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GEO > SEC Filings for GEO > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for GEO GROUP INC


10-May-2013

Quarterly Report


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

Forward-Looking Information

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. "Forward-looking" statements are any statements that are not based on historical information. Statements other than statements of historical facts included in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are "forward-looking" statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" or "continue" or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or "cautionary statements," include, but are not limited to:

our ability to timely build and/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;

our ability to remain qualified for taxation as a real estate investment trust, or REIT;

our ability to fulfill our debt service obligations and its impact on our liquidity;

the instability of foreign exchange rates, exposing us to currency risks in Australia, Canada, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;

our ability to activate the inactive beds at our idle facilities;

our ability to maintain occupancy rates at our facilities;

an increase in unreimbursed labor rates;

our ability to expand, diversify and grow our correctional, detention, re-entry, community-based services, youth services, monitoring services, evidence-based supervision and treatment programs and secure transportation services businesses;

our ability to win management contracts for which we have submitted proposals, retain existing management contracts and meet any performance standards required by such management contracts;

our ability to control operating costs associated with contract start-ups;

our ability to raise new project development capital given the often short-term nature of the customers' commitment to use newly developed facilities;

our ability to estimate the government's level of dependency on privatized correctional services;

our ability to accurately project the size and growth of the U.S. and international privatized corrections industry;

our ability to successfully respond to delays encountered by states privatizing correctional services and cost savings initiatives implemented by a number of states;

our ability to develop long-term earnings visibility;

our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisitions on satisfactory terms, and estimate the synergies to be achieved as a result of such acquisitions;

our exposure to the impairment of goodwill and other intangible assets as a result of our acquisitions;

our ability to successfully conduct our operations in the United Kingdom and South Africa through joint ventures;


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our ability to obtain future financing on satisfactory terms or at all, including our ability to secure the funding we need to complete ongoing capital projects;

our exposure to political and economic instability and other risks impacting our international operations;

our exposure to risks impacting our information systems, including those that may cause an interruption, delay or failure in the provision of our services;

our exposure to rising general insurance costs;

our exposure to state and federal income tax law changes internationally and domestically, including changes to the REIT provisions, and our exposure as a result of federal and international examinations of our tax returns or tax positions;

our exposure to claims for which we are uninsured;

our exposure to rising employee and inmate medical costs;

our ability to manage costs and expenses relating to ongoing litigation arising from our operations;

our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers compensation and automobile liability claims;

the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us and continue to operate under our existing agreements and/ or renew our existing agreements;

our ability to pay quarterly dividends consistent with our requirements as a REIT, and expectations as to timing and amounts;

our ability to comply with government regulations and applicable contractual requirements;

our ability to acquire, protect or maintain our intellectual property;

the risk that future sales of shares of our common stock could adversely affect the market price of our common stock and may be dilutive; and

other factors contained in our filings with the Securities and Exchange Commission, or the SEC, including, but not limited to, those detailed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and our Current Reports on Form 8-K filed with the SEC.

We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q.

Introduction

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under "Forward Looking Information", those described below under "Part II - Item 1A. Risk Factors" and under "Part I - Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. For the purposes of this discussion and analysis, we refer to three months ended March 31, 2013 as "First Quarter 2013," and we refer to the three months ended April 1, 2012 as "First Quarter 2012."

We are a real estate investment trust ("REIT") specializing in the ownership, leasing and management of correctional, detention and re-entry facilities and the provision of community-based services and youth services in the United States, Australia, South Africa, the United Kingdom and Canada. We own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, and community based re-entry facilities. We offer counseling, education and/or treatment to inmates with alcohol and


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drug abuse problems at most of the domestic facilities we manage. We are also a provider of innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. Additionally, we have an exclusive contract with the U.S. Immigration and Customs Enforcement, which we refer to as ICE, to provide supervision and reporting services designed to improve the participation of non-detained aliens in the immigration court system. We develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency. We also provide secure transportation services for offender and detainee populations as contracted domestically and in the United Kingdom through our joint venture, GEO Amey PECS Ltd., which we refer to as GEOAmey.

As of March 31, 2013, our worldwide operations included the management and/or ownership of approximately 72,000 beds at 95 correctional, detention and re-entry facilities, including idle facilities and projects under development and also included the provision of monitoring of more than 70,000 offenders in a community-based environment on behalf of approximately 900 federal, state and local correctional agencies located in all 50 states.

We provide a diversified scope of services on behalf of our government clients:

our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities;

our community-based services involve supervision of adult parolees and probationers and the provision of temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community;

our youth services include residential, detention and shelter care and community-based services along with rehabilitative, educational and treatment programs;

our monitoring services provide our governmental clients with innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants; including services provided under the Intensive Supervision Appearance Program, which we refer to as ISAP, to ICE for the provision of services designed to improve the participation of non-detained aliens in the immigration court system;

we develop new facilities, using our project development experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency; and

we provide secure transportation services for offender and detainee populations as contracted domestically, and internationally, our joint venture GEOAmey is responsible for providing prisoner escort and custody services in the United Kingdom, including all of Wales and all of England except London and The East of England.

For the three months ended March 31, 2013 and April 1, 2012, we had consolidated revenues of $377.0 million and $360.0 million, respectively, and we maintained an average company wide facility occupancy rate of 95.3% including 66,338 active beds and excluding 6,056 idle beds marketed to potential customers for the three months ended March 31, 2013, and 95.5% including 69,983 active beds and excluding 7,056 idle beds marketed to potential customers for the three months ended April 1, 2012.

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

As a REIT, we are required to distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) and we began paying regular distributions in 2013. On January 17, 2013, our Board declared GEO's first quarterly REIT cash dividend of $0.50 per share of common stock, which was paid on March 1, 2013 to shareholders of record as of the close of business on February 15, 2013.


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Divestiture of Residential Treatment Services - Applicable REIT rules substantially restrict the ability of REITs to operate health care facilities. As a result, in order to achieve and preserve REIT status, on December 31, 2012, we completed the divestiture of all of our residential treatment health care facility assets and related management contracts ("Residential Treatment Services" or "RTS"). The operating results of RTS have been retroactively reclassified to discontinued operations for the three months ended April 1, 2012. See Note 8 - Discontinued Operations of Notes to Consolidated Financial Statements.

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

Fiscal Year- In connection with the REIT conversion discussed above, effective December 31, 2012, we changed to a calendar year from a fiscal year that ended on the Sunday closest to the calendar year end and changed our fiscal quarters to coincide with each calendar quarter. The first fiscal quarter of 2013 began on January 1, 2013 and ended on March 31, 2013, and is referred to as the three months ended March 31, 2013. The first fiscal quarter of 2012 began on January 2, 2012 and ended on April 1, 2012, and is referred to as the three months ended April 1, 2012.

Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on March 1, 2013, for further discussion and analysis of information pertaining to our financial condition and results of operations as of and for the fiscal year ended December 31, 2012.

Fiscal 2013 Developments

Contract Awards, Activations and Terminations

We are currently marketing approximately 6,000 vacant beds at seven of our idle facilities to potential customers. The carrying values of these idle facilities totaled $238.7 million as of March 31, 2013, excluding equipment and other assets that can be easily transferred for use at other facilities.

Critical Accounting Policies

The accompanying unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. During the three months ended March 31, 2013, we did not experience any changes in estimates or judgments inherent in the preparation of our consolidated financial statements except that we began operating as a REIT for federal income tax purposes effective January 1, 2013. As a result of the REIT conversion, we reorganized our operations and moved non-real estate components into taxable REIT subsidiaries ("TRS's"). Our TRS structure requires the provisions of services between affiliated companies which are conducted at arm's length subject to applicable tax law and promulgated tax regulations. We have, with the assistance of our tax advisors, undertaken substantial analysis to determine and document the appropriateness of the arm's length compensation used in compliance with the underlying tax rules and regulations. A summary of our significant accounting policies is contained in Note 1 to our financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q. The results of operations presented herein do not include the results of operations related to the Company's discontinued operations for all periods presented. Refer to Note 8-Discontinued Operations of the notes to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


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Comparison of Three Months Ended March 31, 2013 and Three Months Ended April 1, 2012

Revenues



                                   2013        % of Revenue         2012        % of Revenue       $ Change      % Change
                                                                  (Dollars in thousands)
U.S. Corrections & Detention     $ 248,896              66.0 %    $ 235,035              65.2 %    $  13,861           5.9 %
GEO Community Services              73,941              19.6 %       72,258              20.1 %        1,683           2.3 %
International Services              54,194              14.4 %       52,749              14.7 %        1,445           2.7 %

Total                            $ 377,031             100.0 %    $ 360,042             100.0 %    $  16,989           4.7 %

U.S. Corrections & Detention

Revenues increased in First Quarter 2013 compared to First Quarter 2012 primarily due to aggregate increases of $13.4 million resulting from the activation and intake of inmates at our expanded 650-bed Adelanto ICE Processing Center East ("Adelanto East") in August 2012, the 1,500-bed Riverbend Correctional Facility ("Riverbend") in December 2011, the 600-bed Karnes Civil Detention Center ("Karnes Civil") in March 2012 and the commencement of services under our contract, signed in October 2012, with the United States Marshals Service for the housing of up to 320 federal detainees at our Aurora Detention Facility. We also experienced aggregate increases in revenues of $6.5 million at certain of our facilities primarily due to increases in population, transportation services and/or rates, including the expansion to the New Castle Correctional Facility ("New Castle") in the first quarter of 2012. These increases were partially offset by an aggregate decrease of $5.8 million primarily due to contract terminations and other decreases related to lower populations, transportation services and/or rates at certain facilities.

The number of compensated mandays in U.S. Corrections & Detention facilities was 4.2 million in First Quarter 2013 and 4.0 million in First Quarter 2012. We experienced an aggregate net increase of approximately 182,000 mandays as a result of our new contracts discussed above and also as a result of increases in population at certain facilities. These increases were offset by decreases resulting from contract terminations and other decreases related to lower populations at certain facilities. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Detention & Corrections facilities was 96.0% and 96.1% of capacity in First Quarter 2013 and First Quarter 2012 respectively, excluding idle facilities.

GEO Community Services

The increase in revenues for GEO Community Services in First Quarter 2013 compared to First Quarter 2012 is primarily attributable to increases of $1.3 million due to new electronic monitoring contracts of BI and a net increase of $1.0 million primarily due to population increases at certain facilities. This increase was partially offset by decreases in revenues of $0.7 million related to contracts terminated during 2012.

International Services

The increase in revenues for International Services in First Quarter 2013 compared to First Quarter 2012 is primarily attributable to aggregate net increases at our Australian and South African subsidiaries of $2.9 million related to population increases, contractual increases linked to the inflationary index and the provision of additional services under certain contracts. These increases were partially offset by a decrease of $1.5 million as a result of foreign exchange rate fluctuations.


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Operating Expenses



                                                  % of Segment                      % of Segment
                                     2013           Revenues           2012           Revenues         $ Change        % Change
                                                                      (Dollars in thousands)
U.S. Corrections & Detention       $ 179,713               72.2 %    $ 172,760               73.5 %    $   6,953             4.0 %
GEO Community Services                49,333               66.7 %       49,470               68.5 %         (137 )          (0.3 )%
International Services                51,751               95.5 %       48,490               91.9 %        3,261             6.7 %

Total                              $ 280,797               74.5 %    $ 270,720               75.2 %    $  10,077             3.7 %

Operating expenses consist of those expenses incurred in the operation and management of our correctional, detention and community based facilities.

U.S. Corrections & Detention

The increase in operating expenses for U.S. Corrections & Detention reflects the following: (i) the activation and intake of inmates at the Adelanto East expansion, Riverbend, Karnes Civil and services provided under our contract with the United States Marshals at our Aurora facility which contributed an aggregate increase to operating expenses of $4.7 million; and (ii) increases of $2.6 million at certain of our facilities primarily related to net population increases and increased transportation services and the variable costs associated with those increases. These increases were partially offset by a decrease of $0.4 million related to contracts terminated during 2012.

GEO Community Services

Operating expenses for GEO Community Services decreased by $0.1 million during First Quarter 2013 from First Quarter 2012 primarily due to contract terminations in 2012 of $0.5 million These decreases were partially offset by increases of $0.4 million due to population increases and the related variable costs at certain facilities.

International Services

Operating expenses for our International Services segment during First Quarter 2013 increased $3.3 million over First Quarter 2012 which was primarily attributable to an increase of $3.0 million at our Australian subsidiary due to population increases and additional services provided under new contracts at those facilities.

Depreciation and Amortization



                                                % of Segment                      % of Segment
                                    2013           Revenue            2012           Revenue          $ Change         % Change
                                                                      (Dollars in thousands)
U.S. Corrections & Detention      $ 15,097                6.1 %     $ 15,168                6.5 %     $     (71 )           (0.5 )%
GEO Community Services               7,203                9.7 %        6,539                9.0 %           664             10.2 %
International Services                 635                1.2 %          532                1.0 %           103             19.4 %

Total                             $ 22,935                6.1 %     $ 22,239                6.2 %     $     696              3.1 %

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense decreased slightly in First Quarter 2013 compared to First Quarter 2012 primarily because there were no significant construction projects completed during the Second, Third and Fourth Quarters of 2012 or First Quarter 2013.

GEO Community Services

GEO Community Services depreciation and amortization expense increased by $0.7 million in First Quarter 2013 compared to First Quarter 2012. The increase is primarily due to an increase in monitoring and other equipment at BI in 2012 and 2013 related to certain contract wins.


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International Services

Depreciation and amortization expense increased slightly in First Quarter 2013 over First Quarter 2012 primarily from increases in capital expenditures at our Australian subsidiary and also from fluctuations in foreign exchange rates.

Other Unallocated Operating Expenses



                                   2013        % of Revenue          2012        % of Revenue         $ Change        % Change
                                                                     (Dollars in thousands)
General and Administrative
Expenses                         $ 32,040                8.5 %     $ 26,586                7.4 %     $    5,454            20.5 %

General and administrative expenses comprise substantially all of our other unallocated operating expenses primarily including corporate management salaries and benefits, professional fees and other administrative expenses. The increase in general and administrative expenses in First Quarter 2013 compared to First . . .

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