ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Information
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking” statements are any statements that are not based on historical information. Statements other than statements of historical facts included in this report, including, without limitation, statements regarding our future financial position, business strategy, the impact of COVID-19 on our business, the efficacy and distribution of COVID-19 vaccines, budgets, projected costs and plans and objectives of management for future operations, legal proceedings, our corporate structure and potential steps to address our future debt maturities are “forward-looking” statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:
•our ability to mitigate the transmission of the current pandemic of the novel coronavirus, or COVID-19, at our secure facilities, processing centers and reentry centers;
•the magnitude, severity and duration of the COVID-19 pandemic and its impact on our business, financial condition, results of operations and cash flows;
•our ability to timely build and/or open facilities as planned, successfully manage such facilities and successfully integrate such facilities into our operations without substantial additional costs;
•our ability to estimate the government’s level of utilization of public-private partnerships for secure services and the impact of any modifications or reductions by our government customers of their utilization of public-private partnerships;
•our ability to accurately project the size and growth of public-private partnerships for secure services in the U.S. and internationally and our ability to capitalize on opportunities for public-private partnerships;
•our ability to successfully respond to any challenges or concerns that our government customers may raise regarding their use of public-private partnerships for secure services, including finding other government customers or alternative uses for facilities where a government customer has discontinued or announced that a contract with us will be discontinued;
•the impact of adopted or proposed executive action or legislation aimed at limiting public-private partnerships for secure facilities, processing centers and community reentry centers or limiting or restricting the business and operations of financial institutions or others who do business with us;
•our ability to successfully respond to delays encountered by states pursuing public-private partnerships for secure services and cost savings initiatives implemented by a number of states;
•our ability to activate the inactive beds at our idle facilities;
•our ability to maintain or increase occupancy rates at our facilities and the impact of fluctuations in occupancy levels on our revenues and profitability;
•the impact of our termination of our REIT election and the discontinuation of quarterly dividend payments and our ability to maximize the use of cash flows to repay debt, deleverage and internally fund growth;
•we may fail to realize the anticipated benefits of terminating our REIT election or those benefits may take longer to realize than expected, if at all, or may not offset the costs of terminating our REIT election and becoming a taxable C Corporation;
•if we failed to remain qualified as a REIT for those years we elected REIT status, we would be subject to additional corporate income taxes and would not be able to deduct distributions to shareholders when computing our taxable income for those years;
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•our ability to expand, diversify and grow our secure services, reentry, community-based services, monitoring services, evidence-based supervision and treatment programs and secure transportation services businesses;
•our ability to win management contracts for which we have submitted proposals, retain existing management contracts, prevail in any challenge or protest involving the award of a management contract and meet any performance standards required by such management contracts;
•our ability to raise new project development capital given the often short-term nature of the customers’ commitment to use newly developed facilities;
•our ability to develop long-term earnings visibility;
•our ability to successfully conduct our operations in the United Kingdom, South Africa and Australia through joint ventures or a consortium;
•the impact of the LIBOR transition;
•the instability of foreign exchange rates, exposing us to currency risks in Australia, the United Kingdom, and South Africa, or other countries in which we may choose to conduct our business;
•an increase in unreimbursed labor rates;
•our exposure to rising medical costs;
•our ability to manage costs and expenses relating to ongoing litigation arising from our operations;
•our ability to successfully pursue an appeal to reverse the recent unfavorable verdict and judgments in the retrial of the lawsuits in the State of Washington, our company being required to record an accrual for the judgments in the future, and our ability to defend similar other pending litigation and the effect such litigation may have on our company;
•our ability to prevail in our challenge to EHB 1090 legislation that is pending in the State of Washington;
•our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers’ compensation and automobile liability claims;
•our ability to fulfill our debt service obligations and its impact on our liquidity;
•our ability to deleverage and repay, refinance or otherwise address our debt maturities in an amount or on the timeline we expect, or at all;
•despite current indebtedness levels, we may still incur more indebtedness, which could further exacerbate the risks relating to our indebtedness;
•the covenants in the indentures governing the Convertible Notes, the 6.00% Senior Notes due 2026, the 5.875% Senior Notes due 2024 and the covenants in the indentures governing the 2028 Registered Notes, the 2028 Private Exchange Notes and the Exchange Credit Agreement impose significant operating and financial restrictions which may adversely affect our ability to operate our business;
•servicing our indebtedness will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control and we may not be able to generate the cash required to service our indebtedness;
•because portions of our senior indebtedness have floating interest rates, a general increase in interest rates would adversely affect cash flows;
•we depend on distributions from our subsidiaries to make payments on our indebtedness and these distributions may not be made;
•we may not be able to satisfy our repurchase obligations in the event of a change of control because the terms of our indebtedness or lack of funds may prevent us from doing so;
•our ability to identify and successfully complete any potential sales of additional Company-owned assets and businesses in commercially advantageous terms on a timely basis, or at all;
•from time to time, we may not have a management contract with a client to operate existing beds at a facility or new beds at a facility that we are expanding, and we cannot assure you that such a contract will be obtained. Failure to obtain a management contract for these beds will subject us to carrying costs with no corresponding management revenue;
•negative conditions in the capital markets could prevent us from obtaining financing on desirable terms, which could materially harm our business;
35
•we are subject to the loss of our facility management contracts, due to executive orders, terminations, non-renewals or competitive re-bids, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers;
•our growth depends on our ability to secure contracts to develop and manage new secure facilities, processing centers and community-based facilities and to secure contracts to provide electronic monitoring services, community-based reentry services and monitoring and supervision services, the demand for which is outside our control;
•we may not be able to meet state requirements for capital investment or locate land for the development of new facilities, which could adversely affect our results of operations and future growth;
•we partner with a limited number of governmental customers who account for a significant portion of our revenues. The loss of, or a significant decrease in revenues from, these customers could seriously harm our financial condition and results of operations;
•State budgetary constraints may have a material adverse impact on us;
•competition for contracts may adversely affect the profitability of our business;
•we are dependent on government appropriations, which may not be made on a timely basis or at all and may be adversely impacted by budgetary constraints at the federal, state, local and foreign government levels;
•public and political resistance to the use of public-private partnerships for secure facilities, electronic monitoring and supervision as alternatives to detention, processing centers and community reentry centers could result in our inability to obtain new contracts or the loss of existing contracts, impact our ability to obtain or refinance debt financing or enter into commercial arrangements, which could have a material adverse effect on our business, financial condition, results of operations and the market price of our securities;
•adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts;
•we may incur significant start-up and operating costs on new contracts before receiving related revenues, which may impact our cash flows and may not be recouped;
•failure to comply with extensive government regulation and applicable contractual requirements could have a material adverse effect on our business, financial condition or results of operations;
•we may face community opposition to facility locations, which may adversely affect our ability to obtain new contracts;
•our business operations expose us to various liabilities for which we may not have adequate insurance and may have a material adverse effect on our business, financial condition or results of operations;
•we may not be able to obtain or maintain the insurance levels required by our government contracts;
•our exposure to rising general insurance costs;
•natural disasters, pandemic outbreaks, global political events and other serious catastrophic events could disrupt operations and otherwise materially adversely affect our business and financial condition;
•our international operations expose us to risks that could materially adversely affect our financial condition and results of operations;
•we conduct certain of our operations through joint ventures or consortiums, which may lead to disagreements with our joint venture partners or business partners and adversely affect our interest in the joint ventures or consortiums;
•we are dependent upon our senior management and our ability to attract and retain sufficient qualified personnel;
•our profitability may be materially adversely affected by inflation;
•various risks associated with the ownership of real estate may increase costs, expose us to uninsured losses and adversely affect our financial condition and results of operations;
•risks related to facility construction and development activities may increase our costs related to such activities;
•the rising cost and increasing difficulty of obtaining adequate levels of surety credit on favorable terms could adversely affect our operating results;
•adverse developments in our relationship with our employees could adversely affect our business, financial condition or results of operations;
•technological changes could cause our electronic monitoring products and technology to become obsolete or require the redesign of our electronic monitoring products, which could have a material adverse effect on our business;
36
•any negative changes in the level of acceptance of or resistance to the use of electronic monitoring products and services by governmental customers could have a material adverse effect on our business, financial condition and results of operations;
•we depend on a limited number of third parties to manufacture and supply quality infrastructure components for our electronic monitoring products. If our suppliers cannot provide the components or services we require in a timely manner and/or with such quality as we expect, our ability to market and sell our electronic monitoring products and services could be harmed;
•the interruption, delay or failure of the provision of our services or information systems could adversely affect our business;
•an inability to acquire, protect or maintain our intellectual property and patents in the electronic monitoring space could harm our ability to compete or grow;
•our electronic monitoring products could infringe on the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties, and/or prevent us from using technology that is essential to our products;
•we license intellectual property rights in the electronic monitoring space, including patents, from third party owners. If such owners do not properly maintain or enforce the intellectual property underlying such licenses, our competitive position and business prospects could be harmed. Our licensors may also seek to terminate our license;
•we may be subject to costly product liability claims from the use of our electronic monitoring products, which could damage our reputation, impair the marketability of our products and services and force us to pay costs and damages that may not be covered by adequate insurance;
•our ability to identify suitable acquisitions, and to successfully complete and integrate such acquisitions on satisfactory terms, to enhance occupancy levels and the financial performance of assets acquired and estimate the synergies to be achieved as a result of such acquisitions or achieve such synergies;
•as a result of our acquisitions, we have recorded and will continue to record a significant amount of goodwill and other intangible assets. In the future, our goodwill or other intangible assets may become impaired, which could result in material non-cash charges to our results of operations;
•we are subject to risks related to corporate social responsibility;
•the market price of our common stock may vary substantially;
•future sales of shares of our common stock or securities convertible into common stock could adversely affect the market price of our common stock and may be dilutive to current shareholders;
•various anti-takeover protections applicable to us may make an acquisition of us more difficult and reduce the market value of our common stock;
•failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business and the trading price of our common stock;
•we may issue additional debt securities that could limit our operating flexibility and negatively affect the value of our common stock; and
•other factors contained in our filings with the SEC, including, but not limited to, those detailed in the Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC.
We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q.
Introduction
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under “Forward-Looking Information”, those described below under "Part II - Item 1A. Risk Factors" and under “Part I - Item 1A. Risk Factors” in our Annual Report on
37
Form 10-K for the year ended December 31, 2021. This discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
We specialize in the ownership, leasing and management of secure facilities, processing centers and reentry facilities and the provision of community-based services in the United States, Australia and South Africa. We own, lease and operate a broad range of secure facilities including maximum, medium and minimum-security facilities, processing centers, as well as community-based reentry facilities. We develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities. We provide innovative technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community based programs. We also provide secure transportation services domestically and in the United Kingdom through our joint venture GEOAmey.
We operated as a REIT from January 1, 2013 through December 31, 2020. As a REIT, we provided services and conducted other business activities through TRSs. A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax rates and certain qualification requirements. Our use of TRSs permitted us to engage in certain business activities in which the REIT could not engage directly, so long as those activities were conducted in entities that elected to be treated as TRSs under the Code, and enabled GEO to, among other things, provide correctional services at facilities that we own and at facilities owned by our government partners. A TRS is not subject to the distribution requirements applicable to REITs so it may retain income generated by its operations for reinvestment.
On December 2, 2021, we announced that our Board unanimously approved a plan to terminate our REIT status and become a taxable C Corporation, effective for the year ended December 31, 2021. As a result, we are no longer required to operate under REIT rules, including the requirement to distribute at least 90% of REIT taxable income to our shareholders, which provides us with greater flexibility to use our free cash flow. Effective January 1, 2021, we were subject to federal and state income taxes on our taxable income at applicable tax rates and are no longer entitled to a tax deduction for dividends paid. We operated as a REIT for the 2020 tax year, and existing REIT requirements and limitations, including those established by our organizational documents, remained in place until December 31, 2020. In connection with terminating our REIT status, the Board also voted unanimously to discontinue our quarterly dividend.
At September 30, 2022, our worldwide operations include the management and/or ownership of approximately 82,000 beds at 102 secure services and community based facilities, including idle facilities, and also include the provision of community supervision services for an average of more than 500,000 individuals, including nearly 200,000 through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.
We provide a diversified scope of services on behalf of our government agency partners:
•our secure facility management services involve the provision of security, administrative, rehabilitation, education, and food services at secure services facilities;
•our reentry services involve supervision of individuals in community-based programs and re-entry centers and the provision of temporary housing, programming, employment assistance and other services with the intention of the successful reintegration of residents into the community;
•we provide comprehensive electronic monitoring and supervision services;
•we develop new facilities, using our project development experience to design, construct and finance what we believe are state-of-the-art facilities;
•we provide secure transportation services; and
•our services are provided at facilities which we either own, lease or are owned by the government.
For the nine months ended September 30, 2022 and 2021, we had consolidated revenues of $1,756.0 million and $1,699.1 million, respectively. We maintained an average company-wide facility occupancy rate of 86.0% including 68,920 active beds and excluding 13,061 idle beds which includes those being marketed to potential customers for the nine months ended September 30, 2022, and 86.5% including 78,366 active beds and excluding 7,968 idle beds which includes those being marketed to potential customers for the nine months ended September 30, 2021. Overall occupancy levels have been lower than prior periods due to the impact of the COVID-19 pandemic as well as the impacts of the Executive Order (as defined below).
38
Reference is made to Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on February 28, 2022, for further discussion and analysis of information pertaining to our financial condition and results of operations as of and for the year ended December 31, 2021.
Business Segments
We conduct our business through four reportable business segments: our U.S. Secure Services segment; our Electronic Monitoring and Supervision Services segment; our Reentry Services segment and our International Services segment. We have identified these four reportable segments to reflect our current view that we operate four distinct business lines, each of which constitutes a material part of our overall business. We have determined that our previously reportable business segment, Facility Construction and Design, no longer qualifies as a reportable segment as it no longer meets certain quantitative thresholds and has been aggregated with our International Services reportable business segment. In addition, we appointed a new Chief Executive Officer, the chief operating decision maker, during fiscal 2021. Based on changes to the way our chief operating decision maker views the business and financial results used to allocate resources to our electronic monitoring and supervision services operations, along with the growth of the business, we report the electronic monitoring and supervision services operation as a separate reportable segment. This segment is presented as Electronic Monitoring and Supervision Services. Previously, the electronic monitoring and supervision services operations were included in our GEO Care reportable segment. In addition, the GEO Care reportable segment was renamed Reentry Services and includes services provided to adults for residential and non-residential treatment, educational and community-based programs, pre-release and half-way house programs. We have retroactively restated our segment presentation for the three and nine months ended September 30, 2021 to reflect these changes.
Our U.S. Secure Services segment primarily encompasses our U.S.-based public-private partnership secure services business. Our Electronic Monitoring and Supervision Services segment, which conducts its services in the U.S., consists of our electronic monitoring and supervision services. Our Reentry Services segment consists of various community-based and reentry services. Our International Services segment primarily consists of our public-private partnership secure services operations in Australia and South Africa.
Recent Developments
Exchange Offering
On August 19, 2022, we completed an exchange offer to exchange certain of our outstanding 5.125% Senior Notes due 2023, 5.875% Senior Notes due 2024, 6.00% Senior Notes due 2026 and certain revolving credit loans and term loans under our senior secured credit facility into newly issued Senior Second Lien Secured Notes and a new credit facility. Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Ravenhall
Effective September 20, 2022, we sold our equity investment interest in the government-owned Ravenhall Correctional Centre in Australia for approximately $84 million in gross proceeds, pre-tax to an unrelated third party. We continue to manage the operations of the facility on behalf of the State of Victoria. As a result of the sale, we recorded a net gain of approximately $29.3 million. The proceeds, along with available cash on hand, were used to repay all of the remaining outstanding principal of our Term Loan B and our newly issued Tranche 3 Loans. Refer to Note 11 - Commitments, Contingencies and Other Matters and Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Executive Order
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. Two agencies of the DOJ, the Federal Bureau of Prisons (“BOP”) and the U.S. Marshals Service (“USMS”), utilize GEO’s support 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. As of September 30, 2022, GEO has three company-owned/company-leased facilities under direct contracts with USMS, which have current contract option periods that expire between February 28, 2023 and September 30, 2023. These facilities combined represented approximately 6% of our revenues for the year ended December 31, 2021.
39
President Biden’s administration may implement additional executive orders or directives relating to federal criminal justice policies and/or immigration policies, which may impact the federal government’s use of public-private partnerships with respect to secure correctional and detention facilities and immigration processing centers, including with respect to our contracts, and/or may impact the budget and spending priorities of federal agencies, including the BOP, USMS, and U.S. Immigration and Customs Enforcement (“ICE”), which is an agency of the U.S. Department of Homeland Security.
COVID-19
We have been and are currently closely monitoring the impact of the COVID-19 pandemic and the efficacy and distribution of COVID-19 vaccines on all aspects of our business and geographies, including how it will impact those entrusted in our care and governmental partners. We did incur disruptions during the nine months ended September 30, 2022 from the COVID-19 pandemic and are unable to predict the overall future impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. Refer to further discussion regarding the economic impacts of COVID-19 to our operations in the Outlook section below.
Contract Developments
As previously disclosed, our contract with the BOP for our company-owned North Lake Correctional Facility in Michigan expired at the end of September 2022. As of the end of the third quarter, we no longer have any contracts with the BOP for secure correctional facilities.
Idle Facilities
We are currently marketing 13,061 vacant beds at eleven of our idle facilities to potential customers. The carrying values of these idle facilities totaled $352.8 million as of September 30, 2022, excluding equipment and other assets that can be easily transferred for use at other facilities. Refer to Note 11 – Commitments, Contingencies and Other Matters included in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional information.
Critical Accounting Policies
The accompanying unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. During the nine months ended September 30, 2022, we did not experience any significant changes in estimates or judgments inherent in the preparation of our consolidated financial statements. A summary of our significant accounting policies is contained in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Comparison of Third Quarter 2022 and Third Quarter 2021
Revenues
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Secure Services |
|
$ |
368,493 |
|
|
|
59.8 |
% |
|
$ |
369,609 |
|
|
|
66.3 |
% |
|
$ |
(1,116 |
) |
|
|
(0.3 |
)% |
Electronic Monitoring and Supervision Services |
|
|
137,039 |
|
|
|
22.2 |
% |
|
|
74,575 |
|
|
|
13.4 |
% |
|
|
62,464 |
|
|
|
83.8 |
% |
Reentry Services |
|
|
65,406 |
|
|
|
10.6 |
% |
|
|
60,740 |
|
|
|
10.9 |
% |
|
|
4,666 |
|
|
|
7.7 |
% |
International Services |
|
|
45,745 |
|
|
|
7.4 |
% |
|
|
52,353 |
|
|
|
9.4 |
% |
|
|
(6,608 |
) |
|
|
(12.6 |
)% |
Total |
|
$ |
616,683 |
|
|
|
100.0 |
% |
|
$ |
557,277 |
|
|
|
100.0 |
% |
|
$ |
59,406 |
|
|
|
10.7 |
% |
40
U.S. Secure Services
Revenues decreased slightly by $1.1 million in Third Quarter 2022 compared to Third Quarter 2021 primarily due to aggregate decreases of $33.7 million due to the ramp-down/deactivations of our company-owned Big Springs and Flightline Correctional Facilities, our managed-only Bay and Graceville Correctional Rehabilitation Facilities, as well as our managed-only George W. Hill Correctional Facility. These decreases were partially offset by aggregate net increases of $14.0 million resulting from the contract activation and ramp up at our company-owned Moshannon Valley Processing Center, our company-owned Eagle Pass Detention Center and new transportation contracts. In addition, we experienced aggregate net increases in rates and/or per diem amounts in connection with contract modifications, transportation services and increased occupancies of $18.6 million.
The number of compensated mandays in U.S. Secure Services facilities was approximately 4.6 million in Third Quarter 2022 and 4.8 million in Third Quarter 2021. We experienced an aggregate net decrease of approximately 200,000 mandays as a result of contract terminations, partially offset by contract activations and increases in occupancies discussed above. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Secure Services facilities was 90.5% and 88.4% of capacity in the Third Quarter 2022 and Third Quarter 2021, respectively, excluding idle facilities.
Electronic Monitoring and Supervision Services
Revenues increased by $62.5 million in Third Quarter 2022 compared to Third Quarter 2021 due to increases in average participant counts under the Intensive Supervision and Appearance Program ("ISAP").
Reentry Services
Revenues increased by $4.7 million in Third Quarter 2022 compared to Third Quarter 2021 primarily due to increases of $4.0 million due to new/reactivated contracts, day reporting centers and programs including the activation of our company-owned Tampa Residential Reentry Center in Tampa, Florida in September 2021. We also experienced a net aggregate increase of $0.7 million related to increased census levels at certain of our community-based and reentry centers due to increased programming needs and referrals.
International Services
Revenues for International Services decreased by $6.6 million in Third Quarter 2022 compared to Third Quarter 2021 primarily due to foreign exchange rate fluctuations of $3.9 million. We also experienced a net decrease of $2.7 million primarily driven by the transition of our management contract for the Dungavel House Immigration Removal Centre in the United Kingdom to the government effective September 30, 2021.
Operating Expenses
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|
|
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|
2022 |
|
|
% of Segment Revenues |
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|
2021 |
|
|
% of Segment Revenues |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Secure Services |
|
$ |
281,694 |
|
|
|
76.4 |
% |
|
$ |
277,156 |
|
|
|
75.0 |
% |
|
$ |
4,538 |
|
|
|
1.6 |
% |
Electronic Monitoring and Supervision Services |
|
|
61,351 |
|
|
|
44.8 |
% |
|
|
32,043 |
|
|
|
43.0 |
% |
|
|
29,308 |
|
|
|
91.5 |
% |
Reentry Services |
|
|
51,121 |
|
|
|
78.2 |
% |
|
|
43,021 |
|
|
|
70.8 |
% |
|
|
8,100 |
|
|
|
18.8 |
% |
International Services |
|
|
42,044 |
|
|
|
91.9 |
% |
|
|
47,680 |
|
|
|
91.1 |
% |
|
|
(5,636 |
) |
|
|
(11.8 |
)% |
Total |
|
$ |
436,210 |
|
|
|
70.7 |
% |
|
$ |
399,900 |
|
|
|
71.8 |
% |
|
$ |
36,310 |
|
|
|
9.1 |
% |
U.S. Secure Services
Operating expenses for U.S. Secure Services increased by $4.5 million in Third Quarter 2022 compared to Third Quarter 2021 primarily due to aggregate net increases of $11.4 million resulting from the contract activation and ramp up at our company-owned Moshannon Valley Processing Center and Eagle Pass Detention Center. In addition, we experienced aggregate net increases in connection with transportation services, increased occupancies and the variable costs associated with those services of $18.8 million. Partially offsetting these increases were $25.7 million related to the ramp-down/deactivations of our company-owned Big Springs, Flightline and Great Plains Correctional Facilities, our Queens Detention Facility, our managed-only Bay and Graceville Correctional Rehabilitation Facilities, as well as our managed-only George W. Hill Correctional Facility.
Electronic Monitoring and Supervision Services
41
Operating expenses increased by $29.3 million in Third Quarter 2022 compared to Third Quarter 2021 primarily due to increases in variable costs related to increases in average participant counts under ISAP.
Reentry Services
Operating expenses for Reentry Services increased by $8.1 million during Third Quarter 2022 compared to Third Quarter 2021 primarily due to increases of $2.9 million due to new/reactivated contracts, day reporting centers and programs including the activation of our company-owned Tampa Residential Reentry Center in Tampa, Florida in September 2021. We also experienced an aggregate net increase of $5.9 million related to increased census levels at certain of our community-based and reentry centers due to increased programming needs and referrals and the associated variable costs. Partially offsetting these increases was a decrease of $0.7 million due to contract terminations. Operating expenses as a percentage of revenue increased due to the closure of certain underperforming facilities.
International Services
Operating expenses for International Services decreased by $5.6 million in Third Quarter 2022 compared to Third Quarter 2021 primarily due to foreign exchange rate fluctuations of $3.6 million. We also experienced a net decrease of $2.0 million primarily driven by the transition of our management contract for the Dungavel House Immigration Removal Centre in the United Kingdom to the government effective September 30, 2021.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Segment Revenue |
|
|
2021 |
|
|
% of Segment Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Secure Services |
|
$ |
19,337 |
|
|
|
5.2 |
% |
|
$ |
20,399 |
|
|
|
5.5 |
% |
|
$ |
(1,062 |
) |
|
|
(5.2 |
)% |
Electronic Monitoring and Supervision Services |
|
|
8,015 |
|
|
|
5.8 |
% |
|
|
7,479 |
|
|
|
10.0 |
% |
|
|
536 |
|
|
|
7.2 |
% |
Reentry Services |
|
|
4,469 |
|
|
|
6.8 |
% |
|
|
4,455 |
|
|
|
7.3 |
% |
|
|
14 |
|
|
|
0.3 |
% |
International Services |
|
|
509 |
|
|
|
1.1 |
% |
|
|
550 |
|
|
|
1.1 |
% |
|
|
(41 |
) |
|
|
(7.5 |
)% |
Total |
|
$ |
32,330 |
|
|
|
5.2 |
% |
|
$ |
32,883 |
|
|
|
5.9 |
% |
|
$ |
(553 |
) |
|
|
(1.7 |
)% |
U.S. Secure Services
U.S. Secure Services depreciation and amortization expense decreased in Third Quarter 2022 compared to Third Quarter 2021 primarily due to certain assets becoming fully depreciated and or amortized as well as certain asset dispositions at our company-owned facilities.
Electronic Monitoring and Supervision Services
Depreciation and amortization expense increased slightly in Third Quarter 2022 compared to Third Quarter 2021 primarily due to certain equipment additions.
Reentry Services
Reentry Services depreciation and amortization expense was relatively consistent in Third Quarter 2022 compared to Third Quarter 2021.
International Services
Depreciation and amortization expense decreased slightly in Third Quarter 2022 compared to Third Quarter 2021 primarily due to foreign exchange rate fluctuations.
Other Unallocated Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
General and Administrative Expenses |
|
$ |
50,022 |
|
|
|
8.1 |
% |
|
$ |
50,475 |
|
|
|
9.1 |
% |
|
$ |
(453 |
) |
|
|
(0.9 |
)% |
42
General and administrative expenses comprise substantially all of our other unallocated operating expenses which primarily includes corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses were relatively consistent in Third Quarter 2022 compared to Third Quarter 2021.
Non-Operating Expenses
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Interest Income |
|
$ |
5,111 |
|
|
|
0.8 |
% |
|
$ |
5,990 |
|
|
|
1.1 |
% |
|
$ |
(879 |
) |
|
|
(14.7 |
)% |
Interest Expense |
|
$ |
46,537 |
|
|
|
7.5 |
% |
|
$ |
32,525 |
|
|
|
5.8 |
% |
|
$ |
14,012 |
|
|
|
43.1 |
% |
Interest income decreased in Third Quarter 2022 compared to Third Quarter 2021 primarily due to the effect of foreign exchange rate fluctuations.
On August 19, 2022, we completed an exchange offer to exchange certain of our outstanding 5.125% Senior Notes due 2023, 5.875% Senior Notes due 2024, 6.00% Senior Notes due 2026 and certain revolving credit loans and term loans under our senior secured credit facility into newly issued Senior Second Lien Secured Notes and a new Exchange Credit Agreement. Interest expense increased in Third Quarter 2022 compared to Third Quarter 2021 primarily due to higher interest rates on the new debt instruments as well as the net amortization of deferred issuance costs and discounts/premiums related to the transaction. Additionally, SOFR/LIBOR rates have increased in Third Quarter 2022 compared to Third Quarter 2021. Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Loss on Extinguishment of Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Loss on Extinguishment of Debt |
|
$ |
37,487 |
|
|
|
6.1 |
% |
|
$ |
— |
|
|
|
(— |
)% |
|
$ |
37,487 |
|
|
|
100.0 |
% |
During Third Quarter 2022, the Company completed an exchange offer to exchange certain of its outstanding 5.125% Senior Notes due 2023, 5.875% Senior Notes due 2024, 6.000% Senior Notes due 2026 and certain revolving credit loans and term loans under its senior secured credit facility into newly issued Senior Second Lien Secured Notes and a new credit facility. As a result of the transactions, we recorded a net loss on extinguishment of debt of $37.5 million. Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Gain (Loss) on Asset Divestitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Gain (Loss) on Asset Divestitures |
|
$ |
29,279 |
|
|
|
4.7 |
% |
|
$ |
(6,088 |
) |
|
|
(1.1 |
)% |
|
$ |
35,367 |
|
|
|
(580.9 |
)% |
During Third Quarter 2022, we sold our equity investment interest in the government-owned Ravenhall Correctional Centre project in Australia for approximately $84 million in gross proceeds, pre-tax to an unrelated third party. As a result of the transaction, we recorded a gain of approximately $29.3 million. Refer to Note 11 - Commitments, Contingencies and Other Matters of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
During Third Quarter 2021, we completed a divestiture of our youth division. As a result of the transaction, we recorded a loss of approximately $5.0 million. Also in Third Quarter 2021, we recorded a loss of approximately $1.1 million related to the disposition of certain assets at our company-owned Queens Detention Center, located in New York and our company-owned DuPage Interventions center, located in Illinois.
Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
Effective Rate |
|
|
2021 |
|
|
Effective Rate |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Provision for Income Taxes |
|
$ |
11,246 |
|
|
|
23.2 |
% |
|
$ |
8,395 |
|
|
|
20.3 |
% |
|
$ |
2,851 |
|
|
|
34.0 |
% |
43
The provision for income taxes and our effective tax rate during Third Quarter 2022 increased compared to Third Quarter 2021 principally due to the Company electing to terminate its REIT status at the end of 2021 and becoming a taxable C corporation. In Third Quarter 2022, there was a $4.3 million net discrete tax benefit as compared to a $1.7 million net discrete tax expense in Third Quarter 2021. We estimate our 2022 annual effective tax rate to be in the range of approximately 27% to 29%, exclusive of any discrete items.
Equity in Earnings of Affiliates, net of Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Equity in Earnings of Affiliates |
|
$ |
1,071 |
|
|
|
0.2 |
% |
|
$ |
1,640 |
|
|
|
0.3 |
% |
|
$ |
(569 |
) |
|
|
(34.7 |
)% |
Equity in earnings of affiliates, presented net of income tax provision, represents the earnings of SACS and GEOAmey in the aggregate. Equity in earnings of affiliates decreased during Third Quarter 2022 compared to Third Quarter 2021 primarily due to less favorable performance by GEOAmey.
Comparison of Nine Months 2022 and Nine Months 2021
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Secure Services |
|
$ |
1,073,140 |
|
|
|
61.1 |
% |
|
$ |
1,125,014 |
|
|
|
66.2 |
% |
|
$ |
(51,874 |
) |
|
|
(4.6 |
)% |
Electronic Monitoring and Supervision Services |
|
|
346,444 |
|
|
|
19.7 |
% |
|
|
199,788 |
|
|
|
11.8 |
% |
|
|
146,656 |
|
|
|
73.4 |
% |
Reentry Services |
|
|
192,557 |
|
|
|
11.0 |
% |
|
|
212,914 |
|
|
|
12.5 |
% |
|
|
(20,357 |
) |
|
|
(9.6 |
)% |
International Services |
|
|
143,904 |
|
|
|
8.2 |
% |
|
|
161,357 |
|
|
|
9.5 |
% |
|
|
(17,453 |
) |
|
|
(10.8 |
)% |
Total |
|
$ |
1,756,045 |
|
|
|
100 |
% |
|
$ |
1,699,073 |
|
|
|
100.0 |
% |
|
$ |
56,972 |
|
|
|
3.4 |
% |
U.S. Secure Services
Revenues decreased by $51.9 million in Nine Months 2022 compared to Nine Months 2021 primarily due to aggregate decreases of $131.6 million due to the ramp-down/deactivations of our company-owned D. Ray James, Rivers, Big Springs, Flightline, Reeves County Detention I & II and Great Plains Correctional Facilities, our Queens Detention Facility, our managed-only Bay and Graceville Correctional Rehabilitation Facilities, as well as our managed-only George W. Hill Correctional Facility. Also included in this decrease is the transition of the operation of our company-owned Guadalupe County Correctional Facility to the New Mexico Corrections Department in November 2021. These decreases were partially offset by aggregate net increases of $32.4 million resulting from the contract activation and ramp up at our company-owned Moshannon Valley Processing Center, Desert View Annex as well as our company-owned Eagle Pass Detention Center. In addition, we experienced aggregate net increases in rates and/or per diem amounts in connection with contract modifications, transportation services and increased occupancies of $47.3 million.
The number of compensated mandays in U.S. Secure Services facilities was approximately 13.6 million in Nine Months 2022 and 14.3 million in Nine Months 2021. We experienced an aggregate net decrease of approximately 700,000 mandays as a result of contract terminations, partially offset by contract activations and increases in occupancies discussed above. We look at the average occupancy in our facilities to determine how we are managing our available beds. The average occupancy is calculated by taking compensated mandays as a percentage of capacity. The average occupancy in our U.S. Secure Services facilities was 89.9% and 89.3% of capacity in Nine Months 2022 and Nine Months 2021, respectively, excluding idle facilities.
Electronic Monitoring and Supervision Services
Revenues increased by $146.7 million in Nine Months 2022 compared to Nine Months 2021 primarily due to increases in average participant counts under ISAP.
44
Reentry Services
Revenues decreased by $20.4 million in Nine Months 2022 compared to Nine Months 2021 primarily due to a decrease of $34.5 million as a result of the sale of our youth business which was effective July 1, 2021. This decrease was partially offset by increases of $10.2 million due to new/reactivated contracts, day reporting centers and programs including the activation of our company-owned Tampa Residential Reentry Center in Tampa, Florida in September 2021. Also partially offsetting the decrease was a net aggregate increase of $3.9 million related to increased census levels at certain of our community-based and reentry centers due to increased programming needs and referrals.
International Services
Revenues for International Services decreased by $17.5 million in Nine Months 2022 compared to Nine Months 2021 primarily due to foreign exchange rate fluctuations of $10.8 million. We also experienced a net decrease of $6.7 million primarily driven by the transition of our management contract for the Dungavel House Immigration Removal Centre in the United Kingdom to the government effective September 30, 2021.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Segment Revenues |
|
|
2021 |
|
|
% of Segment Revenues |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Secure Services |
|
$ |
796,913 |
|
|
|
74.3 |
% |
|
$ |
843,896 |
|
|
|
75.0 |
% |
|
$ |
(46,983 |
) |
|
|
(5.6 |
)% |
Electronic Monitoring and Supervision Services |
|
|
162,072 |
|
|
|
46.8 |
% |
|
|
87,485 |
|
|
|
43.8 |
% |
|
|
74,587 |
|
|
|
85.3 |
% |
Reentry Services |
|
|
144,563 |
|
|
|
75.1 |
% |
|
|
159,137 |
|
|
|
74.7 |
% |
|
|
(14,574 |
) |
|
|
(9.2 |
)% |
International Services |
|
|
129,614 |
|
|
|
90.1 |
% |
|
|
142,542 |
|
|
|
88.3 |
% |
|
|
(12,928 |
) |
|
|
(9.1 |
)% |
Total |
|
$ |
1,233,162 |
|
|
|
70.2 |
% |
|
$ |
1,233,060 |
|
|
|
72.6 |
% |
|
$ |
102 |
|
|
|
0.0 |
% |
U.S. Secure Services
Operating expenses for U.S. Secure Services decreased by $47.0 million in Nine Months 2022 compared to Nine Months 2021 primarily due to decreases of $107.6 million related to the ramp-down/deactivations of our company-owned D. Ray James, Rivers, Big Springs, Flightline, Reeves County Detention I & II and Great Plains Correctional Facilities, our Queens Detention Facility, our managed-only Bay and Graceville Correctional Rehabilitation Facilities, as well as our managed-only George W. Hill Correctional Facility. Also included in this decrease is the transition of the operation of our company-owned Guadalupe County Correctional Facility to the New Mexico Corrections Department in November 2021. We also experienced a net decrease of $6.2 million related to certain indirect expenses primarily related to actuarial insurance expense adjustment for general liability and employee medical. These decreases were partially offset by aggregate net increases of $28.3 million resulting from the contract activation and ramp up at our company-owned Moshannon Valley Processing Center, Desert View Annex as well as our company-owned Eagle Pass Detention Center. In addition, we experienced aggregate net increases in connection with transportation services, increased occupancies and the variable costs associated with those services of $38.5 million.
Electronic Monitoring and Supervision Services
Operating expenses increased by $74.6 million in Nine Months 2022 compared to Nine Months 2021 primarily due to increases in variable costs related to increases in average participant counts under ISAP.
Reentry Services
Operating expenses for Reentry Services decreased by $14.6 million during Nine Months 2022 compared to Nine Months 2021 primarily due to a decrease of $30.7 million as a result of the sale of our youth business which was effective July 1, 2021. We also experienced a decrease of $2.8 million due to contract termination. These decreases were partially offset by increases of $6.2 million due to new/reactivated contracts, day reporting centers and programs including the activation of our company-owned Tampa Residential Reentry Center in Tampa, Florida in September 2021. Also partially offsetting the decreases was a net aggregate increase of $12.7 million related to increased census levels at certain of our community-based and reentry centers due to increased programming needs and referrals.
International Services
Operating expenses for International Services decreased by $12.9 million in Nine Months 2022 compared to Nine Months 2021 primarily due to foreign exchange rate fluctuations of $9.7 million. We also experienced a net decrease of $3.2 million primarily driven by the transition of our management contract for the Dungavel House Immigration Removal Centre in the United Kingdom to the government effective September 30, 2021.
45
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Segment Revenue |
|
|
2021 |
|
|
% of Segment Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
U.S. Secure Services |
|
$ |
61,233 |
|
|
|
5.7 |
% |
|
$ |
61,647 |
|
|
|
5.5 |
% |
|
$ |
(414 |
) |
|
|
(0.7 |
)% |
Electronic Monitoring and Supervision Services |
|
|
23,534 |
|
|
|
6.8 |
% |
|
|
22,783 |
|
|
|
11.4 |
% |
|
|
751 |
|
|
|
3.3 |
% |
Reentry Services |
|
|
13,967 |
|
|
|
7.3 |
% |
|
|
14,173 |
|
|
|
6.7 |
% |
|
|
(206 |
) |
|
|
(1.5 |
)% |
International Services |
|
|
1,550 |
|
|
|
1.1 |
% |
|
|
1,703 |
|
|
|
1.1 |
% |
|
|
(153 |
) |
|
|
(9.0 |
)% |
Total |
|
$ |
100,284 |
|
|
|
5.7 |
% |
|
$ |
100,306 |
|
|
|
5.9 |
% |
|
$ |
(22 |
) |
|
|
(0.0 |
)% |
U.S. Secure Services
U.S. Secure Services depreciation and amortization expense decreased slightly in Nine Months 2022 compared to Nine Months 2021 primarily due to decreases related to certain assets becoming fully depreciated and/or amortized as well as certain asset dispositions at our company-owned facilities.
Electronic Monitoring and Supervision Services
Depreciation and amortization expense increased slightly in Nine Months 2022 compared to Nine Months 2021 primarily due to certain equipment additions.
Reentry Services
Reentry Services depreciation and amortization expense decreased slightly in Nine Months 2022 compared to Nine Months 2021 primarily due to certain asset dispositions at our company-owned centers.
International Services
Depreciation and amortization expense decreased slightly in Nine Months 2022 compared to Nine Months 2021 primarily due to foreign exchange rate fluctuations.
Other Unallocated Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
General and Administrative Expenses |
|
$ |
147,878 |
|
|
|
8.4 |
% |
|
$ |
153,642 |
|
|
|
9.0 |
% |
|
$ |
(5,764 |
) |
|
|
(3.8 |
)% |
General and administrative expenses comprise substantially all of our other unallocated operating expenses which primarily includes corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses decreased in Nine Months 2022 compared to Nine Months 2021 by $5.8 million primarily due to one-time employee restructuring expenses of $7.5 million incurred in Nine Months 2021. Partially offsetting this decrease were increased professional fees for financial and legal advisors assisting us in reviewing potential asset sales as well as normal professional, consulting and other administrative expenses.
Non-Operating Expenses
Interest Income and Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Interest Income |
|
$ |
16,301 |
|
|
|
0.9 |
% |
|
$ |
18,177 |
|
|
|
1.1 |
% |
|
$ |
(1,876 |
) |
|
|
(10.3 |
)% |
Interest Expense |
|
$ |
111,383 |
|
|
|
6.3 |
% |
|
$ |
96,422 |
|
|
|
5.7 |
% |
|
$ |
14,961 |
|
|
|
15.5 |
% |
Interest income decreased in Nine Months 2022 compared to Nine Months 2021 primarily due to the effect of foreign exchange rate fluctuations.
On August 19, 2022, we completed an exchange offer to exchange certain of our outstanding 5.125% Senior Notes due 2023, 5.875% Senior Notes due 2024, 6.00% Senior Notes due 2026 and certain revolving credit loans and term loans under our senior secured credit facility into newly issued Senior Second Lien Secured Notes and a new Exchange Credit Agreement. Interest expense increased
46
in Nine Months 2022 compared to Nine Months 2021 primarily due to higher interest rates on the new debt instruments as well as the net amortization of deferred issuance costs and discounts/premiums related to the transaction. Additionally, SOFR/LIBOR rates have increased in Nine Months 2022 compared to Nine Months 2021. Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
(Loss) Gain on Extinguishment of Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
(Loss) Gain on Extinguishment of Debt |
|
$ |
(37,487 |
) |
|
|
(2.1 |
)% |
|
$ |
4,693 |
|
|
|
0.3 |
% |
|
$ |
(42,180 |
) |
|
|
(898.8 |
)% |
During Nine Months 2022, we completed an exchange offer to exchange certain of our outstanding 5.125% Senior Notes due 2023, 5.875% Senior Notes due 2024, 6.00% Senior Notes due 2026 and certain revolving credit loans and term loans under our senior secured credit facility into newly issued Senior Second Lien Secured Notes and a new credit facility. As a result of the transactions, we recorded a net loss on extinguishment of debt of $37.5 million, net of the write-off of associated unamortized deferred loan costs.
During Nine Months 2021, we repurchased $22.5 million in aggregate principal amount of our 5.125% Senior Notes due 2023 at a weighted average price of 90.68% for a total cost of $20.4 million. We also repurchased $17.2 million in aggregate principal amount of our 5.875% Senior Notes due 2024 at a weighted average price of 79.51% for a total cost of $13.7 million. As a result of these transactions, we recognized a gain on extinguishment of debt of $4.7 million, net of the write-off of associated unamortized deferred loan costs.
Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Gain on Asset Divestitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Gain on Asset Divestitures |
|
$ |
32,332 |
|
|
|
1.8 |
% |
|
$ |
4,291 |
|
|
|
0.3 |
% |
|
$ |
28,041 |
|
|
|
653.5 |
% |
During Nine Months 2022, we sold our equity investment interest in the government-owned Ravenhall Correctional Centre project in Australia for approximately $84 million in gross proceeds, pre-tax to an unrelated third party. As a result of the transaction, we recorded a gain of approximately $29.3 million. Refer to Note 11 - Commitments, Contingencies and Other Matters of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion. The net gain in Nine Months 2022 also includes the sale of our Perry County Correctional Facility located in Alabama.
The net gain in Nine Months 2021 was primarily due to gains on the sale of our interest in Talbot Hall, located in New Jersey and the sale of our Company-Owned McCabe Center, located in Texas which was partially offset by the divestiture of our youth division which resulted in a loss of approximately $5.0 million.
Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
Effective Rate |
|
|
2021 |
|
|
Effective Rate |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Provision for Income Taxes |
|
$ |
48,106 |
|
|
|
27.6 |
% |
|
$ |
21,394 |
|
|
|
15.0 |
% |
|
$ |
26,712 |
|
|
|
124.9 |
% |
The provision for income taxes and our effective tax rate increased during Nine Months 2022 compared to Nine Months 2021 principally due to the Company electing to terminate its REIT status at the end of 2021 and becoming a taxable C corporation. In Nine Months 2022, there was a net $2.3 million discrete tax benefit compared to a net $3.5 million discrete tax expense in Nine Months 2021. Included in the provision for income taxes in Nine Months 2022 and Nine Months 2021 were a $2.0 million and $2.5 million discrete tax expense related to stock compensation that vested during the respective periods. We estimate our 2022 annual effective tax rate to be in the range of approximately 27% to 29%, exclusive of any discrete items.
Equity in Earnings of Affiliates, net of Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
% of Revenue |
|
|
2021 |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
Equity in Earnings of Affiliates |
|
$ |
3,786 |
|
|
|
0.2 |
% |
|
$ |
5,647 |
|
|
|
0.3 |
% |
|
$ |
(1,861 |
) |
|
|
(33.0 |
)% |
47
Equity in earnings of affiliates, presented net of income tax provision, represents the earnings of SACS and GEOAmey in the aggregate. Equity in earnings of affiliates decreased during Nine Months 2022 compared to Nine Months 2021 primarily due to less favorable performance by GEOAmey.
Financial Condition
Capital Requirements
Our current cash requirements consist of amounts needed for working capital, debt service, supply purchases, investments in joint ventures, and capital expenditures related to either the development of new secure, processing and reentry facilities, or the maintenance of existing facilities. In addition, some of our management contracts require us to make substantial initial expenditures of cash in connection with opening or renovating a facility. Generally, these initial expenditures are subsequently fully or partially recoverable as pass-through costs or are billable as a component of the per diem rates or monthly fixed fees to the contracting agency over the original term of the contract. Additional capital needs may also arise in the future with respect to possible acquisitions, other corporate transactions or other corporate purposes.
We currently have contractual commitments for a number of projects using Company financing. We estimate that the cost of these existing active capital projects will be approximately $32.4 million of which $13.2 million was spent through September 30, 2022. We estimate that the remaining capital requirements related to these capital projects will be $19.2 million which will be spent through the remainder of 2022.
We plan to fund all of our capital needs, including capital expenditures, from cash on hand, cash from operations, borrowings under our Exchange Credit Agreement and any other financings which our management and Board, in their discretion, may consummate. Currently, our primary source of liquidity to meet these requirements is cash flow from operations and borrowings under our Exchange Credit Agreement. Our management believes that our financial resources and sources of liquidity will allow us to manage the continued impact of COVID-19 on our business, financial condition, results of operations and cash flows. For the full-year 2022, we have reduced our planned capital spending by deferring capital expenditure projects where possible and closely managing our working capital. We previously completed our annual budgeting process and have identified cost savings at the corporate and facility level. Additionally, we may from time to time pursue transactions for the potential sale of additional assets and businesses and/or other strategic transactions. Our management believes that cash on hand, cash flows from operations and availability under our Exchange Credit Agreement will be adequate to support our capital requirements for 2022 as disclosed under “Capital Requirements” above. The challenges posed by COVID-19, as well as the current political environment, generally and on our business are continuing to evolve. Consequently, we will continue to evaluate our financial position in light of future developments, the Executive Order and COVID-19.
Liquidity and Capital Resources
Indebtedness
Exchange Offering
On August 19, 2022, we completed an exchange offer to exchange certain of our outstanding 5.125% Senior Notes due 2023, 5.875% Senior Notes due 2024, 6.00% Senior Notes due 2026 and certain revolving credit loans and term loans under our senior secured credit facility into newly issued Senior Second Lien Secured Notes and a new Exchange Credit Agreement. As a result of the transactions, we recorded a net loss on extinguishment of debt of approximately $37.5 million and incurred a total of approximately $52.8 million of debt issuance fees which will be amortized over the terms of the respective agreements using the effective interest method. Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Following the completed exchange offer in August 2022, S&P Global Ratings upgraded our issuer rating to B with a stable outlook. In September 2022, Moody’s Investors Service upgraded our corporate family rating to B3 with a stable outlook.
6.50% Exchangeable Senior Notes due 2026
On February 24, 2021, our wholly owned subsidiary, GEOCH, completed a private offering of $230 million aggregate principal amount of 6.50% Exchangeable Notes due 2026, which included the full exercise of the initial purchasers’ over-allotment option to purchase an additional $30 million aggregate principal amount of Convertible Notes. The Convertible Notes will mature on February 23, 2026, unless earlier repurchased or exchanged. The Convertible Notes bear interest at the rate of 6.50% per year plus an additional
48
amount based on the dividends paid by GEO on its common stock. Interest on the notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021.
Upon conversion, we will pay or deliver, as the case may be, cash or a combination of cash and shares of common stock. The initial conversion rate is 108.4011 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $9.225 per share of common stock). The conversion rate will be subject to adjustment in certain events. If GEO or GEOCH undergoes a fundamental change, holders may require GEOCH to purchase the notes in whole or in part for cash at a fundamental change purchase price equal to 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.
Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Australia - Ravenhall
In connection with a design and build project agreement with the State of Victoria, in September 2014, we entered into a syndicated facility agreement (the "Construction Facility") to provide debt financing for construction of the project. The Construction Facility provided for non-recourse funding for the project. In September 2022, we sold our equity investment interest in the project to an unrelated third party. In connection with the sale, the non-recourse debt was transferred to the buyer and is no longer an outstanding obligation of GEO. Refer to Note 11 - Commitments, Contingencies and Other Matters of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Other
In August of 2019, we entered into two identical promissory notes in the aggregate amount of $44.3 million which are secured by loan agreements and mortgage and security agreements on certain real property and improvements. The terms of the promissory notes are through September 1, 2034 and bear interest at LIBOR plus 200 basis points and are payable in monthly installments plus interest. We have entered into interest rate swap agreements to fix the interest rate to 4.22%. Refer to Note 9 - Derivative Financial Instruments and Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
Our debt outstanding under the new Exchange Credit Agreement, the New Registered Notes, the New Private Notes, the 6.50% Exchangeable Notes due 2026, the 6.00% Senior Notes due 2026 and the 5.875% Senior Notes due 2024 require cash expenditures for debt service. Our significant debt obligations could have material consequences. See “Risk Factors-Risks Related to Our High Level of Indebtedness” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. We are exposed to various commitments and contingencies which may have a material adverse effect on our liquidity. We also have guaranteed certain obligations for certain of our international subsidiaries. These commitments, contingencies and guarantees are further discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Debt Repurchases
On August 16, 2019, our Board authorized us to repurchase and/or retire a portion of our 6.00% Senior Notes due 2026, the 5.875% Senior Notes due 2024, the 5.125% Senior Notes due 2023 and the 5.875% Senior Notes due 2022 (collectively the "GEO Senior Notes") and our term loan under our Amended Credit Agreement through cash purchases, in open market purchases, privately negotiated transactions, or otherwise, up to an aggregate maximum of $100.0 million, subject to certain limitations through December 31, 2020. On February 11, 2021, our Board authorized a new repurchase program for repurchases/retirements of part of the above referenced GEO Senior Notes and term loan, subject to certain limitations up to an aggregate maximum of $100.0 million through December 31, 2022.
During the nine months ended September 30, 2021, we repurchased $22.5 million in aggregate principal amount of our 5.125% Senior Notes due 2023 at a weighted average price of 90.68% for a total cost of $20.4 million. Additionally, we repurchased $17.2 million in aggregate principal amount of our 5.875% Senior Notes due 2024 at a weighted average price of 79.51% for a total cost of $13.7 million. As a result of these repurchases, we recognized a net gain on extinguishment of debt of $4.7 million, net of the write-off of associated unamortized deferred loan costs. There were no debt repurchases during the nine months ended September 30, 2022 except as part of the exchange offering discussed further above.
Refer to Note 10 - Debt of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our indebtedness.
We consider opportunities for future business and/or asset acquisitions or dispositions as we deem appropriate when market conditions present opportunities. If we are successful in our pursuit of any new projects, our cash on hand, cash flows from operations and borrowings under the new Exchange Credit Agreement may not provide sufficient liquidity to meet our capital needs and we could be forced to seek additional financing or refinance our existing indebtedness. There can be no assurance that any such financing or
49
refinancing would be available to us on terms equal to or more favorable than our current financing terms, or at all. Additionally, the magnitude, severity and duration of the COVID-19 pandemic may negatively impact the availability of opportunities for future business and/or asset acquisitions or asset dispositions and market conditions generally. In the future, our access to capital and ability to compete for future capital-intensive projects will also be dependent upon, among other things, our ability to meet certain financial covenants in the indenture governing the New Registered Notes, the indenture governing the New Private Notes, the indenture governing the 5.875% Senior Notes due 2024, the indenture governing the 6.00% Senior Notes due 2026, the indenture governing our Convertible Notes and our Exchange Credit Agreement. A substantial decline in our financial performance could limit our access to capital pursuant to these covenants and have a material adverse effect on our liquidity and capital resources and, as a result, on our financial condition and results of operations. In addition to these foregoing potential constraints on our capital, a number of state government agencies have been suffering from budget deficits and liquidity issues. While we were in compliance with our debt covenants as of September 30, 2022 and we expect to continue to be in compliance with our debt covenants, if these constraints were to intensify, our liquidity could be materially adversely impacted as could our ability to remain in compliance with these debt covenants.
Guarantor Financial Information
GEO’s New Registered Notes, New Private Notes, Convertible Notes, 6.00% Senior Notes due 2026, and the 5.875% Senior Notes due 2024 are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain of our wholly owned domestic subsidiaries (the “Subsidiary Guarantors”).
Summarized financial information is provided for The GEO Group, Inc. (“Parent”) and the Subsidiary Guarantors on a combined basis in accordance with SEC Regulation S-X Rules 3-10 and 13-01. The accounting policies used in the preparation of this summarized financial information are consistent with those elsewhere in the condensed consolidated financial statements of the Company, except that intercompany transactions and balances of the Parent and Subsidiary Guarantor entities with non-guarantor entities have not been eliminated. Intercompany transactions between the Parent and Subsidiary Guarantors have been eliminated and equity in earnings from and investments in non-guarantor subsidiaries have not been presented.
Summarized statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2022 |
|
|
Nine Months Ended September 30, 2021 |
|
Net operating revenues |
|
$ |
1,602,182 |
|
|
$ |
1,529,731 |
|
Income from operations |
|
|
280,776 |
|
|
|
197,208 |
|
Net income |
|
|
105,331 |
|
|
|
103,446 |
|
Net income attributable to The GEO Group, Inc. |
|
|
105,331 |
|
|
|
103,446 |
|
Summarized balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
Current assets |
|
$ |
443,924 |
|
|
$ |
707,457 |
|
Noncurrent assets (a) |
|
|
3,053,143 |
|
|
|
3,115,622 |
|
Current liabilities |
|
|
362,010 |
|
|
|
314,233 |
|
Noncurrent liabilities (b) |
|
|
2,162,065 |
|
|
|
2,820,252 |
|
(a) Includes amounts due from non-guarantor subsidiaries of $13.6 million and $22.5 million as of September 30, 2022 and December 31, 2021, respectively.
(b) Includes amounts due to non-guarantor subsidiaries of $9.2 million and $14.8 million as of September 30, 2022 and December 31, 2021, respectively.
Automatic Shelf Registration on Form S-3
Refer to Note 6 - Shareholders' Equity of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
50
Off-Balance Sheet Arrangements
Except as discussed in the notes to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements.
Cash Flow
Cash, cash equivalents and restricted cash and cash equivalents as of September 30, 2022 was $121.4 million, compared to $585.4 million as of September 30, 2021.
Operating Activities
Net cash provided by operating activities amounted to $311.6 million for the nine months ended September 30, 2022 versus net cash provided by operating activities of $289.5 million for the nine months ended September 30, 2021. Cash provided by operating activities during the nine months ended September 30, 2022 was positively impacted by net income attributable to GEO, non-cash expenses such as depreciation and amortization, loss on extinguishment of debt, amortization of debt issuance costs, discount and/or premium and other non-cash interest, dividends received from unconsolidated joint ventures and stock-based compensation expense. Equity in earnings of affiliates, net of tax and gain on asset divestitures, net, loss on sale/disposal of property and equipment, net and gain on assets held for sale negatively impacted cash. Changes in accounts receivable, prepaid expenses and other assets decreased in total by $49.6 million, representing a positive impact on cash. The increase was primarily driven by the favorable timing of billings and collections. Changes in accounts payable, accrued expenses and other liabilities increased by $9.1 million which positively impacted cash. The increase was primarily driven by the timing of payments.
Net cash provided by operating activities during the nine months ended September 30, 2021 was positively impacted by net income attributable to GEO, non-cash expenses such as depreciation and amortization, amortization of debt issuance costs, discount and/or premium and other non-cash interest, loss on sale/disposal of property and equipment, net, dividends received from unconsolidated joint ventures and stock-based compensation expense. Equity in earnings of affiliates, net of tax, gain on extinguishment of debt and gain on asset divestitures, net negatively impacted cash. Changes in accounts receivable, prepaid expenses and other assets decreased in total by $44.3 million, representing a positive impact on cash. The decrease was primarily driven by the favorable timing of billings and collections. Changes in accounts payable, accrued expenses and other liabilities decreased by $6.1 million which negatively impacted cash. The decrease was primarily driven by the timing of payments. Additionally, cash provided by operating activities for the nine months ended September 30, 2021 was positively impacted by a decrease in changes in contract receivable related to our correctional facility in Ravenhall, Australia of $4.7 million which was a result of the timing of interest accruals and payments received towards the contract receivable.
Investing Activities
Net cash used in investing activities of $60.3 million during the nine months ended September 30, 2022 was primarily the result of capital expenditures of $72.2 million partially offset by proceeds from assets held for sale of $15.8 million. Net cash used in investing activities of $40.5 million during the nine months ended September 30, 2021 was primarily the result of capital expenditures of $57.4 million partially offset by proceeds from sale of real estate of $18.6 million.
Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2022 was approximately $670.1 million compared to net cash provided by financing activities of $28.4 million during the nine months ended September 30, 2021. Net cash used in financing activities during the nine months ended September 30, 2022 was primarily the result of payments on long-term debt of $676.1 million, payments on non-recourse debt of $1.3 million and debt issuance costs of $41.5 million partially offset by proceeds from long-term debt of $50 million. Net cash provided by financing activities during the nine months ended September 30, 2021 was primarily due to proceeds from long-term debt of $435.0 million partially offset by dividends paid of $30.5 million, payments on long-term debt of $359.6 million, payments on non-recourse debt of $5.1 million and debt issuance costs of $9.6 million.
Non-GAAP Measures
Adjusted Funds from Operations ("AFFO") is defined as net income attributable to GEO adjusted by adding depreciation and amortization, stock-based compensation expense, the amortization of debt issuance costs, discount and/or premium and other non-cash interest, (gain)/loss on asset divestitures, pre-tax, and by subtracting facility maintenance capital expenditures and other non-cash revenue and expenses. From time to time, AFFO is also adjusted for certain items which by their nature are not comparable from period to period or that tend to obscure GEO’s actual operating performance, including for the periods presented gain/loss on the extinguishment of debt, pre-tax, transaction related expenses, pre-tax, one-time employee restructuring expenses, pre-tax, and tax effect of adjustments to net income attributable to GEO.
51
Because of the unique design, structure and use of our secure facilities, processing centers and reentry centers, we believe that assessing the performance of our secure facilities, processing centers and reentry centers without the impact of depreciation or amortization is useful and meaningful to investors.
Our assessment of our operations is focused on long-term sustainability. The adjustments we make to derive the non-GAAP measures of AFFO exclude items which may cause short-term fluctuations in net income attributable to GEO but have no impact on our cash flows, or we do not consider them to be fundamental attributes, or the primary drivers of our business plan and they do not affect our overall long-term operating performance. We may make adjustments to AFFO from time to time for certain other income and expenses that do not reflect a necessary component of our operational performance on the basis discussed above, even though such items may require cash settlement. Because AFFO excludes depreciation and amortization unique to real estate as well as non-operational items and certain other charges that are highly variable from year to year, they provide our investors with performance measures that reflect the impact to operations from trends in occupancy rates, per diem rates, operating costs and interest costs, providing a perspective not immediately apparent from net income attributable to GEO.
We believe the presentation of AFFO provides useful information to investors as they provide an indication of our ability to fund capital expenditures and expand our business. AFFO provides disclosure on the same basis as that used by our management and provide consistency in our financial reporting, facilitate internal and external comparisons of our historical operating performance and our business units and provide continuity to investors for comparability purposes.
Our reconciliation of net income attributable to The GEO Group, Inc. to AFFO for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
Net income attributable to GEO |
|
$ |
38,337 |
|
|
$ |
34,710 |
|
|
$ |
130,283 |
|
|
$ |
127,214 |
|
Add (Subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Other non-cash revenue & expenses |
|
|
— |
|
|
|
(1,102 |
) |
|
|
— |
|
|
|
(3,306 |
) |
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 |
) |
Other Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
Add (Subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on extinguishment of debt, pre-tax |
|
|
37,487 |
|
|
|
— |
|
|
|
37,487 |
|
|
|
(4,693 |
) |
Transaction related expenses, pre-tax |
|
|
1,322 |
|
|
|
3,977 |
|
|
|
1,322 |
|
|
|
3,977 |
|
One-time employee restructuring expenses, pre-tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
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 |
|
* Tax effect of adjustments relate to (gain) loss on asset divestitures, loss (gain) on extinguishment of debt, transaction related expenses, one-time employee restructuring expenses and gain on extinguishment of debt. In connection with the termination of our REIT status effective for the year ended December 31, 2021, the tax effect of adjustments to net income attributable to GEO have been presented for third quarter and year to date 2021 to reflect the applicable tax rates that we would have been subject to as a taxable C Corporation.
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Outlook
The following discussion contains statements that are not limited to historical statements and, therefore, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied in the forward-looking statements. Please refer to “Part I - Item 1A. Risk Factors” and the "Forward Looking Statements - Safe Harbor" sections in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for further discussion on forward-looking statements and the risks and other factors that could prevent us from achieving our goals and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements.
Coronavirus Disease (COVID-19) Pandemic
GEO is continuing to coordinate closely with our government agency partners and local health agencies to ensure the health and safety of all those in our care and our employees. We are grateful for our frontline employees, who are making sacrifices daily to provide care for all those in our facilities, during this unprecedented global pandemic. Information on the steps we have taken to address and mitigate the risks of COVID-19 can be found at www.geogroup.com/COVID19.
Economic Impact
In early 2020, we began to observe negative impacts from the pandemic on our performance in our secure services business. In addition to court mandates related to COVID-19 that limit capacity utilization at certain facilities, a driver of low utilization across ICE facilities has been the Title 42 COVID-19 related restrictions that have been in place at the Southwest border since March 2020. Additionally, our reentry services business conducted through our Reentry Services business segment has also been negatively impacted, specifically our residential reentry centers were impacted due to lower levels of referrals by federal, state and local agencies. Throughout the pandemic, new intake at residential reentry centers have significantly slowed down as governmental agencies across the country have opted for non-residential alternatives, including furloughs, home confinement and day reporting. We expect that the COVID-19 pandemic will continue to have an impact on our populations during the remainder of 2022, depending on various factors. While we experienced a significant increase in COVID-19 cases at the end of the fourth quarter of 2021 and in the early part of 2022, consistent with the spread of the Omicron variant across the country, we are currently experiencing relatively low levels of COVID-19 cases among our staff and the individuals in our care. If we are unable to mitigate the transmission of COVID-19 at our facilities, we could experience a material adverse effect on our financial position, results of operations and cash flows. Although we are unable to predict the duration or scope of the COVID-19 pandemic or estimate the extent of the overall future negative financial impact to our 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 our future financial performance.
Revenue
Due to the uncertainty surrounding the COVID-19 pandemic, we are unable to determine the future landscape of growth opportunities in the near term; however, any positive trends may, to some extent, be adversely impacted by government budgetary constraints in light of the pandemic or any changes to a government's willingness to maintain or grow public-private partnerships in the future. While state finances overall were stable prior to the COVID-19 pandemic, future budgetary pressures may cause state agencies to pursue a number of cost savings initiatives which may include reductions in per diem rates and/or the scope of services provided by private operators or the decision to not re-bid a contract after expiration of the contract term. These potential cost savings initiatives could have a material adverse impact on our current operations and/or our ability to pursue new business opportunities. Additionally, if state budgetary constraints, as discussed above, develop, persist or intensify, our state customers’ ability to pay us may be impaired and/or we may be forced to renegotiate our management contracts on less favorable terms and our financial condition, results of operations or cash flows could be materially adversely impacted. We plan to actively bid on any new projects that fit our target profile for profitability and operational risk. Any positive trends in the industry may be offset by several factors, including budgetary constraints, contract modifications, contract terminations, contract non-renewals, contract re-bids and/or the decision to not re-bid a contract after expiration of the contract term and the impact of any other potential changes to the willingness or ability to maintain or grow public-private partnerships on the part of other government agencies. We believe we have a strong relationship with our government agency partners and we believe that we operate facilities that maximize security, safety and efficiency while offering our suite of GEO Continuum of Care programs, services and resources.
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. Two agencies of the DOJ, the BOP and the USMS, utilize GEO’s support 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. As of September 30, 2022, GEO has three company-owned/company-leased facilities under direct contracts with USMS, which have current contract option periods that
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expire between February 28, 2023 and September 30, 2023. These facilities combined represented approximately 6% of our revenues for the year ended December 31, 2021.
President Biden’s administration may implement additional executive orders or directives relating to federal criminal justice policies and/or immigration policies, which may impact the federal government’s use of public-private partnerships with respect to secure correctional and detention facilities and immigration processing centers, including with respect to our contracts, and/or may impact the budget and spending priorities of federal agencies, including the BOP, USMS, and ICE, which is an agency of the U.S. Department of Homeland Security.
Prior to the Executive Order, we have historically had a relatively high contract renewal rate, however, there can be no assurance that we will be able to renew our expiring management contracts on favorable terms, or at all. Also, while we are pleased with our track record in re-bid situations, we cannot assure that we will prevail in any such future situations.
California enacted legislation that became effective on January 1, 2020 aimed at phasing out public-private partnership contracts for the operation of secure correctional facilities and detention facilities within California and facilities outside of the State of California housing State of California inmates. Currently, we have four public-private partnership contracts in place with ICE relating to secure services facilities located in California. These facilities/annexes generated approximately $160 million in combined annual revenues during the year ended December 31, 2021, and their contracts do not expire until December of 2034. GEO and the DOJ have filed separate legal actions challenging the constitutionality of the attempted ban on new federal contracts entered into after the effective date of the California law. On October 5, 2021, the Ninth Circuit Court of Appeals reversed a prior U.S. District Court decision dismissing the requests by GEO and the United States for declaratory and injunctive relief and ruled that AB32 conflicts with federal law in violation of the Supremacy Clause of the U.S. Constitution and discriminates against the federal government in violation of the intergovernmental immunity doctrine. On April 26, 2022, the Ninth Circuit granted California’s petition for an en banc hearing and vacated the previous panel’s opinion. En banc arguments took place the week of June 21, 2022, in Pasadena, California. On September 26, 2022, in an 8-3 decision, the En Banc court vacated the prior decision denying the requests by GEO and the United States for declaratory and injunctive relief barring application of the California law to federal immigration processing centers. The Ninth Circuit Court of Appeals, En Banc, ruled that AB-32 would give California a virtual power of review over detention decisions made by ICE in violation of the Supremacy Clause. The court held that whether analyzed under intergovernmental immunity or preemption, California cannot exert such control over the federal government’s detention operations. The case is remanded to the U.S. District Court for further proceedings, consistent with the court’s ruling.
Recently the State of Washington approved a similar measure, EHB 1090, banning the use of public-private partnership contracts for the operation of detention facilities in the state, that GEO is also challenging in federal court. GEO’s contract for the company-owned 1,575-bed Northwest ICE Processing Center in Washington has a renewal option period that expires in 2025. The facility generates approximately $64 million in annualized revenues for GEO.
Effective April 6, 2022, Delaware County, Pennsylvania took over management of the managed-only George W. Hill Correctional Facility. The George W. Hill Correctional Facility generated approximately $46 million in annualized revenue for GEO.
Internationally, we are exploring opportunities in our current markets and will continue to actively bid on any opportunities that fit our target profile for profitability and operational risk. We are pleased to have been awarded a ten-year contract renewal for the continued delivery of secure transportation under our GEOAmey joint venture in the United Kingdom. Total revenue over the ten-year period is expected to be approximately $760 million. In New South Wales, Australia, we developed a 489-bed expansion at the Junee Correctional Centre. We have also constructed a 137-bed expansion at the Fulham Correctional Centre in Victoria, Australia. With respect to our Dungavel House Immigration Removal Centre in the United Kingdom, we were unfortunately unsuccessful in the competitive rebid process and transitioned the management contract in October 2021. In addition, we transitioned the Arthur Gorrie Correctional Centre to government operation in the State of Queensland, Australia at the end of September 2020.
With respect to our reentry services, electronic monitoring services, and community-based services business, we are currently pursuing a number of business development opportunities. Related to opportunities for community-based reentry services, we are working with our existing federal, state, and local clients to leverage new opportunities for both residential reentry facilities as well as non-residential day reporting centers. However, in light of the uncertainty surrounding the COVID-19 pandemic, we may not be successful. We continue to expend resources on informing federal, state and local governments about the benefits of public-private partnerships, and we anticipate that there will be new opportunities in the future as those efforts continue to yield results. We believe we are well positioned to capitalize on any suitable opportunities that become available in this area.
Operating Expenses
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Operating expenses consist of those expenses incurred in the operation and management of our contracts to provide services to our governmental clients. Labor and related costs represented 58.9% of our operating expenses during each of the nine months ended September 30, 2022 and 2021. Additional significant operating expenses include food, utilities and medical costs. During the nine months ended September 30, 2022 and 2021, operating expenses totaled 70.2% and 72.6%, respectively, of our consolidated revenues. We expect our operating expenses as a percentage of revenues in 2022 will be impacted by the opening of any new or existing idle facilities as a result of the cost of transitioning and/or start-up operations related to a facility opening. We also expect that our operating expenses will be impacted by the effect of inflation on costs related to personnel, utilities, insurance, and medical and food, among other operational costs. During 2022, we will incur carrying costs for facilities that are currently vacant.
General and Administrative Expenses
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. During the nine months ended September 30, 2022 and 2021, general and administrative expenses totaled 8.4% and 9.0%, respectively, of our consolidated revenues. We expect general and administrative expenses as a percentage of revenues in 2022 to remain consistent or decrease as a result of cost savings initiatives.
Idle Facilities
We are currently marketing 13,061 vacant beds at seven of our U.S. Secure Services and at four of our Reentry Services idle facilities to potential customers. The annual net carrying cost of our idle facilities in 2022 is estimated to be $20.3 million, including depreciation expense of $15.7 million. As of September 30, 2022, these eleven facilities had a combined net book value of $352.8 million. We currently do not have any firm commitment or agreement in place to activate the remaining facilities. Historically, some facilities have been idle for multiple years before they received a new contract award. These idle facilities are included in the U.S. Secure Services and Reentry Services segments. The per diem rates that we charge our clients often vary by contract across our portfolio. However, if the eleven remaining idle facilities were to be activated using our U.S. Secure Services and Reentry Services average per diem rates in 2022 (calculated as the U.S. Secure Services and Reentry Services revenue divided by the number of U.S. Secure Services and Reentry Services mandays) and based on the average occupancy rate in our facilities through September 30, 2022, we would expect to receive incremental annualized revenue of approximately $350 million and an annualized increase in earnings per share of approximately $0.35 to $0.40 per share based on our average operating margins.
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