GEO

Business Context and Reporting Period

Company: The GEO Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended September 27, 2009.
Business Overview: GEO is a leading provider of government-outsourced services specializing in the management of correctional, detention, and mental health facilities in the U.S., Australia, South Africa, the U.K., and Canada. As of September 27, 2009, the company managed 58 facilities with approximately 53,400 beds and maintained an average occupancy rate of 94.8% for the thirty-nine weeks ended.

Key Financial Metrics

(In thousands, except per share data)

Margins (39 Weeks): Operating margin was approximately 11.5%. The effective tax rate was 38.5%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 16.0% ($40.8 million) for the quarter and 5.6% ($43.8 million) for the year-to-date compared to the prior year periods.
• Segment Performance:
  • U.S. Corrections: Revenue increased 8.2% (quarter) and 10.9% (YTD) driven by new facility activations (Joe Corley, Rio Grande, Maverick County) and capacity expansions.
  • Facility Construction: Revenue surged 180.8% (quarter) and 3.7% (YTD) primarily due to the construction of the Blackwater River Correctional Facility.
  • International Services: Revenue increased 8.2% (quarter) but decreased 10.4% (YTD) due to unfavorable foreign exchange fluctuations offset by new contracts (Harmondsworth Immigration Removal Centre).
  • GEO Care: Revenue declined 3.7% (quarter) and 5.5% (YTD) due to the termination of the South Florida Evaluation and Treatment Center contract.
• Profitability: Net income increased 21.4% for the quarter and 18.9% year-to-date. Operating expenses as a percentage of revenue decreased slightly to 79.0% for the nine-month period.
• Capital Expenditures: Capital expenditures totaled $113.7 million for the nine months ended September 27, 2009, compared to $98.8 million in the prior year period.

Guidance, Outlook, Risks, and Unusual Items

Subsequent Events and Liquidity

• Debt Refinancing: In October 2009, GEO completed a private offering of $250.0 million in 7 3/4% Senior Notes due 2017. Proceeds were used to fund a tender offer for its 8 1/4% Senior Notes due 2013, resulting in an estimated $4.3 million loss.
• Credit Facility Amendment: The Senior Credit Facility was amended to increase the revolver capacity to $330.0 million and extend the maturity to 2012. As of October 20, 2009, approximately $202 million was available for borrowing.
• Acquisition: GEO Care acquired Just Care, Inc. for $40.0 million on September 30, 2009.

Outlook

Management expects continued growth in the U.S. federal and state markets due to budgetary pressures driving public-private partnerships. Internationally, the company is bidding on four prison projects totaling 12,000 beds. The company estimates its annual effective tax rate for fiscal 2009 to be in the range of 38% to 39%.

Risks and Contingencies

• Litigation: A $51.7 million wrongful death judgment from 2006 was settled in October 2009 within insurance limits. A separate Australian property damage claim seeking up to $15.6 million remains pending; the company believes it has valid defenses but notes a potential material adverse effect if settled unfavorably.
• Tax Examination: The IRS proposed disallowing a $15.4 million deduction for the 2005 tax year. GEO intends to appeal.
• Contract Terminations: The company received notice of intent to terminate the McFarland Community Correctional Facility contract in California. Several other contracts were terminated or assigned during the period, though management does not expect a material adverse impact.
• Government Budgets: Delays in payments from state agencies (e.g., California) could impact liquidity and covenant compliance.

Investor Verification Checklist

• Debt Structure: Verify the terms and covenants of the new $250 million 7 3/4% Senior Notes and the amended Senior Credit Facility.
• Construction Pipeline: Confirm the status and funding sources for the $67.1 million in remaining committed capital projects for fiscal 2009/2010.
• Legal Reserves: Review the adequacy of reserves for the Australian property damage claim and the outcome of the IRS tax appeal.
• Occupancy Rates: Monitor occupancy rates at new facilities (e.g., Blackwater River, Parklea) to ensure projected revenue targets are met.
• Foreign Exchange: Assess the impact of currency fluctuations on the International Services segment, which saw YTD revenue declines due to FX rates.