The GEO (GEO) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Presents the unaudited consolidated financial statements, including operations, income, balance sheets, and cash flows, with detailed explanatory notes Consolidated Statements of Operations (Unaudited) Consolidated Statements of Operations (Unaudited) – Key Figures (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $631,579 | $583,530 | $1,856,212 | $1,731,956 | | Operating income | $78,159 | $69,780 | $234,111 | $201,181 | | Net income attributable to The GEO Group, Inc | $45,932 | $39,289 | $128,551 | $111,697 | | Basic EPS | $0.39 | $0.33 | $1.08 | $0.93 | | Diluted EPS | $0.39 | $0.33 | $1.08 | $0.92 | | Dividends declared per share | $0.48 | $0.47 | $1.44 | $1.41 | Consolidated Statements of Comprehensive Income (Unaudited) Consolidated Statements of Comprehensive Income (Unaudited) – Key Figures (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income | $45,885 | $39,229 | $128,370 | $111,474 | | Total other comprehensive loss, net of tax | $(7,288) | $(567) | $(381) | $(1,363) | | Total comprehensive income | $38,597 | $38,662 | $127,989 | $110,111 | | Comprehensive income attributable to The GEO Group, Inc | $38,659 | $38,734 | $128,180 | $110,358 | Consolidated Balance Sheets Consolidated Balance Sheets – Key Figures (in thousands) | Metric | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $4,282,879 | $4,258,118 | | Total current assets | $517,599 | $601,762 | | Total current liabilities | $408,605 | $705,238 | | Total Shareholders' Equity | $1,007,004 | $1,039,904 | | Long-Term Debt | $2,355,724 | $2,397,227 | | Non-Recourse Debt | $307,032 | $15,017 | Consolidated Statements of Cash Flows (Unaudited) Consolidated Statements of Cash Flows (Unaudited) – Key Figures (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $322,958 | $220,223 | | Net cash used in investing activities | $(77,622) | $(152,047) | | Net cash used in financing activities | $(232,792) | $(69,628) | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash and Cash Equivalents | $10,481 | $(6,844) | | Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period | $94,953 | $126,701 | Notes to Unaudited Consolidated Financial Statements 1. Basis of Presentation The Company operates as a REIT specializing in secure facilities and community reentry centers with a global portfolio of approximately 96,000 beds - The GEO Group, Inc operates as a REIT, specializing in secure facilities, processing centers, and community reentry centers across the United States, Australia, South Africa, and the United Kingdom[25] - As of September 30, 2019, the Company's global operations included managing/owning approximately 96,000 beds at 130 facilities and providing community supervision services for over 210,000 individuals[25] 2. Leases The adoption of ASU No 2016-02 resulted in the balance sheet recognition of approximately $140 million in lease assets and $147 million in lease liabilities - The Company adopted ASU No 2016-02, 'Leases' (Topic 842), on January 1, 2019, requiring lease assets and liabilities to be recorded on the balance sheet[27] - The adoption resulted in the recognition of approximately $140 million in operating right-of-use lease assets and $147 million in operating lease liabilities as of January 1, 2019[126] Lease Related Assets and Liabilities (in thousands) as of September 30, 2019 | Classification on the Balance Sheet | Amount | | :--- | :--- | | Operating Lease Right-of-Use Assets, Net | $125,718 | | Finance lease assets (Property and Equipment, Net) | $3,135 | | Operating lease liabilities, current portion | $28,795 | | Finance lease liabilities, current portion | $1,550 | | Operating Lease Liabilities (noncurrent) | $99,271 | | Finance Lease Liabilities (noncurrent) | $3,403 | | Total lease assets | $128,853 | | Total lease liabilities | $133,019 | Lease Costs (in thousands) for the Three and Nine Months Ended September 30, 2019 | Metric | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Operating lease cost | $11,611 | $35,841 | | Total finance lease cost | $333 | $1,022 | | Short-term lease cost | $1,673 | $5,228 | | Total lease cost | $13,617 | $42,091 | | Weighted average remaining lease term (Operating leases) | 7.3 years | | | Weighted average remaining lease term (Finance leases) | 3.1 years | | | Weighted average discount rate (Operating leases) | 4.74% | | | Weighted average discount rate (Finance leases) | 8.27% | | 3. Goodwill and Other Intangible Assets Goodwill remained stable at $776.3 million while finite-lived intangible assets decreased due to amortization Goodwill Balances (in thousands) | Segment | January 1, 2019 | Foreign Currency Translation | September 30, 2019 | | :--- | :--- | :--- | :--- | | GEO Secure Services | $316,366 | — | $316,366 | | GEO Care | $459,589 | — | $459,589 | | International Services | $404 | $(18) | $386 | | Total Goodwill | $776,359 | $(18) | $776,341 | Intangible Assets, Net (in thousands) | Asset Type | Weighted Average Useful Life (years) | Net Carrying Amount (Sep 30, 2019) | Net Carrying Amount (Dec 31, 2018) | | :--- | :--- | :--- | :--- | | Facility management contracts | 16.3 | $165,395 | $180,938 | | Technology | 7.3 | $5,012 | $6,222 | | Trade names (Indefinite lived) | Indefinite | $45,200 | $45,200 | | Total acquired intangible assets | | $215,607 | $232,360 | - Amortization expense for the nine months ended September 30, 2019, was $16.7 million, primarily from facility management contracts[34] 4. Financial Instruments Financial instruments carried at fair value include a Rabbi Trust and interest rate swaps, the latter of which were terminated in May 2019 Fair Value Measurements (in thousands) at September 30, 2019 and December 31, 2018 (Level 2) | Instrument | Carrying Value (Sep 30, 2019) | Carrying Value (Dec 31, 2018) | | :--- | :--- | :--- | | Rabbi Trust (Assets) | $26,341 | $20,892 | | Interest rate swap derivatives (Liabilities) | $3,515 | $8,638 | | Fixed income securities (Assets) | — | $1,801 | - On May 22, 2019, the Company terminated interest rate swap derivative liabilities in connection with a debt refinancing by its Australian subsidiary[37] - During the nine months ended September 30, 2019, the Company sold approximately $3.0 million in accounts receivable, resulting in no gain or loss[39] 5. Fair Value of Assets and Liabilities The fair values of cash equivalents approximate carrying values, while debt instruments are valued using Level 2 inputs Estimated Fair Value Measurements (in thousands) at September 30, 2019 (Level 2 for Liabilities) | Instrument | Carrying Value | Total Fair Value | | :--- | :--- | :--- | | Borrowings under senior credit facility | $1,222,610 | $1,137,210 | | 5.875% Senior Notes due 2022 | $216,023 | $209,519 | | 5.125% Senior Notes due 2023 | $300,000 | $266,463 | | 5.875% Senior Notes due 2024 | $250,000 | $217,488 | | 6.00% Senior Notes due 2026 | $350,000 | $283,486 | | Non-recourse debt | $325,313 | $325,428 | | Cash and cash equivalents | $54,030 | $54,030 | | Restricted cash and investments | $40,923 | $40,923 | - The fair values of cash, cash equivalents, and restricted cash approximate their carrying values[41] - Fair values for senior notes and non-recourse debt are estimated based on published financial data or market prices of similar instruments (Level 2)[41] 6. Restricted Cash and Cash Equivalents Restricted cash totaled $95.0 million, primarily held for contractual requirements at the Company's Australian subsidiary and for asset replacement Reconciliation of Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric | September 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $54,030 | $66,007 | | Restricted cash and cash equivalents - current | $33,536 | $54,931 | | Restricted cash and investments - non-current | $33,728 | $28,939 | | Less Restricted investments - non-current | $(26,341) | $(23,176) | | Total cash, cash equivalents and restricted cash and cash equivalents shown in the statement of cash flows | $94,953 | $126,701 | - Restricted cash and cash equivalents are primarily due to contractual requirements at the Australian subsidiary related to non-recourse debt and asset replacement funds[43] 7. Shareholders' Equity Shareholders' equity decreased to $1.01 billion, influenced by dividends and accounting standard changes, partially offset by net income Shareholders' Equity Attributable to The GEO Group, Inc (in thousands) | Metric | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total shareholders' equity attributable to The GEO Group, Inc | $1,007,794 | $1,040,503 | | Noncontrolling interests | $(790) | $(599) | | Total shareholders' equity | $1,007,004 | $1,039,904 | - The Company declared quarterly cash dividends of $0.48 per share in 2019, up from $0.47 in 2018, totaling $174.3 million paid for the nine months ended September 30, 2019[11][50] - The Company adopted ASU No 2018-02 on January 1, 2019, reclassifying $1.0 million of tax effects from accumulated other comprehensive income to distributions in excess of earnings[123] REIT Distributions - As a REIT, GEO is required to distribute annually at least 90% of its REIT taxable income[48] Cash Distributions to Shareholders | Declaration Date | Record Date | Payment Date | Distribution Per Share | Aggregate Payment Amount (in millions) | | :--- | :--- | :--- | :--- | :--- | | February 5, 2018 | February 16, 2018 | February 27, 2018 | $0.47 | $58.3 | | April 11, 2018 | April 23, 2018 | May 3, 2018 | $0.47 | $57.4 | | July 10, 2018 | July 20, 2018 | July 27, 2018 | $0.47 | $57.2 | | October 15, 2018 | October 26, 2018 | November 2, 2018 | $0.47 | $57.2 | | February 4, 2019 | February 15, 2019 | February 22, 2019 | $0.48 | $57.9 | | April 3, 2019 | April 15, 2019 | April 22, 2019 | $0.48 | $58.2 | | July 9, 2019 | July 19, 2019 | July 26, 2019 | $0.48 | $58.2 | Stock Buyback Program - The Board authorized a $200 million stock buyback program effective through October 20, 2020[51] - No shares were repurchased under the stock buyback program during the nine months ended September 30, 2019[51] Prospectus Supplement - The Company filed a prospectus supplement on November 9, 2017, for the offer and sale of up to $150 million of common stock through sales agents[52] - No shares of common stock were sold under this prospectus supplement during the nine months ended September 30, 2019[52] Comprehensive Income (Loss) - Total other comprehensive loss, net of tax, was $(371) thousand for the nine months ended September 30, 2019, compared to $(1,339) thousand for the same period in 2018[55][57] - A reclassification of $3.9 million into losses from accumulated other comprehensive income occurred in May 2019 due to the termination of interest rate swap derivatives following debt refinancing[56] 8. Equity Incentive Plans The Company operates under the 2018 Stock Incentive Plan, granting stock options and restricted stock awards to employees - The 2018 Stock Incentive Plan, approved by shareholders, reserves 4,600,000 shares of common stock for awards[58] - The Employee Stock Purchase Plan (ESPP) is non-compensatory, with 21,411 shares issued during the nine months ended September 30, 2019[69] Stock Options Stock Option Activity (in thousands, except price) | Metric | Shares (Sep 30, 2019) | Wtd Avg Exercise Price | | :--- | :--- | :--- | | Options outstanding at January 1, 2019 | 1,462 | $24.30 | | Options granted | 391 | $22.68 | | Options exercised | (78) | $16.03 | | Options forfeited/canceled/expired | (151) | $24.48 | | Options outstanding at September 30, 2019 | 1,624 | $24.31 | | Options vested and expected to vest at September 30, 2019 | 1,538 | $24.37 | | Options exercisable at September 30, 2019 | 819 | $24.88 | - Stock-based compensation expense for stock options was $0.8 million for the nine months ended September 30, 2019, and $0.7 million for the same period in 2018[61] Restricted Stock Restricted Stock Activity (in thousands, except fair value) | Metric | Shares (Sep 30, 2019) | Wtd Avg Grant Date Fair Value | | :--- | :--- | :--- | | Restricted stock outstanding at January 1, 2019 | 2,018 | $27.62 | | Granted | 788 | $23.79 | | Vested | (701) | $24.09 | | Forfeited/canceled | (53) | $24.11 | | Restricted stock outstanding at September 30, 2019 | 2,052 | $27.32 | - During the nine months ended September 30, 2019, 788,000 shares of restricted stock were granted, including 250,000 market and performance-based awards[63] - Compensation expense for restricted stock awards was $16.1 million for the nine months ended September 30, 2019, and $15.6 million for the same period in 2018[67] Employee Stock Purchase Plan - The Employee Stock Purchase Plan (ESPP) allows employees to purchase common stock at a 5% discount[68] - During the nine months ended September 30, 2019, 21,411 shares of common stock were issued under the ESPP[69] 9. Earnings Per Share Basic and diluted EPS increased to $0.39 for Q3 2019 and $1.08 for the nine months ended September 30, 2019 Earnings Per Share (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to The GEO Group, Inc | $45,932 | $39,289 | $128,551 | $111,697 | | Basic EPS | $0.39 | $0.33 | $1.08 | $0.93 | | Diluted EPS | $0.39 | $0.33 | $1.08 | $0.92 | | Weighted average shares outstanding (Basic) | 119,209 | 119,681 | 119,052 | 120,567 | | Weighted average shares assuming dilution | 119,282 | 120,302 | 119,314 | 121,055 | - For the three months ended September 30, 2019, 1.5 million weighted average shares underlying options and 1.8 million restricted shares were excluded from diluted EPS calculation due to their anti-dilutive effect[72] - For the nine months ended September 30, 2019, 1.5 million weighted average shares underlying options and 1.5 million restricted shares were excluded from diluted EPS calculation due to their anti-dilutive effect[74] 10. Derivative Financial Instruments The Company uses interest rate swaps to manage interest rate volatility, entering new swaps totaling $44.3 million in August 2019 - In August 2019, the Company entered into two interest rate swap agreements for an aggregate notional amount of $44.3 million to fix variable interest rates at 4.22%, designated as effective cash flow hedges[77] - Total unrealized losses recorded in other comprehensive income, net of tax, related to these cash flow hedges was $2.8 million during the nine months ended September 30, 2019[78] - On May 22, 2019, interest rate swap agreements for the Australian Ravenhall project were terminated due to debt refinancing, resulting in a $3.9 million reclassification into losses from accumulated other comprehensive income[79] 11. Debt Total debt decreased to $2.69 billion, with key changes including a revolving credit facility extension and refinancing of non-recourse debt Debt Outstanding (in thousands) | Debt Type | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Senior Credit Facility | $1,216,849 | $1,267,139 | | Total 6.00% Senior Notes Due in 2026 | $345,580 | $345,180 | | Total 5.875% Senior Notes Due in 2024 | $247,355 | $247,029 | | Total 5.125% Senior Notes Due in 2023 | $296,951 | $296,452 | | Total 5.875% Senior Notes Due in 2022 | $214,346 | $247,486 | | Total Non-Recourse Debt | $319,888 | $337,027 | | Finance Lease Liabilities | $4,953 | $6,059 | | Other debt | $43,654 | $2,469 | | Total debt | $2,689,576 | $2,748,841 | Amended Credit Agreement - On June 12, 2019, the Company amended its Credit Agreement, extending the revolving credit facility maturity to May 17, 2024, with borrowing capacity remaining at $900.0 million[82] - The amendment resulted in a $1.2 million loss on extinguishment of debt and $4.7 million in capitalized loan costs[82] - As of September 30, 2019, the Company had $780 million outstanding under its term loan, $445 million under its revolver, and $62 million in letters of credit, leaving $393 million in additional borrowing capacity[90] 6.00% Senior Notes due 2026 - Interest on the 6.00% Senior Notes accrues at the stated rate, payable semi-annually on April 15 and October 15[91] - The Company may redeem all or part of these notes on or after April 15, 2019[91] 5.875% Senior Notes due 2024 - Interest on the 5.875% Senior Notes due 2024 accrues at the stated rate, payable semi-annually on April 15 and October 15[93] - The Company may redeem all or part of these notes on or after October 15, 2019[93] 5.125% Senior Notes due 2023 - Interest on the 5.125% Senior Notes accrues at the stated rate, payable semi-annually on April 1 and October 1[94] - The Company may redeem all or part of these notes on or after April 1, 2018[94] 5.875% Senior Notes due 2022 - Interest on the 5.875% Senior Notes due 2022 accrues at the stated rate, payable semi-annually on January 15 and July 15[95] - The Company may redeem all or part of these notes on or after January 15, 2017[95] Debt Repurchases - The Board authorized repurchases of up to $100 million of senior notes and term loan through December 31, 2020[96] - During Q3 2019, the Company repurchased $34.0 million of 5.875% Senior Notes due 2022 for $33.1 million, recognizing a $0.6 million net gain on extinguishment of debt[97] Non-Recourse Debt - The remaining balance of the Tacoma Processing Center note payable to WEDFA is $22.9 million, maturing in October 2021 with a 5.25% fixed coupon rate[98] - In May 2019, the Company completed an offering of AUD 461.6 million ($311.8 million) non-recourse senior secured notes due 2042 for the Australian Ravenhall project, refinancing the Construction Facility[101] - The Ravenhall refinancing resulted in a $4.5 million loss on extinguishment of debt due to swap termination fees and unamortized deferred costs[101] - In August 2019, the Company entered into two identical Notes totaling $44.3 million, secured by real property, with interest fixed at 4.22% via interest rate swap agreements[102] Guarantees - The Company has a guarantee of approximately AUD100.0 million ($67.5 million) for an Australian facility, secured by letters of credit under its Revolver[103] - Other international facility performance guarantees for the Australian subsidiary totaled $9.0 million as of September 30, 2019[104] - Guarantees related to South African Custodial Services (SACS) debt facilities and shareholder's standby facility expired in February 2019[105][106][107] 12. Commitments and Contingencies The Company is involved in various legal proceedings and has capital project commitments totaling $193 million - The Company faces class-action lawsuits in Colorado, Washington, and California alleging violations of minimum wage laws and the federal Trafficking Victims Protection Act (TVPA)[110] - No accrual has been recorded for these lawsuits as a loss is not considered probable or reasonably estimable at this stage[110] - Contractual commitments for capital projects amount to approximately $193 million, with an estimated $50 million remaining to be spent through the remainder of 2019[113] - As of September 30, 2019, the Company was marketing approximately 3,000 vacant beds at four idle facilities with a total carrying value of $49.6 million[114] 13. Business Segments and Geographic Information Total revenues increased by 7.2% to $1.86 billion, driven by growth in Secure Services and GEO Care Segment Revenues (in thousands) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $411,078 | $379,351 | $1,201,063 | $1,107,016 | | GEO Care | $153,422 | $141,808 | $462,772 | $431,819 | | International Services | $57,634 | $62,371 | $176,246 | $193,121 | | Facility Construction & Design | $9,445 | — | $16,131 | — | | Total revenues | $631,579 | $583,530 | $1,856,212 | $1,731,956 | Operating Income from Segments (in thousands) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $85,085 | $77,885 | $248,462 | $224,386 | | GEO Care | $36,325 | $35,959 | $113,936 | $102,795 | | International Services | $5,211 | $3,583 | $13,870 | $10,927 | | Facility Construction & Design | $26 | — | $26 | — | | Operating income from segments | $126,647 | $117,427 | $376,294 | $338,108 | - Equity in earnings of affiliates, net of tax, includes contributions from 50% owned joint ventures in SACS (South Africa) and GEOAmey (United Kingdom)[118] 14. Benefit Plans The Company's unfunded pension liability increased to $33.68 million, with a net periodic pension cost of $1.95 million for the nine-month period Pension Plan Information (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Projected benefit obligation, end of period | $33,683 | $32,474 | | Plan assets at fair value, end of period | $0 | $0 | | Unfunded Status of the Plan | $33,683 | $32,474 | | Net periodic pension cost (9 Months Ended Sep 30, 2019) | $1,952 | $2,230 | | Net periodic pension cost (3 Months Ended Sep 30, 2019) | $701 | $743 | - The long-term portion of the pension liability was $33.4 million as of September 30, 2019[121] 15. Recent Accounting Pronouncements The Company adopted several new accounting standards in 2019, with the new lease standard having a material impact on the balance sheet - ASU No 2016-02, 'Leases,' adopted January 1, 2019, materially impacted the balance sheet by recognizing approximately $140 million in operating right-of-use lease assets and $147 million in operating lease liabilities[126] - ASU No 2018-02, 'Income Statement-Reporting Comprehensive Income-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,' adopted January 1, 2019, resulted in a $1.0 million increase to distributions in excess of earnings[123] - ASU No 2018-07 (Nonemployee Share-Based Payment Accounting) and ASU No 2017-12 (Hedging Activities) were also adopted in 2019 but did not have a material impact on financial position, results of operations, or cash flows[122][124] 16. Condensed Consolidating Financial Information Provides condensed consolidating financial information for The GEO Group, Inc, its Subsidiary Guarantors, and Non-Guarantor Subsidiaries - The Company's senior notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by The GEO Group, Inc and certain wholly-owned domestic subsidiaries (Subsidiary Guarantors)[131] - The condensed consolidating financial information is presented for the issuer, Subsidiary Guarantors, Non-Guarantor Subsidiaries, and consolidated totals, with eliminations for intercompany transactions and investments[134] 17. Subsequent Events The Board declared a quarterly cash dividend of $0.48 per share, and several facility contracts in California are being discontinued - On October 14, 2019, the Board declared a quarterly cash dividend of $0.48 per share, paid on November 1, 2019[158] - The contract for the Central Valley facility was discontinued at the end of September 2019, and contracts for Desert View and Golden State facilities are expected to be discontinued by April 1, 2020, and July 1, 2020, respectively[159] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management discusses financial condition and results of operations, highlighting trends, liquidity, capital resources, and future outlook Forward-Looking Information - The report contains forward-looking statements regarding future financial position, business strategy, budgets, and operational plans, which are subject to risks and uncertainties[160] - Key risk factors include the ability to build/open facilities, meet debt obligations, refinance debt, estimate government utilization of public-private partnerships, and manage operating costs and litigation[161][162] Introduction - The GEO Group, Inc is a REIT specializing in secure services and reentry facilities, offering rehabilitation services under its 'GEO Continuum of Care' platform[166] - As of September 30, 2019, worldwide operations included management/ownership of approximately 96,000 beds at 130 facilities and community supervision for over 210,000 individuals[167] Consolidated Revenues and Occupancy Rates | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Consolidated revenues | $1,856.2 million | $1,732.0 million | | Average company-wide facility occupancy rate | 93.1% (92,053 active beds) | 92.3% (88,480 active beds) | 2019 Developments The Company is actively marketing 3,000 vacant beds and has secured several key contract awards and renewals - Approximately 3,000 vacant beds at four idle facilities are being marketed to potential customers[175] - GEO Amey joint venture secured a ten-year contract renewal for secure transportation in the UK, expected to generate $760 million in total revenue[176] - Negotiations are underway to increase capacity at Ravenhall Correctional Centre (Australia) by 300 beds, projected to add $19 million in incremental annualized revenues[177] - Contract capacity at Montgomery Processing Center (Texas) increased by 314 beds, expected to generate $10 million in incremental annualized revenues[178] - Reactivation of the 1,800-bed North Lake Correctional Facility (Michigan) under a new ten-year contract with BOP, expected to generate $37 million in incremental annualized revenues[179] - Reactivation of the 1,000-bed South Louisiana Processing Center for federal immigration detainees, expected to generate $25 million in incremental annualized revenues[180] Critical Accounting Policies Financial statements are prepared in accordance with GAAP, requiring estimates and assumptions, with no significant changes in the period - Financial statements are prepared in conformity with GAAP, requiring reasonable estimates, judgments, and assumptions[181] - No significant changes in estimates or judgments were experienced during the nine months ended September 30, 2019[181] Results of Operations The Company experienced revenue growth driven by GEO Secure Services and GEO Care, offset by declines in International Services Comparison of Third Quarter 2019 and Third Quarter 2018 Revenues Revenues by Segment (in thousands) | Segment | Q3 2019 | % of Revenue (Q3 2019) | Q3 2018 | % of Revenue (Q3 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $411,078 | 65.1% | $379,351 | 65.0% | $31,727 | 8.4% | | GEO Care | $153,422 | 24.3% | $141,808 | 24.3% | $11,614 | 8.2% | | International Services | $57,634 | 9.1% | $62,371 | 10.7% | $(4,737) | (7.6)% | | Facility Construction & Design | $9,445 | 1.5% | — | —% | $9,445 | 100.0% | | Total | $631,579 | 100.0% | $583,530 | 100.0% | $48,049 | 8.2% | - GEO Secure Services revenue increased by $31.7 million (8.4%) due to population increases, transportation services, and new contract activations[185] - International Services revenue decreased by $4.7 million (7.6%) due to the transition of Parklea Correctional Centre and $3.7 million from foreign exchange rate fluctuations[188] Operating Expenses Operating Expenses by Segment (in thousands) | Segment | Q3 2019 | % of Segment Revenues (Q3 2019) | Q3 2018 | % of Segment Revenues (Q3 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $305,181 | 74.2% | $282,332 | 74.4% | $22,849 | 8.1% | | GEO Care | $104,581 | 68.2% | $94,169 | 66.4% | $10,412 | 11.1% | | International Services | $53,332 | 92.5% | $58,305 | 93.5% | $(4,973) | (8.5)% | | Facility Construction & Design | $9,419 | 100.0% | — | —% | $9,419 | 100.0% | | Total | $472,513 | 74.8% | $434,806 | 74.5% | $37,707 | 8.7% | - GEO Secure Services operating expenses increased by $22.8 million (8.1%) due to population increases, transportation services, and new contract activations[191] - International Services operating expenses decreased by $5.0 million (8.5%) due to the Parklea Correctional Centre transition and $3.5 million from foreign exchange rate fluctuations[193] Depreciation and Amortization Depreciation and Amortization by Segment (in thousands) | Segment | Q3 2019 | % of Segment Revenue (Q3 2019) | Q3 2018 | % of Segment Revenue (Q3 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $19,591 | 4.8% | $19,134 | 5.0% | $457 | 2.4% | | GEO Care | $12,516 | 8.2% | $11,680 | 8.2% | $836 | 7.2% | | International Services | $312 | 0.5% | $483 | 0.8% | $(171) | (35.4)% | | Total | $32,419 | 5.1% | $31,297 | 5.4% | $1,122 | 3.6% | - GEO Secure Services and GEO Care depreciation and amortization increased due to contract activations and renovations[196][197] - International Services depreciation and amortization decreased due to certain assets becoming fully depreciated[198] Other Unallocated Operating Expenses General and Administrative Expenses (in thousands) | Metric | Q3 2019 | % of Revenue (Q3 2019) | Q3 2018 | % of Revenue (Q3 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and Administrative Expenses | $48,488 | 7.7% | $47,647 | 8.2% | $841 | 1.8% | - General and administrative expenses increased slightly due to normal personnel and compensation adjustments, professional fees, and business development expenses[200] Non Operating Expenses Interest Income and Expense (in thousands) | Metric | Q3 2019 | % of Revenue (Q3 2019) | Q3 2018 | % of Revenue (Q3 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest Income | $6,686 | 1.1% | $8,428 | 1.4% | $(1,742) | (20.7)% | | Interest Expense | $36,645 | 5.8% | $37,991 | 6.5% | $(1,346) | (3.5)% | - Interest income decreased due to a lower contract receivable balance in Australia and strengthening of the U.S dollar[201] - Interest expense decreased due to lower overall debt balances and lower interest rates on variable rate debt, partially from repurchases of senior notes[202] - A net gain on extinguishment of debt of $0.6 million was recognized in Q3 2019 from repurchasing $34.0 million of 5.875% Senior Notes due 2022[203] - Income tax provision increased by 38.0% to $5.1 million, with the effective tax rate rising to 10.5% due to a change in income composition[204] - Equity in earnings of affiliates decreased by 18.5% to $2.2 million, primarily due to labor-related expenses for GEOAmey's contract ramp-up in Scotland[206] Comparison of Nine Months 2019 and Nine Months 2018 Revenues Revenues by Segment (in thousands) | Segment | 9 Months Ended Sep 30, 2019 | % of Revenue (9M 2019) | 9 Months Ended Sep 30, 2018 | % of Revenue (9M 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $1,201,063 | 64.7% | $1,107,016 | 64.0% | $94,047 | 8.5% | | GEO Care | $462,772 | 24.9% | $431,819 | 24.9% | $30,953 | 7.2% | | International Services | $176,246 | 9.5% | $193,121 | 11.2% | $(16,875) | (8.7)% | | Facility Construction & Design | $16,131 | 0.9% | — | —% | $16,131 | 100.0% | | Total | $1,856,212 | 100.0% | $1,731,956 | 100.0% | $124,256 | 7.2% | - GEO Secure Services revenue increased by $94.0 million (8.5%) due to population increases with federal clients, transportation services, and new contract activations[208] - International Services revenue decreased by $16.9 million (8.7%) due to the transition of Parklea Correctional Centre and $15.3 million from foreign exchange rate fluctuations[211] Operating Expenses Operating Expenses by Segment (in thousands) | Segment | 9 Months Ended Sep 30, 2019 | % of Segment Revenues (9M 2019) | 9 Months Ended Sep 30, 2018 | % of Segment Revenues (9M 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $892,337 | 74.3% | $825,475 | 74.6% | $66,862 | 8.1% | | GEO Care | $311,758 | 67.4% | $293,299 | 67.9% | $18,459 | 6.3% | | International Services | $162,478 | 92.2% | $180,538 | 93.5% | $(18,060) | (10.0)% | | Facility Construction & Design | $16,105 | 99.8% | — | —% | $16,105 | 100.0% | | Total | $1,382,678 | 74.5% | $1,299,312 | 75.0% | $83,366 | 6.4% | - GEO Secure Services operating expenses increased by $66.9 million (8.1%) due to population increases, transportation services, and new contract activations[214] - International Services operating expenses decreased by $18.1 million (10.0%) due to $14.2 million from foreign exchange rate fluctuations and the Parklea Correctional Centre transition[216] Depreciation and Amortization Depreciation and Amortization by Segment (in thousands) | Segment | 9 Months Ended Sep 30, 2019 | % of Segment Revenue (9M 2019) | 9 Months Ended Sep 30, 2018 | % of Segment Revenue (9M 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $59,043 | 4.9% | $57,155 | 5.2% | $1,888 | 3.3% | | GEO Care | $37,078 | 8.0% | $35,725 | 8.3% | $1,353 | 3.8% | | International Services | $1,119 | 0.6% | $1,656 | 0.9% | $(537) | (32.4)% | | Total | $97,240 | 5.2% | $94,536 | 5.4% | $2,704 | 2.9% | - GEO Secure Services and GEO Care depreciation and amortization increased due to contract activations and renovations[219][220] - International Services depreciation and amortization decreased due to certain assets becoming fully depreciated[221] Other Unallocated Operating Expenses General and Administrative Expenses (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | % of Revenue (9M 2019) | 9 Months Ended Sep 30, 2018 | % of Revenue (9M 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and Administrative Expenses | $142,183 | 7.7% | $136,927 | 7.9% | $5,256 | 3.8% | - General and administrative expenses increased due to normal personnel and compensation adjustments, professional fees, and business development expenses[222] Non Operating Expenses Interest Income and Expense (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | % of Revenue (9M 2019) | 9 Months Ended Sep 30, 2018 | % of Revenue (9M 2018) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest Income | $23,127 | 1.2% | $26,194 | 1.5% | $(3,067) | (11.7)% | | Interest Expense | $115,857 | 6.2% | $110,205 | 6.4% | $5,652 | 5.1% | - Interest income decreased due to a lower contract receivable balance in Australia and strengthening of the U.S dollar[223] - Interest expense increased due to higher average debt balances on the Revolver[224] - A net loss on extinguishment of debt of $5.1 million was recognized, primarily from the Ravenhall refinancing ($4.5 million) and Credit Agreement amendment ($1.2 million), partially offset by a $0.6 million gain from senior notes repurchases[225][226] - Income tax provision increased by 19.0% to $14.5 million, with the effective tax rate rising to 10.7% due to changes in income composition and discrete tax expenses related to stock compensation[227] - Equity in earnings of affiliates decreased slightly by 6.0% to $6.6 million, primarily due to labor-related expenses for GEOAmey's contract ramp-up in Scotland[228] Financial Condition Capital requirements for existing projects are $193 million, with liquidity primarily from cash flow and the amended Credit Facility - Current contractual commitments for capital projects total approximately $193 million, with $50 million estimated to be spent through the remainder of 2019[230][231] - The Credit Agreement was amended on June 12, 2019, extending the revolver maturity to May 17, 2024, with $900.0 million borrowing capacity[232] - As of September 30, 2019, the Company had $393 million in additional borrowing capacity under its Revolver[234] - During Q3 2019, the Company repurchased $34 million of its 5.875% Senior Notes due 2022 for $33.1 million, resulting in a $0.6 million gain[238] - The Company plans to fund capital needs from cash on hand, operations, and Credit Facility borrowings, believing these sources are adequate for 2019[243] Capital Requirements - Current cash requirements include working capital, REIT distributions, debt service, supply purchases, joint venture investments, and capital expenditures for new or existing facilities[229] - Estimated cost for existing capital projects is $193 million, with $143 million spent through September 30, 2019, and $50 million remaining for 2019[230][231] Liquidity and Capital Resources - The Credit Agreement was amended on June 12, 2019, extending the revolver maturity to May 17, 2024, with $900.0 million borrowing capacity[232] - As of September 30, 2019, the Company had $780 million outstanding under its term loan, $445 million under its revolver, and $62 million in letters of credit, leaving $393 million in additional borrowing capacity[234] - The Australian Ravenhall project's Construction Facility was refinanced in May 2019 with AUD 461.6 million ($311.8 million) non-recourse senior secured notes due 2042[235] - In August 2019, the Company entered into two identical Notes totaling $44.3 million, secured by real property, with interest fixed at 4.22% via interest rate swap agreements[236] - The Board authorized repurchases of up to $100 million of senior notes and term loan through December 31, 2020; $34 million of 5.875% Senior Notes due 2022 were repurchased in Q3 2019[238] Stock Buyback Program - The Board authorized a $200 million stock buyback program effective through October 20, 2020[51] - No shares were repurchased under the stock buyback program during the nine months ended September 30, 2019[51] Prospectus Supplement - The Company filed a prospectus supplement for the offer and sale of up to $150 million of common stock through sales agents[52] - No shares of common stock were sold under this prospectus supplement during the nine months ended September 30, 2019[52] Executive Retirement Agreement - The CEO is eligible for a lump sum payment of approximately $8.6 million upon retirement, which the Company believes would not materially impact liquidity[247] Off-Balance Sheet Arrangements - The Company does not have any off-balance sheet arrangements except as discussed in the notes to the Unaudited Consolidated Financial Statements[248] Cash Flow Cash, Cash Equivalents and Restricted Cash (in millions) | Metric | September 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash and cash equivalents | $95.0 | $126.7 | - Cash provided by operating activities increased to $323.0 million for the nine months ended September 30, 2019, from $220.2 million in the prior year, driven by net income and favorable changes in working capital[250] - Cash used in investing activities decreased to $77.6 million for the nine months ended September 30, 2019, from $152.0 million in the prior year, primarily due to lower capital expenditures[253] - Cash used in financing activities increased to $232.8 million for the nine months ended September 30, 2019, from $69.6 million in the prior year, due to higher payments on long-term and non-recourse debt, partially offset by proceeds from new debt[254] Non-GAAP Measures The Company presents FFO, Normalized FFO, and AFFO as supplemental non-GAAP measures to evaluate operating performance - FFO, Normalized FFO, and AFFO are presented as supplemental non-GAAP measures to evaluate operating performance and ability to fund capital expenditures[261] Reconciliation of Net Income to FFO, Normalized FFO, and AFFO (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to The GEO Group, Inc | $45,932 | $39,289 | $128,551 | $111,697 | | NAREIT Defined FFO | $65,059 | $59,132 | $185,214 | $166,929 | | Normalized Funds from Operations | $70,306 | $62,934 | $197,178 | $173,221 | | Adjusted Funds from Operations | $85,628 | $77,867 | $249,335 | $219,876 | Outlook The Company anticipates growth opportunities but acknowledges risks from budgetary constraints and policy changes like California's private facility phase-out - Future revenue may be adversely impacted by government budgetary constraints or changes in willingness to maintain/grow public-private partnerships[265] - California legislation is phasing out public-private partnership contracts for secure facilities, leading to contract discontinuations for Central Valley, Desert View, and Golden State facilities[267] - International developments include a ten-year contract renewal for GEO Amey in the UK ($760 million total revenue) and a potential 300-bed expansion at Ravenhall Correctional Centre in Australia ($19 million incremental annualized revenue)[268] - Operating expenses are expected to be impacted by new facility openings and start-up costs, while general and administrative expenses are expected to remain consistent or decrease due to cost savings initiatives[271][272] - Activating the 3,000 vacant beds at idle facilities could generate approximately $70 million in incremental annualized revenue and $0.05 to $0.10 per share in increased earnings[273] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks from changes in interest rates and foreign currency exchange rates - A 1% increase in the average interest rate on the Credit Facility would increase total annual interest expense by approximately $13 million, based on $1,225 million outstanding borrowings and $62 million in letters of credit as of September 30, 2019[275] - The Company is exposed to foreign currency exchange rate risks with the Australian dollar, South African Rand, and British Pound[277] - A 10% change in historical foreign currency rates would have approximately a $4.5 million effect on financial position and a $0.4 million impact on results of operations for the nine months ended September 30, 2019[277] ITEM 4. CONTROLS AND PROCEDURES Management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2019 - Management concluded that disclosure controls and procedures were effective as of September 30, 2019, providing reasonable assurance for timely and accurate reporting[278] - No material changes in internal control over financial reporting occurred during the period[280] - Internal controls were implemented to evaluate lease contracts and assess the impact of ASC Topic 842, 'Leases,' adopted on January 1, 2019[280] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information on legal proceedings is incorporated by reference from Note 12, detailing ongoing class-action lawsuits - Legal proceedings information is incorporated by reference from Note 12 – Commitments and Contingencies[283] ITEM 1A. RISK FACTORS This section updates risk factors, emphasizing public resistance to public-private partnerships and recent adverse legislative and financial developments - Public resistance to public-private partnerships for correctional facilities could lead to inability to obtain new contracts or loss of existing ones[285] - California enacted legislation to phase out public-private partnership contracts for secure facilities within and outside the state housing California inmates[285] - Several financial institutions have announced they will not renew existing agreements or enter new ones with companies operating such facilities, potentially impacting the Company's access to financing[286] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During Q3 2019, the Company withheld 149 shares for tax purposes, and no shares were repurchased under the buyback program Shares Purchased (in thousands) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1, 2019 - July 31, 2019 | — | $— | | August 1, 2019 - August 31, 2019 | 92 | $17.61 | | September 1, 2019 - September 30, 2019 | 57 | $18.55 | | Total | 149 | | - 149 shares were withheld through net share settlements to satisfy statutory tax withholding requirements upon vesting of restricted stock[288] - No shares were repurchased under the $200 million stock buyback program during the nine months ended September 30, 2019[289] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable to the Company for the reporting period ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company for the reporting period ITEM 5. OTHER INFORMATION This item is not applicable to the Company for the reporting period ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits include SECTION 302 CEO and CFO Certifications, SECTION 906 CEO and CFO Certifications, and various Inline XBRL documents[294] SIGNATURES The report is duly signed on behalf of The GEO Group, Inc by its Senior Vice President & Chief Financial Officer - The report was signed by Brian R Evans, Senior Vice President & Chief Financial Officer, on November 7, 2019[299]