests

     —           —           450        —          450   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

     1,035,434         1,290,667         106,618        (1,396,835     1,035,884   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,678,708       $ 2,487,689       $ 279,276      $ (2,557,471   $ 2,888,202   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 

     As of December 31, 2012  
     The GEO Group, Inc.      Combined
Subsidiary
Guarantors
     Combined
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

  

Cash and cash equivalents

   $ 4,764       $ 1,917       $ 25,074       $ —        $ 31,755   

Restricted cash and investments

     —           —           15,654         —          15,654   

Accounts receivable, less allowance for doubtful accounts

     124,670         102,704         19,261         —          246,635   

Deferred income tax assets, net

     13,106         1,498         3,686         —          18,290   

Prepaid expenses and other current assets

     8,657         5,890         11,456         (1,154     24,849   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     151,197         112,009         75,131         (1,154     337,183   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Restricted Cash and Investments

     7,953         —           24,803         —          32,756   

Property and Equipment, Net

     633,458         939,995         113,706         —          1,687,159   

Assets Held for Sale

     —           3,243         —           —          3,243   

Direct Finance Lease Receivable

     —           —           26,757         —          26,757   

Intercompany Receivable

     591,273         14,305         —           (605,578     —     

Deferred Income Tax Assets, Net

     16,230         —           2,532         (16,230     2,532   

Goodwill

     34         489,502         772         —          490,308   

Intangible Assets, Net

     —           176,666         1,652         —          178,318   

Investment in Subsidiaries

     1,151,998         41,356         —           (1,193,354     —     

Other Non-Current Assets

     38,574         84,931         36,584         (79,151     80,938   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,590,717       $ 1,862,007       $ 281,937       $ (1,895,467   $ 2,839,194   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Accounts payable

   $ 29,889       $ 17,407       $ 2,814       $ —        $ 50,110   

Accrued payroll and related taxes

     4,774         16,264         18,284         —          39,322   

Accrued expenses

     94,350         5,515         17,846         (1,154     116,557   

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

     33,925         1,311         18,646         —          53,882   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     162,938         40,497         57,590         (1,154     259,871   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deferred Income Tax Liabilities

     —           31,933         —           (16,230     15,703   

Intercompany Payable

     —           586,428         19,150         (605,578     —     

Other Non-Current Liabilities

     63,657         96,822         697         (79,151     82,025   

Capital Lease Obligations

     —           11,926         —           —          11,926   

Long-Term Debt

     1,317,310         219         —           —          1,317,529   

Non-Recourse Debt

     —           —           104,836         —          104,836   

Commitments & Contingencies Shareholders’ Equity:

             

The GEO Group, Inc. Shareholders’ Equity

     1,046,812         1,094,182         99,172         (1,193,354     1,046,812   

Noncontrolling Interests

     —           —           492         —          492   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Shareholders’ Equity

     1,046,812         1,094,182         99,664         (1,193,354     1,047,304   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,590,717       $ 1,862,007       $ 281,937       $ (1,895,467   $ 2,839,194   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30, 2013  
     The GEO Group, Inc.     Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Consolidated  

Cash Flow from Operating Activities:

        

Net cash provided by operating activities

   $ 58,343      $ 18,932      $ 24,039      $ 101,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Proceeds from sale of property and equipment

     —          51        —          51   

Proceeds from sale of assets held for sale

     —          1,968        —          1,968   

Net working capital adjustment from RTS divestiture

     (996     —          —          (996

Change in restricted cash and investments

     (134     (1,457     (4,319     (5,910

Capital expenditures

     (69,567     (19,666     (688     (89,921
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (70,697     (19,104     (5,007     (94,808
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Proceeds from long-term debt

     785,000        —          —          785,000   

Income tax benefit of equity compensation

     1,308        —          —          1,308   

Debt issuance costs

     (17,017     —          —          (17,017

Payments on long-term debt

     (688,675     (661     (8,412     (697,748

Proceeds from the exercise of stock options

     4,082        —          —          4,082   

Cash dividends paid

     (71,527     —          —          (71,527

Proceeds from reissuance of treasury stock in connection with ESPP

     155        —          —          155   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     13,326        (661     (8,412     4,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          (4,003     (4,003
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     972        (833     6,617        6,756   

Cash and Cash Equivalents, beginning of period

     4,764        1,917        25,074        31,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, end of period

   $ 5,736      $ 1,084      $ 31,691      $ 38,511   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

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

Cash Flow from Operating Activities:

        

Cash provided by operating activities—continuing operations

   $ 98,442      $ 11,721      $ 6,769      $ 116,932   

Cash provided by operating activities—discontinued operations

     752        6,827        2,455        10,034   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     99,194        18,548        9,224        126,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Investing Activities:

        

Proceeds from sale of assets held for sale

     —          297        —          297   

Proceeds from sale of property and equipment

     —          162        69        231   

Change in restricted cash and investments

     (484     (1,350     2,387        553   

Capital expenditures

     (53,933     (13,363     (2,240     (69,536
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash (used in) provided by investing activities—continuing operations

     (54,417     (14,254     216        (68,455

Cash used in investing activities—discontinued operations

     (311     (2,226     —          (2,537
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (54,728     (16,480     216        (70,992
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow from Financing Activities:

        

Proceeds from long-term debt

     145,000        —          —          145,000   

Payments on long-term debt

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

Income tax provision of equity compensation

     (270     —          —          (270

Debt issuance costs

     (6     —          (38     (44

Distribution to noncontrolling interests

     —          —          (5,758     (5,758

Proceeds from the exercise of stock options

     396        —          —          396   

Payments for retirement of common stock

     (1,035     —          —          (1,035
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —          —          (43     (43