GEO GROUP INC - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 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)

One Park Place, Suite 700,

621 Northwest 53rd Street

Boca Raton, Florida 33487-8242

(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  ☒    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).    Yes  ☒    No    ☐  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

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  ☒

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

As of May 3, 2019, the registrant had 121,205,405 shares of common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018			3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018			4
CONSOLIDATED BALANCE SHEETS AS OF MARCH  31, 2019 (UNAUDITED) AND DECEMBER 31, 2018			5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018			6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS			7
ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			51
ITEM 4. CONTROLS AND PROCEDURES			51
PART II - OTHER INFORMATION			52
ITEM 1. LEGAL PROCEEDINGS			52
ITEM 1A. RISK FACTORS			52
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			53
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			53
ITEM 4. MINE SAFETY DISCLOSURES			53
ITEM 5. OTHER INFORMATION			53
ITEM 6. EXHIBITS			54
SIGNATURES			55

 

2

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

FOR THE THREE MONTHS ENDED

MARCH 31, 2019 AND 2018

(In thousands, except per share data)

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Revenues		$	610,667			$	564,917
Operating expenses			456,997				426,709
Depreciation and amortization			32,469				31,926
General and administrative expenses			46,424				41,832
Operating income			74,777				64,450
Interest income			8,396				9,099
Interest expense			(40,280	)			(35,869	)
Income before income taxes and equity in earnings of affiliates			42,893				37,680
Provision for income taxes			4,840				4,755
Equity in earnings of affiliates, net of income tax provision of $359 and $706, respectively			2,596				1,995
Net income			40,649				34,920
Net loss attributable to noncontrolling interests			56				67
Net income attributable to The GEO Group, Inc.		$	40,705			$	34,987
Weighted-average common shares outstanding:
Basic			118,774				121,768
Diluted			119,496				122,304
Net income per common share attributable to The GEO Group, Inc.:
Basic:
Net income per common share attributable to The GEO Group, Inc. - basic		$	0.34			$	0.29
Diluted:
Net income per common share attributable to The GEO Group, Inc. - diluted		$	0.34			$	0.29
Dividends declared per share		$	0.48			$	0.47

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

 

3

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

FOR THE THREE MONTHS ENDED

MARCH 31, 2019 AND 2018

(In thousands)

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Net income		$	40,649			$	34,920
Other comprehensive income, net of tax:
Foreign currency translation adjustments			1,736				521
Pension liability adjustment, net of tax provision of $11 and $28, respectively			(648	)			105
Change in fair value of derivative instrument classified as cash flow hedge, net of tax provision of $205 and $130, respectively			1,164				736
Total other comprehensive income, net of tax			2,252				1,362
Total comprehensive income			42,901				36,282
Comprehensive loss attributable to noncontrolling interests			56				59
Comprehensive income attributable to The GEO Group, Inc.		$	42,957			$	36,341

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

 

4

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2019 AND DECEMBER 31, 2018

(In thousands, except share data)

 

		March 31, 2019				December 31, 2018
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	67,728			$	31,255
Restricted cash and cash equivalents			53,749				51,678
Accounts receivable, less allowance for doubtful accounts of $4,276 and $4,183, respectively			423,596				445,526
Contract receivable, current portion			16,005				15,535
Prepaid expenses and other current assets			43,535				57,768
Total current assets			604,613				601,762
Restricted Cash and Investments			27,282				22,431
Property and Equipment, Net			2,150,627				2,158,610
Assets Held for Sale			4,607				2,634
Contract Receivable			368,698				368,178
Operating Lease Right-of-Use Assets, Net			133,365				—
Deferred Income Tax Assets			29,924				29,924
Goodwill			776,361				776,359
Intangible Assets, Net			226,782				232,360
Other Non-Current Assets			61,807				65,860
Total Assets		$	4,384,066			$	4,258,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	93,458			$	93,032
Accrued payroll and related taxes			58,079				76,009
Accrued expenses and other current liabilities			189,174				204,170
Operating lease liabilities, current portion			35,210				—
Current portion of finance lease liabilities, long-term debt and non-recourse debt			332,864				332,027
Total current liabilities			708,785				705,238
Deferred Income Tax Liabilities			13,681				13,681
Other Non-Current Liabilities			79,734				82,481
Operating Lease Liabilities			102,238				—
Finance Lease Liabilities			4,179				4,570
Long-Term Debt			2,433,433				2,397,227
Non-Recourse Debt			15,112				15,017
Commitments, Contingencies and Other (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, 125,397,214 and 124,794,986 issued and 121,186,960 and 120,584,732 outstanding, respectively			1,254				1,248
Additional paid-in capital			1,213,922				1,210,916
Distributions in excess of earnings			(71,076	)			(52,868	)
Accumulated other comprehensive loss			(21,366	)			(23,618	)
Treasury stock, 4,210,254 and 4,210,254 shares, at cost, respectively			(95,175	)			(95,175	)
Total shareholders’ equity attributable to The GEO Group, Inc.			1,027,559				1,040,503
Noncontrolling interests			(655	)			(599	)
Total shareholders’ equity			1,026,904				1,039,904
Total Liabilities and Shareholders’ Equity		$	4,384,066			$	4,258,118

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

 

5

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

FOR THE THREE MONTHS ENDED

MARCH 31, 2019 AND 2018

(In thousands)

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Cash Flow from Operating Activities:
Net income		$	40,649			$	34,920
Net loss attributable to noncontrolling interests			56				67
Net income attributable to The GEO Group, Inc.			40,705				34,987
Adjustments to reconcile net income attributable to The GEO Group, Inc. to net cash provided by operating activities:
Depreciation and amortization expense			32,469				31,926
Stock-based compensation			6,727				5,827
Amortization of debt issuance costs, discount and/or premium and other non-cash interest			2,563				2,138
Provision for doubtful accounts			131				195
Equity in earnings of affiliates, net of tax			(2,596	)			(1,995	)
Dividends received from unconsolidated joint venture			3,088				736
Loss on sale/disposal of property and equipment, net			697				(350	)
Loss on assets held for sale			1,083				—
Changes in assets and liabilities, net of effects of acquisitions:
Changes in accounts receivable, prepaid expenses and other assets			27,527				7,525
Changes in contract receivable			1,446				6,298
Changes in accounts payable, accrued expenses and other liabilities			(14,829	)			(17,601	)
Net cash provided by operating activities			99,011				69,686
Cash Flow from Investing Activities:
Insurance proceeds - damaged property			2,503				4,504
Proceeds from sale of property and equipment			274				—
Proceeds from sale of assets held for sale			—				3,797
Change in restricted investments			(4,062	)			(505	)
Capital expenditures			(28,084	)			(52,147	)
Net cash used in investing activities			(29,369	)			(44,351	)
Cash Flow from Financing Activities:
Proceeds from long-term debt			130,000				102,000
Payments on long-term debt			(96,926	)			(43,000	)
Payments on non-recourse debt			(2,089	)			(5,600	)
Taxes paid related to net share settlements of equity awards			(4,172	)			(4,356	)
Proceeds from issuance of common stock in connection with ESPP			124				140
Payment for repurchases of common stock			—				(40,182	)
Proceeds from the exercise of stock options			333				260
Cash dividends paid			(57,945	)			(58,238	)
Net cash used in financing activities			(30,675	)			(48,976	)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash and Cash Equivalents			366				(655	)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash and Cash Equivalents			39,333				(24,296	)
Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, beginning of period			84,472				133,545
Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period		$	123,805			$	109,249
Supplemental Disclosures:
Non-cash Investing and Financing activities:
Right-of-use assets obtained from operating lease liabilities upon adoption of new lease standard (Refer to Note 2 - Leases)		$	147,000			$	—
Capital expenditures in accounts payable and accrued expenses		$	5,081			$	1,814

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

 

6

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 ownership, leasing and management of correctional, detention and reentry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa and the United Kingdom. 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 reentry facilities and offers an expanded delivery of offender rehabilitation services under its ‘GEO Continuum of Care’ platform. The ‘GEO Continuum of Care’ program integrates enhanced in-prison 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 offender and detainee populations as contracted domestically and in the United Kingdom through its joint venture GEO Amey PECS Ltd. (“GEOAmey”). At March 31, 2019, the Company’s worldwide operations include the management and/or ownership of approximately 95,000 beds at 134 correctional and detention 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 offenders and pretrial defendants, including approximately 100,000 individuals 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 three months ended March 31, 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 months ended March 31, 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.

 

7

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		March 31, 2019
Assets
Operating lease assets		Operating Lease Right-of-Use Assets, Net		$	133,365
Finance lease assets		Property and Equipment, Net			3,647
Total lease assets				$	137,012
Liabilities
Current
Operating		Operating lease liabilities, current portion		$	35,210
Finance [1]		Current portion of finance liabilities, long-term debt and non-recourse debt			1,519
Noncurrent
Operating		Operating Lease Liabilities			102,238
Finance [1]		Finance Lease Liabilities			4,179
Total lease liabilities				$	143,146

 

[1]	Also refer to Note 11 - Debt.

 

8

Certain information related to the lease costs for finance and operating leases is presented as follows (in thousands):

 

		Three Months Ended March 31, 2019
Operating lease cost		$	12,492
Finance lease cost:
Amortization of right-of-use assets			256
Interest on lease liabilities			113
Total finance lease cost			369
Short-term lease cost			1,915
Total Lease Cost		$	14,776
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases		$	12,616
Operating cash flows for finance leases		$	113
Financing activities for finance leases		$	394
Right-of-use assets obtained in exchange for new operating lease liabilities		$	3,164
Weighted average remaining lease term:
Operating leases			7.3 years
Finance leases			3.4 years
Weighted average discount rate:
Operating leases [1]			4.71	%
Finance leases			8.27	%

 

[1]	Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

 

9

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 March 31, 2019 (in thousands).

 

		Operating Leases				Finance Leases
2019		$	31,919			$	1,450
2020			30,134				1,934
2021			21,376				1,936
2022			16,054				1,234
2023			13,430				—
Thereafter			51,675				—
Total minimum lease payments			164,588				6,554
Less: amount of lease payment representing interest			(27,140	)			(856	)
Present value of future minimum lease payments			137,448				5,698
Less: current obligations under leases			(35,210	)			(1,519	)
Long-term lease obligations		$	102,238			$	4,179

3. GOODWILL AND OTHER INTANGIBLE ASSETS

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 December 31, 2018 to March 31, 2019 are as follows (in thousands):

 

		December 31, 2018				Acquisition Adjustments				Foreign Currency Translation				March 31, 2019
U.S. Corrections & Detention		$	316,366			$	—			$	—			$	316,366
GEO Care			459,589				—				—				459,589
International Services			404				—				2				406
Total Goodwill		$	776,359			$	—			$	2			$	776,361

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):

 

		March 31, 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			$	308,516			$	(132,753	)		$	175,763			$	308,419			$	(127,481	)		$	180,938
Covenants not to compete			1				—				—				—				700				(700	)			—
Technology			7.3				33,700				(27,881	)			5,819				33,700				(27,478	)			6,222
Trade name (Indefinite lived)			Indefinite				45,200				—				45,200				45,200				—				45,200
Total acquired intangible assets						$	387,416			$	(160,634	)		$	226,782			$	388,019			$	(155,659	)		$	232,360

Amortization expense was $5.6 million and $6.1 million for the three months ended March 31, 2019 and 2018, respectively. Amortization expense was primarily related to the U.S. Corrections & Detention and GEO Care segments’ amortization of acquired facility management contracts. As of March 31, 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.

 

10

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):

 

Fiscal Year		Total Amortization Expense
Remainder of 2019		$	16,522
2020			22,306
2021			19,782
2022			18,273
2023			13,632
Thereafter			91,067
		$	181,582

4. 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 March 31, 2019 and December 31, 2018 (in thousands):

 

						Fair Value Measurements at March 31, 2019
		Carrying Value at March 31, 2019				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Restricted investment:
Rabbi Trust		$	24,954			$	—			$	24,954			$	—
Fixed income securities			1,848				—				1,848				—
Liabilities:
Interest rate swap derivatives		$	5,393			$	—			$	5,393			$	—

 

						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 March 31, 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.

The Australian subsidiary’s interest rate swap derivative liabilities are 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.

 

11

During the three months ended March 31, 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.

 

12

5. 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 March 31, 2019 and December 31, 2018 (in thousands):

 

						Estimated Fair Value Measurements at March 31, 2019
		Carrying Value as of March 31, 2019				Total Fair Value				Level 1				Level 2				Level 3
Assets:
Cash and cash equivalents		$	67,728			$	67,728			$	67,728			$	—			$	—
Restricted cash and investments			56,077				56,077				53,148				2,929				—
Liabilities:
Borrowings under senior credit facility		$	1,311,175			$	1,252,400			$	—			$	1,252,400			$	—
5.875% Senior Notes due 2024			250,000				219,278				—				219,278				—
5.125% Senior Notes			300,000				266,034				—				266,034				—
5.875% Senior Notes due 2022			250,000				242,853				—				242,853				—
6.00% Senior Notes			350,000				294,914				—				294,914				—
Non-recourse debt			341,196				341,595				—				341,595				—
						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				49,884				2,284				—
Liabilities:
Borrowings under senior credit facility		$	1,273,965			$	1,188,196			$	—			$	1,188,196			$	—
5.875% Senior Notes due 2024			250,000				224,590				—				224,590				—
5.125% Senior Notes			300,000				271,992				—				271,992				—
5.875% Senior Notes due 2022			250,000				244,550				—				244,550				—
6.00% Senior Notes			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 March 31, 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.

 

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6. RESTRICTED CASH AND CASH EQUIVALENTS

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:

 

		March 31, 2019				March 31, 2018
Cash and Cash Equivalents		$	67,728			$	49,235
Restricted cash and cash equivalents - current			53,749				56,888
Restricted cash and investments - non-current			27,282				24,394
Less Restricted investments - non-current			(24,954	)			(21,268	)
Total cash, cash equivalents and restricted cash and cash equivalents shown in the statement of cash flows		$	123,805			$	109,249

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.

 

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7. SHAREHOLDERS’ EQUITY

The following table presents the changes in shareholders’ equity that are attributable to the Company’s shareholders and to noncontrolling interests for the three months ended March 31, 2019 and 2018 (in thousands):

 

		Common shares								Additional Paid-In				Distributions in Excess of				Accumulated Other Comprehensive				Treasury shares								Noncontrolling				Total Shareholders’
		Shares				Amount				Capital				Earnings				Loss				Shares				Amount				Interests				Equity
Balance, January 1, 2019			120,585			$	1,248			$	1,210,916			$	(52,868	)		$	(23,618	)			4,210			$	(95,175	)		$	(599	)		$	1,039,904
Proceeds from exercise of stock options			22				—				333				—				—				—				—				—				333
Stock-based compensation expense			—				—				6,727				—				—				—				—				—				6,727
Restricted stock granted			778				8				(8	)			—				—								—				—				—
Restricted stock canceled			(6	)			—				—				—				—				—				—				—				—
Dividends paid			—				—				—				(57,945	)			—				—				—				—				(57,945	)
Shares withheld for net settlements of share-based awards [1]			(198	)			(2	)			(4,170	)			—				—				—				—				—				(4,172	)
Issuance of common stock - ESPP			6				—				124				—				—				—				—				—				124
Transition adjustment for accounting standard adoption [2]			—				—				—				(968	)			968				—				—				—				—
Net income (loss)			—				—				—				40,705				—				—				—				(56	)			40,649
Other comprehensive income			—				—				—				—				1,284				—				—				—				1,284
Balance, March 31, 2019			121,187			$	1,254			$	1,213,922			$	(71,076	)		$	(21,366	)			4,210			$	(95,175	)		$	(655	)		$	1,026,904

 

		Common shares								Additional Paid-In				Earnings in Excess of				Accumulated Other Comprehensive				Treasury shares								Noncontrolling				Total Shareholders’
		Shares				Amount				Capital				Distributions				Loss				Shares				Amount				Interests				Equity
Balance, January 1, 2018			124,008			$	1,240			$	1,190,906			$	31,541			$	(24,446	)			—				—			$	(322	)		$	1,198,919
Proceeds from exercise of stock options			15				1				260				—				—				—				—				—				261
Stock-based compensation expense			—				—				5,827				—				—				—				—				—				5,827
Restricted stock canceled			(9	)			—				—				—				—				—				—				—				—
Dividends paid			—				—				—				(58,319	)			—				—				—				—				(58,319	)
Shares withheld for net settlements of share-based awards [1]			(169	)			(2	)			(4,355	)			—				—				—				—				—				(4,357	)
Issuance of common stock - ESPP			8				—				141				—				—				—				—				—				141
Repurchases of common stock			(1,848	)			—				—				—				—				1,848				(40,182	)			—				(40,182	)
Net income (loss)			—				—				—				34,987				—				—				—				(67	)			34,920
Other comprehensive income			—				—				—				—				1,354				—				—				8				1,362
Balance, March 31, 2018			122,005			$	1,239			$	1,192,779			$	8,209			$	(23,092	)			1,848			$	(40,182	)		$	(381	)		$	1,138,572

 

[1]	During the three months ended March 31, 2019 and 2018, the Company withheld shares through net share settlements to satisfy statutory tax withholding requirements upon vesting of shares of restricted stock held by employees.

[2]	On January 1, 2019, the Company adopted Accounting Standard Update (“ASU”) No. 2018-02 “Income Statement-Reporting Comprehensive Income-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. Refer to Note 15 - Recent Accounting Pronouncements for further information.

 

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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, 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 taxable REIT subsidiaries (“TRSs”) and other factors that GEO’s Board may deem relevant.

During the three months ended March 31, 2019 and the year ended December 31, 2018 GEO declared and paid the following regular cash distributions to its shareholders as follows:

 

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

Stock Buyback Program

On February 14, 2018, the Company announced that its Board authorized a stock buyback program authorizing the Company to repurchase up to a maximum of $200.0 million of its shares of common stock. The stock buyback program will be funded primarily with cash on hand, free cash flow and borrowings under the Company’s $900 million revolving credit facility (the “Revolver”). The program is effective through October 20, 2020. The stock buyback program is intended to be implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicable Securities and Exchange Commission (“SEC”) requirements. The stock buyback program does not obligate the Company to purchase any specific amount of the Company’s common stock and may be suspended or extended at any time at the discretion of the Company’s Board. There were no repurchases of shares of the Company’s common stock during the three months ended March 31, 2019. The Company believes it has the ability to continue to fund the stock buyback program, its debt service requirements and its maintenance and growth capital expenditure requirements, while maintaining sufficient liquidity for other corporate purposes.

Prospectus Supplement

On October 20, 2017, the Company filed with the SEC an automatic shelf registration on Form S-3. Under this shelf registration, the Company may, from time to time, sell any combination of securities described in the prospectus in one or more offerings. Each time that the Company may sell securities, the Company will provide a prospectus supplement that will contain specific information about the terms of that offering and the securities being offered. On November 9, 2017, in connection with the shelf registration, the Company filed with the SEC 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 $150 million through sales agents. Sales of shares of the Company’s common stock under the prospectus supplement and the equity distribution agreements 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 shares of common stock sold under this prospectus supplement during the three months ended March 31, 2019.

 

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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 (loss) 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 within shareholders’ equity and comprehensive income (loss).

The components of accumulated other comprehensive income (loss) attributable to GEO within shareholders’ equity are as follows:

 

		Three Months Ended March 31, 2019 (In thousands)
		Foreign currency translation adjustments, net of tax attributable to The GEO Group, Inc. (1)				Change in fair value of derivatives, net of tax				Pension adjustments, net of tax				Total
Balance, January 1, 2019		$	(14,573	)		$	(5,746	)		$	(3,299	)		$	(23,618	)
Current-period other comprehensive (loss) income			1,736				1,164				(648	)			2,252
Balance, March 31, 2019		$	(12,837	)		$	(4,582	)		$	(3,947	)		$	(21,366	)

 

(1)	The foreign currency translation related to noncontrolling interests was not significant at March 31, 2019 or December 31, 2018.

 

		Three Months Ended March 31, 2018 (In thousands)
		Foreign currency translation adjustments, net of tax attributable to The GEO Group, Inc. (1)				Change in fair value of derivatives, net of tax				Pension adjustments, net of tax				Total
Balance, January 1, 2018			(7,470	)			(11,892	)			(5,084	)			(24,446	)
Current-period other comprehensive (loss) income			513				736				105				1,354
Balance, March 31, 2018			(6,957	)			(11,156	)			(4,979	)			(23,092	)

 

1)	The foreign currency translation related to noncontrolling interests was not significant at March 31, 2018 or December 31, 2017.

8. EQUITY INCENTIVE PLANS

The Board has adopted The GEO Group, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), which was approved by the Company’s shareholders on April 24, 2018. The 2018 Plan replaced the 2014 Stock Incentive Plan (the “2014 Plan”). As of the date the 2018 Plan was adopted, it provided for a reserve of 4,600,000 shares of common stock that may be issued pursuant to awards granted under the 2018 Plan. The Company filed a Form S-8 registration statement related to the 2018 Plan on May 11, 2018.

Stock Options

The Company uses a Black-Scholes option valuation model to estimate the fair value of each time based or performance based option awarded. For options granted during the three months ended March 31, 2019, the fair value was estimated using the following assumptions: (i) volatility of 40.69%; (ii) expected term of 5.0 years; (iii) risk free interest rate of 2.44%; and (iv) expected dividend yield of 8.47%. A summary of the activity of stock option awards issued and outstanding under Company plans was as follows for the three months ended March 31, 2019:

 

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		Shares				Wtd. Avg. Exercise Price				Wtd. Avg. Remaining Contractual Term (years)				Aggregate Intrinsic Value
		(in thousands)												(in thousands)
Options outstanding at January 1, 2019			1,462			$	24.30				7.20			$	924
Options granted			379				22.68
Options exercised			(22	)			14.83
Options forfeited/canceled/expired			(55	)			25.43
Options outstanding at March 31, 2019			1,764			$	24.06				7.61			$	700
Options vested and expected to vest at March 31, 2019			1,642			$	24.11				7.49			$	700
Options exercisable at March 31, 2019			896			$	24.42				6.18			$	700

On March 1, 2019, the Company granted approximately 379,000 options to certain employees which had a per share grant date fair value of $3.96. For the three months ended March 31, 2019 and March 31, 2018, the amount of stock-based compensation expense related to stock options was $0.3 million and $0.2 million, respectively. As of March 31, 2019, the Company had $2.9 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 3.1 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 fair value of restricted stock awards, which do not contain a market-based vesting condition, is determined using the closing price of the Company’s common stock on the date of grant. The Company has historically issued share-based awards with service-based, performance-based and market-based vesting criteria.

A summary of the activity of restricted stock outstanding is as follows for the three months ended March 31, 2019:

 

		Shares				Wtd. Avg. Grant Date Fair Value
		(in thousands)
Restricted stock outstanding at January 1, 2019			2,018			$	27.62
Granted			778				23.79
Vested			(697	)			24.08
Forfeited/canceled			(6	)			24.89
Restricted stock outstanding at March 31, 2019			2,093			$	27.26

During the three months ended March 31, 2019, the Company granted approximately 778,000 shares of restricted stock to certain employees and executive officers. Of these awards, 250,000 are market and performance-based awards which will be forfeited if the Company does not achieve certain annual metrics during 2019, 2020 and 2021.

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 50% of the shares of restricted stock (“TSR 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, over a three year period from January 1, 2019 to December 31, 2021 and (ii) up to 50% of the shares of restricted stock (“ROCE Target Award”) can vest at the end of a three year period if GEO meets certain return on capital employed (“ROCE”) performance targets over a three year period from January 1, 2019 to December 31, 2021. These market and 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 the 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

 

18

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 43.7%; (ii) beta of 1.0; and (iii) risk free rate of 2.53%.

For the three months ended March 31, 2019 and March 31, 2018, the Company recognized $6.5 million and $5.6 million, respectively, of compensation expense related to its restricted stock awards. As of March 31, 2019, the Company had $41.2 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 2.6 years.

Employee Stock Purchase Plan

The Company previously adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan or “ESPP”) which was approved by the Company’s shareholders. 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 750,000 shares of its common stock, which were registered with the Securities and Exchange Commission on May 4, 2012, as amended on July 18, 2014, for sale to eligible employees under the Plan.

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 three months ended March 31, 2019, 5,886 shares of the Company’s common stock were issued in connection with the Plan.

 

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9. EARNINGS PER SHARE

Basic earnings per share of common stock is computed by dividing the net income attributable to The GEO Group, Inc. 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 were calculated for the three months ended March 31, 2019 and 2018 as follows (in thousands, except per share data):

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Net income		$	40,649			$	34,920
Net loss attributable to noncontrolling interests			56				67
Net income attributable to The GEO Group, Inc.			40,705				34,987
Basic earnings per share attributable to The GEO Group, Inc.:
Weighted average shares outstanding			118,774				121,768
Per share amount		$	0.34			$	0.29
Diluted earnings per share attributable to The GEO Group, Inc.:
Weighted average shares outstanding			118,774				121,768
Dilutive effect of equity incentive plans			721				536
Weighted average shares assuming dilution			119,496				122,304
Per share amount		$	0.34			$	0.29

Three Months

For the three months ended March 31, 2019, 1,191,206 weighted average shares of common stock underlying options were excluded from the computation of diluted earnings per share (“EPS”) because the effect would be anti-dilutive. There were 874,714 common stock equivalents from restricted shares that were anti-dilutive.

For the three months ended March 31, 2018, 759,382 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. There were 757,401 common stock equivalents from restricted shares that were anti-dilutive.

10. 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.

Australia - Ravenhall

The Company’s Australian subsidiary has entered into interest rate swap agreements to fix the interest rate on its variable rate non-recourse debt related to a correctional facility project in Ravenhall, a locality near Melbourne, Australia to 4.2% during the project’s operating phase. The swaps’ notional amounts coincide with outstanding draws under the project. At March 31, 2019, the swaps had a notional amount of approximately AUD 448 million, or $318.1 million, based on exchange rates at March 31, 2019. The Company has determined that the swaps have payment, expiration dates, and provisions that coincide with the terms of the non-recourse debt and are therefore considered to be effective cash flow hedges. Accordingly, the Company records the change in the fair value of the interest rate swaps in accumulated other comprehensive income, net of applicable income taxes. Total unrealized gain recorded in other comprehensive income, net of tax, related to this cash flow hedge was $1.2 million during the three months ended March 31,

 

20

2019. The total fair value of the swap liability as of March 31, 2019 was $5.4 million and is recorded as a component of Other Non-Current liabilities within the accompanying consolidated balance sheet. There was no material ineffectiveness for the periods presented. If the Company refinances the debt before its maturity date, this would result in the reclassification into earnings or losses amounts associated with these swaps currently reported in accumulated other comprehensive income (loss). The Company intends to refinance the construction facility prior to September 2019. The transaction is expected to close in the second quarter of 2019 and, as such, the amounts associated with the swaps will be reclassified to earnings or losses at that time.

11. DEBT

Debt outstanding as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

		March 31, 2019				December 31, 2018
Senior Credit Facility:
Term loan		$	784,000			$	786,000
Unamortized discount on term loan			(2,729	)			(2,878	)
Unamortized debt issuance costs on term loan			(6,472	)			(6,826	)
Revolver			529,904				490,843
Total Senior Credit Facility			1,304,703				1,267,139
6.00% Senior Notes:
Notes Due in 2026			350,000				350,000
Unamortized debt issuance costs			(4,691	)			(4,820	)
Total 6.00% Senior Notes Due in 2026			345,309				345,180
5.875% Senior Notes:
Notes Due in 2024			250,000				250,000
Unamortized debt issuance costs			(2,865	)			(2,971	)
Total 5.875% Senior Notes Due in 2024			247,135				247,029
5.125% Senior Notes:
Notes Due in 2023			300,000				300,000
Unamortized debt issuance costs			(3,386	)			(3,548	)
Total 5.125% Senior Notes Due in 2023			296,614				296,452
5.875% Senior Notes:
Notes Due in 2022			250,000				250,000
Unamortized debt issuance costs			(2,329	)			(2,514	)
Total 5.875% Senior Notes Due in 2022			247,671				247,486
Non-Recourse Debt			341,338				341,074
Unamortized debt issuance costs on non-recourse debt			(2,738	)			(3,883	)
Unamortized discount on non-recourse debt			(142	)			(164	)
Total Non-Recourse Debt			338,458				337,027
Finance Lease Liabilities			5,698				6,059
Other debt			—				2,469
Total debt			2,785,588				2,748,841
Current portion of finance lease liabilities, long-term debt and non-recourse debt			(332,864	)			(332,027	)
Finance Lease Liabilities, long-term portion			(4,179	)			(4,570	)
Non-Recourse Debt, long-term portion			(15,112	)			(15,017	)
Long-Term Debt		$	2,433,433			$	2,397,227

 

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Amended and Restated Credit Agreement

On April 30, 2018, GEO entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (the “Credit Agreement”) by and among the refinancing lenders party thereto, the other lenders party thereto, GEO and GEO Corrections Holdings, Inc. and BNP Paribas, as administrative agent. The amendment, among other things, provides for the refinancing of all of GEO’s existing senior secured term loans with refinancing term loans in the aggregate principal amount of $792.0 million and makes certain other modifications to GEO’s senior secured credit agreement. The interest rate applicable to the refinancing term loans is equal to LIBOR plus 2.00% (with a LIBOR floor of 0.75%). The amendment was considered to be a modification and loan costs of approximately $1.0 million were incurred and capitalized in connection with the transaction.

The Credit Agreement evidences a credit facility (the “Credit Facility”) consisting of the $792.0 million term loan discussed above (the “Term Loan”) bearing interest at LIBOR plus 2.00% (with a LIBOR floor of 0.75%), and a $900.0 million Revolver initially bearing interest at LIBOR plus 2.25% (with no LIBOR floor) together with AUD275 million available solely for the issuance of financial letters of credit and performance letters of credit, in each case denominated in Australian Dollars under the Australian Dollar Letter of Credit Facility (the “Australian LC Facility”). As of March 31, 2019, there were no letters of credit issued under the Australian LC Facility. Amounts to be borrowed by GEO under the Credit Agreement are subject to the satisfaction of customary conditions to borrowing. The Term Loan component is scheduled to mature on March 23, 2024. The revolving credit commitment component is scheduled to mature on May 19, 2021. The Credit Agreement also has an accordion feature of $450.0 million, subject to lender demand and prevailing market conditions and satisfying the relevant borrowing conditions.

The Credit Agreement contains certain customary representations and warranties, and certain customary covenants that restrict GEO’s ability to, among other things (i) create, incur or assume any indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make certain restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio to exceed 6.25 to 1.00, allow the senior secured leverage ratio to exceed 3.50 to 1.00, or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, except as permitted, (x) alter the business GEO conducts, and (xi) materially impair GEO’s lenders’ security interests in the collateral for its loans.

Events of default under the Credit Agreement include, but are not limited to, (i) GEO’s failure to pay principal or interest when due, (ii) GEO’s material breach of any representation 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) certain material environmental liability claims asserted against GEO, and (viii) a change in control.

All of the obligations under the Credit Agreement are unconditionally guaranteed by certain domestic subsidiaries of GEO and the Credit Agreement and the related guarantees are secured by a perfected first-priority pledge of substantially all of GEO’s present and future tangible and intangible domestic assets and all present and future tangible and intangible domestic assets of each guarantor, including but not limited to a first-priority pledge of all of the outstanding capital stock owned by GEO and each guarantor in their domestic subsidiaries.

GEO Australasia Holdings Pty Ltd, GEO Australasia Finance Holdings Pty Ltd as trustee for the GEO Australasia Finance Holding Trust, and together with GEO Australasia Holdings, collectively (“the Australian Borrowers”) are wholly owned foreign subsidiaries of GEO. GEO has designated each of the Australian Borrowers as restricted subsidiaries under the Credit Agreement. However, the Australian Borrowers are not obligated to pay or perform any obligations under the Credit Agreement other than their own obligations as Australian Borrowers under the Credit Agreement. The Australian Borrowers do not pledge any of their assets to secure any obligations under the Credit Agreement.

On August 18, 2016, the Company executed a Letter of Offer by and among GEO and HSBC Bank Australia Limited (the “Letter of Offer”) providing for a bank guarantee line and bank guarantee/standby sub-facility in an aggregate amount of approximately AUD100 million, or $71.0 million, based on exchange rates in effect as of March 31, 2019 (collectively, the “Bank Guarantee Facility”). The Bank Guarantee Facility allows GEO to provide letters of credit to assure performance of certain obligations of its wholly owned subsidiary relating to its correctional facility in Ravenhall, located near Melbourne, Australia. The Bank Guarantee Facility is unsecured. The issuance of letters of credit under the Bank Guarantee Facility is subject to the satisfaction of the conditions precedent specified in the Letter of Offer. Letters of credit issued under the bank

 

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guarantee lines are due on demand and letters of credit issued under the bank guarantee/standby sub-facility cannot have a duration exceeding twelve months. The Bank Guarantee Facility may be terminated by HSBC Bank Australia Limited on 90 days written notice. As of March 31, 2019, there was AUD100 million in letters of credit issued under the Bank Guarantee Facility.

As of March 31, 2019, the Company had approximately $784 million in aggregate borrowings outstanding under the Term Loan, approximately $530 million in borrowings under the Revolver, and approximately $62 million in letters of credit which left approximately $308 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Credit Agreement as of March 31, 2019 was 4.6%.

6.00% Senior Notes due 2026

Interest on the 6.00% 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 April 15, 2019, the Company may, at its option, redeem all or part of the 6.00% Senior Notes at the redemption prices set forth in the indenture governing the 6.00% Senior Notes. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 16- Condensed Consolidating Financial Information.

5.875% Senior Notes due 2024

Interest on the 5.875% Senior Notes due 2024 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, 2019, the Company may, at its option, redeem all or part of the 5.875% Senior Notes due 2024 at the redemption prices set forth in the indenture governing the 5.875% Senior Notes due 2024. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 16- Condensed Consolidating Financial Information.

5.125% Senior Notes due 2023

Interest on the 5.125% Senior Notes accrues at the stated rate. The Company pays interest semi-annually in arrears on April 1 and October 1 of each year. On or after April 1, 2018, the Company may, at its option, redeem all or part of the 5.125% Senior Notes at the redemption prices set forth in the indenture governing the 5.125% Senior Notes. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 16- Condensed Consolidating Financial Information.

5.875% Senior Notes due 2022

Interest on the 5.875% Senior Notes due 2022 accrues at the stated rate. The Company pays interest semi-annually in arrears on January 15 and July 15 of each year. On or after January 15, 2017, the Company may, at its option, redeem all or part of the 5.875% Senior Notes due 2022 at the redemption prices set forth in the indenture governing the 5.875% Senior Notes due 2022. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors. Refer to Note 16- Condensed Consolidating Financial Information.

Non-Recourse Debt

Northwest Detention Center

The remaining balance of the original debt service requirement under the $54.4 million note payable (“2011 Revenue Bonds”) to WEDFA is $23.0 million, of which $7.3 million is classified as current in the accompanying consolidated balance sheet as of March 31, 2019. The payment of principal and interest on the 2011 Revenue Bonds issued by WEDFA is non-recourse to GEO. The 2011 Revenue Bonds will mature in October 2021 with fixed coupon rates of 5.25%.

As of March 31, 2019, included in current restricted cash and cash equivalents is $8.0 million of funds held in trust for debt service and other reserves with respect to the above mentioned note payable to WEDFA.

 

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Australia - Ravenhall

In connection with a design and build correctional facility project agreement with the State of Victoria, the Company entered into a syndicated facility agreement (the “Construction Facility”) with National Australia Bank Limited to provide debt financing for construction of the project. The Construction Facility provided for non-recourse funding up to AUD 791.0 million, or approximately $561.6 million, based on exchange rates as of March 31, 2019. The term of the Construction Facility is through September 2019 and bears interest at a variable rate quoted by certain Australian banks plus 200 basis points. The Company intends to refinance the Construction Facility prior to September 2019. As of March 31, 2019, approximately $318 million was outstanding under the Construction Facility. The Company also entered into interest rate swap agreements related to its non-recourse debt in connection with the project. Refer to Note 10 - Derivative Financial Instruments.

Guarantees

Australia

The Company has entered into a guarantee in connection with the operating performance of a facility in Australia. The obligation amounted to approximately AUD 100.0 million, or $71.0 million, based on exchange rates as of March 31, 2019. The guarantee is secured by outstanding letters of credit under the Company’s Revolver as of March 31, 2019.

At March 31, 2019, the Company also had nine other letters of credit outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $12.3 million.

South Africa

In connection with the creation of South African Custodial Services Pty. Limited (“SACS”), the Company had entered into certain guarantees related to the financing, construction and operation of the prison. The Company had guaranteed certain obligations of SACS under its debt agreements to SACS’ senior lenders through the issuance of letters of credit under the Company’s Revolver. In July 2018, SACS settled all amounts due under the debt facilities and has therefore discharged the guaranteed obligations, therefore the guarantees related to these obligations were no longer necessary and the letters of credit were not renewed. Additionally, SACS was required to maintain funding in a rectification account maintained for the payment of certain costs in the event of contract termination. SACS has met the required funding obligation and there is no further requirement to maintain the required funding amount.

In addition to the above, the Company had also agreed to provide a loan, if required, of up to 20 million South African Rand, or $1.4 million based on exchange rates as of March 31, 2019, referred to as the shareholder’s standby facility, to SACS for the purpose of financing SACS’ obligations under its contract with the South African government. No amounts have been funded under the shareholder’s standby facility. The Company’s obligations under the shareholder’s standby facility expired upon SACS’s release from its obligations under the common terms agreement. SACS’ obligations in terms of the common terms agreements expired in February 2019 with the final payment of the facility management fees when the Company’s obligations under the shareholder’s standby facility expired.

The Company had 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 expired in February 2019 when all SACS obligation in terms of the finance agreements were settled.

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

12. COMMITMENTS, CONTINGENCIES AND OTHER

Litigation, Claims and Assessments

As previously reported and described in the Company’s prior periodic reports, including most recently in our Form 10-K for the year ended December 31, 2018, on February 8, 2017, former civil immigration detainees at the Aurora Immigration Detention Center filed a class action lawsuit on October 22, 2014, against the Company in the United States District Court for the District of Colorado (the “Court”). The complaint alleges that the Company was in violation of the Colorado Minimum Wages of Workers Act and the federal Trafficking Victims Protection Act (“TVPA”). The plaintiff class claims that the Company was unjustly enriched because of the level of payment the detainees received for work performed at the facility, even though the voluntary work program as well as the wage rates and standards associated with the program that are at issue in the case are authorized by the Federal government under guidelines approved by the United States Congress. On July 6, 2015, the

 

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Court found that detainees were not employees under the Colorado Minimum Wage Order and dismissed this claim. In February 2017, the Court granted the plaintiff-class’ motion for class certification. The plaintiff class seeks actual damages, compensatory damages, exemplary damages, punitive damages, restitution, attorneys’ fees and costs, and such other relief as the Court may deem proper. In the time since the Colorado suit was initially filed, three similar lawsuits have been filed - two in Washington and one in California. In Washington, one of the two lawsuits was filed on September 9, 2017 by immigration detainees against the Company in the U.S. District Court for the Western District of Washington. The second was filed on September 20, 2017 by the State Attorney General against the Company in the Superior Court of the State of Washington for Pierce County, which the Company removed to the U.S. District Court for the Western District of Washington on October 9, 2017. In California, a class-action lawsuit was filed on December 19, 2017 by immigration detainees against the Company in the U.S. District Court Eastern Division of the Central District of California. All three lawsuits allege violations of the respective state’s minimum wage laws. However, the California lawsuit, like the Colorado suit, also includes claims that the Company violated the TVPA and California’s equivalent state statute. The Company intends to take all necessary steps to vigorously defend itself and has consistently refuted the allegations and claims in these lawsuits. The Company has not recorded an accrual relating to these matters at this time, as a loss is not considered probable nor reasonably estimable at this stage of the lawsuit.

The nature of the Company’s business exposes it to various types of third-party legal claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, product liability claims, intellectual property infringement claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company’s facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. 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. However, the results of these claims or proceedings cannot be predicted with certainty, and an unfavorable resolution of one or more of these claims or proceedings could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Other Assessment

A state non-income tax audit completed in 2016 included tax periods for which the state tax authority had a number of years ago processed a substantial tax refund. At the completion of the audit fieldwork, the Company received a notice of audit findings disallowing deductions that were previously claimed by the Company, approved by the state tax authority and served as the basis for the approved refund claim. In early January 2017, the Company received a formal Notice of Assessment of Taxes and Demand for Payment from the taxing authority disallowing the deductions. The total tax, penalty and interest assessed is approximately $19.6 million. The Company has filed an administrative protest and disagrees with the assessment and intends to take all necessary steps to vigorously defend its position. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of outside counsel in connection with this matter.

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 be approximately $218 million of which $195 million was spent through the first three months of 2019. The Company estimates the remaining capital requirements related to these capital projects will be $23 million which will be spent through the remainder of 2019.

Idle Facilities

As of March 31, 2019, the Company was marketing approximately 4,000 vacant beds at four of its idle facilities to potential customers. The carrying values of these idle facilities, which are included in Property and Equipment, Net in the accompanying consolidated balance sheets, totaled $110.0 million as of March 31, 2019, excluding equipment and other assets that can be easily transferred for use at other facilities. There was no indication of impairment related to the Company’s idle facilities at March 31, 2019. In May 2019, the Company entered into a contract for the reactivation of its company-owned 1,800-bed North Lake Correctional Facility located in Baldwin, Michigan which was included in the above idle facilities. Refer to Note 17 - Subsequent Events.

 

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13. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

Operating and Reporting Segments

The Company conducts its business through four reportable business segments: the U.S. Corrections & Detention segment; the GEO Care segment; the International Services segment; and the Facility Construction & Design segment. The Company’s segment revenues from external customers and a measure of segment profit are as follows (in thousands):

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Revenues:
U.S. Corrections & Detention		$	390,510			$	358,681
GEO Care			153,843				140,078
International Services			64,224				66,158
Facility Construction & Design [1]			2,090				—
Total revenues		$	610,667			$	564,917
Operating income from segments:
U.S. Corrections & Detention		$	76,924			$	69,188
GEO Care			38,538				31,692
International Services			5,739				5,402
Facility Construction & Design [1]			—				—
Operating income from segments		$	121,201			$	106,282
General and Administrative Expenses			(46,424	)			(41,832	)
Total Operating Income		$	74,777			$	64,450

 

[1]	In 2019, Facility Construction & Design revenues related to an expansion project at the Company’s Fulham Correctional Centre in Australia which is expected to be completed in the third quarter of 2020. There is no margin associated with the expansion.

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
		March 31, 2019				March 31, 2018
Operating income from segments		$	121,201			$	106,282
Unallocated amounts:
General and Administrative Expenses			(46,424	)			(41,832	)
Net Interest Expense			(31,884	)			(26,770	)
Income before income taxes and equity in earnings of affiliates		$	42,893			$	37,680

 

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