QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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.)
4955 Technology Way
Boca Raton
Florida
33431
(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)
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
GEO
New York Stock Exchange
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. Yesþ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of July 31, 2019, the registrant had 121,251,948 shares of common stock outstanding.
Accounts receivable, less allowance for doubtful accounts of $4,228 and $4,183, respectively
394,720
445,526
Contract receivable, current portion
13,944
15,535
Prepaid expenses and other current assets
46,316
57,768
Total current assets
532,884
601,762
Restricted Cash and Investments
27,358
22,431
Property and Equipment, Net
2,148,225
2,158,610
Assets Held for Sale
4,607
2,634
Contract Receivable
365,208
368,178
Operating Lease Right-of-Use Assets, Net
132,016
—
Deferred Income Tax Assets
29,924
29,924
Goodwill
776,357
776,359
Intangible Assets, Net
221,222
232,360
Other Non-Current Assets
70,337
65,860
Total Assets
$
4,308,138
$
4,258,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable
$
91,257
$
93,032
Accrued payroll and related taxes
71,369
76,009
Accrued expenses and other current liabilities
189,083
204,170
Operating lease liabilities, current portion
32,077
—
Current portion of finance lease liabilities, long-term debt and non-recourse debt
25,866
332,027
Total current liabilities
409,652
705,238
Deferred Income Tax Liabilities
13,681
13,681
Other Non-Current Liabilities
81,812
82,481
Operating Lease Liabilities
102,844
—
Finance Lease Liabilities
3,779
4,570
Long-Term Debt
2,354,526
2,397,227
Non-Recourse Debt
320,306
15,017
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, 187,500,000 shares authorized, 125,422,811 and 124,794,986 issued and 121,212,557 and 120,584,732 outstanding, respectively
1,254
1,248
Additional paid-in capital
1,220,242
1,210,916
Distributions in excess of earnings
(87,339
)
(52,868
)
Accumulated other comprehensive loss
(16,716
)
(23,618
)
Treasury stock, 4,210,254 shares, at cost
(95,175
)
(95,175
)
Total shareholders’ equity attributable to The GEO Group, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company” or “GEO”) is a fully-integrated real estate investment trust (“REIT”) specializing in the design, financing, development and operation of correctional facilities, processing centers and community reentry centers in the United States, Australia, South Africa and the United Kingdom. The Company owns, leases and operates a broad range of facilities including maximum, medium and minimum security facilities, processing centers, as well as community-based reentry facilities and offers an expanded delivery of rehabilitation services under its 'GEO Continuum of Care' platform. The 'GEO Continuum of Care' program integrates enhanced rehabilitative programs, which are evidence-based and include cognitive behavioral treatment and post-release services, and provides academic and vocational classes in life skills and treatment programs while helping individuals reintegrate into their communities. The Company develops new facilities based on contract awards, using its project development expertise and experience to design, construct and finance what it believes are state-of-the-art facilities that maximize security and efficiency. The Company provides innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. The Company also provides secure transportation services for individuals as contracted domestically and in the United Kingdom through its joint venture GEO Amey PECS Ltd. (“GEOAmey”). At June 30, 2019, the Company’s worldwide operations include the management and/or ownership of approximately 97,000 beds at 133 facilities, including idle facilities, projects under development and recently awarded contracts, and also include the provision of community supervision services for more than 210,000 individuals, including approximately 100,000 through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.
The Company's unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2019 for the year ended December 31, 2018. The accompanying December 31, 2018 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, 2018. Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported financial position, results of operations or cash flows. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results for the entire year ending December 31, 2019, or for any other future interim or annual periods.
2. LEASES
On January 1, 2019, the Company adopted Accounting Standard Update ("ASU") No. 2016-02, "Leases" (Topic 842) which requires that entities record lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company implemented the new standard using the transition method that provided for adoption on the adoption date and recognizing a cumulative-effect adjustment to retained earnings, if any, upon adoption. Therefore, the consolidated financial statements for the three and six months ended June 30, 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. Refer to Note 15 - Recent Accounting Pronouncements for further information.
The Company has operating and finance leases for facilities, ground leases, office space, computers, copier equipment and transportation vehicles that have remaining lease terms of one year to seventy-seven years, some of which include options to extend the lease for up to ten years. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of the lease payments over the term of the lease. Many of GEO's leases include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Only renewal or termination options that are reasonably certain to be exercised by the Company are included in the lease term which is used in the calculation of lease liabilities and right-of-use assets. GEO does not typically enter into lease agreements that contain a residual guarantee or that provide for variable lease payments.
When available, GEO uses the rate implicit in the lease to discount lease payments to present value, however, most of GEO's lease agreements do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Lease related assets and liabilities are recorded on the balance sheet as follows (in thousands):
Classification on the Balance Sheet
June 30, 2019
Assets
Operating lease assets
Operating Lease Right-of-Use Assets, Net
$
132,016
Finance lease assets
Property and Equipment, Net
3,391
Total lease assets
$
135,407
Liabilities
Current
Operating
Operating lease liabilities, current portion
$
32,077
Finance [1]
Current portion of finance liabilities, long-term debt and non-recourse debt
Certain information related to the lease costs for finance and operating leases is presented as follows (in thousands):
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Operating lease cost
$
11,738
$
24,230
Finance lease cost:
Amortization of right-of-use assets
256
512
Interest on lease liabilities
68
181
Total finance lease cost
324
693
Short-term lease cost
1,640
3,555
Total Lease Cost
$
13,702
$
28,478
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases
$
12,400
$
25,016
Operating cash flows for finance leases
$
68
$
181
Financing activities for finance leases
$
396
$
790
Right-of-use assets obtained in exchange for new operating lease liabilties
$
3,154
$
6,318
Weighted average remaining lease term:
Operating leases
7.3 years
Finance leases
3.4 years
Weighted average discount rate:
Operating leases
4.74
%
Finance leases
8.27
%
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities and finance lease liabilities recorded on the balance sheet as of June 30, 2019 (in thousands).
Operating Leases
Finance Leases
2019
$
20,548
$
965
2020
31,861
1,934
2021
24,100
1,936
2022
17,521
1,234
2023
14,189
—
Thereafter
53,661
—
Total minimum lease payments
161,880
6,069
Less: amount of lease payment representing interest
The Company has recorded goodwill as a result of its various business combinations. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible assets and intangible assets acquired net of liabilities assumed, including noncontrolling interests. Changes in the Company's goodwill balances from January 1, 2019 to June 30, 2019 are as follows (in thousands):
January 1, 2019
Foreign Currency Translation
June 30, 2019
GEO Secure Services
$
316,366
$
—
$
316,366
GEO Care
459,589
—
459,589
International Services
404
(2
)
402
Total Goodwill
$
776,359
$
(2
)
$
776,357
The Company has also recorded other finite and indefinite-lived intangible assets as a result of its various business combinations. The Company's intangible assets include facility management contracts, covenants not to compete, trade names and technology, as follows (in thousands):
June 30, 2019
December 31, 2018
Weighted Average Useful Life (years)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Facility management contracts
16.3
$
308,515
$
(137,909
)
$
170,606
$
308,419
$
(127,481
)
$
180,938
Covenants not to compete
1
—
—
—
700
(700
)
—
Technology
7.3
33,700
(28,284
)
5,416
33,700
(27,478
)
6,222
Trade names (Indefinite lived)
Indefinite
45,200
—
45,200
45,200
—
45,200
Total acquired intangible assets
$
387,415
$
(166,193
)
$
221,222
$
388,019
$
(155,659
)
$
232,360
Amortization expense was $11.2 million and $11.7 million for the six months ended June 30, 2019 and 2018, respectively. Amortization expense was primarily related to the GEO Secure Services (formerly known as U.S. Corrections & Detention) and GEO Care segments' amortization of acquired facility management contracts. As of June 30, 2019, the weighted average period before the next contract renewal or extension for the acquired facility management contracts was approximately 1.5 years. Although the facility management contracts acquired have renewal and extension terms in the near term, the Company has historically maintained these relationships beyond the current contractual periods.
Estimated amortization expense related to the Company's finite-lived intangible assets for the remainder of 2019 through 2023 and thereafter is as follows (in thousands):
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, 2019 and December 31, 2018 (in thousands):
Fair Value Measurements at June 30, 2019
Carrying Value at June 30, 2019
Quoted Prices in
Active Markets
(Level 1)
Significant Other Observable Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Assets:
Restricted investment:
Rabbi Trust
$
25,708
$
—
$
25,708
$
—
Fixed income securities
1,881
—
1,881
—
Fair Value Measurements at December 31, 2018
Carrying Value at December 31, 2018
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Assets:
Restricted investments:
Rabbi Trust
$
20,892
$
—
$
20,892
$
—
Fixed income securities
1,801
—
1,801
—
Liabilities:
Interest rate swap derivatives
$
8,638
$
—
$
8,638
$
—
The Company’s Level 2 financial instruments included in the tables above as of June 30, 2019 and December 31, 2018 consist of interest rate swap derivative liabilities held by the Company's Australian subsidiary, the Company's rabbi trust established for GEO employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and an investment in Canadian dollar denominated fixed income securities. On May 22, 2019, the Company terminated the interest rate swap derivative liabilities in connection with a debt refinancing transaction by our Australian subsidiary. Refer to Note 10 - Derivative Financial Instruments and Note 11 - Debt for additional information.
The Australian subsidiary’s interest rate swap derivative liabilities were valued using a discounted cash flow model based on projected Australian borrowing rates. The Company's restricted investment in the rabbi trust is invested in Company-owned life insurance policies which are recorded at their cash surrender values. These investments are valued based on the underlying investments held in the policies' separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities. The Canadian dollar denominated securities, not actively traded, are valued using quoted rates for these and similar securities.
During the six months ended June 30, 2019, the Company transferred certain accounts receivable balances that had a carrying value of approximately $3.0 million to an unrelated third party. The transfer was accounted for as a sale and the Company has no continuing involvement with the transferred assets. The Company received cash proceeds in connection with the sale of approximately $3.0 million, and as such, there was no gain or loss in connection with the transaction.
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, 2019 and December 31, 2018 (in thousands):
Estimated Fair Value Measurements at June 30, 2019
Carrying Value as of June 30, 2019
Total Fair Value
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
21,561
$
21,561
$
21,561
$
—
$
—
Restricted cash and investments
57,993
57,993
57,993
—
—
Liabilities:
Borrowings under senior credit facility
$
1,231,322
$
1,206,589
$
—
$
1,206,589
$
—
5.875% Senior Notes due 2022
250,000
247,275
—
247,275
—
5.125% Senior Notes due 2023
300,000
269,220
—
269,220
—
5.875% Senior Notes due 2024
250,000
221,240
—
221,240
—
6.00% Senior Notes due 2026
350,000
305,620
—
305,620
—
Non-recourse debt
342,233
339,188
—
339,188
—
Estimated Fair Value Measurements at December 31, 2018
Carrying Value as of December 31, 2018
Total Fair Value
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
$
31,255
$
31,255
$
31,255
$
—
$
—
Restricted cash and investments
53,217
53,217
50,499
2,718
—
Liabilities:
Borrowings under senior credit facility
$
1,273,965
$
1,188,196
$
—
$
1,188,196
$
—
5.875% Senior Notes due 2022
250,000
244,550
—
244,550
—
5.125% Senior Notes due 2023
300,000
271,992
—
271,992
—
5.875% Senior Notes due 2024
250,000
224,590
—
224,590
—
6.00% Senior Notes due 2026
350,000
310,177
—
310,177
—
Non-recourse debt
340,910
348,274
—
348,274
—
The fair values of the Company’s cash and cash equivalents, and restricted cash approximates the carrying values of these assets at June 30, 2019 and December 31, 2018. Restricted cash consists of money market funds, bank deposits, commercial paper and time deposits used for asset replacement funds and other funds contractually required to be maintained at the Company's Australian subsidiary. The fair value of the money market funds and bank deposits is based on quoted market prices (Level 1) and the fair value of commercial paper and time deposits is based on market prices for similar instruments (Level 2).
The fair values of the Company's 5.875% senior unsecured notes due 2022 ("5.875% Senior Notes due 2022"), 5.875% senior unsecured notes due 2024 ("5.875% Senior Notes due 2024"), 6.00% senior unsecured notes due 2026 (“6.00% Senior Notes”), and the 5.125% senior unsecured notes due 2023 ("5.125% Senior Notes"), although not actively traded, are based on published financial data for these instruments. The fair values of the Company's non-recourse debt related to the Washington Economic Development Finance Authority ("WEDFA") and the Company’s Australian subsidiary are estimated based on market prices of similar instruments. The fair value of borrowings under the senior credit facility is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.
The following table provides a reconciliation of cash, cash equivalents and restricted cash and cash equivalents reported on the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
June 30, 2019
June 30, 2018
Cash and Cash Equivalents
$
21,561
$
65,451
Restricted cash and cash equivalents - current
56,343
58,720
Restricted cash and investments - non-current
27,358
25,297
Less Restricted investments - non-current
(25,708
)
(22,253
)
Total cash, cash equivalents and restricted cash and cash equivalents shown in the statement of cash flows
$
79,554
$
127,215
Amounts included in restricted cash and cash equivalents are attributable to certain contractual cash restriction requirements at the Company's wholly owned Australian subsidiary related to non-recourse debt and asset replacement funds contractually required to be maintained and other guarantees. Restricted investments - non-current (included in Restricted Cash and Investments in the accompanying consolidated balance sheets) consists of the Company's rabbi trust established for employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and is not considered to be a restricted cash equivalent. Refer to Note 4 - Financial Instruments.
The following table presents the changes in shareholders’ equity that are attributable to the Company’s shareholders and to noncontrolling interests for the three and six months ended June 30, 2019 and 2018 (in thousands):