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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to_______             

Commission file number: 1-14260 

 

The GEO Group, Inc.

(Exact name of registrant as specified in its charter) 

 

 

Florida

 

65-0043078

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

4955 Technology Way

Boca Raton, Florida

 

33431

(Address of principal executive offices)

 

(Zip Code)

 

(561) 893-0101

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

GEO

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  

As of November 2, 2021, the registrant had 122,534,921 shares of common stock outstanding.

 

 

 

 


Table of Contents

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

3

ITEM 1. FINANCIAL STATEMENTS

3

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

4

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020

5

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

62

ITEM 4. CONTROLS AND PROCEDURES

62

PART II - OTHER INFORMATION

63

ITEM 1. LEGAL PROCEEDINGS

63

ITEM 1A. RISK FACTORS

63

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

64

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

64

ITEM 4. MINE SAFETY DISCLOSURES

64

ITEM 5. OTHER INFORMATION

64

ITEM 6. EXHIBITS

65

SIGNATURES

66

 

2


Table of Contents

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2021 AND 2020

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

September 30, 2021

 

 

September 30, 2020

 

Revenues

 

$

557,277

 

 

$

579,136

 

 

$

1,699,073

 

 

$

1,771,982

 

Operating expenses

 

 

399,900

 

 

 

434,131

 

 

 

1,233,060

 

 

 

1,339,912

 

Depreciation and amortization

 

 

32,883

 

 

 

33,628

 

 

 

100,306

 

 

 

100,389

 

General and administrative expenses

 

 

50,475

 

 

 

46,644

 

 

 

153,642

 

 

 

145,969

 

Operating income

 

 

74,019

 

 

 

64,733

 

 

 

212,065

 

 

 

185,712

 

Interest income

 

 

5,990

 

 

 

6,360

 

 

 

18,177

 

 

 

17,046

 

Interest expense

 

 

(32,525

)

 

 

(30,749

)

 

 

(96,422

)

 

 

(95,539

)

Gain on extinguishment of debt

 

 

 

 

 

1,472

 

 

 

4,693

 

 

 

3,035

 

Loss on asset divestiture

 

 

(5,031

)

 

 

 

 

 

(5,031

)

 

 

 

Gain (loss) on dispositions of real estate

 

 

(1,057

)

 

 

(271

)

 

 

9,322

 

 

 

(1,151

)

Income before income taxes and equity in earnings of affiliates

 

 

41,396

 

 

 

41,545

 

 

 

142,804

 

 

 

109,103

 

Provision for income taxes

 

 

8,395

 

 

 

4,616

 

 

 

21,394

 

 

 

15,358

 

Equity in earnings of affiliates, net of income tax provision of

   $291, $484, $631 and $928 respectively

 

 

1,640

 

 

 

2,243

 

 

 

5,647

 

 

 

7,202

 

Net income

 

 

34,641

 

 

 

39,172

 

 

 

127,057

 

 

 

100,947

 

Net loss attributable to noncontrolling interests

 

 

69

 

 

 

48

 

 

 

157

 

 

 

174

 

Net income attributable to The GEO Group, Inc.

 

$

34,710

 

 

$

39,220

 

 

$

127,214

 

 

$

101,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

120,525

 

 

 

119,826

 

 

 

120,326

 

 

 

119,677

 

Diluted

 

 

120,872

 

 

 

120,032

 

 

 

120,583

 

 

 

119,964

 

Net income per common share attributable to The GEO Group,

   Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to The GEO Group,

   Inc. - basic

 

$

0.24

 

 

$

0.33

 

 

$

0.94

 

 

$

0.84

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to The GEO Group,

   Inc. - diluted

 

$

0.24

 

 

$

0.33

 

 

$

0.94

 

 

$

0.84

 

Dividends declared per share

 

$

 

 

$

0.48

 

 

$

0.25

 

 

$

1.44

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


Table of Contents

 

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2021 AND 2020

(In thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

September 30, 2021

 

 

September 30, 2020

 

Net income

 

$

34,641

 

 

$

39,172

 

 

$

127,057

 

 

$

100,947

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(3,181

)

 

 

2,002

 

 

 

(3,822

)

 

 

(2,802

)

Pension liability adjustment, net of tax provision

   of $41, $28, $124 and $85, respectively

 

 

156

 

 

 

107

 

 

 

467

 

 

 

320

 

Change in fair value of derivative instrument

   classified as cash flow hedge, net of tax (benefit) provision of

   $82, $114, $556 and $(1,143), respectively

 

 

311

 

 

 

376

 

 

 

2,093

 

 

 

(4,299

)

Total other comprehensive income (loss), net of tax

 

 

(2,714

)

 

 

2,485

 

 

 

(1,262

)

 

 

(6,781

)

Total comprehensive income

 

 

31,927

 

 

 

41,657

 

 

 

125,795

 

 

 

94,166

 

Comprehensive loss attributable to noncontrolling interests

 

 

61

 

 

 

44

 

 

 

154

 

 

 

217

 

Comprehensive income attributable to The GEO Group, Inc.

 

$

31,988

 

 

$

41,701

 

 

$

125,949

 

 

$

94,383

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


Table of Contents

 

THE GEO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

(In thousands, except share data)

 

 

 

September 30, 2021

 

 

December 31, 2020

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

537,070

 

 

$

283,524

 

Restricted cash and cash equivalents

 

 

30,201

 

 

 

26,740

 

Accounts receivable, less allowance for doubtful accounts of $1,285 and $4,183,

   respectively

 

 

327,723

 

 

 

362,668

 

Contract receivable, current portion

 

 

6,313

 

 

 

6,283

 

Prepaid expenses and other current assets

 

 

31,682

 

 

 

32,108

 

Total current assets

 

 

932,989

 

 

 

711,323

 

Restricted Cash and Investments

 

 

60,732

 

 

 

37,338

 

Property and Equipment, Net

 

 

2,055,406

 

 

 

2,122,195

 

Assets Held for Sale

 

 

9,717

 

 

 

9,108

 

Contract Receivable

 

 

366,155

 

 

 

396,647

 

Operating Lease Right-of-Use Assets, Net

 

 

118,073

 

 

 

124,727

 

Deferred Income Tax Assets

 

 

36,604

 

 

 

36,604

 

Goodwill

 

 

755,222

 

 

 

755,250

 

Intangible Assets, Net

 

 

172,794

 

 

 

187,747

 

Other Non-Current Assets

 

 

81,104

 

 

 

79,187

 

Total Assets

 

$

4,588,796

 

 

$

4,460,126

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

67,411

 

 

$

85,861

 

Accrued payroll and related taxes

 

 

80,798

 

 

 

67,797

 

Accrued expenses and other current liabilities

 

 

216,404

 

 

 

202,378

 

Operating lease liabilities, current portion

 

 

28,982

 

 

 

29,080

 

Current portion of finance lease liabilities, long-term debt and non-recourse debt

 

 

27,010

 

 

 

26,180

 

Total current liabilities

 

 

420,605

 

 

 

411,296

 

Deferred Income Tax Liabilities

 

 

30,726

 

 

 

30,726

 

Other Non-Current Liabilities

 

 

95,789

 

 

 

115,555

 

Operating Lease Liabilities

 

 

95,357

 

 

 

101,375

 

Finance Lease Liabilities

 

 

2,147

 

 

 

2,988

 

Long-Term Debt

 

 

2,629,010

 

 

 

2,561,881

 

Non-Recourse Debt

 

 

297,456

 

 

 

324,223

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 30,000,000 shares authorized,

   none issued or outstanding

 

 

 

 

 

 

Common stock, $0.01 par value, 187,500,000 shares authorized,

   127,317,890 and 126,153,173 issued and 122,465,518

and 121,318,175 outstanding, respectively

 

 

1,273

 

 

 

1,262

 

Additional paid-in capital

 

 

1,272,725

 

 

 

1,262,267

 

Distributions in excess of earnings

 

 

(126,165

)

 

 

(222,892

)

Accumulated other comprehensive loss

 

 

(23,854

)

 

 

(22,589

)

Treasury stock, 4,852,372 and 4,834,998 shares, at cost, respectively

 

 

(105,099

)

 

 

(104,946

)

Total shareholders’ equity attributable to The GEO Group, Inc.

 

 

1,018,880

 

 

 

913,102

 

Noncontrolling interests

 

 

(1,174

)

 

 

(1,020

)

Total shareholders’ equity

 

 

1,017,706

 

 

 

912,082

 

Total Liabilities and Shareholders’ Equity

 

$

4,588,796

 

 

$

4,460,126

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


Table of Contents

 

THE GEO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2021 AND 2020

(In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

Cash Flow from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

127,057

 

 

$

100,947

 

Net loss attributable to noncontrolling interests

 

 

157

 

 

 

174

 

Net income attributable to The GEO Group, Inc.

 

 

127,214

 

 

 

101,121

 

Adjustments to reconcile net income attributable to The GEO Group, Inc. to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

100,306

 

 

 

100,389

 

Stock-based compensation

 

 

15,755

 

 

 

19,163

 

Gain on extinguishment of debt

 

 

(4,693

)

 

 

(3,035

)

Amortization of debt issuance costs, discount and/or premium and other non-cash

   interest

 

 

5,559

 

 

 

5,153

 

Provision for doubtful accounts

 

 

 

 

 

288

 

Equity in earnings of affiliates, net of tax

 

 

(5,647

)

 

 

(7,202

)

Dividends received from unconsolidated joint ventures

 

 

5,186

 

 

 

5,296

 

Loss on sale/disposal of property and equipment, net

 

 

7,111

 

 

 

3,593

 

Loss on assets held for sale

 

 

 

 

 

774

 

Loss on asset divestiture

 

 

5,031

 

 

 

 

(Gain) loss on disposition of real estate

 

 

(9,322

)

 

 

1,151

 

Changes in assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

 

Changes in accounts receivable, prepaid expenses and other assets

 

 

44,339

 

 

 

58,498

 

Changes in contract receivable

 

 

4,734

 

 

 

3,787

 

Changes in accounts payable, accrued expenses and other liabilities

 

 

(6,096

)

 

 

69,151

 

Net cash provided by operating activities

 

 

289,477

 

 

 

358,127

 

Cash Flow from Investing Activities:

 

 

 

 

 

 

 

 

Insurance proceeds - damaged property

 

 

1,027

 

 

 

9,497

 

Proceeds from sale of property and equipment

 

 

4,118

 

 

 

83

 

Proceeds from sales of real estate

 

 

18,581

 

 

 

 

Proceeds from sale of assets held for sale

 

 

 

 

 

1,516

 

Change in restricted investments

 

 

(6,807

)

 

 

(4,455

)

Capital expenditures

 

 

(57,382

)

 

 

(83,817

)

Net cash used in investing activities

 

 

(40,463

)

 

 

(77,176

)

Cash Flow from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

435,000

 

 

 

311,579

 

Payments on long-term debt

 

 

(359,638

)

 

 

(380,055

)

Payments on non-recourse debt

 

 

(5,081

)

 

 

(4,530

)

Taxes paid related to net share settlements of equity awards

 

 

(2,091

)

 

 

(2,789

)

Proceeds from issuance of common stock in connection with ESPP

 

 

252

 

 

 

465

 

Payment for repurchases of common stock

 

 

 

 

 

(9,562

)

Debt issuance costs

 

 

(9,587

)

 

 

 

Cash dividends paid

 

 

(30,487

)

 

 

(174,134

)

Net cash provided by (used in) financing activities

 

 

28,368

 

 

 

(259,026

)

Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash

   and Cash Equivalents

 

 

(3,788

)

 

 

(309

)

Net Increase in Cash, Cash Equivalents and Restricted Cash

   and Cash Equivalents

 

 

273,594

 

 

 

21,616

 

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, beginning of period

 

 

311,853

 

 

 

67,472

 

Cash, Cash Equivalents and Restricted Cash and Cash Equivalents, end of period

 

$

585,447

 

 

$

89,088

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

Non-cash Investing and Financing activities:

 

 

 

 

 

 

 

 

Right-of-use assets obtained from operating lease liabilities

 

$

2,103

 

 

$

10,398

 

Equipment obtained from finance lease liabilities

 

$

 

 

$

1,616

 

Dividends paid in treasury shares

 

$

153

 

 

$

553

 

Conversion of pension liability to shares of common stock

 

$

 

 

$

8,925

 

Conversion of shares of common stock to pension liability

 

$

3,600

 

 

$

 

Capital expenditures in accounts payable and accrued expenses

 

$

7,795

 

 

$

7,983

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


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THE GEO GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company” or “GEO”) is a fully-integrated real estate investment trust (“REIT”) specializing in the ownership, leasing and management of secure facilities, processing centers and community reentry centers in the United States, Australia, South Africa and the United Kingdom. The Company owns, leases and operates a broad range of facilities including maximum, medium and minimum security facilities, processing centers, as well as community-based reentry facilities and offers an expanded delivery of rehabilitation services under its 'GEO Continuum of Care' platform. The 'GEO Continuum of Care' program integrates enhanced rehabilitative programs, which are evidence-based and include cognitive behavioral treatment and post-release services, and provides academic and vocational classes in life skills and treatment programs while helping individuals reintegrate into their communities. The Company develops new facilities based on contract awards, using its project development expertise and experience to design, construct and finance what it believes are state-of-the-art facilities that maximize security and efficiency. The Company provides innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. The Company also provides secure transportation services for individuals as contracted domestically and in the United Kingdom through its joint venture GEO Amey PECS Ltd. (“GEOAmey”). At September 30, 2021, the Company’s worldwide operations include the management and/or ownership of approximately 86,000 beds at 107 facilities, including idle facilities, projects under development and recently awarded contracts, and also include the provision of community supervision services for more than 200,000 individuals, including over 100,000 through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.

 

The Company's unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 16, 2021 for the year ended December 31, 2020. The accompanying December 31, 2020 consolidated balance sheet has been derived from those audited financial statements. Additional information may be obtained by referring to the Company’s Form 10-K for the year ended December 31, 2020. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results for the entire year ending December 31, 2021, or for any other future interim or annual periods.

 

Risks and uncertainties

 

Executive Order

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Table of Contents

 

On January 26, 2021, President Biden signed an executive order directing the United States Attorney General not to renew Department of Justice (“DOJ”) contracts with privately operated criminal detention facilities, as consistent with applicable law (the “Executive Order”). Two agencies of the DOJ, the Bureau of Prisons (BOP”) and U.S. Marshals Service (“USMS”), utilize GEO’s services. The BOP houses inmates who have been convicted of federal crimes, and the USMS is generally responsible for detainees who are awaiting trial or sentencing in U.S. federal courts. GEO’s contracts with the BOP for its company-owned 1,940-bed Great Plains Correctional Facility, company-owned 1,732-bed Big Spring Correctional Facility, company-owned 1,800-bed Flightline Correctional Facility, and company-owned 1,800-bed North Lake Correctional Facility have renewal option periods that expire on May 31, 2021, November 30, 2021, November 30, 2021, and September 30, 2022, respectively. Additionally, the contracts with the BOP for the county owned and managed 1,800-bed Reeves County Detention Center I & II and the 1,376-bed Reeves County Detention Center III have renewal option periods that expire September 30, 2022 and June 30, 2022, respectively. The Company has a management agreement with Reeves County, Texas for the management oversight of these two county-owned facilities. In total, the Great Plains, Big Spring, Flightline, North Lake Correctional Facilities, Reeves County Detention Center I & II and Reeves County Detention Center III generated approximately $145 million in revenues during the year ended December 31, 2020. The BOP has experienced a decline in federal prison populations over the last several years, a trend that has more recently been accelerated by the COVID-19 global pandemic. As a result of the Executive Order and the decline in federal prison populations, the above-described contracts with the BOP may not be renewed over the coming years. On March 5, 2021, the Company was notified by the BOP that it had decided to not exercise its contract renewal option for the company-owned, 1,940-bed Great Plains Correctional Facility in Oklahoma, when the contract base period expires on May 31, 2021. On March 25, 2021, the Company was notified that the BOP had decided to terminate its contract with the county-owned and managed Reeves County Detention Center I & II effective May 10, 2021. On March 15, 2021, the Company announced that the USMS had decided to not exercise the contract renewal option for its company-owned, 222-bed Queens Detention Facility in New York, when the contract base period ended on March 31, 2021. On August 18, 2021, the Company was notified by the BOP of the non-renewal of the contract options for its Big Spring and Flightline Facilities.  

 

Quarterly Dividends

 

On April 7, 2021, GEO announced that its Board of Directors (the “Board”) had immediately suspended GEO’s quarterly dividend payments with the goal of maximizing the use of cash flows to repay debt, deleverage and internally fund growth. While GEO currently intends to maintain its corporate tax structure as a REIT, the Board is evaluating GEO’s corporate tax structure. The Board’s evaluation of the current corporate tax structure and GEO’s REIT status is expected to take into consideration, among other factors, potential changes to GEO’s financial operating performance, as well as potential changes to the Internal Revenue Code of 1986, as amended (the “Code”) applicable to U.S. corporations and REITs. As a part of this evaluation, GEO has engaged financial advisors and legal advisors to assist in evaluating various capital structure alternatives. The Board expects to conclude its evaluation in the fourth quarter of 2021, and should the Board determine to maintain GEO’s REIT status, an additional dividend payment may be required before year-end in order to meet the minimum REIT distribution requirements under the Code.

 

COVID-19

In December 2019, a novel strain of coronavirus, now known as COVID-19 (“COVID-19”), was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.  

The Company has been closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact those entrusted to its care and governmental partners. During the year ended December 31, 2020 and into 2021, the Company did incur disruptions from the COVID-19 pandemic but, it is unable to predict the overall future impact that the COVID-19 pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties related to the pandemic. The COVID-19 pandemic and related government-imposed mandatory closures, the efficacy and distribution of COVID-19 vaccines, shelter in-place restrictions and social distancing protocols and increased expenditures on engineering controls, personal protective equipment, diagnostic testing, medical expenses, temperature scanners, protective plexiglass barriers and increased sanitation have had, and will continue to have, a severe impact on global economic conditions and the environment in which the Company operates. Starting in early 2020, the Company began to observe negative impacts from the pandemic on its performance in its secure services business, specifically with its U.S. Immigration and Customs Enforcement (“ICE”) Processing Centers and U.S. Marshals Facilities, as a result of a decrease in court sentencing at the federal level and reduced operational capacity to promote social distancing protocols. Additionally, the Company’s reentry services business conducted through its GEO Care business segment has also been negatively impacted, specifically its residential reentry centers and non-residential day reporting programs were impacted by declines in programs due to lower levels of referrals by federal, state and local agencies. Additionally, the Company has experienced the transmission of COVID-19 among detainees and staff at most of its facilities during 2020 and continuing into 2021. If the Company is unable to mitigate the transmission of COVID-19 at its facilities it could experience a material adverse effect on its financial position, results of operations and cash flows. Although the Company is unable to predict the duration or scope of the COVID-19 pandemic or estimate the extent of the negative financial impact to its operating results, an extended period of depressed economic activity necessitated to combating the disease, and the severity and duration of the related global economic crisis may adversely impact its future financial performance.

 

2. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has recorded goodwill as a result of its various business combinations. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible assets and intangible assets acquired net of liabilities assumed, including noncontrolling interests. Changes in the Company's goodwill balances from January 1, 2021 to September 30, 2021 are as follows (in thousands):

 

 

 

January 1,

2021

 

 

Foreign Currency

Translation

 

 

September 30, 2021

 

U.S. Secure Services

 

$

316,366

 

 

$

 

 

$

316,366

 

GEO Care [1]

 

 

438,443

 

 

 

 

 

 

438,443

 

International Services

 

 

441

 

 

 

(28

)

 

 

413

 

Total Goodwill

 

$

755,250

 

 

$

(28

)

 

$

755,222

 

[1] Net of accumulated loss on impairment of $21.1 million related to the Community Based reporting unit for an impairment charge incurred during the fourth quarter of 2020.

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Table of Contents

 

 

As previously discussed in Note 1 – Basis of Presentation, on January 26, 2021, President Biden signed an Executive Order directing the United States Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, as consistent with applicable law. The Company considered the issuance of the Executive Order to be a “triggering event” that requires certain quantitative testing for potential impairment of goodwill for its U.S. Secure Services reporting unit.

 

The quantitative testing performed during first quarter 2021 resulted in no impairment in the goodwill of the U.S. Secure Services reporting unit. The carrying value of the U.S. Secure Services reporting unit is all of the goodwill in the U.S. Secure Services segment in the table above. The calculated fair value of the U.S. Secure Services reporting unit exceeded its carrying value. The percentage that the fair value exceeded the carrying value was approximately 6%. The Company used a third-party valuation firm to determine the estimated fair value of the reporting unit using a discounted cash flow model which is dependent on several significant estimates and assumptions related to forecasts of future cash flows and the weighted average cost of capital, among other factors. A discount rate of 10% was utilized to adjust the cash flow forecasts based on the Company’s estimate of a market participant’s weighted-average cost of capital. Growth rates for sales, profits and other assumptions were determined using inputs from the Company’s long-term planning process. The Company also makes estimates for discount rates and other factors based on market conditions, historical experience and other economic factors. Additionally, management made certain assumptions relating to future re-activations and sales of certain idle facilities, including those where the BOP and USMS have recently notified the Company of its intention not to exercise upcoming renewal options and/or not to rebid contracts with upcoming contract expirations. A change in one or a combination of these assumptions could significantly impact the fair value of the reporting unit. For example, a 1% increase in the discount rate would cause the carrying value to exceed the fair value and trigger an impairment of approximately $76 million or 24% of the goodwill balance in the U.S. Secure Services reporting unit. Conversely, a 1% decrease in the discount rate would increase the percentage that the fair value exceeded the carrying value to 22%.

 

Future impairment charges may be required on the Company’s goodwill, as the discounted cash flow model is subject to change based upon the Company’s performance, overall market conditions, the state of the credit markets and political environment. The Company will continue to monitor these relevant factors to determine if an additional interim impairment assessment is warranted. If there were to be a deterioration in management’s forecasted financial performance, an increase in discount rates or a reduction in long-term growth rates, these factors could all be potential indicators of an impairment charge to our remaining goodwill, which could be material, in future periods.

 

 

 

 

The Company has also recorded other finite and indefinite-lived intangible assets as a result of its various business combinations. The Company's intangible assets include facility management contracts, covenants not to compete, trade names and technology, as follows (in thousands):

 

 

 

September 30, 2021

 

 

December 31, 2020

 

 

 

Weighted

Average

Useful Life

(years)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Facility management contracts

 

 

16.3

 

 

$

308,424

 

 

$

(182,851

)

 

$

125,573

 

 

$

308,398

 

 

$

(168,848

)

 

$

139,550

 

Technology

 

 

7.3

 

 

 

33,700

 

 

 

(31,679

)

 

 

2,021

 

 

 

33,700

 

 

 

(30,703

)

 

 

2,997

 

Trade names

 

Indefinite

 

 

 

45,200

 

 

 

 

 

 

45,200

 

 

 

45,200

 

 

 

 

 

 

45,200

 

Total acquired intangible assets

 

 

 

 

 

$

387,324

 

 

$

(214,530

)

 

$

172,794

 

 

$

387,298

 

 

$

(199,551

)

 

$

187,747

 

 

Amortization expense was $15.0 million and $16.7 million for the nine months ended September 30, 2021 and 2020, respectively. Amortization expense was primarily related to the U.S Secure Services and GEO Care segments' amortization of acquired facility management contracts. As of September 30, 2021, the weighted average period before the next contract renewal or extension for the acquired facility management contracts was approximately 2.3 years.

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Table of Contents

 

Estimated amortization expense related to the Company's finite-lived intangible assets for the remainder of 2021 through 2025 and thereafter is as follows (in thousands):

 

Fiscal Year

 

Total

Amortization

Expense

 

Remainder of 2021

 

$

7,178

 

2022

 

 

18,131

 

2023

 

 

13,487

 

2024

 

 

9,754

 

2025

 

 

9,703

 

Thereafter

 

 

69,341

 

 

 

$

127,594

 

 

3. FINANCIAL INSTRUMENTS

The following tables provide a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2021

 

 

 

Carrying Value at

September 30,

2021

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rabbi Trust

 

$

42,556

 

 

$

 

 

$

42,556

 

 

$

 

Fixed income securities

 

 

2,101

 

 

 

 

 

 

2,101

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivatives

 

$

3,367

 

 

$

 

 

$

3,367

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020

 

 

 

Carrying Value at

December 31,

2020

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rabbi Trust

 

$

35,749

 

 

$

 

 

$

35,749

 

 

$

 

Fixed income securities

 

 

1,932

 

 

 

 

 

 

1,932

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivatives

 

$

6,015

 

 

$

 

 

$

6,015

 

 

$

 

 

The Company’s Level 2 financial instruments included in the tables above as of September 30, 2021 and December 31, 2020 consist of interest rate swap derivative liabilities held by GEO, the Company's rabbi trust established for a GEO employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and an investment in Canadian dollar denominated fixed income securities.

The interest rate swap derivative liabilities are valued using a discounted cash flow model based on projected borrowing rates. The Company's restricted investment in the rabbi trust is invested in Company-owned life insurance policies which are recorded at their cash surrender values. These investments are valued based on the underlying investments held in the policies' separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities. The Canadian dollar denominated securities, which are not actively traded, are valued using quoted rates for these and similar securities.

 

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Table of Contents

 

 

4. FAIR VALUE OF ASSETS AND LIABILITIES

The Company’s consolidated balance sheets reflect certain financial assets and liabilities at carrying value. The carrying value of certain debt instruments, if applicable, is net of unamortized discount. The following tables present the carrying values of those financial instruments and the estimated corresponding fair values at September 30, 2021 and December 31, 2020 (in thousands):

 

 

 

 

 

 

 

Estimated Fair Value Measurements at September 30, 2021

 

 

 

Carrying Value as

of September 30,

2021

 

 

Total Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

537,070

 

 

$

537,070

 

 

$

537,070

 

 

$

 

 

$

 

Restricted cash and investments

 

 

48,377

 

 

 

48,377

 

 

 

48,377

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under senior credit facility

 

$

1,549,783

 

 

$

1,444,437

 

 

$

 

 

$

1,444,437

 

 

$

 

5.125% Senior Notes due 2023

 

 

259,275

 

 

 

245,410