THE GEO GROUP, INC. 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 "Item 1A. Risk Factors," and "Forward-Looking Statements - Safe Harbor" below. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and are incorporated herein by reference. We specialize in the ownership, leasing and management of secure, reentry facilities and processing centers and the provision of community-based services inthe United States ,Australia andSouth Africa . We own, lease and operate a broad range of secure facilities including maximum, medium and minimum-security facilities, processing centers, and community-based reentry facilities. We offer counseling, education and/or treatment for alcohol and drug abuse problems at most of the domestic facilities we manage. We are also a provider of innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. Additionally, we have a contract with ICE to provide supervision and reporting services designed to improve the participation of non-detained aliens in the immigration court system. 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 that maximize security and efficiency. We also provide secure transportation services for offender and detainee populations as contracted domestically and in theUnited Kingdom through our joint venture GEOAmey. As ofDecember 31, 2022 , our worldwide operations included the management and/or ownership of approximately 82,000 beds at 102 correctional, detention and reentry facilities, including idle facilities, and also included the provision of servicing individuals in a community-based environment on behalf of federal, state and local correctional agencies located throughout the country. For the years endedDecember 31, 2022 and 2021, we had consolidated revenues of$2.4 billion and$2.3 billion , respectively, and we maintained an average company-wide facility occupancy rate of 86.3% including 69,418 active beds and excluding 13,061 idle beds for the year endedDecember 31, 2022 , and 85.4% including 74,834 active beds and excluding 11,200 idle beds for the year endedDecember 31, 2021 . REIT Election OnDecember 2, 2021 , we announced that our Board unanimously approved a plan to terminate our REIT election and become a taxableC Corporation , effective for the year endedDecember 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 stockholders, which provides us with greater flexibility to use our free cash flow. EffectiveJanuary 1, 2021 , we are 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 untilDecember 31, 2020 . The Board also voted unanimously to discontinue our quarterly dividend payment and prioritize allocating our free cash flow to reduce debt.
Critical Accounting Policies and Estimates
The consolidated financial statements in this report are prepared in conformity withU.S. generally accepted accounting principles, or GAAP. 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 at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. A summary of our significant accounting policies is described in Note 1 - Summary ofBusiness Organization , Operations and Significant Accounting Policies of the notes to the audited consolidated financial statements contained Part II, Item 8 of this Annual Report on Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: 53 --------------------------------------------------------------------------------
Asset Impairments
The following table summarizes the Company's idled facilities as ofDecember 31, 2022 and their respective carrying values, excluding equipment and other assets that can be easily transferred to other facilities. Secure Reentry Services Services Total Secure Reentry Net Carrying Net Carrying Net Carrying Services Services Value Value Value Design Design December 31, December 31,
Facility Year Idled Capacity Capacity 2022 December 31, 2022 2022
Great Plains
Correctional
Facility 2021 1,940 - $ 69,367 $ - $ 69,367
D. Ray James
Correctional
Facility 2021 1,900 - 50,829 - 50,829
Northlake
Correctional
Facility 2022 1,800 - 68,524 - 68,524
Rivers Correctional
Facility 2021 1,450 - 37,911 - 37,911
Big Spring
Correctional
Facility 2021 1,732 - 32,959 - 32,959
Flightline
Correctional
Facility 2021 1,800 - 35,094 - 35,094
McFarland Female
Community
Reentry Facility 2020 300 - 10,900 - 10,900
Cheyenne Mountain
Recovery Center 2020 - 750 - 16,659 16,659
Albert Bo Robinson
Assessment &
Treatment Center 2022 - 900 - 14,011 14,011
Coleman Hall 2017 - 350 - 7,759 7,759
Hector Garza Center 2020 - 139 - 4,794 4,794
Total 10,922 2,139 $ 305,584 $ 43,223 $ 348,807
We review long-lived assets to be held and used for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be fully recoverable. Events that would trigger an impairment assessment
include deterioration of profits for a business segment that has long-lived
assets, or when other changes occur that might impair recovery of long-lived
assets such as the termination of a management contract or a prolonged decrease
in population. If impairment indicators are present, we perform a recoverability
test to determine whether or not an impairment loss should be measured.
We test idle facilities for impairment upon notification that the facilities
will no longer be utilized by the customer. If a long-lived asset is part of a
group that includes other assets, the unit of accounting for the long-lived
asset is its group. Generally, we group assets by facility for the purpose of
considering whether any impairment exists. The estimates of recoverability are
based on projected undiscounted cash flows associated with actual marketing
efforts where available or, in other instances, projected undiscounted cash
flows that are comparable to historical cash flows from management contracts
achieved in the past at that facility or at similar facilities and probability
weighted cash flows. Our probability weighted cash flows include adjustments to
projected cash flows compared to the historical cash flows due to current
business conditions which impact per diem rates as well as labor and other
operating costs, changes related to facility mission due to changes in
prospective clients, and changes in projected capacity and occupancy rates. We
also factor in prolonged periods of vacancies as well as the time and costs
required to ramp up facility population once a contract is obtained. We perform
the impairment analysis on an annual basis for each of the idle facilities, or
more frequently if needed, and take into consideration updates each quarter for
market developments affecting the potential utilization of each of the
facilities in order to identify events that may cause the Company to reconsider
the most recent assumptions. Such events could include negotiations with a
prospective customer for the utilization of an idle facility at terms
significantly less favorable than the terms used in our most recent impairment
analysis, or changes in legislation surrounding a particular facility that could
impact our ability to house certain types of individuals at such facility.
Further, a substantial increase in the number of available beds at other
facilities we own, or in the marketplace, could lead to deterioration in market
conditions and projected cash flows. Although they are not frequently received,
an unsolicited offer to purchase any of our idle facilities, at amounts that are
less than their carrying value could also cause us to reconsider the assumptions
used in the most recent impairment analysis. We have identified marketing
prospects to utilize each of the remaining currently idled facilities and have
determined that no current impairment exists. We also received valuations from a
third party on certain facilities. However, we can provide no assurance that we
will be able to secure management contracts to utilize our idle facilities, or
that we will not incur impairment charges in the future. In all cases, the
projected value in our analysis as of December 31, 2022 , exceeded the carrying
amounts of each facility, therefore no impairment charges were recorded. During
the year ended December 31, 2020 , we recorded an
54
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impairment charge of approximately $5.7 million related to one leased facility
where the projected undiscounted cash flows of the facility did not exceed the
carrying amount.
Reserves for Insurance Losses
The nature of our business exposes us to various types of third-party legal
claims, including, but not limited to, civil rights claims relating to
conditions of confinement and/or mistreatment, sexual misconduct claims brought
by individuals within our care, medical malpractice claims, product liability
claims, intellectual property infringement claims, claims relating to employment
matters (including, but not limited to, employment discrimination claims, union
grievances and wage and hour claims), property loss claims, environmental
claims, automobile liability claims, contractual claims and claims for personal
injury or other damages resulting from contact with our facilities, programs,
electronic monitoring products, personnel or individuals within our care,
including damages arising from the escape of an individual in our care or from a
disturbance or riot at a facility. In addition, our management contracts
generally require us to indemnify the governmental agency against any damages to
which the governmental agency may be subject in connection with such claims or
litigation. We maintain a broad program of insurance coverage for these general
types of claims, except for claims relating to employment matters, for which we
carry no insurance. There can be no assurance that our insurance coverage will
be adequate to cover all claims to which we may be exposed. It is our general
practice to bring merged or acquired companies into our corporate master
policies in order to take advantage of certain economies of scale.
On October 1, 2021 , GEO formed a wholly owned captive insurance subsidiary,
Florina Insurance Company, Inc. ("Florina"), to enhance our risk financing
strategies. Florina is incorporated in the state of Vermont and is licensed and
regulated by the state of Vermont , including with respect to its insurance
programs, levels of liquidity and other requirements. GEO began procuring
insurance policies to cover deductibles for workers' compensation, general
liability, automobile liability, medical professional liability and directors'
and officers' liability as well as procuring insurance policies for its excess
liability, directors' and officers' excess liability and excess medical
professional liability through Florina effective October 1, 2021 . Florina holds
cash and investments in order to meet solvency requirements and meet financial
obligations as presented, including an investment portfolio of marketable fixed
income and equity securities.
We currently maintain a general liability policy and excess liability policies
with total limits of $75.0 million per occurrence and $95.0 million total
general liability annual aggregate limits covering the operations of U.S. Secure
Services, Reentry Services and Electronic Monitoring and Supervision Services.
We have an occurrence based liability insurance program with a specific loss
limit of $40.0 million per occurrence and in the aggregate related to medical
professional liability claims arising out of correctional healthcare services.
We are uninsured for any claims in excess of these limits. We also maintain
insurance to cover property and other casualty risks including, workers'
compensation, environmental liability, cybersecurity liability and automobile
liability.
For most casualty insurance policies, we carry substantial deductibles or
self-insured retentions of $4.0 million per occurrence for general liability and
$5.0 million per occurrence for medical professional liability, $2.0 million per
occurrence for workers' compensation, $2.5 million per occurrence for directors'
and officers' liability and $1.0 million per occurrence for automobile
liability. In addition, certain of our facilities located in Florida and other
high-risk hurricane areas carry substantial windstorm deductibles. Since
hurricanes are considered unpredictable future events, no reserves have been
established to pre-fund for potential windstorm damage. Limited commercial
availability of certain types of insurance relating to windstorm exposure in
coastal areas and earthquake exposure mainly in California and the Pacific
Northwest may prevent us from insuring some of our facilities to full
replacement value.
With respect to operations in
Of the insurance policies discussed above, our most significant insurance reserves relate to workers' compensation, general liability and auto claims. These reserves, which include Florina's reserves and GEO's legacy reserves and administrative costs for the plans, are undiscounted and were$79.0 million and$74.2 million as ofDecember 31, 2022 and 2021, respectively, and are included in Accrued Expenses in the accompanying Consolidated Balance Sheets. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses 55 --------------------------------------------------------------------------------
related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially adversely impacted.
We have recorded goodwill as a result of our business combinations.Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets and other intangible assets acquired. Our goodwill is not amortized and is tested for impairment annually on the first day of the fourth quarter, and whenever events or circumstances arise that indicate impairment may have occurred. Impairment testing is performed for all reporting units that contain goodwill. The reporting units are the same as the reportable segments forU.S. Secure Services, Electronic Monitoring and Supervision Services, Reentry Services and International Services. Under provisions of the qualitative analysis, when testing goodwill for impairment, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative impairment test to identify goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The qualitative factors used by GEO's management to determine the likelihood that the fair value of the reporting unit is less than the carrying amount include, among other things, a review of overall economic conditions and their current and future impact on our existing business, our financial performance and stock price, industry outlook and market competition. With respect to the qualitative assessments, management determined that, as ofOctober 1, 2022 , it was more likely than not that the fair values of the reporting units exceeded their carrying values. During the year endedDecember 31, 2020 , in connection with our annual impairment test, we performed a quantitative analysis for our Reentry Services reporting unit using a third-party valuation firm to determine the estimated fair value of the reporting unit using a discounted cash flow model. A discount rate of 10% was utilized to adjust the cash flow forecasts based on management's estimate of a market participant's weighted-average cost of capital. Growth rates for sales and profits were determined using inputs from our long-term planning process. We also made estimates for discount rates and other factors based on market conditions, historical experience and other economic factors. Changes in these factors could significantly impact the fair value of the reporting unit. With respect to the Reentry Services reporting unit that was assessed quantitatively, management determined that the carrying value exceeded its fair value due to future declines in cash flow projections primarily due to the negative impact of the COVID-19 pandemic on our reentry facilities. As such, we recorded a goodwill impairment charge of$21.1 million during the year endedDecember 31, 2020 . A change in one or combination of the assumptions discussed above could have impacted the estimated fair value of the reporting unit. If our expectations of future results and cash flows decrease significantly or other economic conditions deteriorate, goodwill may be further impaired. No impairment charges were recorded for the year endedDecember 31, 2022 or 2021.
Other Intangible Assets, Net
We have also recorded other finite and indefinite lived intangible assets as a result of previously completed business combinations. Other acquired finite and indefinite lived intangible assets are recognized separately if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of our intent to do so. Our intangible assets include facility management contracts, trade names and technology. The facility management contracts represent customer relationships in the form of management contracts acquired at the time of each business combination; the value ofBI's and Protocol Criminal Justice, Inc.'s ("Protocol") trade names represent, among other intangible benefits, name recognition to its customers and intellectual property rights; and the acquired technology represents BI's innovation with respect to its GPS tracking, monitoring, radio frequency monitoring, voice verification monitoring and alcohol compliance systems, Protocol's innovation with respect to its customer relationship management software andSoberlink, Inc.'s innovation with respect to its alcohol monitoring devices. When establishing useful lives, we consider the period and the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up; or, if that pattern cannot be reliably determined, using a straight-line amortization method over a period that may be shorter than the ultimate life of such intangible asset. We also consider the impact of renewal terms when establishing useful lives. We currently amortize our acquired facility management contracts over periods ranging from three to twenty-one years and its acquired technology over seven years to eight years. There is no residual value associated with our finite-lived intangible assets. We review our trade name assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. We do not amortize its indefinite lived intangible assets. We review our indefinite lived intangible assets annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. These reviews resulted in no significant impairment to the carrying value of the indefinite lived intangible assets for all periods presented. We record the costs associated with renewal and extension of facility management contracts as expenses in the period they are incurred. 56 --------------------------------------------------------------------------------
Fair Value Measurements
We define fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date ("exit price"). We carry certain of our
assets and liabilities at fair value, measured on a recurring basis, in the
accompanying Consolidated Balance Sheets. We also have certain assets and
liabilities which are not carried at fair value in our accompanying Consolidated
Balance Sheets and disclose the fair value measurements compared to the carrying
values as of each balance sheet date. We establish the fair value of our assets
and liabilities using a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels which
distinguish between assumptions based on market data (observable inputs) and the
Company's assumptions (unobservable inputs). The level in the fair value
hierarchy within which the respective fair value measurement falls is determined
based on the lowest level input that is significant to the measurement in its
entirety. Level 1 inputs are quoted market prices in active markets for
identical assets or liabilities. Level 2 inputs are other than quotable market
prices included in Level 1 that are observable for the asset or liability either
directly or indirectly through corroboration with observable market data. Level
3 inputs are unobservable inputs for the assets or liabilities that reflect
management's own assumptions about the assumptions market participants would use
in pricing the asset or liability. We recognize transfers between Levels 1, 2
and 3 as of the actual date of the event or change in circumstances that cause
the transfer. We utilized a third-party valuation firm to assist with the
estimation of the fair values on the date of issuance for our new debt
instruments. The fair value of each new debt instrument on the date of issuance
was estimated using a Black-Derman-Toy ("BDT") lattice model which used Level 3
inputs. Refer to Note 10 - Fair Value of Assets and Liabilities and Note 12 -
Debt of the notes to the audited consolidated financial statements contained
Part II, Item 8 of this Annual Report on Form 10-K
Recent Accounting Pronouncements
The following accounting standards will be adopted in future periods:
InMarch 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Reform Rate (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," to provide temporary optional expedients and exceptions to the contract modifications, hedge relationships and other transactions affected by reference rate reform if certain criteria are met. This ASU, which was effective upon issuance and may be applied throughDecember 31, 2024 , is applicable to all contracts and hedging relationships that reference the London Interbank Offered Rate or any other reference rate expected to be discontinued. We do not expect any significant impacts of reference rate reform and the application of this guidance.
Other recent accounting pronouncements issued by the FASB (including its
Results of Operations
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 below. 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 will report the electronic monitoring and supervision services operation as a separate reportable segment. This new 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, our 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. Refer to Note 15 - Business Segments and Geographic Information of the Notes to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. The following discussion should be read in conjunction with our consolidated financial statements and the notes to the consolidated financial statements accompanying this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in the forward-looking statements as a result of certain factors, including, but not limited to, those described under "Item 1A. Risk Factors" and those included in other portions of this report. 57 --------------------------------------------------------------------------------
2022 versus 2021
Revenues
% of % of %
2022 Revenue 2021 Revenue $ Change Change
(Dollars in thousands)
U.S. Secure Services $ 1,437,831 60.5 % $ 1,488,936 66.0 % $ (51,105 ) (3.4 )%
Electronic Monitoring and
Supervision Services 496,268 20.9 % 278,934 12.4 % 217,334 77.9 %
Reentry Services 255,428 10.7 % 274,893 12.2 % (19,465 ) (7.1 )%
International Services 187,200 7.9 % 213,849 9.5 % (26,649 ) (12.5 )%
Total $ 2,376,727 100.0 % $ 2,256,612 100.0 % $ 120,115 5.3 %
U.S. Secure Services
Revenues decreased by $51.1 million in 2022 compared to 2021 primarily due to
aggregate decreases of $164.8 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 North Lake Correctional 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 $47.7 million resulting from the contract activation and ramp up at our
company-owned Moshannon Valley Processing Center, Desert View Annex, 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 $66.0 million .
The number of compensated mandays in U.S. Secure Services facilities was
approximately 17.9 million in 2022 and 18.7 million in 2021. We experienced an
aggregate net decrease of approximately 800,000 mandays as a result of net
decreases in population as a result of contract terminations, partially offset
by contract activations 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 88.2% of capacity in 2022 and 2021, respectively, excluding idle facilities.
Electronic Monitoring and Supervision Services
Revenues increased by
Reentry Services
Revenues decreased by$19.5 million in 2022 compared to 2021 primarily due to a decrease of$34.7 million as a result of the sale of our youth business which was effectiveJuly 1, 2021 . This decrease was partially offset by increases of$10.5 million due to new/reactivated contracts, day reporting centers and programs including the activation of our company-owned Tampa Residential Reentry Center inTampa, Florida inSeptember 2021 . Also partially offsetting the decrease was a net aggregate increase of$4.7 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$26.6 million in 2022 compared to 2021 primarily due to foreign exchange rate fluctuations of$15.6 million . We also experienced a net decrease of$11.0 million primarily driven by the transition of our management contract for the Dungavel House Immigration Removal Centre in theUnited Kingdom to the government effectiveSeptember 30, 2021 . 58 -------------------------------------------------------------------------------- Operating Expenses % of % of Segment Segment % 2022 Revenues 2021 Revenues $ Change Change (Dollars in thousands) U.S. Secure Services$ 1,077,256 74.9 %$ 1,112,290 74.7 %$ (35,034 ) (3.1 )% Electronic Monitoring and Supervision Services 226,236 45.6 % 121,442 43.5 % 104,794 86.3 % Reentry Services 194,089 76.0 % 205,992 74.9 % (11,903 ) (5.8 )% International Services 166,147 88.8 % 189,322 88.5 % (23,175 ) (12.2 )% Total$ 1,663,728 $ 1,629,046 $ 34,682 2.1 %
Operating expenses consist of those expenses incurred in the operation and
management of our
Operating expenses forU.S. Secure Services decreased by$35.0 million in 2022 compared to 2021 primarily due to decreases of$130.6 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, ourQueens Detention Facility , ourNorth Lake Correctional Facility , our managed-only Bay and Graceville Correctional Rehabilitation Facilities, as well as our managed-onlyGeorge W. Hill Correctional Facility . Also included in this decrease is the transition of the operation of our company-ownedGuadalupe County Correctional Facility to theNew Mexico Corrections Department inNovember 2021 . These decreases were partially offset by aggregate net increases of$30.7 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-ownedEagle 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$64.9 million .
Electronic Monitoring and Supervision Services
Operating expenses increased by
Reentry Services
Operating expenses for Reentry Services decreased by$11.9 million during 2022 compared to 2021 primarily due to a decrease of$30.8 million as a result of the sale of our youth business which was effectiveJuly 1, 2021 . We also experienced a decrease of$4.2 million due to contract terminations. These decreases were partially offset by increases of$6.8 million due to new/reactivated contracts, day reporting centers and programs including the activation of our company-owned Tampa Residential Reentry Center inTampa, Florida inSeptember 2021 . Also partially offsetting the decreases was a net aggregate increase of$16.3 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$23.2 million in 2022 compared to 2021 primarily due to foreign exchange rate fluctuations of$14.1 million . We also experienced a net decrease of$9.1 million primarily driven by the transition of our management contract for the Dungavel House Immigration Removal Centre in theUnited Kingdom to the government effectiveSeptember 30, 2021 .
Depreciation and Amortization
% of % of
Segment Segment %
2022 Revenue 2021 Revenue $ Change Change
(Dollars in thousands)
U.S. Secure Services $ 80,600 5.6 % $ 83,721 5.6 % $ (3,121 ) (3.7 )%
Electronic Monitoring and
Supervision Services 31,838 6.4 % 30,422 10.9 % 1,416 4.7 %
Reentry Services 18,416 7.2 % 18,773 6.8 % (357 ) (1.9 )%
International Services 2,071 1.1 % 2,261 1.1 % (190 ) (8.4 )%
Total $ 132,925 5.6 % $ 135,177 6.0 % $ (2,252 ) (1.7 )%
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U.S. Secure ServicesU.S. Secure Services depreciation and amortization expense decreased in 2022 compared to 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. Partially offsetting this decrease was a write-off of approximately$3.4 million of intangible assets related to facility management contracts whenDelaware County, Pennsylvania took over management of the managed-onlyGeorge W. Hill Correctional Facility inApril 2022 .
Electronic Monitoring and Supervision Services
Depreciation and amortization expense increased in 2022 compared to 2021 primarily due to certain equipment additions.
Reentry Services
Reentry Services depreciation and amortization expense decreased slightly in 2022 compared to 2021 primarily due to certain asset dispositions at our company-owned centers.
International Services
Depreciation and amortization expense decreased in 2022 compared to 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 $ 196,972 8.3 % $ 204,306 9.1 % $ (7,334 ) (3.6 )%
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 2022 compared to 2021 by $7.3
million primarily due to one-time employee restructuring expenses of $7.5
million incurred in 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 Income and Expense
Interest Income and Interest Expense
% of % of
2022 Revenue 2021 Revenue $ Change % Change
(Dollars in thousands)
Interest Income $ 16,831 0.7 % $ 24,007 1.1 % $ (7,176 ) (29.9 )%
Interest Expense $ 164,550 6.9 % $ 129,460 5.7 % $ 35,090 27.1 %
Interest income decreased in 2022 compared to 2021 primarily due to the effect
of foreign exchange rate fluctuations as well as the sale
of our contract receivable related to our Ravenhall facility in Australia in
September 2022 . Refer to Note 17 Commitments, Contingencies and Other Matters of
the Notes to the audited consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K for further discussion.
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 2022 compared to 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 2022 compared to 2021. Refer to Note 12 -
60
--------------------------------------------------------------------------------Debt of the Notes to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
(Loss) Gain on Extinguishment of Debt
% of % of
2022 Revenue 2021 Revenue $ Change % Change
(Dollars in thousands)
(Loss) Gain on Extinguishment of Debt $ (37,895 ) -1.6 % $ 4,693 0.2 %
During 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$37.9 million , net of the write-off of associated unamortized deferred loan costs. During 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.
Refer to Note 12- Debt of the Notes to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
2022 % of Revenue 2021 % of Revenue $ Change % Change
(Dollars in thousands)
Net Gain (Loss) on Disposition
of Assets $ 32,332 1.4 % $ 5,499 0.2 % $ 26,833 488.0 %
During 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 17 - Commitments, Contingencies and Other Matters of the
Notes to the audited consolidated financial statements included in Part II, Item
8 of this Annual Report on Form 10-K. The net gain in 2022 also includes the
sale of our Perry County Correctional Facility located in Alabama .
The net gain on disposition of assets in 2021 was primarily due to the sale of
our interest in Talbot Hall, located in New Jersey , and the sale of our
company-owned McCabe Center, located in Texas . The gain was partially offset by
a loss on the divestiture of our youth division on July 1, 2021 . Refer to Note
17- Commitments, Contingencies and Other Matters of the Notes to the audited
consolidated financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
Provision for Income Taxes
Effective Effective
2022 Rate 2021 Rate $ Change % Change
(Dollars in thousands)
Provision for Income Taxes $ 62,899 27.4 % $ 122,730 63.6 %
The provision for income taxes in 2022 decreased compared to 2021 along with the effective tax rate. In 2022, there was a$1.4 million discrete tax benefit compared to a net$74.6 million discrete tax expense in 2021. Included in the provision for income taxes in 2022 and 2021 were, respectively, a$2.1 million and$3.6 million discrete tax expense related to stock compensation that vested during the respective periods. In 2021, the Company elected to terminate its REIT status and became a taxable C corporation which resulted in a one-time, non-cash deferred tax charge of$70.8 million related to the termination. We estimate our 2023 annual effective tax rate to be in the range of approximately 27% to 29% exclusive of any discrete items. 61 --------------------------------------------------------------------------------
Equity in Earnings of Affiliates
% of % of
2022 Revenue 2021 Revenue $ Change % Change
(Dollars in thousands)
Equity in Earnings of Affiliates $ 4,771 0.2 % $ 7,141 0.3 %
Equity in earnings of affiliates, presented net of income taxes, represents the earnings of SACS and GEOAmey in the aggregate. Equity in earnings of affiliates in 2022 compared to 2021 decreased primarily due to unfavorable performance at 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. As ofDecember 31, 2022 , we were developing a number of contractually committed projects that we estimate will cost approximately$42.2 million , of which$19.5 million was spent throughDecember 31, 2022 . We estimate our remaining contractually committed capital requirements to be approximately$22.7 million . These projects are expected to be completed through 2023. 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. We completed our annual budgeting process, and for 2023, we will continue to strategically manage our capital expenditures to maintain both short and long term financial objectives. 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 2023 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
Exchange Offer
OnAugust 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$37.9 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 12 - Debt of the Notes to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Following the completed exchange offer in
As ofDecember 31, 2022 , we had approximately$30.0 million in borrowings under our revolver, and approximately$77.6 million in letters of credit which left approximately$226.4 million in additional borrowing capacity under the revolver. The weighted average interest rate on outstanding borrowings under the Credit Agreement as ofDecember 31, 2022 was 9.85%. 62 --------------------------------------------------------------------------------
6.50% Exchangeable Senior Notes due 2026
OnFebruary 24, 2021 , our wholly-owned subsidiary,GEO Corrections Holdings, Inc. ("GEOCH"), completed a private offering of$230 million aggregate principal amount of 6.50% exchangeable senior unsecured notes due 2026 (the "Convertible Notes"), 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 onFebruary 23, 2026 , unless earlier repurchased or exchanged. The Convertible Notes bear interest at the rate of 6.50% per year plus an additional amount based on the dividends paid by GEO on its common stock. Interest on the notes is payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2021 . Subject to certain restrictions on share ownership and transfer, holders may exchange the notes at their option prior to the close of business on the business day immediately precedingNovember 25, 2025 , but only under the following circumstances: (1) during the five consecutive business day period after any five consecutive trading day period, or the measurement period, in which the trading price per$1,000 principal amount of notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the exchange rate for the notes on each such trading day; or (2) upon the occurrence of certain specified corporate events. On or afterNovember 25, 2025 , until the close of business on the second scheduled trading day immediately preceding the maturity date of the notes, holders may exchange their notes at any time, regardless of the foregoing circumstances. Upon exchange of a note, we will pay or deliver, as the case may be, cash or a combination of cash and shares of our common stock. As ofDecember 31, 2022 , conditions had not been met to exchange the notes. 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.
Debt Repurchases
OnAugust 16, 2019 , our Board authorized us to repurchase and/or retire a portion of the 6.00% Senior Notes due 2026, the 5.875% Senior Notes due 2024, the 5.125% Senior Notes due 2023, 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, privately negotiated transactions, or otherwise, up to an aggregate maximum of$100.0 million , subject to certain limitations throughDecember 31, 2020 . OnFebruary 11, 2021 , our Board authorized a new repurchase program for repurchases/retirements of the above referenced GEO Senior Notes and term loan, subject to certain limitations up to an aggregate maximum of$100.0 million throughDecember 31, 2022 . During 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 year ended 2022 except as part of the exchange offer discussed further above. 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 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 indentures governing the second lien 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 ofDecember 31, 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. 63 -------------------------------------------------------------------------------- We may from time to time seek to purchase or retire our outstanding senior notes through repurchases, redemptions and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Quarterly Dividends
As previously discussed above, onDecember 2, 2021 , GEO's Board unanimously approved a plan to terminate our REIT status and become a taxableC Corporation , effective for the year endedDecember 31, 2021 . In connection with terminating the GEO's REIT status, the Board also voted unanimously to discontinue our quarterly dividend payments and prioritize allocating GEO's free cash flow to reduce debt. Stock Buyback Program OnFebruary 14, 2018 , we announced that our Board authorized a stock buyback program authorizing us to repurchase up to a maximum of$200 million of our shares of common stock. The stock buyback program was funded primarily with cash on hand, free cash flow and borrowings under our$900 million revolving credit facility. The program expired onOctober 20, 2020 . The stock buyback program was intended to be implemented through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with applicableSEC requirements. The stock buyback program did not obligate us to purchase any specific amount of our common stock and could have been suspended or extended at any time at the discretion of our Board. During the year endedDecember 31, 2020 , we purchased 553,665 shares of our common stock at a cost of$9.0 million primarily purchased with proceeds from our revolver. There were no purchases of our common stock during the years endedDecember 31, 2022 or 2021.
Automatic Shelf Registration on Form S-3
OnOctober 30, 2020 , we filed an automatic shelf registration on Form S-3 with theSEC that enables us to offer for sale, from time to time and as the capital markets permit, an unspecified amount of common stock, preferred stock, debt securities, guarantees of debt securities, warrants and units. The shelf registration statement was automatically effective upon filing.
Prospectus Supplement
OnJune 28, 2021 , in connection with the shelf registration, we filed with theSEC a prospectus supplement related to the offer and sale from time to time of our common stock at an aggregate offering price of up to$300 million through sales agents. Sales of shares of our common stock under the prospectus supplement and equity distribution agreements entered into with the sales agents, if any, will be made in negotiated transactions or transactions that are deemed to be "at the market" offerings as defined in Rule 415 under the Securities Act of 1933. There were no shares of common stock sold under this prospectus supplement during the year endedDecember 31, 2022 .
In connection with a design and build project agreement with theState of Victoria , inSeptember 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. InSeptember 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 17 - Commitments, Contingencies and Other Matters of the Notes to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Other
InAugust 2019 , we entered into two identical Notes (as defined below) 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 Notes are throughSeptember 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%. Included in the balance atDecember 31, 2022 is$0.6 million of deferred loan costs incurred in the transaction. Refer to Note 7 - Derivative Financial Instruments in the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. 64 --------------------------------------------------------------------------------
Guarantees
The Company has entered into certain guarantees in connection with the design, financing and construction of certain facilities as well as loan, working capital and other obligation guarantees for our subsidiaries inAustralia ,South Africa and our joint ventures. Refer to Note 12 - Debt in the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Executive Retirement Agreement
We have a non-qualified deferred compensation agreement with our Executive
Chairmen and former Chief Executive Officer ("former CEO"). The agreement
provides for a lump sum payment upon retirement, no sooner than age 55. As of
December 31, 2022 , our Executive Chairman had reached age 55 and was eligible to
receive the payment upon retirement.
GEO and our Executive Chairman and former CEO, entered into on May 27, 2021 , and
effective July 1, 2021 , an Amended and Restated Executive Retirement Agreement
which replaced the prior February 26, 2020 agreement discussed below. Pursuant
to the terms of the Amended and Restated Executive Retirement Agreement, upon
the date that the Executive Chairman ceases to provide services to GEO, we will
pay to the Executive Chairman an amount equal to $3,600,000 (the "2021
Grandfathered Payment") which shall be paid in cash. The Grandfathered Payment
shall be credited with interest at a rate of 5% compounded quarterly (the
"Grandfathered Earnings Account"). Additionally, at the end of each calendar
year provided that our Executive Chairman is still providing services to GEO
pursuant to the Executive Chairman Employment Agreement, we will credit an
amount equal to $1,000,000 at the end of each calendar year (the "Employment
Contributions Account"). The Employment Contributions Account will be credited
with interest at the rate of 5% compounded quarterly. Upon the date that the
Executive Chairman ceases to provide services to GEO, we will pay the Executive
Chairman in one lump sum cash payment each of the 2021 Grandfathered Payment,
the Grandfathered Earnings Account and the Employment Contributions Account
subject to the six-month delay provided in the Amended and Restated Executive
Retirement Agreement. As the Executive Chairman's retirement payment will no
longer be settled with a fixed number of shares of GEO's common stock (as
discussed below under the prior agreement), $3,600,000 has been reclassified
from equity to other non-current liabilities in 2021. The balance of the Amended
and Restated Executive Retirement Agreement was approximately $7 million at
December 31, 2022 which is fully funded. The following table presents the
balance due to the Executive Chairman at the end of each the next five years
under the Amended and Restated Executive Retirement Agreement provided that the
Executive Chairman is still providing services to GEO under his Executive
Chairman Employment Agreement:
Retirement
Fiscal Year Obligation
(In thousands)
12/31/2023 $ 9,557
12/31/2024 $ 12,617
12/31/2025 $ 16,336
12/31/2026 $ 20,856
12/31/2027 $ 26,351
The prior executive retirement agreement entered into on February 26, 2020
provided that upon the former CEO's retirement from GEO, we would have had to
pay a lump sum amount equal to $8,925,065 (determined as of February 26, 2020 )
(the "Grandfathered Payment") which would have been paid in the form of a fixed
number of shares of our common stock. The Grandfathered Payment would have been
delayed for six months and a day following the effective date of our former
CEO's termination of employment in compliance with Section 409A of the Internal
Revenue Code of 1986, as amended.
On February 26, 2020 , an amount equal to the Grandfathered Payment was invested
in our common stock ("GEO Shares"). The number of our shares of common stock as
of this date was equal to the Grandfathered Payment divided by the closing price
of our common stock on this date (rounded up to the nearest whole number of
shares), which equaled 553,665 shares of our common stock. Additional shares of
our common stock were credited with a value equal to any dividends declared and
paid on our shares of common stock, calculated by reference to the closing price
of our common stock on the payment date for such dividends (rounded up to the
nearest whole number of shares).
We have established several trusts for the purpose of paying the retirement
benefit pursuant to the Amended and Restated Executive Retirement Agreement. The
trusts were revocable "rabbi trusts" and the assets of the trusts are subject to
the claims of our creditors in the event of our insolvency.
65
--------------------------------------------------------------------------------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 forThe GEO Group, Inc. ("Parent") and the Subsidiary Guarantors on a combined basis in accordance withSEC 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 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):
Year Ended Year Ended
December 31, December 31,
2022 2021
Net operating revenues $ 2,176,556 $ 2,032,884
Income from operations 378,691 267,413
Net income 139,570 45,312
Net income attributable to The GEO Group, Inc. 139,570 45,312
Summarized balance sheets (in thousands):
December 31, 2022 December 31, 2021
Current assets $ 492,080 $ 707,457
Noncurrent assets (a) 3,059,195 3,115,622
Current liabilities 370,177 314,233
Noncurrent liabilities (b) 2,163,004 2,820,252
(a)
Includes amounts due from non-guarantor subsidiaries of
(b)
Includes amounts due to non-guarantor subsidiaries of
Off-Balance Sheet Arrangements
Except as discussed above, and in the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, we do not have any off-balance sheet arrangements.
We are also exposed to various commitments and contingencies which may have a material adverse effect on our liquidity. See Note 17 - Commitments, Contingencies and Other Matters in the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Derivatives
InAugust 2019 , we entered into two interest rate swap agreements in the aggregate notional amount of$44.3 million to fix the interest rate on certain of our variable rate debt to 4.22%. We have designated these interest rate swaps as hedges against changes in the cash flows of two identical promissory notes (the "Notes") which are secured by loan agreements and mortgage and security agreements on certain real property and improvements. We have determined that the swaps have payment, expiration dates, and provisions that coincide with the terms of the Notes and are therefore considered to be effective cash flow hedges. Accordingly, we record the change in fair value of the interest rate swaps as accumulated other comprehensive income (loss), net of applicable taxes. There was no material ineffectiveness for the period presented. We do not expect to enter into any transactions during the next twelve months which would result in reclassification into earnings or losses associated with these swaps currently reported in accumulated other comprehensive income (loss). Refer to Note 12 - Debt and Note 7 - Derivative Financial Instruments in the notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information. 66 --------------------------------------------------------------------------------
Cash Flow
Cash, cash equivalents, restricted cash and cash equivalents as ofDecember 31, 2022 was$143.8 million , compared to$548.3 million as ofDecember 31, 2021 and was impacted by the following: Net cash provided by operating activities in 2022 and 2021 was$296.4 million and$282.6 million , respectively. Net cash provided by operating activities in 2022 was positively impacted by non-cash expenses such as depreciation and amortization, deferred tax provision (benefit), amortization of debt issuance costs, discount and/or premium and other non-cash interest, stock-based compensation expense, gain on sale/disposal of property and equipment, loss on extinguishment of debt and dividends received from our unconsolidated joint venture. Equity in earnings of affiliates negatively impacted cash along with a net gain on disposition of assets. Changes in accounts receivable, prepaid expenses and other assets increased in total by a net of$53.0 million , representing a negative impact on cash. The increase was primarily driven by the timing of billings and collections. Changes in accounts payable, accrued expenses and other liabilities increased by$21.8 million which positively impacted cash. The decrease was primarily due to the timing of payments. Net cash provided by operating activities in 2021 was positively impacted by non-cash expenses such as depreciation and amortization, deferred tax provision, amortization of debt issuance costs, discount and/or premium and other non-cash interest, stock-based compensation expense, loss on sale/disposal of property and equipment and dividends received from our unconsolidated joint venture. Equity in earnings of affiliates negatively impacted cash along with gain on extinguishment of debt and net gain on disposition of assets. Changes in accounts receivable, prepaid expenses and other assets decreased in total by a net of$9.5 million , representing a positive impact on cash. The decrease was primarily driven by the timing of billings and collections. Changes in accounts payable, accrued expenses and other liabilities decreased by$58.1 million which negatively impacted cash. The decrease was primarily due to the timing of payments. Additionally, cash provided by operating activities in 2021 was positively impacted by a decrease in contract receivable of$6.2 million . The decrease relates to the timing of payments received and interest accrued, along with the effect of foreign exchange rates, related to theRavenhall Project . Refer to Note 6 - Contract Receivable included in the notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Net provided by investing activities of$3.0 million in 2022 was primarily the result of capital expenditures of$90.0 million and changes in restricted investments of$8.4 million , offset by proceeds from sale of real estate and other assets of$101.4 million . Net cash used in investing activities of$53.7 million in 2021 was primarily the result of capital expenditures of$69.4 million and changes in restricted investments of$18.7 million , offset by proceeds from sale of real estate and other assets of$21.2 million , proceeds from the sale of property and equipment of$4.1 million and payments received on note receivable of$8.0 million . Net cash used in financing activities in 2022 reflects payments of$680.9 million on long term debt offset by$30.0 million of proceeds from long term debt and payments on non-recourse debt of$5.7 million . We also paid$41.5 million of debt issuance costs in connection with our exchange offering. Refer to Note 12 - Debt included in the notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Net cash provided by financing activities in 2021 reflects payments of$360.3 million on long term debt offset by$435.0 million of proceeds from long term debt and payments on non-recourse debt of$21.6 million . We also paid cash dividends of$30.5 million and paid$9.6 million of debt issuance costs in connection with the issuance of our 6.50% Exchangeable Senior Notes. Refer to Note 12 - Debt included in the notes to our audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Inflation
We believe that inflation, in general, did have a negative impact but did not have a material effect on our results of operations during 2022 and 2021. While some of our contracts include provisions for inflationary indexing, inflation could have a substantial adverse effect on our results of operations in the future to the extent that wages and salaries, which represent our largest recurring/fixed expense, increase at a faster rate than the per diem or fixed rates received by us for our management services.
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, and by subtracting gain on asset divestitures, net, and
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 extinguishment of debt, pre-tax, transaction related expenses,
67
--------------------------------------------------------------------------------
pre-tax, one-time employee restructuring expenses, pre-tax, close-out expenses,
pre-tax, start up expenses, pre-tax, change in tax structure to C Corp and tax
effect of adjustments to net income attributable to GEO.
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 GEO to AFFO for the years ended
December 31 ,
2022 2021
Net income attributable to GEO$ 171,813 $
77,418
Add (Subtract): Depreciation and amortization 132,925
135,177
Facility maintenance capital expenditures (21,817 ) (11,313 ) Stock-based compensation expense 16,204
19,199
Other non-cash revenue & expenses - (4,408 ) Amortization of debt issuance costs, discount and/or premium and other non-cash interest 9,004
7,498
Gain on asset divestitures, net (32,332 ) (3,722 ) Other Adjustments Add (Subtract): Loss (gain) on extinguishment of debt, pre-tax 37,895 (4,693 ) Start-up expenses, pre-tax -
1,723
Transaction related expenses, pre-tax 1,322
8,118
One-time employee restructuring expenses, pre-tax -
7,459
Change in tax structure toC Corp -
70,813
Close-out expenses, pre-tax -
1,475
Tax effect of adjustments to net income attributable to GEO *
(7,032 ) (26 )
Adjusted Funds from Operations $ 307,982 $ 304,718
* Tax adjustments relate to gain asset divestitures, loss (gain) on debt
extinguishment, start-up expenses, transaction related expenses, one-time
employee restructuring expenses, close-out expenses and change in tax structure
to
Outlook
The following discussion of our future performance contains statements that are
not 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 statement. Please refer to "Item 1A. Risk Factors" in this
Annual Report on Form 10-K, the "Forward-Looking Statements - Safe Harbor," as
well as the other disclosures contained in this Annual Report on Form 10-K, for
further discussion on forward-looking statements and the risks
68
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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
We will continue 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. The information on or accessible through our website is not incorporated by reference in this Annual Report on Form 10-K.
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 GEOContinuum of Care programs, services and resources. OnJanuary 26, 2021 ,President Biden signed an executive order directingthe United States Attorney General not to renewDOJ contracts with privately operated criminal detention facilities, as consistent with applicable law. Two agencies of theDOJ , 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 inU.S. federal courts. As ofDecember 31, 2022 , GEO has three company-owned/company-leased facilities under direct contracts with USMS, which have current contract option periods that expire betweenFebruary 28, 2023 andSeptember 30, 2023 . These facilities combined represented approximately 6% of our revenues for the year endedDecember 31, 2022 . As ofDecember 31, 2022 , we no longer have any contracts with the BOP for secure correctional facilities.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 theU.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 onJanuary 1, 2020 aimed at phasing out public-private partnership contracts for the operation of secure correctional facilities and detention facilities withinCalifornia and facilities outside of theState of California housingState of California inmates. Currently, we have four public-private partnership contracts in place with ICE relating to secure services facilities located inCalifornia . These facilities/annexes generated approximately$173 million in combined annual revenues during the year endedDecember 31, 2022 , and their contracts do not expire until December of 2034. GEO and theDOJ have filed separate legal actions challenging the constitutionality of the attempted ban on new federal contracts entered into after the effective date of theCalifornia law. OnOctober 5, 2021 , theNinth Circuit Court of Appeals reversed a priorU.S. District Court decision dismissing the requests by GEO andthe United States for declaratory and injunctive relief and ruled that AB32 conflicts with federal law in violation of the Supremacy Clause of theU.S. Constitution and discriminates against the federal government in violation of the intergovernmental immunity doctrine. OnApril 26, 2022 , the Ninth Circuit grantedCalifornia's petition for an en banc hearing and vacated the previous panel's opinion. En banc arguments took place the week ofJune 21, 2022 , inPasadena, California . OnSeptember 26, 2022 , in an 8-3 decision, the En Banc court vacated the prior decision 69 -------------------------------------------------------------------------------- denying the requests by GEO andthe United States for declaratory and injunctive relief barring application of theCalifornia law to federal immigration processing centers.The Ninth Circuit Court of Appeals , En Banc, ruled that AB-32 would giveCalifornia 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 theU.S. District Court for further proceedings, consistent with the court's ruling. Refer to Note 17- Commitments, Contingencies and Other Matters of the Notes to the audited consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Recently theState 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 inWashington has a renewal option period that expires in 2025. The facility generated approximately$66 million in annualized revenues for GEO during the year endedDecember 31, 2022 . EffectiveApril 6, 2022 ,Delaware County, Pennsylvania took over management of the managed-onlyGeorge W. Hill Correctional Facility .The George W. Hill Correctional Facility generated approximately$47 million in annualized revenue for GEO during the year endedDecember 31, 2021 . 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 theUnited Kingdom . With respect to our Dungavel House Immigration Removal Centre in theUnited Kingdom , we were unfortunately unsuccessful in the competitive rebid process and transitioned the management contract inOctober 2021 . InJanuary 2023 , our Australian subsidiary, GEO Australia, had entered into a contract with theDepartment of Justice and Community Safety in theState of Victoria for the delivery of primary health services across thirteen public prisons. The contract will commence onJuly 1, 2023 and is expected to generate approximately$33 million in incremental annualized revenue for GEO. 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. With respect to theDepartment of Homeland's Intensive Supervision and Appearance Program ("ISAP"), the number of participants steadily increased throughout 2022, however, since the beginning of 2023, there has been a decline in ISAP participants as a result of recent changes in immigration and budgetary pressures. There are no assurances that there will not be a further decline in ISAP participants in 2023 and beyond. 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
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 approximately 63% and 65% of our operating expenses in 2022 and 2021, respectively. Additional significant operating expenses include food, utilities and inmate medical costs. In 2022 and 2021, operating expenses totaled approximately 70% and 72% of our consolidated revenues, respectively. Our operating expenses as a percentage of revenue in 2023 will be impacted by the opening of any new or existing facilities as a result of the cost of transitioning and/or start-up operations related to a facility opening. During 2023, we will incur carrying costs for facilities that were vacant in 2022.
General and Administrative Expenses
General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. In 2022 and 2021, general and administrative expenses totaled approximately 8% and 9%, respectively, of our consolidated revenues. We expect general and administrative expenses as a percentage of revenue in 2023 to remain consistent or decrease as a result of cost savings initiatives.
Idle Facilities
In our Secure Services segment, we are currently marketing 10,922 vacant beds with a net book value of approximately$306 million at seven of our idle facilities to potential customers. In our Reentry Services segment, we are currently marketing 2,139 vacant beds with a net book value of approximately$43 million at four of our idle facilities to potential customers. The combined annual carrying cost of these idle 70 -------------------------------------------------------------------------------- facilities in 2022 is estimated to be$32.8 million , including depreciation expense of$16.5 million . With the exception of a contract pending due diligence for one of our reentry facilities, we currently do not have any firm commitments or agreements in place to activate these facilities but have ongoing contact with several potential customers. Historically, some facilities have been idle for multiple years before they received a new contract award. The per diem rates that we charge our clients often vary by contract across our portfolio. However, if the eleven idle facilities in our Secure Services and Reentry Services segments were to be activated using our Secure Services and Reentry Services average per diem rate in 2022 (calculated as revenue divided by the number of mandays) and based on the average occupancy rate in our facilities for 2022, we would expect to receive annual incremental revenue of approximately$360 million and an increase in annual earnings per share of approximately$.35 to$.40 per share based on our average operating margin. Refer to discussion in Item I, Part I - Business under Executive Order and Contract Developments above for discussion of recent developments.
Forward-Looking Statements - Safe Harbor
This Annual Report on Form 10-K 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, budgets, projected costs and plans and objectives of management for future operations, 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:
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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;
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the magnitude, severity and duration of the COVID-19 pandemic and its impact on our business, financial condition, results of operations and cash flows;
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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;
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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;
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our ability to accurately project the size and growth of public-private
partnerships for secure services in the
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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;
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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;
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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;
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our ability to activate the inactive beds at our idle facilities;
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our ability to maintain or increase occupancy rates at our facilities and the impact of fluctuations in occupancy levels on our revenues and profitability;
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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;
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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 taxableC Corporation ;
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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;
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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;
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our ability to raise new project development capital given the often short-term nature of the customers' commitment to use newly developed facilities;
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our ability to develop long-term earnings visibility;
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our ability to successfully conduct our operations in the
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the impact of the LIBOR transition;
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the instability of foreign exchange rates, exposing us to currency risks in
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an increase in unreimbursed labor rates;
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our exposure to rising medical costs;
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our ability to manage costs and expenses relating to ongoing litigation arising from our operations;
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our ability to successfully pursue an appeal to reverse the recent unfavorable verdict and judgments in the retrial of the lawsuits in theState 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;
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our ability to prevail in our challenge to EHB 1090 legislation that is pending
in the
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our ability to accurately estimate on an annual basis, loss reserves related to general liability, workers' compensation and automobile liability claims;
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our ability to fulfill our debt service obligations and its impact on our liquidity;
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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;
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despite current indebtedness levels, we may still incur more indebtedness, which could further exacerbate the risks relating to our indebtedness;
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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;
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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;
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because portions of our senior indebtedness have floating interest rates, an increase in interest rates would adversely affect cash flows;
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we depend on distributions from our subsidiaries to make payments on our indebtedness and these distributions may not be made;
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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;
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the conditional exchange feature of the 6.5% Exchangeable Senior Notes, if triggered, may adversely affect our financial condition;
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the second lien notes and the related guarantees are effectively subordinated to our and our subsidiary guarantors' current senior secured indebtedness and structurally subordinated to the indebtedness of our subsidiaries that do not guarantee the second lien notes;
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it may be difficult to realize the value of the collateral securing the second lien notes and related guarantees;
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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;
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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;
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negative conditions in the capital markets could prevent us from obtaining financing on desirable terms, which could materially harm our business;
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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;
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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;
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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;
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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;
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State budgetary constraints may have a material adverse impact on us;
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competition for contracts may adversely affect the profitability of our business;
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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;
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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;
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adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts;
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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;
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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;
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we may face community opposition to facility locations, which may adversely affect our ability to obtain new contracts;
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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;
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we may not be able to obtain or maintain the insurance levels required by our government contracts;
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our exposure to rising general insurance costs;
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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;
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our international operations expose us to risks that could materially adversely affect our financial condition and results of operations;
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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;
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we are dependent upon our senior management and our ability to attract and retain sufficient qualified personnel;
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our profitability may be materially adversely affected by inflation;
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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;
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risks related to facility construction and development activities may increase our costs related to such activities;
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the rising cost and increasing difficulty of obtaining adequate levels of surety credit on favorable terms could adversely affect our operating results;
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adverse developments in our relationship with our employees could adversely affect our business, financial condition or results of operations;
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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;
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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;
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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;
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the interruption, delay or failure of the provision of our services or information systems could adversely affect our business;
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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;
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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;
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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;
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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;
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our ability to identify suitable acquisitions or dispositions, and to successfully complete such acquistitons or dispositions;
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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;
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we are subject to risks related to corporate social responsibility;
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the market price of our common stock may vary substantially;
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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;
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various anti-takeover protections applicable to us may make an acquisition of us more difficult and reduce the market value of our common stock;
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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;
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we may issue additional debt securities that could limit our operating flexibility and negatively affect the value of our common stock;
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failure to comply with anti-bribery and anti-corruption laws could subject us to penalties and other adverse consequences; and
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other factors contained in our filings with theSEC , including, but not limited to, those detailed in this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with theSEC . 74
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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 report.
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