The GEO (GEO) - 2020 Q3 - Quarterly Report

Part I ITEM 1. FINANCIAL STATEMENTS This section presents the company's unaudited consolidated financial statements, covering operations, comprehensive income, balance sheets, and cash flows CONSOLIDATED STATEMENTS OF OPERATIONS This statement presents the company's revenues, operating expenses, and net income for the three and nine months ended September 30, 2020 and 2019 Consolidated Statements of Operations (Unaudited, in thousands, except per share data) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $579,136 | $631,579 | $1,771,982 | $1,856,212 | | Operating expenses | 434,402 | 472,513 | 1,341,063 | 1,382,678 | | Depreciation and amortization | 33,628 | 32,419 | 100,389 | 97,240 | | General and administrative expenses | 46,644 | 48,488 | 145,969 | 142,183 | | Operating income | 64,462 | 78,159 | 184,561 | 234,111 | | Interest income | 6,360 | 6,686 | 17,046 | 23,127 | | Interest expense | (30,749) | (36,645) | (95,539) | (115,857) | | Gain (loss) on extinguishment of debt | 1,472 | 594 | 3,035 | (5,147) | | Net income attributable to The GEO Group, Inc. | $39,220 | $45,932 | $101,121 | $128,551 | | Basic EPS | $0.33 | $0.39 | $0.84 | $1.08 | | Diluted EPS | $0.33 | $0.39 | $0.84 | $1.08 | | Dividends declared per share | $0.48 | $0.48 | $1.44 | $1.44 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME This statement presents net income and other comprehensive income components, including foreign currency adjustments and derivative fair value changes Consolidated Statements of Comprehensive Income (Unaudited, in thousands) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $39,172 | $45,885 | $100,947 | $128,370 | | Other comprehensive income (loss), net of tax: | | | | | | Foreign currency translation adjustments | 2,002 | (4,553) | (2,802) | (2,787) | | Pension liability adjustment, net of tax provision | 107 | 42 | 320 | (563) | | Change in fair value of derivative instrument classified as cash flow hedge, net of tax | 376 | (2,777) | (4,299) | 2,969 | | Total other comprehensive income (loss), net of tax | 2,485 | (7,288) | (6,781) | (381) | | Total comprehensive income | 41,657 | 38,597 | 94,166 | 127,989 | | Comprehensive loss attributable to noncontrolling interests | 44 | 62 | 217 | 191 | | Comprehensive income attributable to The GEO Group, Inc. | $41,701 | $38,659 | $94,383 | $128,180 | CONSOLIDATED BALANCE SHEETS This statement provides a snapshot of the company's assets, liabilities, and shareholders' equity as of September 30, 2020, and December 31, 2019 Consolidated Balance Sheets (Unaudited, in thousands, except share data) | | September 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | ASSETS | | | | Current Assets | | | | Cash and cash equivalents | $53,676 | $32,463 | | Restricted cash and cash equivalents | 27,229 | 32,418 | | Accounts receivable, less allowance for doubtful accounts | 380,072 | 430,982 | | Contract receivable, current portion | 5,703 | 11,199 | | Prepaid expenses and other current assets | 33,393 | 40,716 | | Total current assets | 500,073 | 547,778 | | Restricted Cash and Investments | 40,970 | 30,923 | | Property and Equipment, Net | 2,126,438 | 2,144,722 | | Assets Held for Sale | 9,521 | 6,059 | | Contract Receivable | 368,887 | 360,647 | | Operating Lease Right-of-Use Assets, Net | 121,805 | 121,527 | | Deferred Income Tax Assets | 36,278 | 36,278 | | Goodwill | 776,364 | 776,356 | | Intangible Assets, Net | 193,265 | 210,070 | | Other Non-Current Assets | 74,234 | 83,174 | | Total Assets | $4,247,835 | $4,317,534 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Current Liabilities | | | | Accounts payable | $91,955 | $99,232 | | Accrued payroll and related taxes | 64,812 | 54,672 | | Accrued expenses and other current liabilities | 212,127 | 191,608 | | Operating lease liabilities, current portion | 27,910 | 26,208 | | Current portion of finance lease liabilities, long-term debt and non-recourse debt | 25,073 | 24,208 | | Total current liabilities | 421,877 | 395,928 | | Deferred Income Tax Liabilities | 19,254 | 19,254 | | Other Non-Current Liabilities | 121,525 | 88,526 | | Operating Lease Liabilities | 96,675 | 97,291 | | Finance Lease Liabilities | 2,979 | 2,954 | | Long-Term Debt | 2,343,342 | 2,408,297 | | Non-Recourse Debt | 309,899 | 309,236 | | Shareholders' Equity | | | | Total shareholders' equity attributable to The GEO Group, Inc. | 933,283 | 996,830 | | Noncontrolling interests | (999) | (782) | | Total shareholders' equity | 932,284 | 996,048 | | Total Liabilities and Shareholders' Equity | $4,247,835 | $4,317,534 | CONSOLIDATED STATEMENTS OF CASH FLOWS This statement details cash flows from operating, investing, and financing activities for the nine months ended September 30, 2020 and 2019 Consolidated Statements of Cash Flows (Unaudited, in thousands) | | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Cash Flow from Operating Activities: | | | | Net income | $100,947 | $128,370 | | Net cash provided by operating activities | 358,127 | 322,958 | | Cash Flow from Investing Activities: | | | | Capital expenditures | (83,817) | (90,787) | | Net cash used in investing activities | (77,176) | (77,622) | | Cash Flow from Financing Activities: | | | | Proceeds from long-term debt | 311,579 | 274,370 | | Payments on long-term debt | (380,055) | (310,616) | | Payments on non-recourse debt | (4,530) | (332,717) | | Proceeds from non-recourse debt | — | 322,906 | | Payment for repurchases of common stock | (9,562) | — | | Cash dividends paid | (174,134) | (174,332) | | Net cash used in financing activities | (259,026) | (232,792) | | Net Increase in Cash, Cash Equivalents and Restricted Cash | 21,616 | 10,481 | | Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period | $89,088 | $94,953 | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements 1. BASIS OF PRESENTATION GEO Group, a REIT, prepares unaudited financial statements under GAAP, with COVID-19 significantly impacting operations, facility populations, and costs - GEO Group is a REIT specializing in secure facilities, processing centers, and community reentry centers in the US, Australia, South Africa, and the UK, managing/owning ~93,000 beds at 123 facilities and providing community supervision for >210,000 individuals[21] - The COVID-19 pandemic has caused significant disruptions, including declines in populations at ICE Processing Centers and U.S. Marshals Facilities due to reduced border crossings and court sentencing, and negative impacts on reentry services due to lower referrals[25] - Increased expenditures on engineering controls, PPE, diagnostic testing, medical expenses, and sanitation due to COVID-19 have impacted operations[25] 2. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill remained stable at $776.4 million, while net intangible assets decreased to $193.3 million due to amortization of contracts and technology Goodwill Balances (in thousands) | | January 1, 2020 | Foreign Currency Translation | September 30, 2020 | | :--- | :--- | :--- | :--- | | GEO Secure Services | $316,366 | $— | $316,366 | | GEO Care | $459,589 | $— | $459,589 | | International Services | $401 | $8 | $409 | | Total Goodwill | $776,356 | $8 | $776,364 | Acquired Intangible Assets (in thousands) | | September 30, 2020 (Net Carrying Amount) | December 31, 2019 (Net Carrying Amount) | | :--- | :--- | :--- | | Facility management contracts | $144,665 | $160,261 | | Technology | $3,400 | $4,609 | | Trade names | $45,200 | $45,200 | | Total acquired intangible assets | $193,265 | $210,070 | - Amortization expense for finite-lived intangible assets was $16.7 million for each of the nine months ended September 30, 2020 and 2019, primarily from facility management contracts[27] 3. FINANCIAL INSTRUMENTS Significant financial instruments include restricted investments and interest rate swap derivatives, with swap liabilities increasing to $7.3 million as of September 30, 2020 Fair Value Measurements at September 30, 2020 (in thousands) | | Carrying Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Assets: | | | | | | Restricted investment: Rabbi Trust | $32,787 | $— | $32,787 | $— | | Fixed income securities | $1,893 | $— | $1,893 | $— | | Liabilities: | | | | | | Interest rate swap derivatives | $7,310 | $— | $7,310 | $— | Fair Value Measurements at December 31, 2019 (in thousands) | | Carrying Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Assets: | | | | | | Restricted investments: Rabbi Trust | $28,332 | $— | $28,332 | $— | | Fixed income securities | $1,892 | $— | $1,892 | $— | | Liabilities: | | | | | | Interest rate swap derivatives | $1,869 | $— | $1,869 | $— | - Interest rate swap derivative liabilities are valued using a discounted cash flow model (Level 2), while restricted investments in the rabbi trust are based on underlying equity and fixed income pooled funds (Level 1 and Level 2 securities)[30] 4. FAIR VALUE OF ASSETS AND LIABILITIES Fair values of cash and restricted cash approximate carrying values, while most debt instruments' fair values are lower than carrying values as of September 30, 2020 Estimated Fair Value Measurements at September 30, 2020 (in thousands) | | Carrying Value as of Sep 30, 2020 | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | :--- | | Assets: | | | | | | | Cash and cash equivalents | $53,676 | $53,676 | $53,676 | $— | $— | | Restricted cash and investments | $35,412 | $35,412 | $35,412 | $— | $— | | Liabilities: | | | | | | | Borrowings under senior credit facility | $1,244,130 | $1,148,880 | $— | $1,148,880 | $— | | 5.875% Senior Notes due 2022 | $193,958 | $191,466 | $— | $191,466 | $— | | 5.125% Senior Notes due 2023 | $288,988 | $238,519 | $— | $238,519 | $— | | 5.875% Senior Notes due 2024 | $248,000 | $190,218 | $— | $190,218 | $— | | 6.00% Senior Notes due 2026 | $350,000 | $254,993 | $— | $254,993 | $— | | Non-recourse debt | $329,062 | $329,377 | $— | $329,377 | $— | - Fair values of senior unsecured notes are based on published financial data, while non-recourse debt and senior credit facility borrowings are estimated based on market prices of similar instruments and borrowing rates[32] 5. RESTRICTED CASH AND CASH EQUIVALENTS Total cash, cash equivalents, and restricted cash decreased to $89.1 million by September 30, 2020, with restricted cash primarily held by the Australian subsidiary Reconciliation of Cash, Cash Equivalents and Restricted Cash (in thousands) | | September 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $53,676 | $54,030 | | Restricted cash and cash equivalents - current | $27,229 | $33,536 | | Restricted cash and investments - non-current | $40,970 | $33,728 | | Less Restricted investments - non-current | $(32,787) | $(26,341) | | Total cash, cash equivalents and restricted cash | $89,088 | $94,953 | - Restricted cash is mainly for contractual requirements at the Australian subsidiary (non-recourse debt, asset replacement funds, guarantees)[34] 6. SHAREHOLDERS' EQUITY Shareholders' equity decreased to $933.3 million by September 30, 2020, primarily due to distributions exceeding earnings and comprehensive loss, despite net income Total Shareholders' Equity Attributable to The GEO Group, Inc. (in thousands) | | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total shareholders' equity attributable to The GEO Group, Inc. | $933,283 | $996,830 | Key Changes in Shareholders' Equity (Nine Months Ended September 30, 2020, in thousands) | Item | Amount | | :--- | :--- | | Balance January 1, 2020 | $996,048 | | Stock-based compensation expense | $19,163 | | Dividends paid | $(174,687) | | Purchase of treasury shares | $(9,562) | | Net income (loss) | $100,947 | | Other comprehensive income (loss) | $(6,781) | | Balance, September 30, 2020 | $932,284 | - The company repurchased 553,665 shares of its common stock under the program during the nine months ended September 30, 2020[41] 7. EQUITY INCENTIVE PLANS The company's 2018 Stock Incentive Plan had 1.98 million stock options and 2.16 million restricted shares outstanding, with significant unrecognized compensation costs Stock Option Activity (Nine Months Ended September 30, 2020, in thousands) | | Shares | Wtd. Avg. Exercise Price | | :--- | :--- | :--- | | Options outstanding at January 1, 2020 | 1,590 | $24.29 | | Options granted | 480 | $14.64 | | Options forfeited/canceled/expired | (93) | $21.83 | | Options outstanding at September 30, 2020 | 1,977 | $22.07 | Restricted Stock Activity (Nine Months Ended September 30, 2020, in thousands) | | Shares | Wtd. Avg. Grant Date Fair Value | | :--- | :--- | :--- | | Restricted stock outstanding at January 1, 2020 | 2,047 | $27.33 | | Granted | 900 | $15.30 | | Vested | (736) | $27.79 | | Forfeited/canceled | (49) | $20.67 | | Restricted stock outstanding at September 30, 2020 | 2,162 | $20.60 | - As of September 30, 2020, the Company had $2.0 million of unrecognized compensation costs related to non-vested stock option awards (expected to be recognized over 2.4 years) and $26.6 million for non-vested restricted stock awards (expected over 2.3 years)[47][53] 8. EARNINGS PER SHARE Basic and diluted EPS for the nine months ended September 30, 2020, decreased to $0.84 from $1.08 in 2019, with minimal dilutive effects Basic and Diluted EPS (in thousands, except per share data) | | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to The GEO Group, Inc. | $39,220 | $45,932 | $101,121 | $128,551 | | Basic EPS | $0.33 | $0.39 | $0.84 | $1.08 | | Diluted EPS | $0.33 | $0.39 | $0.84 | $1.08 | - For the three months ended September 30, 2020, 1,996,201 weighted average shares of common stock underlying options and 1,810,572 common stock equivalents from restricted shares were excluded from diluted EPS computation due to their anti-dilutive effect[56] 9. DERIVATIVE FINANCIAL INSTRUMENTS The company uses interest rate swaps as cash flow hedges, incurring $4.3 million in unrealized losses and holding $7.3 million in swap liabilities as of September 30, 2020 - In August 2019, the Company entered into two interest rate swap agreements for an aggregate notional amount of $44.3 million to fix the interest rate on certain variable rate debt to 4.22%, designated as effective cash flow hedges[61] - Total unrealized losses recorded in other comprehensive income, net of tax, related to these cash flow hedges was $4.3 million during the nine months ended September 30, 2020, with the total fair value of swap liabilities at $7.3 million[61] - On May 22, 2019, the Australian subsidiary refinanced associated debt and terminated swap agreements, resulting in a reclassification of $3.9 million into losses previously reported in accumulated other comprehensive income[62] 10. DEBT Total debt decreased to $2.68 billion by September 30, 2020, driven by debt payments and repurchases, with the Credit Agreement including a $792.0 million term loan Debt Outstanding (in thousands) | | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Senior Credit Facility | $1,237,902 | $1,290,980 | | 6.00% Senior Notes Due in 2026 | $346,143 | $345,718 | | 5.875% Senior Notes Due in 2024 | $245,835 | $247,468 | | 5.125% Senior Notes Due in 2023 | $286,727 | $297,124 | | 5.875% Senior Notes Due in 2022 | $193,083 | $192,607 | | Non-Recourse Debt | $324,045 | $322,818 | | Finance Lease Liabilities | $4,896 | $4,570 | | Other debt | $42,662 | $43,410 | | Total debt | $2,681,293 | $2,744,695 | - During the nine months ended September 30, 2020, the Company repurchased approximately $11.0 million of its 5.125% Senior Notes due 2023 and $2.0 million of its 5.875% Senior Notes due 2024, resulting in a net gain on extinguishment of debt of $3.0 million[78] - As of September 30, 2020, the Company had approximately $772.0 million in aggregate borrowings outstanding under its term loan and $472.1 million under its revolver, with approximately $368.3 million in additional borrowing capacity[71] 11. COMMITMENTS AND CONTINGENCIES The company faces legal proceedings, including class actions and challenges to AB-32, while managing $62 million in capital projects and deferring $27.6 million in CARES Act taxes - A shareholder class action lawsuit was filed on July 7, 2020, alleging false and misleading statements regarding the Company's COVID-19 response procedures[87] - Multiple class action lawsuits by immigration detainees allege violations of minimum wage laws and the Federal Trafficking Victims Protection Act (TVPA) in Colorado, Washington, and California[88] - GEO filed a lawsuit challenging California's AB-32 law, which bars federal government contractors from providing detention services for illegal immigrants; the court enjoined enforcement against U.S. Marshals' facilities but not ICE facilities[93] - The Company has contractual commitments for approximately $62 million in active capital projects, with an estimated $20 million remaining to be spent through the remainder of 2020[98] - The Company deferred approximately $27.6 million related to the employer's share of Social Security taxes as of September 30, 2020, under the CARES Act, with payments due in two equal installments on December 31, 2021, and December 31, 2022[97] - As of September 30, 2020, the Company was marketing approximately 2,100 vacant beds at four idle facilities with a combined net book value of $50.5 million[99] 12. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION Total revenues decreased by 4.5% to $1.77 billion, and operating income fell by 12.2% to $330.5 million, primarily due to declines across most segments Revenues by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $392,384 | $411,078 | $1,180,211 | $1,201,063 | | GEO Care | $134,940 | $153,422 | $417,643 | $462,772 | | International Services | $48,489 | $57,634 | $158,593 | $176,246 | | Facility Construction & Design | $3,323 | $9,445 | $15,535 | $16,131 | | Total revenues | $579,136 | $631,579 | $1,771,982 | $1,856,212 | Operating Income from Segments (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $78,076 | $85,085 | $226,000 | $248,462 | | GEO Care | $28,617 | $36,325 | $89,166 | $113,936 | | International Services | $4,400 | $5,211 | $15,316 | $13,870 | | Facility Construction & Design | $13 | $26 | $48 | $26 | | Operating income from segments | $111,106 | $126,647 | $330,530 | $376,294 | - Equity in earnings of affiliates (SACS and GEOAmey) increased to $7.2 million (net of tax) for the nine months ended September 30, 2020, up from $6.6 million in 2019, primarily due to favorable performance at GEOAmey[103][104][187] 13. BENEFIT PLANS Projected benefit obligation for pension plans decreased to $30.0 million, largely due to an $8.9 million reclassification for the CEO's retirement agreement Change in Projected Benefit Obligation (in thousands) | | Nine Months Ended Sep 30, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Projected benefit obligation, beginning of period | $37,551 | $32,474 | | Other reclassification | $(8,925) | $— | | Projected benefit obligation, end of period | $29,982 | $37,551 | - The CEO's amended retirement agreement provides for an $8.9 million lump sum payment in fixed common stock shares upon retirement, funded by repurchased treasury stock held in revocable rabbi trusts[107][108][110] - The long-term portion of the pension liability as of September 30, 2020, was $29.7 million, down from $33.4 million at December 31, 2019[111] 14. RECENT ACCOUNTING PRONOUNCEMENTS Several accounting standards adopted in 2020 had no material impact, and future pronouncements are also not expected to materially affect financial statements - Adopted SEC Final Rule 33-10762 (guarantor financial disclosures), ASU 2018-13 (fair value measurement disclosures), and ASU 2016-13 (credit losses on financial instruments) in 2020, with no material impact[112][113][114] - Future adoptions include ASU 2020-06 (convertible debt, effective 2022), ASU 2020-04 (reference rate reform, effective upon issuance through 2022), and ASU 2018-14 (retirement benefits, effective 2021), none expected to have a material impact[115][116][117] 15. SUBSEQUENT EVENTS The Board reduced the quarterly dividend to $0.34 per share to prioritize debt reduction, and an automatic shelf registration was filed for future security sales - On October 6, 2020, the Board declared a quarterly cash dividend of $0.34 per share, reduced from $0.48, to prioritize capital preservation and debt reduction[119][203] - The dividend reduction is expected to free up $100 million for debt repayment in 2020 and an average of $50-100 million annually thereafter[204] - An automatic shelf registration on Form S-3 was filed on October 30, 2020, enabling future sales of common stock, preferred stock, debt securities, and other securities[120] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the company's financial condition, results of operations, and cash flows, including critical accounting policies, significant developments, and future outlook Forward-Looking Information This section contains forward-looking statements subject to risks, including COVID-19 impacts, debt, legislative changes, and market conditions, with no obligation to update - Forward-looking statements are identified by words like "may," "will," "expect," and "anticipate," and are subject to risks that could cause actual results to differ materially[121] - Key risk factors include the ability to mitigate COVID-19 transmission, the pandemic's impact on business, debt service obligations, government utilization of public-private partnerships, and legislative changes affecting the business[122] - Other risks include the ability to obtain future financing, exposure to political/economic instability, foreign exchange rates, information system risks, rising insurance/medical costs, and litigation[124] Introduction GEO Group, a REIT, manages 93,000 beds globally, with revenues of $1.77 billion and an 87.0% occupancy rate, impacted by COVID-19 - GEO Group is a REIT operating secure services and reentry facilities and providing community-based services globally, managing/owning ~93,000 beds at 123 facilities and supervising >210,000 individuals[128][129] Consolidated Revenues and Occupancy Rate | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Consolidated Revenues | $1,772.0 million | $1,856.2 million | $(84.2) million (4.5% decrease) | | Average Company-Wide Occupancy Rate | 87.0% | 93.1% | (6.1 percentage points decrease) | - The decrease in occupancy is primarily due to the impact of the COVID-19 pandemic[130] - As a REIT, the company is required to distribute annually at least 90% of its REIT taxable income[134] 2020 Developments Key 2020 developments include new ICE contracts, the non-renewal of the D Ray James facility contract, and ongoing challenges from the COVID-19 pandemic - Secured a five-year contract with U.S. Immigration and Customs Enforcement (ICE) for the continued provision of case management and supervision services under the Intensive Supervision and Appearance Program (ISAP)[138] - Successfully rebid the continued operation of the company-owned 1,840-bed South Texas ICE Processing Center contract, effective August 6, 2020, with a ten-year term[139] - The Federal Bureau of Prisons (BOP) will not resolicit the 1,900-bed D Ray James Correctional Facility contract, which generates approximately $60 million in annualized revenues, though a four-month extension was granted through January 31, 2021[140] - The company is marketing approximately 2,100 vacant beds at four idle facilities, with a combined carrying value of $50.5 million as of September 30, 2020[141] Critical Accounting Policies The company's unaudited consolidated financial statements are prepared using GAAP, requiring management to make reasonable estimates and assumptions, with no significant changes in 2020 - The unaudited consolidated financial statements are prepared in conformity with GAAP, requiring management to make certain estimates, judgments, and assumptions[142] - During the nine months ended September 30, 2020, the company did not experience any significant changes in estimates or judgments inherent in the preparation of its consolidated financial statements[142] RESULTS OF OPERATIONS This section analyzes the company's financial performance for the third quarter and nine months ended September 30, 2020, compared to 2019, detailing revenue and expense drivers Comparison of Third Quarter 2020 and Third Quarter 2019 Q3 2020 revenues decreased by 8.3% to $579.1 million, and operating income fell by 17.5% to $64.5 million, driven by COVID-19 impacts and contract changes Revenues by Segment (Q3 2020 vs Q3 2019, in thousands) | Segment | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $392,384 | $411,078 | $(18,694) | (4.5)% | | GEO Care | $134,940 | $153,422 | $(18,482) | (12.0)% | | International Services | $48,489 | $57,634 | $(9,145) | (15.9)% | | Facility Construction & Design | $3,323 | $9,445 | $(6,122) | (64.8)% | | Total | $579,136 | $631,579 | $(52,443) | (8.3)% | - GEO Secure Services revenue decreased by $18.7 million, primarily due to $18.1 million net decreases in population at ICE processing centers and U.S. Marshals facilities due to COVID-19, partially offset by $18.2 million from new contract activations[145] - GEO Care revenue decreased by $18.5 million, driven by $7.8 million from contract terminations/closures, $4.5 million from ISAP policy changes, and $6.2 million from census declines at community-based centers due to COVID-19[147] - International Services revenue decreased by $9.1 million, mainly due to the transition of the Arthur Gorrie Correctional Centre to government operation[148] Operating Expenses (Q3 2020 vs Q3 2019, in thousands) | Segment | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $294,324 | $305,181 | $(10,857) | (3.6)% | | GEO Care | $93,218 | $104,581 | $(11,363) | (10.9)% | | International Services | $43,550 | $53,332 | $(9,782) | (18.3)% | | Facility Construction & Design | $3,310 | $9,419 | $(6,109) | (64.9)% | | Total | $434,402 | $472,513 | $(38,111) | (8.1)% | - Interest expense decreased by $5.9 million (16.1%) in Q3 2020, primarily due to lower interest rates on variable rate debt and reductions in higher interest rate debt balances from repurchases[161] - A net gain on extinguishment of debt of $1.5 million was recognized in Q3 2020 from repurchasing approximately $2.0 million of its 5.875% Senior Notes due 2024[162] Comparison of Nine Months 2020 and Nine Months 2019 Nine-month revenues decreased by 4.5% to $1.77 billion, and operating income fell by 21.2% to $184.6 million, primarily due to COVID-19 and contract changes Revenues by Segment (Nine Months 2020 vs Nine Months 2019, in thousands) | Segment | 9M 2020 | 9M 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $1,180,211 | $1,201,063 | $(20,852) | (1.7)% | | GEO Care | $417,643 | $462,772 | $(45,129) | (9.8)% | | International Services | $158,593 | $176,246 | $(17,653) | (10.0)% | | Facility Construction & Design | $15,535 | $16,131 | $(596) | (3.7)% | | Total | $1,771,982 | $1,856,212 | $(84,230) | (4.5)% | - GEO Secure Services revenue decreased by $20.9 million, primarily due to $51.3 million from contract terminations and $32.7 million from population declines at ICE and U.S. Marshals facilities due to COVID-19, partially offset by $54.5 million from new contract activations[166] - GEO Care revenue decreased by $45.1 million, mainly due to $26.6 million from contract terminations/closures, $11.8 million from ISAP policy changes, and $6.7 million from census declines due to COVID-19[169] - International Services revenue decreased by $17.7 million, primarily due to the transition of the Arthur Gorrie Correctional Centre to government operation and negative foreign exchange rate fluctuations[170] Operating Expenses (Nine Months 2020 vs Nine Months 2019, in thousands) | Segment | 9M 2020 | 9M 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | GEO Secure Services | $893,930 | $892,337 | $1,593 | 0.2% | | GEO Care | $289,907 | $311,758 | $(21,851) | (7.0)% | | International Services | $141,739 | $162,478 | $(20,739) | (12.8)% | | Facility Construction & Design | $15,487 | $16,105 | $(618) | (3.8)% | | Total | $1,341,063 | $1,382,678 | $(41,615) | (3.0)% | - Interest expense decreased by $20.3 million (17.5%) for the nine months ended September 30, 2020, due to lower interest rates on variable rate debt and reduced higher interest rate debt balances from repurchases[183] - A net gain on extinguishment of debt of $3.0 million was recognized for the nine months ended September 30, 2020, from repurchasing senior notes[184] Financial Condition This section assesses the company's financial position, including capital requirements, liquidity, capital resources, and off-balance sheet arrangements Capital Requirements Current cash requirements include working capital, REIT distributions, debt service, and $62 million in active capital projects, with $20 million remaining for 2020 - Current cash requirements consist of amounts needed for working capital, REIT distributions, debt service, supply purchases, investments in joint ventures, and capital expenditures[188] - The company has contractual commitments for approximately $62 million in active capital projects, with an estimated $20 million remaining to be spent through the remainder of 2020[189] Liquidity and Capital Resources The company maintains $368.3 million in borrowing capacity, reduced its dividend to $0.34 per share for debt reduction, and repurchased $13.0 million in senior notes - As of September 30, 2020, the company had approximately $772.0 million in aggregate borrowings outstanding under its term loan and $472.1 million under its revolver, with approximately $368.3 million in additional borrowing capacity[192] - Six lenders have indicated they do not intend to provide new financing but will honor existing obligations, representing less than 25% of overall borrowing capacity, and their withdrawal is not expected to negatively impact financial flexibility[191] - The Board authorized a $100.0 million debt repurchase program through December 31, 2020; during the nine months ended September 30, 2020, $13.0 million in aggregate principal amount of senior notes were repurchased[197][199] - The quarterly dividend was reduced to $0.34 per share to preserve capital and focus on debt reduction, with an anticipated $100 million applied to debt repayment in 2020 and an average of $50-100 million annually thereafter[203][204] Guarantor Financial Information Parent and Subsidiary Guarantors reported $1.59 billion in net operating revenues and $74.6 million in net income, with adequate liquidity expected for 2020 Summarized Statement of Operations (Parent and Subsidiary Guarantors, Nine Months Ended Sep 30, 2020, in thousands) | | Amount | | :--- | :--- | | Net operating revenues | $1,589,861 | | Income from operations | $162,437 | | Net income | $74,582 | | Net income attributable to The GEO Group, Inc. | $74,582 | Summarized Balance Sheets (Parent and Subsidiary Guarantors, in thousands) | | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Current assets | $389,150 | $431,048 | | Noncurrent assets | $3,290,752 | $3,328,078 | | Current liabilities | $357,755 | $331,042 | | Noncurrent liabilities | $2,515,049 | $2,548,034 | - Management believes that cash on hand, cash flows from operations, and availability under the Credit Facility will be adequate to support capital requirements for 2020, despite the challenges posed by COVID-19[208] Stock Buyback Program This section refers to Note 6 for further details on the company's stock buyback program - Refer to Note 6 - Shareholders' Equity for further information on the stock buyback program[209] Prospectus Supplement This section refers to Note 6 for further information regarding the prospectus supplement - Refer to Note 6 - Shareholders' Equity for further information on the prospectus supplement[210] Executive Retirement Agreement The CEO's amended retirement agreement provides an $8.9 million lump sum in common stock shares, funded by treasury stock, with a delayed payment schedule - The CEO's amended retirement agreement provides for a lump sum payment of $8,925,065 in a fixed number of common stock shares upon retirement, delayed for six months and a day[213] - The payment is funded by repurchased treasury stock held in revocable "rabbi trusts," classified as treasury stock, and the fair value reclassified to stockholders' equity[214][216] Off-Balance Sheet Arrangements The company reports no off-balance sheet arrangements beyond those disclosed in the notes to its unaudited consolidated financial statements - The company does not have any off-balance sheet arrangements except as discussed in the notes to its Unaudited Consolidated Financial Statements[217] Cash Flow Total cash and equivalents decreased to $89.1 million, with $358.1 million from operations, $77.2 million used in investing, and $259.0 million used in financing activities Cash, Cash Equivalents and Restricted Cash (in millions) | | September 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $89.1 | $95.0 | Cash Flow from Operating Activities (Nine Months Ended Sep 30, in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $358,127 | $322,958 | Cash Flow from Investing Activities (Nine Months Ended Sep 30, in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in investing activities | $(77,176) | $(77,622) | Cash Flow from Financing Activities (Nine Months Ended Sep 30, in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in financing activities | $(259,026) | $(232,792) | Non-GAAP Measures The company uses FFO, Normalized FFO, and AFFO as non-GAAP measures to assess operating performance and capital funding capacity, adjusting for real estate and non-comparable items - Funds from Operations (FFO) is defined as net income (loss) attributable to common shareholders, excluding real estate related depreciation and amortization, and gains and losses from property sales, including adjustments for unconsolidated partnerships and joint ventures[225] - Normalized FFO is defined as FFO adjusted for certain items not comparable from period to period or that obscure actual operating performance, including COVID-19 expenses, gain/loss on extinguishment of debt, start-up expenses, close-out expenses, and their tax effects[227] - AFFO is defined as Normalized FFO adjusted by adding non-cash expenses (non-real estate depreciation/amortization, stock-based compensation, amortization of debt issuance costs, non-cash interest) and subtracting recurring consolidated maintenance capital expenditures[228] Reconciliation of Net Income to FFO, Normalized FFO, and AFFO (Nine Months Ended Sep 30, in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net income attributable to The GEO Group, Inc. | $101,121 | $128,551 | | NAREIT Defined FFO | $157,411 | $185,214 | | Normalized Funds from Operations | $171,496 | $197,178 | | Adjusted Funds from Operations | $226,017 | $249,335 | Outlook The company anticipates continued COVID-19 impacts on revenue and occupancy, faces risks from legislative actions and public resistance, and pursues international expansion and domestic reentry opportunities - The COVID-19 pandemic is expected to result in estimated revenue declines of approximately 10% within GEO Secure Services and approximately 11% for GEO Reentry Services during 2020 due to lower occupancy and referrals[244] - The Federal Bureau of Prisons (BOP) has decided not to rebid the contract for the 1,900-bed D. Ray James Correctional Facility (generating ~$60 million in annualized revenues), and other contracts (Rivers, Great Plains, Big Spring Correctional Facilities) are up for renewal in 2021[270] - Public resistance and legislative actions, such as California's AB-32 and potential similar laws in Washington, along with financial institutions withdrawing support, pose significant risks to contract acquisition and renewal[273][274] - International expansion projects include a 489-bed expansion at Junee Correctional Centre and a 137-bed expansion at Fulham Correctional Centre (both completed in Q3 2020), and a potential 300-bed increase at Ravenhall Correctional Centre (expected to generate ~$19 million incremental annualized revenue)[250] - Operating expenses are expected to be impacted by the opening of new or existing idle facilities (due to transition/start-up costs) and several millions of dollars in non-recurring COVID-19 related costs (PPE, diagnostic testing, medical expenses, sanitation)[252] - Marketing 2,100 idle beds at four facilities (combined net book value of $50.5 million) could generate approximately $56 million in incremental annualized revenue if activated, based on average operating margins[255] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily interest rate risk and foreign currency exchange rate risk, and their potential impact on financial performance Interest Rate Risk A one percent increase in interest rates would raise annual interest expense by approximately $12 million, primarily impacting the variable-rate Credit Facility - For every one percent increase in the average interest rate applicable to the Credit Facility, total annual interest expense would increase by approximately $12 million, based on $1,244 million in borrowings and $60 million in outstanding letters of credit as of September 30, 2020[256] - A hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on the financial condition or results of operations for short-term financial instruments[257] Foreign Currency Exchange Rate Risk The company faces foreign currency exchange rate risk, with a 10 percent change impacting financial position by $6.0 million and operations by $2.1 million - A 10 percent change in historical foreign currency rates would have approximately a $6.0 million effect on the financial position and approximately a $2.1 million impact on the results of operations during the nine months ended September 30, 2020[258] ITEM 4. CONTROLS AND PROCEDURES This section details the evaluation of the company's disclosure controls and procedures and any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, ensuring timely and accurate reporting, despite inherent limitations - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective as of September 30, 2020, providing reasonable assurance for timely and accurate reporting of information required to be disclosed in SEC reports[260] - The effectiveness of the system of disclosure controls and procedures is subject to certain inherent limitations, including judgment, assumptions, and the inability to eliminate misconduct completely[261] Changes in Internal Control Over Financial Reporting Management reports no material changes in internal control over financial reporting during the nine months ended September 30, 2020 - Management believes that there have not been any material changes in internal control over financial reporting during the nine months ended September 30, 2020[263] Part II ITEM 1. LEGAL PROCEEDINGS This section incorporates by reference detailed information on legal proceedings from Note 11 - Commitments and Contingencies - Information regarding legal proceedings is incorporated by reference from Note 11 - Commitments and Contingencies in the Notes to the Unaudited Consolidated Financial Statements[266] ITEM 1A. RISK FACTORS Updated risk factors highlight COVID-19 impacts, public and legislative resistance to partnerships, financial institution withdrawals, and potential impairment of goodwill and intangible assets - The COVID-19 pandemic has adversely impacted business, leading to lower occupancy at facilities (especially ICE and U.S. Marshals), increased operational costs for mitigation, and potential litigation (e.g., shareholder class action)[268][269][271] - Public resistance and legislative actions (e.g., California's AB-32, potential similar laws in Washington) threaten existing contracts and the ability to secure new ones, with several contracts (D. Ray James, Rivers, Great Plains, Big Spring) facing non-renewal or rebid[270][273] - Financial institutions withdrawing support for private prison operators could materially adversely affect the company's business, financial condition, and operations[274][275] - The company has $969.6 million of goodwill and other intangible assets, which are subject to annual impairment evaluations, and any impairment could result in material non-cash charges to results of operations[277] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company purchased 92 shares in August 2020, separate from its $200.0 million stock buyback program, which had $95.5 million remaining Stock Repurchase Activity (in millions, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | August 1, 2020 - August 31, 2020 | 92 | $10.82 | $95.5 | - The Board of Directors authorized a stock buyback program for up to $200.0 million of common stock, effective through October 20, 2020, with $95.5 million remaining as of September 30, 2020[280] - 228 shares were withheld through net share settlements to satisfy statutory tax withholding requirements upon vesting of restricted stock, which were not made as part of a publicly announced plan or program[280] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable - Not applicable[279] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable - Not applicable[280] ITEM 5. OTHER INFORMATION This item is not applicable - Not applicable[281] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including bylaws, agreements, CEO/CFO certifications, and Inline XBRL documents - Exhibits include Amendment to the Second Amended and Restated Bylaws, Consultant Agreement, SECTION 302 CEO/CFO Certifications, SECTION 906 CEO/CFO Certifications, and Inline XBRL documents[282] SIGNATURES The report was signed by Brian R. Evans, Senior Vice President & Chief Financial Officer, on behalf of The GEO Group, Inc. on November 6, 2020 - The report was signed by Brian R. Evans, Senior Vice President & Chief Financial Officer, on behalf of The GEO Group, Inc. on November 6, 2020[286]