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GEO > SEC Filings for GEO > Form 10-Q on 6-May-2014All Recent SEC Filings

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Form 10-Q for GEO GROUP INC


6-May-2014

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;

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 and our ability to capitalize on opportunities for public-private partnerships;

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;


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

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;

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 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, federal and foreign income tax law changes, 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, 2013 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, 2013. 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.


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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 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, 2014, our worldwide operations included the management and/or ownership of approximately 77,000 beds at 98 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 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 and educational 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;

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 theUnited Kingdom, including all of Wales and England except London and The East of England; and

our services are provided at facilities which we either own, lease or are owned by our customers

For the three months ended March 31, 2014 and March 31, 2013, we had consolidated revenues of $393.1 million and $377.0 million, respectively, and we maintained an average company wide facility occupancy rate of 95.5% including 71,239 active beds and excluding 5,756 beds marketed to potential customers for the three months ended March 31, 2014, and 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.

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. The amount, timing and frequency of future dividends, however, will be at the sole discretion of our Board and will be declared based upon various factors, many of which are beyond our control, including, our financial condition and operating cash flows, the amount


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required to maintain REIT status and reduce any income taxes that we otherwise would be required to pay, limitations on distributions in our existing and future debt instruments, limitations on our ability to fund distributions using cash generated through our TRSs and other factors that our Board may deem relevant.

During the three months ended March 31, 2014 and the year ended December 31, 2013, respectively, we declared and paid the following regular cash distributions to our stockholders as follows:

                                                                                                                   Aggregate Payment
Declaration Date                      Payment Due            Record Date          Distribution Per Share         Amount (in millions)
January 17, 2013                   March 1, 2013          February 15, 2013      $                   0.50        $                35.7
May 7, 2013                        June 3, 2013           May 20, 2013           $                   0.50        $                35.8
July 30, 2013                      August 29, 2013        August 19, 2013        $                   0.50        $                36.1
November 1, 2013                   November 26, 2013      November 14, 2013      $                   0.55        $                39.6
February 18, 2014                  March 14, 2014         March 3, 2014          $                   0.57        $                41.1

Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on March 3, 2014, 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, 2013.

Fiscal 2014 Developments

Contract Awards

We are currently marketing approximately 5,800 vacant beds at five of our idle facilities to potential customers. The carrying values of these idle facilities totaled $181 million as of March 31, 2014, excluding equipment and other assets that can be easily transferred for use at other facilities.

On February 3, 2014, we announced that we assumed management of the 985-bed Moore Haven Correctional Facility, the 985-bed Bay Correctional Facility, and the 1,884-bed Graceville Correctional Facility under contracts with the Florida Department of Management Services effective February 1, 2014. The facilities are expected to generate approximately $56 million in combined annualized revenues at full occupancy.

On February 3, 2014, we announced that we had increased the contracted capacity at the Company-owned Rio Grande Detention Center in Laredo, Texas from 1,500 to 1,900 beds under a contract with the U.S. Marshals Service. The 1,900-bed center is expected to generate approximately $38 million in total annualized revenues. at full capacity.

On April 1, 2014, the Company announced that it had signed a contract with the California Department of Corrections and Rehabilitation for the reactivation of the Company-owned, 260-bed McFarland Female Community Reentry Facility located in McFarland, California. The facility is expected to generate approximately $9 million in annualized revenues.

On April 30, 2014, the Company announced that it had signed an amendment to the existing contract with the City of Adelanto, California for a 640-bed expansion to the Company-owned, 1,300-bed Adelanto Detention Facility. The facility is expected to generate approximately $21 million in additional annualized revenues.

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 as of 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, 2014, we did not experience any significant changes in estimates or judgments inherent in the preparation of our consolidated financial statements. A summary of our significant accounting policies is contained in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.


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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.

Comparison of the Quarter Ended March 31, 2014 and the Quarter Ended March 31, 2013

Revenues



                                    2014        % of Revenue         2013        % of Revenue       $ Change        % Change
                                                                    (Dollars in thousands)
U.S. Corrections & Detention      $ 266,715              67.8 %    $ 248,772              66.0 %    $  17,943             7.2 %
GEO Community Services               76,652              19.5 %       73,941              19.6 %        2,711             3.7 %
International Services               49,770              12.7 %       54,318              14.4 %       (4,548 )          (8.4 )%

Total                             $ 393,137             100.0 %    $ 377,031             100.0 %    $  16,106             4.3 %

U.S. Corrections & Detention

Revenues increased in the Quarter Ended March 31, 2014 compared to the Quarter Ended March 31, 2013 primarily due to aggregate increases of $16.1 million resulting from: (i) the activation and intake of inmates at the Central Valley and Desert View correctional facilities in the fourth quarter of 2013; and
(ii) our assumption of the management of the Moore Haven, Bay and Graceville correctional facilities in the first quarter of 2014. We also experienced aggregate increases in revenues of $8.9 million at certain of our facilities primarily due to net increases in population, transportation services and/or rates, including the increased revenues due to our purchase of the previously managed-only 1,287-bed Joe Corley Detention Center in June 2013 and our expansion of the Company-owned Rio Grande Detention Center from 1,500 beds to 1,900 beds in the first quarter of 2013. These increases were partially offset by an aggregate decrease of $7.0 million primarily due to contract terminations in 2013.

The number of compensated mandays in U.S. Corrections & Detention facilities was approximately 4.5 million in the Quarter Ended March 31, 2014 and 4.2 million in the Quarter Ended March 31, 2013. We experienced an aggregate net increase of approximately 330,000 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 partially offset by decreases resulting from 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. Corrections & Detention facilities was 96.1% and 96.0% of capacity in the Quarter Ended March 31, 2014 and the Quarter Ended March 31, 2013 respectively, excluding idle facilities.

GEO Community Services

The increase in revenues for GEO Community Services in the Quarter Ended March 31, 2014 compared to the Quarter Ended March 31, 2013 is primarily attributable to net increases of $3.1 million due to new electronic monitoring contracts at BI and BI's acquisition of Protocol in the first quarter of 2014. In addition, we experienced a net increase of $0.6 million primarily due to new programs and program growth at our community based and re-entry centers. These increases were partially offset by decreases in revenues of $1.0 million related to contract terminations and census declines at certain facilities.

International Services

The decrease in revenues for International Services in the Quarter Ended March 31, 2014 compared to the Quarter Ended March 31, 2013 is primarily due to the result of foreign exchange rate fluctuations of $(6.2) million. This decrease was partially offset by an aggregate net increase of $1.7 million primarily attributable to our Australian subsidiary related to population increases, contractual increases linked to the inflationary index and the provision of additional services under certain contracts.


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Operating Expenses



                                                  % of Segment                      % of Segment
                                     2014           Revenues           2013           Revenues         $ Change        % Change
                                                                      (Dollars in thousands)
U.S. Corrections & Detention       $ 191,777               71.9 %    $ 179,583               72.2 %    $  12,194             6.8 %
GEO Community Services                53,596               69.9 %       49,333               66.7 %        4,263             8.6 %
International Services                46,550               93.5 %       51,881               95.5 %       (5,331 )         (10.3 )%

Total                              $ 291,923               74.3 %    $ 280,797               74.5 %    $  11,126             4.0 %

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) an increase of $12.6 million due to the activation and intake of inmates at the Central Valley and Desert View correctional facilities in the fourth quarter of 2013; and (ii) our assumption of the management of the Moore Haven, Bay and Graceville correctional facilities in the first quarter of 2014. In addition, we experienced increases of $4.0 million at certain of our facilities primarily attributable to net population increases, increased transportation services, including our expansion of the Company-owned Rio Grande Detention Center from 1,500 beds to 1,900 beds in the first quarter of 2014, and the variable costs associated with those increases. These increases were partially offset by a decrease of $4.7 million due to contract terminations.

GEO Community Services

Operating expenses for GEO Community Services increased by $4.3 million during the Quarter Ended March 31, 2014 from the Quarter Ended March 31, 2013 primarily due to net increases of $5.0 million due to the following: (i) variable costs associated with increases in electronic monitoring contracts at BI; (ii) new programs and program growth at our community based and re-entry centers; and
(iii) BI's acquisition of Protocol in late February 2014. These increases were partially offset by decreases that resulted from contract terminations and census declines of $0.7 million. In addition, operating costs as a percentage of revenue have increased primarily due to revenue decreases at certain of our youth facilities related to census declines without a corresponding reduction in certain fixed overhead costs at these facilities.

International Services

Operating expenses for our International Services segment during the Quarter Ended March 31, 2014 decreased $5.3 million over the Quarter Ended March 31, 2013 which was primarily attributable to the impact of foreign currency exchange rate fluctuations of $(5.8) million. In addition, there was a net decrease of $2.0 million primarily related to cost cutting measures implemented to reduce our overhead costs in the United Kingdom. These decreases were partially offset by a net increase of $2.4 million primarily attributable to our Australian subsidiary due to net population increases and contractual increases in labor.

Depreciation and Amortization



                                                   % of                        % of
                                                  Segment                     Segment
                                      2014        Revenue         2013        Revenue        $ Change      % Change
                                                                 (Dollars in thousands)
U.S. Corrections & Detention        $ 16,128           6.0 %    $ 15,097           6.1 %    $    1,031           6.8 %
GEO Community Services                 7,355           9.6 %       7,203           9.7 %           152           2.1 %
International Services                   659           1.3 %         635           1.2 %            24           3.8 %

Total                               $ 24,142           6.1 %    $ 22,935           6.1 %    $    1,207           5.3 %

U.S. Corrections & Detention

U.S. Corrections & Detention depreciation and amortization expense increased slightly in the Quarter Ended March 31, 2014 compared to the Quarter Ended March 31, 2013 primarily due to renovations made at our Broward Transition Center which were completed in September 2013 and also our purchase of the 1,287-bed Joe Corley Detention Center in June 2013.


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GEO Community Services

GEO Community Services depreciation and amortization expense increased by $0.2 million in the Quarter Ended March 31, 2014 compared to the Quarter Ended March 31, 2013. The increase is primarily due to an increase in monitoring and other equipment at BI in 2013 and 2014.

International Services

Depreciation and amortization expense was fairly consistent in the Quarter Ended March 31, 2014 compared to the Quarter Ended March 31, 2013 as there were not significant additions during 2013 or 2014 at our international subsidiaries.

Other Unallocated Operating Expenses



                                                     % of                        % of
                                        2014        Revenue         2013        Revenue       $ Change        % Change
                                                                   (Dollars in thousands)
General and Administrative Expenses   $ 28,502           7.2 %    $ 32,040           8.5 %    $  (3,538 )         (11.0 )%

General and administrative expenses comprise substantially all of our other . . .

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