The GEO (GEO) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides a comprehensive overview of the company's financial information ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements, including statements of operations, comprehensive income, balance sheets, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) This section presents the company's unaudited consolidated statements of operations, detailing revenues, operating income, and net income Consolidated Statements of Operations | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Revenues | $616,683 | $557,277 | $1,756,045 | $1,699,073 | | Operating income | $98,121 | $74,019 | $274,721 | $212,065 | | Net income | $38,312 | $34,641 | $130,164 | $127,057 | | Net income attributable to The GEO Group, Inc. | $38,337 | $34,710 | $130,283 | $127,214 | | Basic EPS | $0.26 | $0.24 | $0.89 | $0.94 | | Diluted EPS | $0.26 | $0.24 | $0.89 | $0.94 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) This section outlines the company's unaudited consolidated statements of comprehensive income, including net income and other comprehensive income components Consolidated Statements of Comprehensive Income | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income | $38,312 | $34,641 | $130,164 | $127,057 | | Total other comprehensive income (loss), net of tax | $(775) | $(2,714) | $(6,390) | $(1,262) | | Total comprehensive income | $37,537 | $31,927 | $123,774 | $125,795 | | Comprehensive income attributable to The GEO Group, Inc. | $37,539 | $31,988 | $123,862 | $125,949 | CONSOLIDATED BALANCE SHEETS This section provides the company's consolidated balance sheets, detailing assets, liabilities, and shareholders' equity at specific dates Consolidated Balance Sheets | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------------- | :------------------------------- | | Total Assets | $3,704,508 | $4,537,408 | | Total Liabilities | $2,562,258 | $3,504,595 | | Total Shareholders' Equity | $1,110,580 | $975,016 | CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) This section presents the company's unaudited consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing Consolidated Statements of Cash Flows | Cash Flow Activity | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $311,552 | $289,477 | | Net cash used in investing activities | $(60,318) | $(40,463) | | Net cash (used in) provided by financing activities | $(670,103) | $28,368 | | Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period | $121,373 | $585,447 | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items 1. BASIS OF PRESENTATION This note describes the company's business, its termination of REIT status, the impact of an Executive Order, and COVID-19 uncertainties - 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. It also provides community supervision services for over 500,000 individuals, including nearly 200,000 through technology products[19] - The Company terminated its REIT status and became a taxable C Corporation effective January 1, 2021, providing greater flexibility to use free cash flow and discontinuing quarterly dividends[21] - An Executive Order signed on January 26, 2021, directs the Attorney General not to renew Department of Justice contracts with privately operated criminal detention facilities. As of September 30, 2022, three company-owned/leased facilities under direct contracts with USMS have option periods expiring between February 28, 2023, and September 30, 2023[23][24] - The COVID-19 pandemic has caused disruptions, and the Company is unable to predict its overall future impact on financial condition, results of operations, and cash flows due to numerous uncertainties[25] 2. GOODWILL AND OTHER INTANGIBLE ASSETS This note details the company's goodwill and other intangible assets, including their carrying values, amortization schedules, and segment allocation Goodwill by Segment | Segment | January 1, 2022 (in thousands) | Foreign Currency Translation (in thousands) | September 30, 2022 (in thousands) | | :----------------------------------- | :----------------------------------- | :------------------------------------------ | :---------------------------------- | | U.S. Secure Services | $316,366 | $0 | $316,366 | | Electronic Monitoring and Supervision Services | $289,570 | $0 | $289,570 | | Reentry Services | $148,873 | $0 | $148,873 | | International Services | $416 | $(46) | $370 | | Total Goodwill | $755,225 | $(46) | $755,179 | Intangible Assets | Intangible Asset | Weighted Average Useful Life (years) | Gross Carrying Amount Sep 30, 2022 (in thousands) | Accumulated Amortization Sep 30, 2022 (in thousands) | Net Carrying Amount Sep 30, 2022 (in thousands) | | :----------------------------------- | :----------------------------------- | :------------------------------------------------ | :--------------------------------------------------- | :---------------------------------------------- | | Facility management contracts | 16.3 | $308,335 | $(203,071) | $105,264 | | Technology | 7.3 | $33,700 | $(32,892) | $808 | | Trade names | Indefinite | $45,200 | $0 | $45,200 | | Total acquired intangible assets | | $387,235 | $(235,963) | $151,272 | Amortization Expense Schedule | Fiscal Year | Total Amortization Expense (in thousands) | | :----------------------------------- | :---------------------------------------- | | Remainder of 2022 | $3,601 | | 2023 | $11,813 | | 2024 | $9,314 | | 2025 | $9,263 | | 2026 | $7,157 | | Thereafter | $64,924 | | Total | $106,072 | 3. FINANCIAL INSTRUMENTS This note provides information on the company's financial instruments, including their carrying and fair values, focusing on restricted investments and derivatives Financial Instruments Fair Value (Sep 30, 2022) | Financial Instrument | Carrying Value at Sep 30, 2022 (in thousands) | Fair Value (Level 2) at Sep 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Restricted investment: Rabbi Trust | $34,934 | $34,934 | | Marketable equity and fixed income securities | $25,098 | $25,098 | | Interest rate swap derivatives | $4,712 | $4,712 | Financial Instruments Fair Value (Dec 31, 2021) | Financial Instrument | Carrying Value at Dec 31, 2021 (in thousands) | Fair Value (Level 2) at Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Restricted investments: Rabbi Trust | $42,937 | $42,937 | | Marketable equity and fixed income securities | $11,551 | $11,551 | | Fixed income securities | $1,927 | $1,927 | | Interest rate swap derivatives (liability) | $3,195 | $3,195 | 4. FAIR VALUE OF ASSETS AND LIABILITIES This note discloses the fair values of various financial assets and liabilities, and the methodologies used for their estimation Fair Value of Financial Instruments | Financial Instrument | Carrying Value at Sep 30, 2022 (in thousands) | Total Fair Value at Sep 30, 2022 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cash and cash equivalents | $91,645 | $91,645 | | Restricted cash and investments | $29,728 | $29,728 | | Borrowings under exchange credit facility | $1,143,977 | $1,161,385 | | 10.500% Public Second Lien Notes due 2028 | $286,521 | $283,882 | | 9.500% Private Second Lien Notes due 2028 | $239,142 | $222,856 | | 5.875% Senior Notes due 2024 | $23,253 | $22,197 | | 6.00% Senior Notes due 2026 | $110,858 | $90,945 | | 6.50% Exchangeable Senior Notes due 2026 | $230,000 | $246,392 | - The fair value of new debt instruments issued in August 2022 (Exchange Credit Facility, 10.500% Public Second Lien Notes, 9.500% Private Second Lien Notes) was estimated using a Black-Derman-Toy (BDT) lattice model, incorporating SOFR forward rates, risk-free rates, yield volatility, and credit spreads[32] 5. RESTRICTED CASH AND CASH EQUIVALENTS This note details the components of restricted cash and cash equivalents, explaining changes due to asset sales and their impact on liquidity Restricted Cash and Equivalents | Metric | September 30, 2022 (in thousands) | September 30, 2021 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Cash and cash equivalents | $91,645 | $537,070 | | Restricted cash and cash equivalents - current | $0 | $30,201 | | Restricted cash and investments - non-current | $89,760 | $60,732 | | Less Restricted investments - non-current | $(60,032) | $(42,556) | | Total cash, cash equivalents and restricted cash and cash equivalents | $121,373 | $585,447 | - The Company had no current restricted cash and cash equivalents as of September 30, 2022, due to the sale of shares/units in certain Australian subsidiaries related to its Ravenhall facility, transferring associated restricted cash to the buyer[36] 6. SHAREHOLDERS' EQUITY This note presents the components of shareholders' equity, including common stock, additional paid-in capital, accumulated deficit, and accumulated other comprehensive loss Shareholders' Equity Details | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Common stock | $1,290 | $1,273 | | Additional paid-in capital | $1,288,075 | $1,276,213 | | Accumulated deficit | $(45,766) | $(175,960) | | Accumulated other comprehensive loss | $(26,637) | $(20,216) | | Treasury stock | $(105,099) | $(105,099) | | Total shareholders' equity attributable to The GEO Group, Inc. | $1,111,863 | $976,211 | | Noncontrolling interests | $(1,283) | $(1,195) | | Total shareholders' equity | $1,110,580 | $975,016 | Accumulated Other Comprehensive Income (Loss) | Component of AOCI | Balance, Jan 1, 2022 (in thousands) | Current-period other comprehensive income (loss) (in thousands) | Balance, Sep 30, 2022 (in thousands) | | :----------------------------------- | :---------------------------------- | :-------------------------------------------------------------- | :----------------------------------- | | Foreign currency translation adjustments, net of tax | $(12,461) | $(11,679) | $(24,140) | | Change in fair value of derivatives, net of tax | $(2,524) | $6,247 | $3,723 | | Change in marketable securities, net of tax | $7 | $(1,245) | $(1,238) | | Pension adjustments, net of tax | $(5,238) | $256 | $(4,982) | | Total | $(20,216) | $(6,421) | $(26,637) | 7. EQUITY INCENTIVE PLANS This note describes the company's equity incentive plans, including stock option and restricted stock activity, compensation expenses, and unrecognized costs Stock Option Activity | Stock Option Activity | Shares (in thousands) | Wtd. Avg. Exercise Price | | :----------------------------------- | :-------------------- | :----------------------- | | Options outstanding at January 1, 2022 | 1,847 | $19.92 | | Options granted | 342 | $5.76 | | Options exercised | (3) | $7.52 | | Options forfeited/canceled/expired | (260) | $15.94 | | Options outstanding at September 30, 2022 | 1,926 | $17.98 | - For the nine months ended September 30, 2022, stock-based compensation expense related to stock options was $0.4 million, with $1.0 million of unrecognized compensation costs remaining[48] Restricted Stock Activity | Restricted Stock Activity | Shares (in thousands) | Wtd. Avg. Grant Date Fair Value | | :----------------------------------- | :-------------------- | :------------------------------ | | Restricted stock outstanding at January 1, 2022 | 2,619 | $12.56 | | Granted | 1,836 | $6.09 | | Vested | (807) | $16.27 | | Forfeited/canceled | (46) | $9.49 | | Restricted stock outstanding at September 30, 2022 | 3,602 | $8.25 | - During the nine months ended September 30, 2022, the Company granted 1,835,592 shares of restricted stock, including 1,025,000 market and performance-based awards subject to TSR and ROCE targets[50][51] - For the nine months ended September 30, 2022, compensation expense for restricted stock awards was $12.6 million, with $17.0 million of unrecognized compensation costs remaining[54] - The Employee Stock Purchase Plan (ESPP) is non-compensatory; 20,769 shares were issued during the nine months ended September 30, 2022[56] 8. EARNINGS PER SHARE This note details the calculation of basic and diluted earnings per share, including the treatment of anti-dilutive securities and potential common shares Earnings Per Share Calculation | Metric | Three Months Ended Sep 30, 2022 (in thousands, except per share) | Three Months Ended Sep 30, 2021 (in thousands, except per share) | Nine Months Ended Sep 30, 2022 (in thousands, except per share) | Nine Months Ended Sep 30, 2021 (in thousands, except per share) | | :----------------------------------- | :------------------------------------------------------------- | :------------------------------------------------------------- | :------------------------------------------------------------ | :------------------------------------------------------------ | | Net income attributable to The GEO Group, Inc. available to common stockholders | $31,794 | $28,761 | $108,024 | $113,590 | | Basic weighted average shares outstanding | 121,154 | 120,525 | 120,998 | 120,326 | | Basic EPS | $0.26 | $0.24 | $0.89 | $0.94 | | Diluted weighted average shares outstanding | 122,426 | 120,872 | 121,907 | 120,583 | | Diluted EPS | $0.26 | $0.24 | $0.89 | $0.94 | - For the three months ended September 30, 2022, 1,961,377 weighted average shares underlying options and 305,897 common stock equivalents from restricted shares were anti-dilutive and excluded from diluted EPS[57] - Approximately 24.9 million shares of potential common shares associated with the conversion option of the 6.50% Exchangeable Notes due 2026 were excluded from diluted EPS for both periods as the average stock price was lower than the exchange price[61] 9. DERIVATIVE FINANCIAL INSTRUMENTS This note explains the company's use of interest rate swap agreements as cash flow hedges, detailing their notional amounts, fair values, and impact on comprehensive income - The Company uses interest rate swap agreements with 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[63] - Total unrealized gains recorded in other comprehensive income, net of tax, related to these cash flow hedges was $6.2 million during the nine months ended September 30, 2022[63] - The total fair value of the swap assets as of September 30, 2022, was $4.7 million, recorded as a component of Other Non-Current assets[63] 10. DEBT This note provides a comprehensive overview of the company's debt structure, including various credit facilities, senior notes, and recent debt restructuring activities Debt Summary | Debt Type | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------------- | :------------------------------- | | Senior Credit Facility | $0 | $1,543,010 | | Exchange Credit Agreement | $1,137,231 | $0 | | 10.500% Public Second Lien Notes due 2028 | $262,104 | $0 | | 9.500% Private Second Lien Notes due 2028 | $209,255 | $0 | | 6.50% Exchangeable Senior Notes | $223,055 | $221,754 | | 6.00% Senior Notes | $110,029 | $346,901 | | 5.875% Senior Notes | $23,144 | $223,883 | | 5.125% Senior Notes | $0 | $258,054 | | Non-Recourse Debt | $0 | $305,552 | | Finance Lease Liabilities | $2,147 | $3,843 | | Other debt, net | $40,596 | $41,363 | | Total debt | $2,007,561 | $2,944,360 | | Current portion of debt | $(44,702) | $(18,568) | | Long-Term Debt | $1,961,402 | $2,625,959 | - On August 19, 2022, the Company completed an exchange offer, converting existing senior notes and credit facility loans into newly issued Senior Second Lien Secured Notes and a new Exchange Credit Agreement. This resulted in a net loss on extinguishment of debt of approximately $37.5 million and incurred $52.8 million in debt issuance fees[67][71][95] - The new Exchange Credit Agreement includes Tranche 1 Loans ($857 million), Tranche 2 Loans ($237 million), and an Exchange Revolving Credit Facility ($187 million). Tranche 3 Loans ($45 million) were redeemed in full prior to September 30, 2022[72][76] - The Company issued $286.5 million of 10.500% Public Second Lien Secured Notes due 2028 and $239.1 million of 9.500% Private Second Lien Secured Notes due 2028 as part of the exchange offer[83][90] - The 5.125% Senior Notes due 2023 were redeemed in full on October 6, 2022, after the remaining balance was deposited with the Trustee prior to September 30, 2022[80] - The non-recourse debt related to the Ravenhall project in Australia was transferred to the buyer and is no longer an outstanding obligation of the Company as of September 20, 2022[108] 11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS This note outlines the company's legal proceedings, contractual commitments, and significant asset divestitures, including the sale of its Ravenhall project - The Company is involved in shareholder class action and derivative lawsuits alleging violations of securities laws and breaches of fiduciary duties, which it strongly disputes and intends to vigorously defend[112][114][115] - Multiple class action lawsuits have been filed by immigration detainees in Colorado, Washington, and California, alleging violations of minimum wage laws, human trafficking, and unjust enrichment related to voluntary work programs. The Company denies these claims and is appealing an unfavorable $23.2 million judgment in Washington[116][118][119][120][121] - The Ninth Circuit Court of Appeals, in an en banc decision on September 26, 2022, ruled that California's AB-32, which prohibits private detention facilities, violates the U.S. Constitution's Supremacy Clause and is preempted by federal law. A similar challenge to Washington's EHB 1090 is stayed pending the AB-32 appeal[122][123] - Effective September 20, 2022, the Company sold its equity investment interest in the Ravenhall Correctional Centre project in Australia for approximately $84 million gross proceeds, resulting in a pre-tax gain of $29.3 million. Proceeds were used to repay outstanding debt[128] - The Company has contractual commitments for active capital projects totaling $32.4 million, with $13.2 million spent through Q3 2022 and $19.2 million remaining for the rest of 2022[129] Idle Facilities Summary | Facility | Year Idled | Secure Services Design Capacity | Reentry Services Design Capacity | Total Net Carrying Value Sep 30, 2022 (in thousands) | | :----------------------------------- | :-------------------- | :------------------------------------ | :----------------------------------- | :------------------------------------------------ | | Great Plains Correctional Facility | 2021 | 1,940 | — | $70,016 | | D. Ray James Correctional Facility | 2021 | 1,900 | — | $51,285 | | Northlake Correctional Facility | 2022 | 1,800 | — | $69,113 | | Rivers Correctional Facility | 2021 | 1,450 | — | $38,348 | | Big Spring Correctional Facility | 2021 | 1,732 | — | $33,678 | | Flightline Correctional Facility | 2021 | 1,800 | — | $35,586 | | McFarland Female Community Reentry Facility | 2020 | 300 | — | $11,038 | | Cheyenne Mountain Recovery Center | 2020 | — | 750 | $16,806 | | Albert Bo Robinson Assessment & Treatment Center | 2022 | — | 900 | $14,198 | | Coleman Hall | 2017 | — | 350 | $7,844 | | Hector Garza Center | 2020 | — | 139 | $4,882 | | Total | | 10,922 | 2,139 | $352,794 | 12. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION This note details the company's reportable business segments, their revenues, operating income, and geographic information, reflecting recent segment changes - The Company operates through four reportable business segments: U.S. Secure Services, Electronic Monitoring and Supervision Services, Reentry Services, and International Services. The Facility Construction and Design segment was aggregated into International Services, and Electronic Monitoring and Supervision Services became a separate segment due to growth and changes in management's view[133][134] Segment Revenues and Operating Income (Q3) | Segment | Q3 2022 Revenues (in thousands) | Q3 2021 Revenues (in thousands) | Q3 2022 Operating Income (in thousands) | Q3 2021 Operating Income (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------ | :-------------------------------------- | :-------------------------------------- | | U.S. Secure Services | $368,493 | $369,609 | $67,462 | $72,054 | | Electronic Monitoring and Supervision Services | $137,039 | $74,575 | $67,673 | $35,052 | | Reentry Services | $65,406 | $60,740 | $9,816 | $13,265 | | International Services | $45,745 | $52,353 | $3,192 | $4,123 | | Total Operating Income | | | $148,143 | $124,494 | Segment Revenues and Operating Income (YTD) | Segment | YTD 2022 Revenues (in thousands) | YTD 2021 Revenues (in thousands) | YTD 2022 Operating Income (in thousands) | YTD 2021 Operating Income (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | :------------------------------------- | :------------------------------------- | | U.S. Secure Services | $1,073,140 | $1,125,014 | $214,994 | $219,471 | | Electronic Monitoring and Supervision Services | $346,444 | $199,788 | $160,838 | $89,520 | | Reentry Services | $192,557 | $212,914 | $34,027 | $39,604 | | International Services | $143,904 | $161,357 | $12,740 | $17,112 | | Total Operating Income | | | $422,599 | $365,707 | - Equity in earnings of affiliates, net of tax, for SACS (South Africa) was $2.1 million (YTD 2022) and $2.7 million (YTD 2021). For GEOAmey (United Kingdom), it was $1.7 million (YTD 2022) and $2.9 million (YTD 2021)[138][139] 13. BENEFIT PLANS This note provides information on the company's pension plans, including projected benefit obligations and net periodic pension costs, as well as deferred compensation agreements Pension Plan Obligations and Costs | Metric | Nine Months Ended Sep 30, 2022 (in thousands) | Year Ended Dec 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :------------------------------------- | | Projected benefit obligation, beginning of period | $31,830 | $33,530 | | Projected benefit obligation, end of period | $32,657 | $31,830 | | Unfunded Status of the Plan | $32,657 | $31,830 | Net Periodic Pension Cost | Metric | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net periodic pension cost | $1,884 | $2,600 | - The Company has a non-qualified deferred compensation agreement with its former CEO, with a balance of approximately $5.8 million at September 30, 2022, to be paid in cash upon retirement[141][142] 14. RECENT ACCOUNTING PRONOUNCEMENTS This note discusses recent accounting pronouncements and their expected impact on the company's financial reporting, specifically ASU 2020-04 - ASU 2020-04, 'Reference Reform Rate (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,' provides temporary optional expedients for contracts and hedge relationships affected by reference rate reform. The Company does not expect significant impacts from its application[144][145] 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 condition and results of operations, including an overview of business segments, recent developments, critical accounting policies, and a detailed comparison of financial performance for the three and nine months ended September 30, 2022 and 2021. It also discusses liquidity, capital resources, non-GAAP measures, and the company's outlook, highlighting the impacts of the COVID-19 pandemic, government policies, and debt restructuring Forward-Looking Information This section highlights the inherent risks and uncertainties associated with forward-looking statements, including operational, regulatory, and financial factors - The report contains forward-looking statements subject to risks and uncertainties, including the impact of COVID-19, government utilization of public-private partnerships, executive orders, and the ability to manage debt and litigation[147][148][149][150] Introduction This section provides an overview of the company's business, its operational scope, and key financial metrics for the reporting period - The GEO Group specializes in secure facilities, processing centers, reentry facilities, and community-based services in the US, Australia, and South Africa, managing/owning approximately 82,000 beds at 102 facilities and providing supervision services for over 500,000 individuals[154][157] - The Company terminated its REIT status and became a taxable C Corporation effective January 1, 2021, discontinuing quarterly dividends to gain greater flexibility in using free cash flow[156] Consolidated Revenues and Occupancy Rates | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Consolidated revenues | $1,756.0 million | $1,699.1 million | | Average company-wide facility occupancy rate (excluding idle beds) | 86.0% (68,920 active beds) | 86.5% (78,366 active beds) | Business Segments This section describes the company's four reportable business segments and recent changes in their classification - The Company's four reportable business segments are U.S. Secure Services, Electronic Monitoring and Supervision Services, Reentry Services, and International Services. Electronic Monitoring and Supervision Services is now a separate segment due to growth, and Facility Construction and Design was aggregated into International Services[161][162] Recent Developments This section outlines significant recent events impacting the company, including debt restructuring, asset sales, and government policy changes - On August 19, 2022, the Company completed an exchange offer for certain outstanding senior notes and credit facility loans into newly issued Senior Second Lien Secured Notes and a new Exchange Credit Agreement[163] - Effective September 20, 2022, the Company sold its equity investment interest in the Ravenhall Correctional Centre in Australia for approximately $84 million gross proceeds, resulting in a $29.3 million net gain, with proceeds used to repay debt[164] - President Biden's Executive Order (January 26, 2021) directs the DOJ not to renew contracts with privately operated criminal detention facilities. As of September 30, 2022, three USMS contracts (6% of 2021 revenues) expire between February and September 2023[165] - The Company's contract with the BOP for the North Lake Correctional Facility expired at the end of September 2022, meaning no more BOP contracts for secure correctional facilities[168] - The Company is marketing 13,061 vacant beds at eleven idle facilities, with a combined carrying value of $352.8 million as of September 30, 2022[169] Critical Accounting Policies This section discusses the critical accounting policies and estimates used in preparing the consolidated financial statements - The unaudited consolidated financial statements are prepared in conformity with GAAP, requiring estimates and assumptions. No significant changes in estimates or judgments occurred during the nine months ended September 30, 2022[170] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance, comparing results for the current and prior periods Comparison of Third Quarter 2022 and Third Quarter 2021 This section compares the company's financial results for the third quarter of 2022 against the same period in 2021, analyzing revenue and expense changes Revenue by Segment (Q3) | Segment | Q3 2022 Revenues (in thousands) | Q3 2021 Revenues (in thousands) | $ Change (in thousands) | % Change | | :----------------------------------- | :------------------------------ | :------------------------------ | :---------------------- | :------- | | U.S. Secure Services | $368,493 | $369,609 | $(1,116) | (0.3)% | | Electronic Monitoring and Supervision Services | $137,039 | $74,575 | $62,464 | 83.8% | | Reentry Services | $65,406 | $60,740 | $4,666 | 7.7% | | International Services | $45,745 | $52,353 | $(6,608) | (12.6)% | | Total | $616,683 | $557,277 | $59,406 | 10.7% | - U.S. Secure Services revenues decreased slightly due to facility deactivations, partially offset by new contract activations and increased rates/occupancies. Electronic Monitoring and Supervision Services revenues increased significantly due to higher participant counts under ISAP. International Services revenues decreased due to foreign exchange rate fluctuations and contract transitions[173][175][176][177] Expense Analysis (Q3) | Expense Category | Q3 2022 (in thousands) | Q3 2021 (in thousands) | $ Change (in thousands) | % Change | | :----------------------------------- | :--------------------- | :--------------------- | :---------------------- | :------- | | Operating expenses | $436,210 | $399,900 | $36,310 | 9.1% | | Depreciation and amortization | $32,330 | $32,883 | $(553) | (1.7)% | | General and administrative expenses | $50,022 | $50,475 | $(453) | (0.9)% | | Interest income | $5,111 | $5,990 | $(879) | (14.7)% | | Interest expense | $46,537 | $32,525 | $14,012 | 43.1% | | Loss on extinguishment of debt | $37,487 | $0 | $37,487 | 100.0% | | Gain (loss) on asset divestitures | $29,279 | $(6,088) | $35,367 | (580.9)% | | Provision for income taxes | $11,246 | $8,395 | $2,851 | 34.0% | | Equity in earnings of affiliates | $1,071 | $1,640 | $(569) | (34.7)% | - Interest expense increased significantly due to higher interest rates on new debt instruments from the exchange offer and rising SOFR/LIBOR rates. A $37.5 million net loss on extinguishment of debt was recorded from the exchange offer. A $29.3 million gain on asset divestitures resulted from the Ravenhall sale[192][193][194] Comparison of Nine Months 2022 and Nine Months 2021 This section compares the company's financial results for the nine months ended September 30, 2022, against the same period in 2021, detailing revenue and expense trends Revenue by Segment (YTD) | Segment | YTD 2022 Revenues (in thousands) | YTD 2021 Revenues (in thousands) | $ Change (in thousands) | % Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :---------------------- | :------- | | U.S. Secure Services | $1,073,140 | $1,125,014 | $(51,874) | (4.6)% | | Electronic Monitoring and Supervision Services | $346,444 | $199,788 | $146,656 | 73.4% | | Reentry Services | $192,557 | $212,914 | $(20,357) | (9.6)% | | International Services | $143,904 | $161,357 | $(17,453) | (10.8)% | | Total | $1,756,045 | $1,699,073 | $56,972 | 3.4% | - U.S. Secure Services revenues decreased due to facility deactivations, partially offset by new contract activations and increased rates/occupancies. Electronic Monitoring and Supervision Services revenues increased significantly due to higher ISAP participant counts. Reentry Services revenues decreased due to the sale of the youth business, partially offset by new/reactivated contracts. International Services revenues decreased due to foreign exchange and contract transitions[200][202][204][205] Expense Analysis (YTD) | Expense Category | YTD 2022 (in thousands) | YTD 2021 (in thousands) | $ Change (in thousands) | % Change | | :----------------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Operating expenses | $1,233,162 | $1,233,060 | $102 | 0.0% | | Depreciation and amortization | $100,284 | $100,306 | $(22) | (0.0)% | | General and administrative expenses | $147,878 | $153,642 | $(5,764) | (3.8)% | | Interest income | $16,301 | $18,177 | $(1,876) | (10.3)% | | Interest expense | $111,383 | $96,422 | $14,961 | 15.5% | | (Loss) Gain on extinguishment of debt | $(37,487) | $4,693 | $(42,180) | (898.8)% | | Gain on Asset Divestitures | $32,332 | $4,291 | $28,041 | 653.5% | | Provision for Income Taxes | $48,106 | $21,394 | $26,712 | 124.9% | | Equity in Earnings of Affiliates | $3,786 | $5,647 | $(1,861) | (33.0)% | - General and administrative expenses decreased due to one-time employee restructuring expenses in 2021, partially offset by increased professional fees. Interest expense increased due to higher rates on new debt and amortization of issuance costs/discounts. A $37.5 million net loss on extinguishment of debt was recorded in 2022, compared to a $4.7 million gain in 2021. Income tax provision increased significantly due to the Company's transition to a taxable C corporation[216][219][220][225] Financial Condition This section discusses the company's current financial position, including cash requirements, capital expenditures, and funding strategies - Current cash requirements include working capital, debt service, supply purchases, joint venture investments, and capital expenditures for new or existing facilities. The Company plans to fund these needs from cash on hand, operations, borrowings under the Exchange Credit Agreement, and other financings[228][230] - Estimated remaining capital requirements for active projects are $19.2 million for the remainder of 2022[229] Liquidity and Capital Resources This section analyzes the company's liquidity and capital resources, including credit ratings, cash flow activities, and debt management strategies - Following the August 2022 exchange offer, S&P Global Ratings upgraded the Company's issuer rating to B with a stable outlook, and Moody's Investors Service upgraded its corporate family rating to B3 with a stable outlook[232] Cash Flow Summary | Cash Flow Activity | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $311,552 | $289,477 | | Net cash used in investing activities | $(60,318) | $(40,463) | | Net cash used in financing activities | $(670,103) | $28,368 | | Cash, cash equivalents and restricted cash and cash equivalents, end of period | $121,373 | $585,447 | - Net cash used in financing activities significantly increased in 2022 due to $676.1 million in payments on long-term debt and $41.5 million in debt issuance costs, partially offset by $50 million in proceeds from long-term debt[254] Non-GAAP Measures This section defines and reconciles non-GAAP financial measures, such as Adjusted Funds from Operations (AFFO), to provide additional insights into performance - Adjusted Funds from Operations (AFFO) is a non-GAAP measure defined as net income attributable to GEO adjusted for depreciation, amortization, stock-based compensation, non-cash interest, asset divestitures, facility maintenance capital expenditures, and other non-cash items, providing insight into the ability to fund capital expenditures and expand the business[255][256][257][258] Adjusted Funds from Operations (AFFO) Reconciliation | Metric | Q3 2022 (in thousands) | Q3 2021 (in thousands) | YTD 2022 (in thousands) | YTD 2021 (in thousands) | | :----------------------------------- | :--------------------- | :--------------------- | :-------------------- | :-------------------- | | Net income attributable to GEO | $38,337 | $34,710 | $130,283 | $127,214 | | Depreciation and amortization | $32,330 | $32,883 | $100,284 | $100,306 | | Facility maintenance capital expenditures | $(4,211) | $(2,229) | $(13,217) | $(7,795) | | Stock-based compensation expense | $3,141 | $4,329 | $13,010 | $15,755 | | Amortization of debt issuance costs, discount and/or premium and other non-cash interest | $2,456 | $1,974 | $6,211 | $5,559 | | (Gain) loss on asset divestitures, net | $(29,279) | $6,088 | $(32,332) | $(4,291) | | Loss (gain) on extinguishment of debt, pre-tax | $37,487 | $0 | $37,487 | $(4,693) | | Transaction related expenses, pre-tax | $1,322 | $3,977 | $1,322 | $3,977 | | One-time employee restructuring expenses, pre-tax | $0 | $0 | $0 | $7,459 | | Tax effect of adjustments to net income attributable to GEO | $(7,697) | $(2,254) | $(6,930) | $1,685 | | Adjusted Funds from Operations | $73,886 | $78,376 | $236,118 | $241,870 | Outlook This section provides the company's forward-looking perspective on business trends, potential impacts of external factors, and strategic initiatives - The COVID-19 pandemic continues to impact populations and referrals, particularly in reentry services, with new intake at residential reentry centers significantly slowed. The Company expects continued impact on populations for the remainder of 2022[263] - The Executive Order directing the DOJ not to renew contracts with privately operated criminal detention facilities continues to pose uncertainty, with three USMS contracts (6% of 2021 revenues) expiring between February and September 2023[265][266] - The Ninth Circuit Court of Appeals ruled that California's AB-32, banning private detention facilities, violates the Supremacy Clause, remanding the case for further proceedings. A similar challenge to Washington's EHB 1090 is stayed[269][270] - Operating expenses are expected to be impacted by inflation on costs (personnel, utilities, insurance, medical, food) and carrying costs for vacant facilities. General and administrative expenses are expected to remain consistent or decrease due to cost savings initiatives[275][276] - The 11 idle facilities (13,061 vacant beds) have an annual net carrying cost of $20.3 million (including $15.7 million depreciation). If activated at average 2022 per diem rates and occupancy, they could generate approximately $350 million in incremental annualized revenue and $0.35-$0.40 increase in EPS[277] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section outlines the company's exposure to market risks, specifically interest rate risk on its variable-rate debt and foreign currency exchange rate risk from its international operations in Australia, South Africa, and the United Kingdom - For every one percent increase in the average interest rate applicable to the Exchange Credit Agreement, the total annual interest expense would increase by approximately $12 million, based on $1,144 million outstanding borrowings and $99.0 million in outstanding letters of credit as of September 30, 2022[278] - A hypothetical 10% change in historical foreign currency exchange rates (USD vs. AUD, ZAR, GBP) would have approximately a $6.4 million effect on financial position and a $1.9 million impact on results of operations during the nine months ended September 30, 2022[280] ITEM 4. CONTROLS AND PROCEDURES Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, providing reasonable assurance for timely and accurate financial reporting. No material changes in internal control over financial reporting were identified during the quarter - The Company's disclosure controls and procedures were effective as of September 30, 2022, ensuring timely and accurate reporting of information required by the SEC[282] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[285] PART II - OTHER INFORMATION This section details other relevant information and disclosures ITEM 1. LEGAL PROCEEDINGS This section provides updates on various legal proceedings, including shareholder and derivative lawsuits, immigration detainee litigation across multiple states, and challenges to state legislation that conflict with federal contracts. The company maintains its strong defense against all claims and outlines its policy for accruing legal losses - The Company is actively defending against shareholder class action and three derivative lawsuits alleging securities law violations and breaches of fiduciary duties, with some claims dismissed and others stayed pending resolution of the class action[288][289][290] - Multiple class action lawsuits by immigration detainees in Colorado, Washington, and California allege minimum wage violations, human trafficking, and unjust enrichment related to voluntary work programs. The Company disputes these claims and is appealing an unfavorable $23.2 million judgment in Washington[291][293][294][295][296] - The Ninth Circuit Court of Appeals, in an en banc decision, ruled that California's AB-32, prohibiting private detention facilities, violates the U.S. Constitution's Supremacy Clause. A similar lawsuit challenging Washington's EHB 1090 is stayed pending the AB-32 appeal[297][298] - Accruals for legal proceedings are established when a loss is probable and estimable, with quarterly reviews. The Company does not accrue for anticipated legal fees[300] ITEM 1A. RISK FACTORS This section refers readers to the comprehensive discussion of risk factors detailed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect its business, financial condition, or future prospects - For a detailed discussion of risk factors, refer to Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021[301] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item is not applicable for the reporting period - Not applicable[302] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable for the reporting period - Not applicable[302] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable for the reporting period - Not applicable[303] ITEM 5. OTHER INFORMATION This item is not applicable for the reporting period - Not applicable[304] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including various indentures, credit agreements, intercreditor agreements, and certifications, which provide supporting documentation for the financial and operational disclosures - Key exhibits include Indentures for 10.500% and 9.500% Senior Second Lien Secured Notes due 2028, Supplemental Indentures for various Senior Notes, Amendment No. 4 and 5 to the Third Amended and Restated Credit Agreement, the new Credit Agreement, and various Intercreditor Agreements[306][308] - Certifications under Sections 302 and 906 of the Sarbanes-Oxley Act by the CEO and CFO are also included[308] SIGNATURES This section contains the official signatures required for the submission of the Quarterly Report on Form 10-Q, confirming its authorization and accuracy - The report is signed by Brian R. Evans, Senior Vice President & Chief Financial Officer, on November 8, 2022[312]