The GEO (GEO) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion for The GEO Group, Inc. ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for The GEO Group, Inc. for Q2 and H1 2023 and 2022, including statements of operations, comprehensive income, balance sheets, and cash flows, with detailed notes. Consolidated Statements of Operations (Unaudited) This section provides the unaudited consolidated statements of operations, detailing revenues, operating income, and net income for Q2 and H1 2023 and 2022. | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $593,891 | $588,177 | $1,202,100 | $1,139,362 | | Operating income | $92,380 | $95,074 | $185,040 | $176,600 | | Net income | $29,525 | $53,673 | $57,519 | $91,852 | | Net income attributable to The GEO Group, Inc. | $29,571 | $53,727 | $57,574 | $91,946 | | Basic EPS | $0.20 | $0.37 | $0.39 | $0.63 | | Diluted EPS | $0.20 | $0.37 | $0.39 | $0.63 | - Revenues increased by 1.0% to $593.9 million for the three months ended June 30, 2023, and by 5.5% to $1.202 billion for the six months ended June 30, 2023, compared to the respective prior-year periods[9] - Net income attributable to The GEO Group, Inc. decreased by 45.0% to $29.6 million for the three months ended June 30, 2023, and by 37.4% to $57.6 million for the six months ended June 30, 2023, compared to the respective prior-year periods[9] Consolidated Statements of Comprehensive Income (Unaudited) This section presents the unaudited consolidated statements of comprehensive income, including net income and other comprehensive income components. | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $29,525 | $53,673 | $57,519 | $91,852 | | Foreign currency translation adjustments | $(1,011) | $(9,826) | $(2,390) | $(9,401) | | Change in marketable securities, net of tax | $553 | $(353) | $953 | $(758) | | Change in fair value of derivative instrument, net of tax | $827 | $1,910 | $(200) | $4,374 | | Total other comprehensive income (loss), net of tax | $369 | $(8,184) | $(1,637) | $(5,615) | | Total comprehensive income | $29,894 | $45,489 | $55,882 | $86,237 | - Total comprehensive income decreased by 34.3% to $29.9 million for the three months ended June 30, 2023, and by 35.2% to $55.9 million for the six months ended June 30, 2023, compared to the respective prior-year periods[12] - Foreign currency translation adjustments significantly impacted other comprehensive income, showing a loss of $(1.0 million) for Q2 2023 and $(2.4 million) for H1 2023[12] Consolidated Balance Sheets This section provides the unaudited consolidated balance sheets, detailing assets, liabilities, and shareholders' equity as of June 30, 2023, and December 31, 2022. | Metric (in thousands) | June 30, 2023 (Unaudited) | December 31, 2022 | | :-------------------- | :------------------------ | :---------------- | | Total Assets | $3,671,889 | $3,760,383 | | Total Liabilities | $2,439,518 | $2,593,905 | | Total Shareholders' Equity | $1,232,371 | $1,165,088 | | Cash and cash equivalents | $48,716 | $95,073 | | Total current assets | $451,976 | $555,008 | | Total current liabilities | $347,208 | $437,212 | | Long-Term Debt, Net | $1,845,649 | $1,933,145 | - Total assets decreased by 2.4% to $3.672 billion from December 31, 2022, to June 30, 2023, primarily due to a decrease in cash and cash equivalents and accounts receivable[15] - Total liabilities decreased by 5.9% to $2.440 billion from December 31, 2022, to June 30, 2023, driven by reductions in current liabilities and long-term debt[15] - Shareholders' equity increased by 5.8% to $1.232 billion from December 31, 2022, to June 30, 2023, primarily due to retained earnings[15] Consolidated Statements of Cash Flows (Unaudited) This section presents the unaudited consolidated statements of cash flows, outlining operating, investing, and financing activities for H1 2023 and 2022. | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $112,950 | $171,979 | | Net cash used in investing activities | $(32,326) | $(19,316) | | Net cash used in financing activities | $(103,628) | $(59,860) | | Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash and Cash Equivalents | $(25,054) | $88,472 | | Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period | $118,789 | $636,794 | - Net cash provided by operating activities decreased by 34.3% to $113.0 million in the first six months of 2023 compared to the same period in 2022[17] - Net cash used in investing activities increased by 67.4% to $32.3 million in the first six months of 2023, primarily due to capital expenditures and changes in restricted investments[17] - Net cash used in financing activities increased by 73.1% to $103.6 million in the first six months of 2023, mainly due to higher payments on long-term debt[17] Notes to Unaudited Consolidated Financial Statements This section provides detailed notes explaining the basis of presentation, significant accounting policies, and specific financial instrument details. 1. Basis of Presentation This note describes the company's business, its termination of REIT status, and the scope of its worldwide operations. - The GEO Group, Inc. specializes in the ownership, leasing, and management of secure facilities, processing centers, and community reentry centers in the United States, Australia, and South Africa[21] - The company terminated its REIT status effective December 31, 2021, becoming a taxable C Corporation, which provides greater flexibility for cash flow utilization and debt repayment[23] - As of June 30, 2023, GEO's worldwide operations include approximately 82,000 beds at 102 facilities and community supervision services for over 400,000 individuals, including 180,000 through technology products[21] 2. Goodwill and Other Intangible Assets This note details the company's goodwill balances by segment and acquired intangible assets, including their carrying amounts and amortization. Goodwill Balances (in thousands) | Segment | January 1, 2023 | Foreign Currency Translation | June 30, 2023 | | :-------------------------------- | :-------------- | :--------------------------- | :------------ | | U.S. Secure Services | $316,366 | $— | $316,366 | | Electronic Monitoring and Supervision Services | $289,570 | $— | $289,570 | | Reentry Services | $148,873 | $— | $148,873 | | International Services | $390 | $(10) | $380 | | Total Goodwill | $755,199 | $(10) | $755,189 | Acquired Intangible Assets (in thousands) | Asset Type | Weighted Average Useful Life (years) | Gross Carrying Amount (June 30, 2023) | Net Carrying Amount (June 30, 2023) | Net Carrying Amount (December 31, 2022) | | :-------------------------- | :----------------------------------- | :------------------------------------ | :---------------------------------- | :-------------------------------------- | | Facility management contracts | 16.3 | $308,326 | $95,771 | $101,983 | | Technology | 7.3 | $33,700 | $— | $505 | | Trade names | Indefinite | $45,200 | $45,200 | $45,200 | | Total acquired intangible assets | | $387,226 | $140,971 | $147,688 | - Amortization expense for finite-lived intangible assets was $6.7 million for the six months ended June 30, 2023, a decrease from $11.1 million in the prior year[25] 3. Financial Instruments This note provides fair value measurements for various financial instruments, categorized by Level 1, Level 2, and Level 3 inputs. Fair Value Measurements at June 30, 2023 (in thousands) | Asset Type | Carrying Value | Level 1 (Quoted Prices) | Level 2 (Observable Inputs) | Level 3 (Unobservable Inputs) | | :-------------------------------- | :------------- | :---------------------- | :-------------------------- | :---------------------------- | | Restricted investment: Rabbi Trusts | $46,372 | $7,014 | $39,358 | $— | | Marketable equity and fixed income securities | $44,297 | $17,231 | $27,066 | $— | | Interest rate swap derivatives | $4,360 | $— | $4,360 | $— | - Level 2 financial instruments include interest rate swap derivatives, investments in equity and fixed income mutual funds in the captive insurance subsidiary, and the rabbi trust for the Non-qualified Deferred Compensation Plan[27] - Level 1 financial instruments primarily consist of money market funds held in the captive insurance subsidiary and the Executive Chairman's retirement account[27] 4. Fair Value of Assets and Liabilities This note presents the estimated fair values of assets and liabilities, including cash, restricted investments, and debt instruments, categorized by fair value hierarchy. Estimated Fair Value Measurements at June 30, 2023 (in thousands) | Instrument | Carrying Value | Total Fair Value | Level 1 | Level 2 | Level 3 | | :---------------------------------------- | :------------- | :--------------- | :------ | :------------ | :------ | | Assets: | | | | | | | Cash and cash equivalents | $48,716 | $48,716 | $48,716 | $— | $— | | Restricted cash and investments | $45,828 | $45,828 | $45,828 | $— | $— | | Liabilities: | | | | | | | Borrowings under exchange credit facility | $1,007,724 | $1,021,141 | $— | $1,021,141 | $— | | 10.500% Public Second Lien Notes due 2028 | $286,521 | $288,679 | $— | $288,679 | $— | | 9.500% Private Second Lien Notes due 2028 | $239,142 | $235,555 | $— | $235,555 | $— | | 5.875% Senior Notes due 2024 | $23,253 | $22,712 | $— | $22,712 | $— | | 6.00% Senior Notes due 2026 | $110,858 | $102,197 | $— | $102,197 | $— | | 6.50% Exchangeable Senior Notes due 2026 | $230,000 | $258,622 | $— | $258,622 | $— | - The fair values of cash and cash equivalents, and restricted cash and investments approximate their carrying values, primarily classified as Level 1[30] - The fair values of the Company's debt instruments, including the exchange credit facility and various senior notes, are based on Level 2 inputs using market quotations and estimates of trading value[31][32] 5. Restricted Cash and Cash Equivalents This note reconciles cash, cash equivalents, and restricted cash, highlighting significant changes and underlying reasons. Reconciliation of Cash, Cash Equivalents and Restricted Cash (in thousands) | Item | June 30, 2023 | June 30, 2022 | | :---------------------------------------------------------------- | :------------ | :------------ | | Cash and cash equivalents | $48,716 | $587,861 | | Restricted cash and cash equivalents - current | $— | $21,134 | | Restricted cash and investments - non-current | $136,497 | $81,392 | | Less Restricted investments - non-current | $(66,424) | $(53,593) | | Total cash, cash equivalents and restricted cash and cash equivalents | $118,789 | $636,794 | - Total cash, cash equivalents, and restricted cash decreased significantly from $636.8 million at June 30, 2022, to $118.8 million at June 30, 2023[33] - The decrease in restricted cash and cash equivalents is partly due to the sale of shares/units in Australian subsidiaries in August 2022, which transferred related restricted cash to the buyer[33] 6. Shareholders' Equity This note details changes in shareholders' equity, including common shares, retained earnings, and other comprehensive loss components. Changes in Shareholders' Equity (Six Months Ended June 30, 2023, in thousands) | Item | Common Shares (Shares) | Common Shares (Amount) | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Shares (Shares) | Treasury Shares (Amount) | Noncontrolling Interests | Total Shareholders' Equity | | :------------------------------------ | :--------------------- | :--------------------- | :------------------------- | :---------------- | :----------------------------------- | :----------------------- | :----------------------- | :----------------------- | :------------------------- | | Balance January 1, 2023 | 124,061 | $1,289 | $1,291,363 | $(4,236) | $(16,919) | 4,852 | $(105,099) | $(1,310) | $1,165,088 | | Net income (loss) | — | — | — | $57,574 | — | — | — | $(55) | $57,519 | | Other comprehensive income (loss) | — | — | — | — | $(1,663) | — | — | $26 | $(1,637) | | Balance, June 30, 2023 | 126,075 | $1,303 | $1,292,826 | $53,338 | $(18,582) | 4,210 | $(95,175) | $(1,339) | $1,232,371 | - Total shareholders' equity increased from $1.165 billion at January 1, 2023, to $1.232 billion at June 30, 2023, primarily driven by net income and proceeds from treasury share sales[35] - The Company sold 642 thousand treasury shares for $5.75 million to partially fund an executive retirement agreement[35][36] 7. Equity Incentive Plans This note outlines the company's equity incentive plans, including stock option activity and compensation expense for restricted stock awards. - The GEO Group, Inc. Amended and Restated 2018 Stock Incentive Plan, approved in April 2021, reserved an additional 16.8 million shares of common stock for awards[42] Stock Option Activity (Six Months Ended June 30, 2023, in thousands) | Item | Shares | Wtd. Avg. Exercise Price | | :---------------------------------- | :----- | :----------------------- | | Options outstanding at January 1, 2023 | 1,885 | $18.03 | | Options granted | 362 | $9.07 | | Options exercised | (13) | $6.63 | | Options forfeited/canceled/expired | (106) | $14.06 | | Options outstanding at June 30, 2023 | 2,128 | $16.78 | - The Company recognized $8.9 million in compensation expense for restricted stock awards and $0.3 million for stock options during the six months ended June 30, 2023[46][52] - Unrecognized compensation costs for non-vested restricted stock awards totaled $22.5 million as of June 30, 2023, expected to be recognized over 2.6 years[52] 8. Earnings Per Share This note details the calculation of basic and diluted earnings per share, including weighted average shares outstanding. Earnings Per Share Calculation (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to The GEO Group, Inc. available to common stockholders | $24,555 | $44,556 | $47,787 | $76,229 | | Basic EPS | $0.20 | $0.37 | $0.39 | $0.63 | | Diluted EPS | $0.20 | $0.37 | $0.39 | $0.63 | | Weighted average shares outstanding (basic) | 122,045 | 121,119 | 121,740 | 120,918 | | Weighted average shares assuming dilution | 123,278 | 121,881 | 123,496 | 121,650 | - Basic and diluted EPS decreased significantly year-over-year for both the three and six-month periods, reflecting lower net income[55] - Approximately 24.9 million potential common shares from the 6.50% Exchangeable Notes due 2026 were excluded from diluted EPS calculation as the average stock price was below the exchange price[59] 9. Derivative Financial Instruments This note describes the company's use of interest rate swap agreements to hedge variable interest rate debt and their accounting treatment. - The Company uses interest rate swap agreements to hedge against variable interest rate debt, fixing the rate at 4.22% on a notional amount of $44.3 million[61] - These swaps are designated as effective cash flow hedges, with changes in fair value recorded in accumulated other comprehensive income[61] - Total unrealized losses related to cash flow hedges recorded in other comprehensive income were $0.2 million for the six months ended June 30, 2023[61] 10. Debt This note provides a detailed breakdown of the company's debt outstanding, including credit agreements, senior notes, and finance lease liabilities. Debt Outstanding (in thousands) | Debt Instrument | June 30, 2023 | December 31, 2022 | | :------------------------------------------------ | :------------ | :---------------- | | Exchange Credit Agreement | $1,001,356 | $1,106,777 | | 10.500% Public Second Lien Notes due 2028 | $264,154 | $263,253 | | 9.500% Private Second Lien Notes due 2028 | $211,232 | $210,067 | | 6.50% Exchangeable Senior Notes Due in 2026 | $224,432 | $223,511 | | 6.00% Senior Notes Due in 2026 | $110,189 | $110,082 | | 5.875% Senior Notes Due in 2024 | $23,182 | $23,157 | | Finance Lease Liabilities | $1,632 | $1,977 | | Other debt, net of unamortized debt issuance costs | $39,771 | $40,323 | | Total debt | $1,875,948| $1,979,147 | | Current portion of finance lease liabilities and long-term debt | $(29,377) | $(44,722) | | Finance Lease Liabilities, long-term portion | $(922) | $(1,280) | | Long-Term Debt | $1,845,649| $1,933,145 | - Total debt decreased from $1.979 billion at December 31, 2022, to $1.876 billion at June 30, 2023[63] - The Company completed an exchange offer in August 2022, converting existing debt into new senior second lien secured notes and an Exchange Credit Agreement, resulting in $52.8 million in debt issuance fees[64][69][92] - The weighted average interest rate on outstanding borrowings under the Credit Agreement was 12.01% as of June 30, 2023[76] 11. Commitments, Contingencies and Other Matters This note discusses various legal proceedings, tax assessments, asset sales, capital commitments, and idle facility marketing efforts. - The Company is involved in several lawsuits, including shareholder class actions, derivative actions, and immigration detainee litigation, which it intends to vigorously defend[104][105][107][112] - A state non-income tax assessment of approximately $20.5 million (tax, penalty, interest) is being appealed, with a reserve established based on the probable loss[118] - The Company sold its equity investment in the Ravenhall Correctional Centre project in Australia for approximately $84 million in gross proceeds in September 2022, recording a $29.3 million pre-tax gain[119] - As of June 30, 2023, the Company had contractual commitments for capital projects totaling $53.3 million, with $20.4 million remaining to be spent in 2023[120] - Nine idle facilities, with a combined net book value of $261.1 million, are being marketed to potential customers, including the Albert Bo Robinson Assessment and Treatment Center which is under a purchase and sale agreement for $15 million[122][123] 12. Business Segments and Geographic Information This note provides financial information by reportable segment and geographic area, including revenues and operating income. - The Company operates through four reportable segments: U.S. Secure Services, Electronic Monitoring and Supervision Services, Reentry Services, and International Services[125] Segment Revenues (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | U.S. Secure Services | $372,543 | $353,402 | $738,500 | $704,647 | | Electronic Monitoring and Supervision Services | $108,029 | $121,484 | $240,669 | $209,405 | | Reentry Services | $67,594 | $65,720 | $131,817 | $127,151 | | International Services | $45,725 | $47,571 | $91,114 | $98,159 | | Total revenues | $593,891 | $588,177 | $1,202,100 | $1,139,362 | Operating Income from Segments (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | U.S. Secure Services | $67,058 | $72,824 | $131,402 | $147,532 | | Electronic Monitoring and Supervision Services | $55,121 | $54,245 | $119,809 | $93,165 | | Reentry Services | $10,186 | $14,207 | $20,372 | $24,211 | | International Services | $1,707 | $3,094 | $5,283 | $9,548 | | Operating income from segments | $134,072 | $144,370 | $276,866 | $274,456 | - Equity in earnings of affiliates, net of tax, for the six months ended June 30, 2023, was $2.4 million, a decrease from $2.7 million in the prior year, primarily due to less favorable performance by GEOAmey[130][204] 13. Benefit Plans This note details the company's pension plan obligations and the balance of its executive retirement agreement. Pension Plan Projected Benefit Obligation (in thousands) | Metric | Six Months Ended June 30, 2023 | | :-------------------------------------- | :----------------------------- | | Projected benefit obligation, beginning of period | $26,207 | | Service cost | $373 | | Interest cost | $673 | | Benefits paid | $(425) | | Projected benefit obligation, end of period | $26,828 | | Unfunded Status of the Plan | $26,828 | - The long-term portion of the pension liability was $26.0 million as of June 30, 2023[133] - The balance of the Amended and Restated Executive Retirement Agreement was approximately $7.8 million at June 30, 2023, and is included in Other Non-Current Liabilities[135] 14. Recent Accounting Pronouncements This note states that no recent accounting pronouncements are expected to materially affect the company's financial results. - No recent accounting pronouncements are expected to have a material effect on the Company's results of operations or financial position[137] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the Company's financial performance and condition, covering results, outlook, capital, and liquidity. Forward-Looking Information This section highlights forward-looking statements and key risks, including operational challenges, legislative impacts, and financial obligations. - The report contains forward-looking statements regarding future financial position, business strategy, projected costs, and plans, which are subject to various risks and uncertainties[138] - Key risk factors include the ability to manage facilities, estimate government utilization of public-private partnerships, respond to challenges, and the impact of executive actions or legislation limiting such partnerships[139] - Other risks involve maintaining occupancy rates, realizing benefits from REIT termination, managing debt obligations, and exposure to litigation, foreign exchange rates, and rising costs[139][140][141] Introduction This section introduces The GEO Group's core business, global operations, facility capacity, and occupancy rates. - The GEO Group specializes in the ownership, leasing, and management of secure facilities, processing centers, and reentry facilities, along with community-based services in the U.S., Australia, and South Africa[144] - As of June 30, 2023, worldwide operations include approximately 82,000 beds at 102 facilities and community supervision services for over 400,000 individuals, with an average company-wide facility occupancy rate of 85%[145][146] Consolidated Revenues (in millions) | Period | 2023 | 2022 | | :-------------------- | :---------- | :---------- | | Six months ended June 30 | $1,202.1 | $1,139.4 | Business Segments This section outlines the company's four reportable business segments: U.S. Secure Services, Electronic Monitoring, Reentry Services, and International Services. - The Company operates through four distinct reportable business segments: U.S. Secure Services, Electronic Monitoring and Supervision Services, Reentry Services, and International Services[148][149][150] - U.S. Secure Services focuses on public-private partnership secure services, while Electronic Monitoring and Supervision Services provides technology and monitoring for community-based parolees, probationers, and pretrial defendants[149] - Reentry Services offers evidence-based supervision and treatment programs, and International Services primarily covers secure services in Australia and South Africa[149][150] Recent Developments This section details recent operational developments, including a new facility lease and efforts to market vacant beds. - The Company signed a 66-month lease with the Oklahoma Department of Corrections for its previously idled Great Plains Correctional Facility, expected to generate approximately $8.4 million in annualized revenue[151] - The Company is marketing 10,221 vacant beds at nine idle facilities, with a combined carrying value of $261.1 million as of June 30, 2023[152] Critical Accounting Policies This section confirms the use of GAAP for financial statements and notes no significant changes in accounting estimates. - The unaudited consolidated financial statements are prepared in conformity with GAAP, requiring estimates, judgments, and assumptions[153] - No significant changes in estimates or judgments were experienced during the six months ended June 30, 2023[153] Results of Operations This section provides a detailed comparison of the company's financial results for the second quarter and six months ended June 30, 2023, versus 2022. Comparison of Second Quarter 2023 and Second Quarter 2022 This section compares the company's financial performance for the second quarter of 2023 against the same period in 2022, focusing on revenues and expenses. Revenues by Segment (Q2 2023 vs. Q2 2022, in thousands) | Segment | Q2 2023 | Q2 2022 | $ Change | % Change | | :---------------------------------------- | :----------- | :----------- | :--------- | :------- | | U.S. Secure Services | $372,543 | $353,402 | $19,141 | 5.4% | | Electronic Monitoring and Supervision Services | $108,029 | $121,484 | $(13,455) | (11.1)% | | Reentry Services | $67,594 | $65,720 | $1,874 | 2.9% | | International Services | $45,725 | $47,571 | $(1,846) | (3.9)% | | Total | $593,891 | $588,177 | $5,714 | 1.0% | - U.S. Secure Services revenue increased by $19.1 million due to new transportation contracts and net increases in rates/occupancies, partially offset by facility ramp-downs[156] - Electronic Monitoring and Supervision Services revenue decreased by $13.5 million due to lower average participant counts under the Intensive Supervision and Appearance Program (ISAP)[158] - Operating expenses increased by $16.3 million (4.0%) in Q2 2023, primarily due to higher labor and medical costs in U.S. Secure Services, but decreased in Electronic Monitoring due to lower participant counts[161][162][163] - Interest expense increased by $21.8 million (65.7%) in Q2 2023 due to higher interest rates on new debt instruments and amortization of deferred issuance costs[173][174] - Net income decreased by 45.0% in Q2 2023, largely due to increased interest expense and a loss on extinguishment of debt, despite a decrease in general and administrative expenses[9][171][174][175] Comparison of Six Months 2023 and Six Months 2022 This section compares the company's financial performance for the first six months of 2023 against the same period in 2022, analyzing key financial metrics. Revenues by Segment (H1 2023 vs. H1 2022, in thousands) | Segment | H1 2023 | H1 2022 | $ Change | % Change | | :---------------------------------------- | :------------- | :------------- | :--------- | :------- | | U.S. Secure Services | $738,500 | $704,647 | $33,853 | 4.8% | | Electronic Monitoring and Supervision Services | $240,669 | $209,405 | $31,264 | 14.9% | | Reentry Services | $131,817 | $127,151 | $4,666 | 3.7% | | International Services | $91,114 | $98,159 | $(7,045) | (7.2)% | | Total | $1,202,100 | $1,139,362 | $62,738| 5.5% | - Electronic Monitoring and Supervision Services revenue increased by $31.3 million due to increases in average participant counts under ISAP[182] - Operating expenses increased by $64.7 million (8.1%) in H1 2023, primarily driven by higher labor and medical costs in U.S. Secure Services and increased census levels in Reentry Services[185][186][190] - Interest expense increased by $44.5 million (68.6%) in H1 2023, primarily due to higher interest rates on new debt instruments and amortization of deferred issuance costs[200] - Net income attributable to The GEO Group, Inc. decreased by 37.4% in H1 2023, mainly due to increased interest expense and a loss on extinguishment of debt[9][200][201] Financial Condition This section discusses the company's current cash requirements, capital needs, funding sources, and compliance with debt covenants. - Current cash requirements include working capital, debt service, supply purchases, R&D for electronic monitoring products, joint venture investments, and capital expenditures for new or existing facilities[205] - Estimated remaining capital requirements for active projects are $20.4 million for the remainder of 2023[206] - The Company plans to fund capital needs from cash on hand, cash from operations, and borrowings under its Exchange Credit Agreement, believing these sources are adequate for 2023[207] - Following the August 2022 exchange offer, S&P Global Ratings upgraded the issuer rating to B with a stable outlook, and Moody's Investors Service upgraded the corporate family rating to B3 with a stable outlook[209] - The Company was in compliance with its debt covenants as of June 30, 2023[215] Off-Balance Sheet Arrangements This section confirms the absence of significant off-balance sheet arrangements beyond those disclosed in the financial statement notes. - The Company does not have any off-balance sheet arrangements except as discussed in the notes to its Unaudited Consolidated Financial Statements[219] Cash Flow This section analyzes changes in net cash provided by operating, investing, and financing activities for the first six months of 2023 compared to 2022. - Net cash provided by operating activities decreased to $113.0 million for the six months ended June 30, 2023, from $172.0 million in the prior year, primarily due to changes in accounts payable and accrued expenses[221][222] - Net cash used in investing activities increased to $32.3 million for the six months ended June 30, 2023, from $19.3 million in the prior year, mainly due to capital expenditures[223] - Net cash used in financing activities increased to $103.6 million for the six months ended June 30, 2023, from $59.9 million in the prior year, primarily due to higher payments on long-term debt[224] Outlook This section discusses future growth opportunities, potential challenges from government policies, and expected impacts on operating expenses and EPS. - The Company is encouraged by growth opportunities but acknowledges potential adverse impacts from government budgetary constraints or changes in willingness to maintain public-private partnerships[228] - As of June 30, 2023, three facilities under direct contracts with USMS represented approximately 6% of revenues for the six months ended June 30, 2023, with no remaining contracts with the BOP[229] - The State of Washington has stipulated it will not enforce House Bill 1090 against GEO's Northwest ICE Processing Center, which generated approximately $66 million in annualized revenues in 2022[234] - The Company launched VeriWatch, a new wrist-worn GPS tracking device, and continues to inform governments about the benefits of public-private partnerships[237] - Operating expenses as a percentage of revenues are expected to be impacted by new facility openings, inflation on costs (personnel, utilities, insurance, medical, food), and carrying costs for vacant facilities[238] - Activation of the nine remaining idle facilities could generate approximately $300 million in incremental annualized revenue and an annualized increase in EPS of $0.30 to $0.35 per share[241] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the Company's exposure to market risks, specifically interest rate risk and foreign currency exchange rate risk, and quantifies their potential impact. Interest Rate Risk This section discusses the company's exposure to variable interest rates on its Exchange Credit Agreement and quantifies the potential impact of rate changes. - The Company is exposed to interest rate risk on its Exchange Credit Agreement, which has variable interest rates[243] - A one percent increase in the average interest rate on the Exchange Credit Facility would increase annual interest expense by approximately $10 million, based on $1.008 billion outstanding borrowings and $76 million in letters of credit as of June 30, 2023[243] Foreign Currency Exchange Rate Risk This section outlines the company's exposure to foreign currency fluctuations, primarily involving the U.S. dollar, Australian dollar, South African Rand, and British Pound. - The Company is exposed to foreign currency exchange rate fluctuations, primarily involving the U.S. dollar, Australian dollar, South African Rand, and British Pound[245] - A 10 percent change in historical currency rates would have an approximate $7.4 million effect on financial position and a $0.6 million impact on results of operations for the six months ended June 30, 2023[245] ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of the Company's disclosure controls and procedures and any changes in internal control over financial reporting. Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion that disclosure controls and procedures were effective as of June 30, 2023. - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023, providing reasonable assurance for timely and accurate reporting[246] - The effectiveness of disclosure controls is subject to inherent limitations, including judgment and the inability to eliminate misconduct completely[247] Changes in Internal Control Over Financial Reporting This section states that no significant changes in internal control over financial reporting occurred during the quarter ended June 30, 2023. - Management believes there have been no significant changes in internal control over financial reporting during the quarter ended June 30, 2023[249] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, sales of equity securities, defaults, mine safety, and other relevant information. ITEM 1. LEGAL PROCEEDINGS This section provides an update on various legal proceedings, including shareholder litigation, immigration detainee lawsuits, and challenges to state legislation. Litigation, Claims and Assessments This section details ongoing lawsuits, including class actions, derivative actions, and immigration detainee litigation, and the company's defense strategy. - A shareholder class action lawsuit filed in July 2020 has been resolved following mediation, with a final approval hearing set for November 14, 2023[251] - Three related shareholder derivative actions are stayed pending the resolution of the federal putative shareholder class action lawsuit[252] - Immigration detainee class action lawsuits in Colorado, Washington, and California allege violations of minimum wage laws and the Federal Trafficking Victims Protection Act (TVPA)[254][257][258][259] - In Washington, an unfavorable jury verdict and judgment of $23.2 million, plus $12.7 million in attorney's fees and interest, is pending appeal to the U.S. Court of Appeals for the Ninth Circuit[257] - The Ninth Circuit Court of Appeals ruled that California's AB-32, which prohibits private detention facilities, violates the Supremacy Clause, and a permanent injunction was entered in favor of GEO and the United States on May 23, 2023[262] - The State of Washington stipulated on June 22, 2023, that it will not enforce House Bill 1090 against GEO's operation of the Northwest ICE Processing Center[263] - The Company establishes accruals for legal proceedings when a loss is probable and estimable, but has not recorded accruals for the immigration detainee lawsuits as losses are not considered probable[260][265] ITEM 1A. RISK FACTORS This section refers to the detailed discussion of risk factors in the Company's Annual Report on Form 10-K for 2022. - Readers are encouraged to review the comprehensive risk factors detailed in the 2022 Form 10-K for a full understanding of potential material impacts on the business[266] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item is marked as 'Not applicable,' indicating no unregistered sales of equity securities or use of proceeds to report. - This item is not applicable for the reporting period[267] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is marked as 'Not applicable,' indicating no defaults upon senior securities to report for the period. - This item is not applicable for the reporting period[268] ITEM 4. MINE SAFETY DISCLOSURES This item is marked as 'Not applicable,' indicating no mine safety disclosures to report for the period. - This item is not applicable for the reporting period[269] ITEM 5. OTHER INFORMATION This section provides other relevant information, including details on securities trading plans of directors and executive officers and changes to the Performance Plan. Securities Trading Plans of Directors and Executive Officers This section confirms that no directors or executive officers adopted or terminated Rule 10b5-1 trading plans during the quarter. - None of the Company's directors or executive officers adopted or terminated a Rule 10b5-1 trading plan or a non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2023[271] Senior Management Performance Award Plan (the "Performance Plan") This section details the Compensation Committee's approval to replace the net income metric with Adjusted EBITDA for annual cash incentive compensation. - Effective for the 2023 fiscal year, the Compensation Committee approved replacing the net income metric with the Adjusted EBITDA metric under the Performance Plan for annual cash incentive compensation for named executive officers[272] - Adjusted EBITDA is weighted 65% and revenue is weighted 35% for determining annual incentive cash compensation, aligning with peer compensation practices[272] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including certifications, XBRL documents, and the cover page formatting. - The exhibits include SECTION 302 and 906 CEO/CFO Certifications, Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbases), and the formatted cover page[275] SIGNATURES This section contains the official signatures for the report, confirming its authorization and submission. - The report was signed on August 9, 2023, by Brian R. Evans, Senior Vice President & Chief Financial Officer, as a duly authorized officer and principal financial officer[279]