ITEM 1. FINANCIAL STATEMENTS
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The GEO Group, Inc., a Florida corporation, and subsidiaries (the “Company” or “GEO”) is a fully-integrated real estate investment trust (“REIT”) specializing in the ownership, leasing and management of secure facilities, processing centers and community reentry centers in the United States, Australia, South Africa and the United Kingdom. The Company owns, leases and operates a broad range of facilities including maximum, medium and minimum security facilities, processing centers, as well as community-based reentry facilities and offers an expanded delivery of rehabilitation services under its 'GEO Continuum of Care' platform. The 'GEO Continuum of Care' program integrates enhanced rehabilitative programs, which are evidence-based and include cognitive behavioral treatment and post-release services, and provides academic and vocational classes in life skills and treatment programs while helping individuals reintegrate into their communities. The Company develops new facilities based on contract awards, using its project development expertise and experience to design, construct and finance what it believes are state-of-the-art facilities that maximize security and efficiency. The Company provides innovative compliance technologies, industry-leading monitoring services, and evidence-based supervision and treatment programs for community-based parolees, probationers and pretrial defendants. The Company also provides secure transportation services for individuals as contracted domestically and in the United Kingdom through its joint venture GEO Amey PECS Ltd. (“GEOAmey”). At September 30, 2021, the Company’s worldwide operations include the management and/or ownership of approximately 86,000 beds at 107 facilities, including idle facilities, projects under development and recently awarded contracts, and also include the provision of community supervision services for more than 200,000 individuals, including over 100,000 through an array of technology products including radio frequency, GPS, and alcohol monitoring devices.
The Company's unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-Q and consequently do not include all disclosures required by Form 10-K. The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 16, 2021 for the year ended December 31, 2020. The accompanying December 31, 2020 consolidated balance sheet has been derived from those audited financial statements. Additional information may be obtained by referring to the Company’s Form 10-K for the year ended December 31, 2020. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial information for the interim periods reported in this Quarterly Report on Form 10-Q have been made. Results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results for the entire year ending December 31, 2021, or for any other future interim or annual periods.
Risks and uncertainties
Executive Order
7
Table of Contents
On January 26, 2021, President Biden signed an executive order directing the United States Attorney General not to renew Department of Justice (“DOJ”) contracts with privately operated criminal detention facilities, as consistent with applicable law (the “Executive Order”). Two agencies of the DOJ, the Bureau of Prisons (“BOP”) and U.S. Marshals Service (“USMS”), utilize GEO’s services. The BOP houses inmates who have been convicted of federal crimes, and the USMS is generally responsible for detainees who are awaiting trial or sentencing in U.S. federal courts. GEO’s contracts with the BOP for its company-owned 1,940-bed Great Plains Correctional Facility, company-owned 1,732-bed Big Spring Correctional Facility, company-owned 1,800-bed Flightline Correctional Facility, and company-owned 1,800-bed North Lake Correctional Facility have renewal option periods that expire on May 31, 2021, November 30, 2021, November 30, 2021, and September 30, 2022, respectively. Additionally, the contracts with the BOP for the county owned and managed 1,800-bed Reeves County Detention Center I & II and the 1,376-bed Reeves County Detention Center III have renewal option periods that expire September 30, 2022 and June 30, 2022, respectively. The Company has a management agreement with Reeves County, Texas for the management oversight of these two county-owned facilities. In total, the Great Plains, Big Spring, Flightline, North Lake Correctional Facilities, Reeves County Detention Center I & II and Reeves County Detention Center III generated approximately $145 million in revenues during the year ended December 31, 2020. The BOP has experienced a decline in federal prison populations over the last several years, a trend that has more recently been accelerated by the COVID-19 global pandemic. As a result of the Executive Order and the decline in federal prison populations, the above-described contracts with the BOP may not be renewed over the coming years. On March 5, 2021, the Company was notified by the BOP that it had decided to not exercise its contract renewal option for the company-owned, 1,940-bed Great Plains Correctional Facility in Oklahoma, when the contract base period expires on May 31, 2021. On March 25, 2021, the Company was notified that the BOP had decided to terminate its contract with the county-owned and managed Reeves County Detention Center I & II effective May 10, 2021. On March 15, 2021, the Company announced that the USMS had decided to not exercise the contract renewal option for its company-owned, 222-bed Queens Detention Facility in New York, when the contract base period ended on March 31, 2021. On August 18, 2021, the Company was notified by the BOP of the non-renewal of the contract options for its Big Spring and Flightline Facilities.
Quarterly Dividends
On April 7, 2021, GEO announced that its Board of Directors (the “Board”) had immediately suspended GEO’s quarterly dividend payments with the goal of maximizing the use of cash flows to repay debt, deleverage and internally fund growth. While GEO currently intends to maintain its corporate tax structure as a REIT, the Board is evaluating GEO’s corporate tax structure. The Board’s evaluation of the current corporate tax structure and GEO’s REIT status is expected to take into consideration, among other factors, potential changes to GEO’s financial operating performance, as well as potential changes to the Internal Revenue Code of 1986, as amended (the “Code”) applicable to U.S. corporations and REITs. As a part of this evaluation, GEO has engaged financial advisors and legal advisors to assist in evaluating various capital structure alternatives. The Board expects to conclude its evaluation in the fourth quarter of 2021, and should the Board determine to maintain GEO’s REIT status, an additional dividend payment may be required before year-end in order to meet the minimum REIT distribution requirements under the Code.
COVID-19
In December 2019, a novel strain of coronavirus, now known as COVID-19 (“COVID-19”), was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.
The Company has been closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact those entrusted to its care and governmental partners. During the year ended December 31, 2020 and into 2021, the Company did incur disruptions from the COVID-19 pandemic but, it is unable to predict the overall future impact that the COVID-19 pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties related to the pandemic. The COVID-19 pandemic and related government-imposed mandatory closures, the efficacy and distribution of COVID-19 vaccines, shelter in-place restrictions and social distancing protocols and increased expenditures on engineering controls, personal protective equipment, diagnostic testing, medical expenses, temperature scanners, protective plexiglass barriers and increased sanitation have had, and will continue to have, a severe impact on global economic conditions and the environment in which the Company operates. Starting in early 2020, the Company began to observe negative impacts from the pandemic on its performance in its secure services business, specifically with its U.S. Immigration and Customs Enforcement (“ICE”) Processing Centers and U.S. Marshals Facilities, as a result of a decrease in court sentencing at the federal level and reduced operational capacity to promote social distancing protocols. Additionally, the Company’s reentry services business conducted through its GEO Care business segment has also been negatively impacted, specifically its residential reentry centers and non-residential day reporting programs were impacted by declines in programs due to lower levels of referrals by federal, state and local agencies. Additionally, the Company has experienced the transmission of COVID-19 among detainees and staff at most of its facilities during 2020 and continuing into 2021. If the Company is unable to mitigate the transmission of COVID-19 at its facilities it could experience a material adverse effect on its financial position, results of operations and cash flows. Although the Company is unable to predict the duration or scope of the COVID-19 pandemic or estimate the extent of the negative financial impact to its operating results, an extended period of depressed economic activity necessitated to combating the disease, and the severity and duration of the related global economic crisis may adversely impact its future financial performance.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has recorded goodwill as a result of its various business combinations. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible assets and intangible assets acquired net of liabilities assumed, including noncontrolling interests. Changes in the Company's goodwill balances from January 1, 2021 to September 30, 2021 are as follows (in thousands):
|
|
January 1,
2021
|
|
|
Foreign Currency
Translation
|
|
|
September 30, 2021
|
|
U.S. Secure Services
|
|
$
|
316,366
|
|
|
$
|
—
|
|
|
$
|
316,366
|
|
GEO Care [1]
|
|
|
438,443
|
|
|
|
—
|
|
|
|
438,443
|
|
International Services
|
|
|
441
|
|
|
|
(28
|
)
|
|
|
413
|
|
Total Goodwill
|
|
$
|
755,250
|
|
|
$
|
(28
|
)
|
|
$
|
755,222
|
|
[1] Net of accumulated loss on impairment of $21.1 million related to the Community Based reporting unit for an impairment charge incurred during the fourth quarter of 2020.
8
Table of Contents
As previously discussed in Note 1 – Basis of Presentation, on January 26, 2021, President Biden signed an Executive Order directing the United States Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, as consistent with applicable law. The Company considered the issuance of the Executive Order to be a “triggering event” that requires certain quantitative testing for potential impairment of goodwill for its U.S. Secure Services reporting unit.
The quantitative testing performed during first quarter 2021 resulted in no impairment in the goodwill of the U.S. Secure Services reporting unit. The carrying value of the U.S. Secure Services reporting unit is all of the goodwill in the U.S. Secure Services segment in the table above. The calculated fair value of the U.S. Secure Services reporting unit exceeded its carrying value. The percentage that the fair value exceeded the carrying value was approximately 6%. The Company used a third-party valuation firm to determine the estimated fair value of the reporting unit using a discounted cash flow model which is dependent on several significant estimates and assumptions related to forecasts of future cash flows and the weighted average cost of capital, among other factors. A discount rate of 10% was utilized to adjust the cash flow forecasts based on the Company’s estimate of a market participant’s weighted-average cost of capital. Growth rates for sales, profits and other assumptions were determined using inputs from the Company’s long-term planning process. The Company also makes estimates for discount rates and other factors based on market conditions, historical experience and other economic factors. Additionally, management made certain assumptions relating to future re-activations and sales of certain idle facilities, including those where the BOP and USMS have recently notified the Company of its intention not to exercise upcoming renewal options and/or not to rebid contracts with upcoming contract expirations. A change in one or a combination of these assumptions could significantly impact the fair value of the reporting unit. For example, a 1% increase in the discount rate would cause the carrying value to exceed the fair value and trigger an impairment of approximately $76 million or 24% of the goodwill balance in the U.S. Secure Services reporting unit. Conversely, a 1% decrease in the discount rate would increase the percentage that the fair value exceeded the carrying value to 22%.
Future impairment charges may be required on the Company’s goodwill, as the discounted cash flow model is subject to change based upon the Company’s performance, overall market conditions, the state of the credit markets and political environment. The Company will continue to monitor these relevant factors to determine if an additional interim impairment assessment is warranted. If there were to be a deterioration in management’s forecasted financial performance, an increase in discount rates or a reduction in long-term growth rates, these factors could all be potential indicators of an impairment charge to our remaining goodwill, which could be material, in future periods.
The Company has also recorded other finite and indefinite-lived intangible assets as a result of its various business combinations. The Company's intangible assets include facility management contracts, covenants not to compete, trade names and technology, as follows (in thousands):
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Weighted
Average
Useful Life
(years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Facility management contracts
|
|
|
16.3
|
|
|
$
|
308,424
|
|
|
$
|
(182,851
|
)
|
|
$
|
125,573
|
|
|
$
|
308,398
|
|
|
$
|
(168,848
|
)
|
|
$
|
139,550
|
|
Technology
|
|
|
7.3
|
|
|
|
33,700
|
|
|
|
(31,679
|
)
|
|
|
2,021
|
|
|
|
33,700
|
|
|
|
(30,703
|
)
|
|
|
2,997
|
|
Trade names
|
|
Indefinite
|
|
|
|
45,200
|
|
|
|
—
|
|
|
|
45,200
|
|
|
|
45,200
|
|
|
|
—
|
|
|
|
45,200
|
|
Total acquired intangible assets
|
|
|
|
|
|
$
|
387,324
|
|
|
$
|
(214,530
|
)
|
|
$
|
172,794
|
|
|
$
|
387,298
|
|
|
$
|
(199,551
|
)
|
|
$
|
187,747
|
|
Amortization expense was $15.0 million and $16.7 million for the nine months ended September 30, 2021 and 2020, respectively. Amortization expense was primarily related to the U.S Secure Services and GEO Care segments' amortization of acquired facility management contracts. As of September 30, 2021, the weighted average period before the next contract renewal or extension for the acquired facility management contracts was approximately 2.3 years.
9
Table of Contents
Estimated amortization expense related to the Company's finite-lived intangible assets for the remainder of 2021 through 2025 and thereafter is as follows (in thousands):
Fiscal Year
|
|
Total
Amortization
Expense
|
|
Remainder of 2021
|
|
$
|
7,178
|
|
2022
|
|
|
18,131
|
|
2023
|
|
|
13,487
|
|
2024
|
|
|
9,754
|
|
2025
|
|
|
9,703
|
|
Thereafter
|
|
|
69,341
|
|
|
|
$
|
127,594
|
|
3. FINANCIAL INSTRUMENTS
The following tables provide a summary of the Company’s significant financial assets and liabilities carried at fair value and measured on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
Fair Value Measurements at September 30, 2021
|
|
|
|
Carrying Value at
September 30,
2021
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi Trust
|
|
$
|
42,556
|
|
|
$
|
—
|
|
|
$
|
42,556
|
|
|
$
|
—
|
|
Fixed income securities
|
|
|
2,101
|
|
|
|
—
|
|
|
|
2,101
|
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives
|
|
$
|
3,367
|
|
|
$
|
—
|
|
|
$
|
3,367
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020
|
|
|
|
Carrying Value at
December 31,
2020
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi Trust
|
|
$
|
35,749
|
|
|
$
|
—
|
|
|
$
|
35,749
|
|
|
$
|
—
|
|
Fixed income securities
|
|
|
1,932
|
|
|
|
—
|
|
|
|
1,932
|
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives
|
|
$
|
6,015
|
|
|
$
|
—
|
|
|
$
|
6,015
|
|
|
$
|
—
|
|
The Company’s Level 2 financial instruments included in the tables above as of September 30, 2021 and December 31, 2020 consist of interest rate swap derivative liabilities held by GEO, the Company's rabbi trust established for a GEO employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and an investment in Canadian dollar denominated fixed income securities.
The interest rate swap derivative liabilities are valued using a discounted cash flow model based on projected borrowing rates. The Company's restricted investment in the rabbi trust is invested in Company-owned life insurance policies which are recorded at their cash surrender values. These investments are valued based on the underlying investments held in the policies' separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities. The Canadian dollar denominated securities, which are not actively traded, are valued using quoted rates for these and similar securities.
10
Table of Contents
4. FAIR VALUE OF ASSETS AND LIABILITIES
The Company’s consolidated balance sheets reflect certain financial assets and liabilities at carrying value. The carrying value of certain debt instruments, if applicable, is net of unamortized discount. The following tables present the carrying values of those financial instruments and the estimated corresponding fair values at September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
Estimated Fair Value Measurements at September 30, 2021
|
|
|
|
Carrying Value as
of September 30,
2021
|
|
|
Total Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
537,070
|
|
|
$
|
537,070
|
|
|
$
|
537,070
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and investments
|
|
|
48,377
|
|
|
|
48,377
|
|
|
|
48,377
|
|
|
|
—
|
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under senior credit facility
|
|
$
|
1,549,783
|
|
|
$
|
1,444,437
|
|
|
$
|
—
|
|
|
$
|
1,444,437
|
|
|
$
|
—
|
|
5.125% Senior Notes due 2023
|
|
|
259,275
|
|
|
|
245,410
|
|
|
|
—
|
|
|
|
245,410
|
|
|
|
—
|
|
5.875% Senior Notes due 2024
|
|
|
225,293
|
|
|
|
191,519
|
|
|
|
—
|
|
|
|
191,519
|
|
|
|
—
|
|
6.00% Senior Notes due 2026
|
|
|
350,000
|
|
|
|
276,113
|
|
|
|
—
|
|
|
|
276,113
|
|
|
|
—
|
|
6.50% Exchangeable Senior Notes due 2026
|
|
|
230,000
|
|
|
|
238,799
|
|
|
|
—
|
|
|
|
238,799
|
|
|
|
—
|
|
Non-recourse debt
|
|
|
317,671
|
|
|
|
317,671
|
|
|
|
—
|
|
|
|
317,671
|
|
|
|
—
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements at December 31, 2020
|
|
|
|
Carrying Value as
of December 31,
2020
|
|
|
Total Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
283,524
|
|
|
$
|
283,524
|
|
|
$
|
283,524
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and investments
|
|
|
28,329
|
|
|
|
28,329
|
|
|
|
28,329
|
|
|
|
—
|
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under senior credit facility
|
|
$
|
1,474,437
|
|
|
$
|
1,342,066
|
|
|
$
|
—
|
|
|
$
|
1,342,066
|
|
|
$
|
—
|
|
5.875% Senior Notes due 2022
|
|
|
193,958
|
|
|
|
192,736
|
|
|
|
—
|
|
|
|
192,736
|
|
|
|
—
|
|
5.125% Senior Notes due 2023
|
|
|
281,783
|
|
|
|
256,096
|
|
|
|
—
|
|
|
|
256,096
|
|
|
|
—
|
|
5.875% Senior Notes due 2024
|
|
|
242,500
|
|
|
|
202,458
|
|
|
|
—
|
|
|
|
202,458
|
|
|
|
—
|
|
6.00% Senior Notes due 2026
|
|
|
350,000
|
|
|
|
279,493
|
|
|
|
—
|
|
|
|
279,493
|
|
|
|
—
|
|
Non-recourse debt
|
|
|
344,614
|
|
|
|
344,632
|
|
|
|
—
|
|
|
|
344,632
|
|
|
|
—
|
|
The fair values of the Company’s cash and cash equivalents, and restricted cash and investments approximates the carrying values of these assets at September 30, 2021 and December 31, 2020. Restricted cash consists of money market funds, bank deposits, commercial paper and time deposits used for asset replacement funds and other funds contractually required to be maintained at the Company's Australian subsidiary. The fair value of the money market funds and bank deposits is based on quoted market prices (Level 1) and the fair value of commercial paper and time deposits is based on market prices for similar instruments (Level 2).
The fair values of the Company's 5.875% senior unsecured notes due 2022 ("5.875% Senior Notes due 2022"), 5.875% senior unsecured notes due 2024 ("5.875% Senior Notes due 2024"), 6.00% senior unsecured notes due 2026 (“6.00% Senior Notes”), the 5.125% senior unsecured notes due 2023 ("5.125% Senior Notes") and the 6.50% exchangeable senior unsecured notes due 2026 (“Convertible Notes” or “6.50% Exchangeable Notes due 2026”) are based on published financial data for these instruments. On February 24, 2021, the Company completed a private offering of $230 million aggregate principal amount of 6.50% exchangeable senior unsecured notes due 2026. The Company used the net proceeds from this offering to fund the redemption of the then outstanding amount of the Company’s 5.875% Senior Notes due 2022. Refer to Note 10 – Debt for further information. The fair values of the Company's non-recourse debt related to the Washington Economic Development Finance Authority ("WEDFA") and the Company’s Australian subsidiary are estimated based on market prices of similar instruments. The fair value of borrowings under the senior credit facility is based on an estimate of trading value considering the Company’s borrowing rate, the undrawn spread and similar instruments.
11
Table of Contents
5. RESTRICTED CASH AND CASH EQUIVALENTS
The following table provides a reconciliation of cash, cash equivalents and restricted cash and cash equivalents reported on the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
Cash and cash equivalents
|
|
$
|
537,070
|
|
|
$
|
53,676
|
|
Restricted cash and cash equivalents - current
|
|
|
30,201
|
|
|
|
27,229
|
|
Restricted cash and investments - non-current
|
|
|
60,732
|
|
|
|
40,970
|
|
Less Restricted investments - non-current
|
|
|
(42,556
|
)
|
|
|
(32,787
|
)
|
Total cash, cash equivalents and restricted cash and cash
equivalents shown in the statement of cash flows
|
|
$
|
585,447
|
|
|
$
|
89,088
|
|
Amounts included in restricted cash and cash equivalents are attributable to certain contractual cash restriction requirements at the Company's wholly owned Australian subsidiary related to non-recourse debt and asset replacement funds contractually required to be maintained and other guarantees. Restricted investments - non-current (included in Restricted Cash and Investments in the accompanying consolidated balance sheets) consists of the Company's rabbi trust established for an employee and employer contributions to The GEO Group, Inc. Non-qualified Deferred Compensation Plan and is not considered to be a restricted cash equivalent. Refer to Note 3 - Financial Instruments.
6. SHAREHOLDERS’ EQUITY
The following tables present the changes in shareholders’ equity that are attributable to the Company’s shareholders and to noncontrolling interests for the three and nine months ended September 30, 2021 and 2020 (in thousands):
|
|
Common shares
|
|
|
Additional
Paid-In
|
|
|
Distributions
in Excess of
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Treasury shares
|
|
|
Noncontrolling
|
|
|
Total
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Interests
|
|
|
Equity
|
|
For the Three Months Ended
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021
|
|
|
122,409
|
|
|
$
|
1,273
|
|
|
$
|
1,272,014
|
|
|
$
|
(160,875
|
)
|
|
$
|
(21,132
|
)
|
|
|
4,852
|
|
|
$
|
(105,099
|
)
|
|
$
|
(1,113
|
)
|
|
$
|
985,068
|
|
Stock-based compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
4,329
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,329
|
|
Restricted stock granted
|
|
|
103
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock canceled
|
|
|
(43
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other adjustment to additional
paid-in capital [2]
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,600
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,600
|
)
|
Shares withheld for net
settlements of share-
based awards [3]
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
(90
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(90
|
)
|
Issuance of common
stock - ESPP
|
|
|
8
|
|
|
|
—
|
|
|
|
72
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,710
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
34,641
|
|
Other comprehensive income
(loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,722
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
(2,714
|
)
|
Balance, September 30, 2021
|
|
|
122,465
|
|
|
$
|
1,273
|
|
|
$
|
1,272,725
|
|
|
$
|
(126,165
|
)
|
|
$
|
(23,854
|
)
|
|
|
4,852
|
|
|
$
|
(105,099
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
1,017,706
|
|
|
|
Common shares
|
|
|
Additional
Paid-In
|
|
|
Distributions
in Excess of
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Treasury shares
|
|
|
Noncontrolling
|
|
|
Total
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Interests
|
|
|
Equity
|
|
For the Three Months Ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
|
121,371
|
|
|
$
|
1,262
|
|
|
$
|
1,252,037
|
|
|
$
|
(174,038
|
)
|
|
$
|
(29,554
|
)
|
|
|
4,787
|
|
|
$
|
(104,457
|
)
|
|
$
|
(955
|
)
|
|
$
|
944,295
|
|
Proceeds from exercise of
stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Stock-based compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
4,689
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,689
|
|
Restricted stock canceled
|
|
|
(22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Dividends paid [1]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(58,527
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(58,527
|
)
|
Other adjustment to paid-in capital [2]
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
Purchase of treasury shares [2]
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
(280
|
)
|
|
|
|
|
|
|
(280
|
)
|
Shares withheld for net
settlements of share-
based awards [3]
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Issuance of common
stock - ESPP
|
|
|
16
|
|
|
|
—
|
|
|
|
170
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
170
|
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,220
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(48
|
)
|
|
|
39,172
|
|
Other comprehensive income
(loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,481
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
2,485
|
|
Balance, September 30, 2020
|
|
|
121,339
|
|
|
$
|
1,262
|
|
|
$
|
1,257,176
|
|
|
$
|
(193,345
|
)
|
|
$
|
(27,073
|
)
|
|
|
4,812
|
|
|
$
|
(104,737
|
)
|
|
$
|
(999
|
)
|
|
$
|
932,284
|
|
12
Table of Contents
|
|
Common shares
|
|
|
Additional
Paid-In
|
|
|
Distributions
in Excess of
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Treasury shares
|
|
|
Noncontrolling
|
|
|
Total
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Interests
|
|
|
Equity
|
|
For the Nine Months Ended
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2021
|
|
|
121,318
|
|
|
$
|
1,262
|
|
|
$
|
1,262,267
|
|
|
$
|
(222,892
|
)
|
|
$
|
(22,589
|
)
|
|
|
4,835
|
|
|
$
|
(104,946
|
)
|
|
$
|
(1,020
|
)
|
|
$
|
912,082
|
|
Proceeds from exercise of
stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
15,755
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,755
|
|
Restricted stock granted
|
|
|
1,551
|
|
|
|
16
|
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock canceled
|
|
|
(154
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dividends paid [1]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,487
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,487
|
)
|
Other adjustment to additional
paid-in capital [2]
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,447
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,447
|
)
|
Shares withheld for net
settlements of share-
based awards [3]
|
|
|
(268
|
)
|
|
|
(3
|
)
|
|
|
(2,088
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,091
|
)
|
Issuance of common
stock - ESPP
|
|
|
35
|
|
|
|
—
|
|
|
|
252
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
252
|
|
Purchase of treasury shares [2]
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
17
|
|
|
|
(153
|
)
|
|
|
—
|
|
|
|
(153
|
)
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127,214
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(157
|
)
|
|
|
127,057
|
|
Other comprehensive income
(loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,265
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
(1,262
|
)
|
Balance, September 30, 2021
|
|
|
122,465
|
|
|
$
|
1,273
|
|
|
$
|
1,272,725
|
|
|
$
|
(126,165
|
)
|
|
$
|
(23,854
|
)
|
|
|
4,852
|
|
|
$
|
(105,099
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
1,017,706
|
|
|
|
Common shares
|
|
|
Additional
Paid-In
|
|
|
Earnings in
Excess of
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Treasury shares
|
|
|
Noncontrolling
|
|
|
Total
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Distributions
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Interests
|
|
|
Equity
|
|
For the Nine Months Ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2020
|
|
|
121,225
|
|
|
$
|
1,254
|
|
|
$
|
1,230,865
|
|
|
$
|
(119,779
|
)
|
|
$
|
(20,335
|
)
|
|
|
4,210
|
|
|
|
(95,175
|
)
|
|
$
|
(782
|
)
|
|
$
|
996,048
|
|
Proceeds from exercise
of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Stock-based compensation
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
19,163
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,163
|
|
Restricted stock granted
|
|
|
900
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Restricted stock canceled
|
|
|
(49
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Dividends paid [1]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(174,687
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(174,687
|
)
|
Shares withheld for net
settlements of share-
based awards [3]
|
|
|
(174
|
)
|
|
|
(1
|
)
|
|
|
(2,788
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,789
|
)
|
Issuance of common
stock - ESPP
|
|
|
39
|
|
|
|
—
|
|
|
|
465
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
465
|
|
Purchase of treasury shares [2]
|
|
|
(602
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
602
|
|
|
|
(9,562
|
)
|
|
|
—
|
|
|
|
(9,562
|
)
|
Other adjustment to additional paid-in capital [2]
|
|
|
—
|
|
|
|
—
|
|
|
|
9,479
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,479
|
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
101,121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(174
|
)
|
|
|
100,947
|
|
Other comprehensive
income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,738
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43
|
)
|
|
|
(6,781
|
)
|
Balance, September 30, 2020
|
|
|
121,339
|
|
|
$
|
1,262
|
|
|
$
|
1,257,176
|
|
|
$
|
(193,345
|
)
|
|
$
|
(27,073
|
)
|
|
|
4,812
|
|
|
$
|
(104,737
|
)
|
|
$
|
(999
|
)
|
|
$
|
932,284
|
|
[1]
|
Dividends paid are net of dividends forfeited on unvested shares of restricted stock.
|
[2] On February 26, 2020 (the "Effective Date"), the Company and its then Chief Executive Officer (“former CEO”) entered into an amended and restated executive retirement agreement that amends the former CEO’s executive retirement agreement. The amended and restated executive retirement agreement provided that upon the former CEO’s retirement from the Company, the Company would pay a lump sum amount initially equal to $8,925,065 (the “Grandfathered Payment”) which was to be paid in the form of a fixed number of shares of the Company’s common stock. The fair value of the Grandfathered Payment was reclassified to stockholders’ equity. Additional shares of the Company’s common stock were credited with a value equal to any dividends declared and paid on the Company’s shares of common stock, calculated by reference to the closing price of the Company’s common stock on the payment date for such dividends (rounded up to the nearest whole number of shares).
On the Effective Date, an amount equal to the Grandfathered Payment was invested in the Company’s common stock (“GEO Shares”). The number of the Company’s shares of common stock as of the Effective Date was equal to the Grandfathered Payment divided by the closing price of the Company’s common stock on the Effective Date (rounded up to the nearest whole number of shares), which equaled 553,665 shares of the Company’s common stock. Additional shares of the Company’s common stock are credited with a value equal to any dividends declared and paid on the Company’s shares of common stock, calculated by reference to the closing price of the Company’s common stock on the payment date for such dividends (rounded up to the nearest whole number of shares).
13
Table of Contents
The Company and its former CEO entered into on May 27, 2021, and effective as of July 1, 2021, an Amended and Restated Executive Retirement Agreement which replaced the February 26, 2020 agreement discussed above. Pursuant to the terms of the Amended and Restated Executive Retirement Agreement, upon the date that the former CEO ceases to provide services to the Company, the Company will pay to the former CEO an amount equal to $3,600,000 which shall be paid in cash. As the former CEO’s retirement payment will no longer be settled with a fixed number of shares of GEO’s common stock, $3,600,000 has been reclassed from equity to other non-current liabilities. Refer to Note 11 – Commitments, Contingencies and Other Matters for further information.
[3]
|
During the nine months ended September 30, 2021 and 2020, the Company withheld shares through net share settlements to satisfy statutory tax withholding requirements upon vesting of shares of restricted stock held by employees.
|
REIT Distributions
As a REIT, GEO is required to distribute annually at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) and began paying regular quarterly REIT dividends in 2013. The amount, timing and frequency of future dividends, however, will be at the sole discretion of GEO's Board and will be declared based upon various factors, many of which are beyond GEO's control, including, GEO's financial condition and operating cash flows, the amount required to maintain REIT status, limitations on distributions in GEO's existing and future debt instruments, limitations on GEO's ability to fund distributions using cash generated through GEO's taxable REIT subsidiaries ("TRSs") and other factors that GEO's Board may deem relevant. On April 7, 2021, GEO’s Board immediately suspended GEO’s quarterly dividend payments. Refer to Note 1 – Basis of Presentation for further information.
During the nine months ended September 30, 2021 and the year ended December 31, 2020, GEO declared and paid the following regular cash distributions to its shareholders as follows:
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Distribution
Per Share
|
|
|
Aggregate
Payment Amount
(in millions)
|
|
February 3, 2020
|
|
February 14, 2020
|
|
February 21, 2020
|
|
$
|
0.48
|
|
|
$
|
58.2
|
|
April 6, 2020
|
|
April 17, 2020
|
|
April 24, 2020
|
|
$
|
0.48
|
|
|
$
|
58.5
|
|
July 7, 2020
|
|
July 17, 2020
|
|
July 24, 2020
|
|
$
|
0.48
|
|
|
$
|
58.5
|
|
October 6, 2020
|
|
October 16, 2020
|
|
October 23, 2020
|
|
$
|
0.34
|
|
|
$
|
41.5
|
|
January 15, 2021
|
|
January 25, 2021
|
|
February 1, 2021
|
|
$
|
0.25
|
|
|
$
|
30.5
|
|
Stock Buyback Program
On February 14, 2018, the Company announced that its Board authorized a stock buyback program authorizing the Company to repurchase up to a maximum of $200.0 million of its shares of common stock. The stock buyback program was to be funded primarily with cash on hand, free cash flow and borrowings under the Company's $900.0 million revolving credit facility (the "Revolver"). The program was effective through October 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 applicable Securities and Exchange Commission ("SEC") requirements. The stock buyback program did not obligate the Company to purchase any specific amount of the Company's common stock and could have been suspended or extended at any time at the discretion of the Company's Board.
Automatic Shelf Registration on Form S-3
On October 30, 2020, the Company filed an automatic shelf registration on Form S-3 with the SEC that enables the Company 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 became automatically effective upon filing and is valid for three years.
Prospectus Supplement
On June 28, 2021, in connection with the shelf registration, the Company filed with the SEC a prospectus supplement related to the offer and sale from time to time of the Company’s common stock at an aggregate offering price of up to $300 million through sales agents. Sales of shares of the Company’s 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 nine months ended September 30, 2021.
14
Table of Contents
Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in shareholders' equity from transactions and other events and circumstances arising from non-shareholder sources. The Company's total comprehensive income (loss) is comprised of net income attributable to GEO, net income attributable to noncontrolling interests, foreign currency translation adjustments that arise from consolidating foreign operations that do not impact cash flows, net unrealized gains and/or losses on derivative instruments, and pension liability adjustments within shareholders' equity and comprehensive income (loss).
The components of accumulated other comprehensive income (loss) attributable to GEO within shareholders' equity are as follows:
|
|
Nine Months Ended September 30, 2021
|
|
|
|
(In thousands)
|
|
|
|
Foreign currency
translation
adjustments,
net of tax (1)
|
|
|
Change
in fair
value of
derivatives,
net of tax
|
|
|
Pension
adjustments,
net of tax
|
|
|
Total
|
|
Balance, January 1, 2021
|
|
$
|
(9,207
|
)
|
|
$
|
(4,752
|
)
|
|
$
|
(8,630
|
)
|
|
$
|
(22,589
|
)
|
Current-period other comprehensive income (loss)
|
|
|
(3,825
|
)
|
|
|
2,093
|
|
|
|
467
|
|
|
|
(1,265
|
)
|
Balance, September 30, 2021
|
|
$
|
(13,032
|
)
|
|
$
|
(2,659
|
)
|
|
$
|
(8,163
|
)
|
|
$
|
(23,854
|
)
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
(In thousands)
|
|
|
|
Foreign currency
translation
adjustments,
net of tax (1)
|
|
|
Change
in fair
value of
derivatives,
net of tax
|
|
|
Pension
adjustments,
net of tax
|
|
|
Total
|
|
Balance, January 1, 2020
|
|
$
|
(12,314
|
)
|
|
$
|
(1,476
|
)
|
|
$
|
(6,545
|
)
|
|
$
|
(20,335
|
)
|
Current-period other comprehensive income (loss)
|
|
|
(2,759
|
)
|
|
|
(4,299
|
)
|
|
|
320
|
|
|
|
(6,738
|
)
|
Balance, September 30, 2020
|
|
$
|
(15,073
|
)
|
|
$
|
(5,775
|
)
|
|
$
|
(6,225
|
)
|
|
$
|
(27,073
|
)
|
|
(1)
|
The foreign currency translation related to noncontrolling interests was not significant at September 30, 2021 or 2020.
|
7. EQUITY INCENTIVE PLANS
The Board adopted The GEO Group, Inc. Amended and Restated 2018 Stock Incentive Plan (the "2018 Amended and Restated Plan"), which was approved by the Company's shareholders on April 28, 2021. The 2018 Amended and Restated Plan supersedes the previous 2018 Stock Incentive Plan. As of the date the 2018 Amended and Restated Plan was approved by the Company’s shareholders’, it provided for a reserve of an additional 16,800,000 shares of common stock that may be issued pursuant to awards granted under the 2018 Amended and Restated Plan. The Company filed a Form S-8 registration statement related to the 2018 Amended and Restated Plan on June 15, 2021.
Stock Options
The Company uses a Black-Scholes option valuation model to estimate the fair value of each time-based or performance-based option awarded. For options granted during the nine months ended September 30, 2021, the fair value was estimated using the following assumptions: (i) volatility of 43.28%; (ii) expected term of 5 years; (iii) risk free interest rate of 0.24%; and (iv) the then expected dividend yield of 13.30% (subsequent to the grant date the Board suspended the Company’s quarterly dividend payments). A summary of the activity of stock option awards issued and outstanding under Company plans was as follows for the nine months ended September 30, 2021:
|
|
Shares
|
|
|
Wtd. Avg.
Exercise
Price
|
|
|
Wtd. Avg.
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Options outstanding at January 1, 2021
|
|
|
1,951
|
|
|
$
|
22.07
|
|
|
|
6.62
|
|
|
$
|
—
|
|
Options granted
|
|
|
478
|
|
|
|
7.52
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Options forfeited/canceled/expired
|
|
|
(482
|
)
|
|
|
16.49
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2021
|
|
|
1,947
|
|
|
$
|
19.89
|
|
|
|
6.41
|
|
|
$
|
—
|
|
Options vested and expected to vest at September 30, 2021
|
|
|
1,864
|
|
|
$
|
17.57
|
|
|
|
6.31
|
|
|
$
|
—
|
|
Options exercisable at September 30, 2021
|
|
|
1,170
|
|
|
$
|
24.16
|
|
|
|
5.01
|
|
|
$
|
—
|
|
15
Table of Contents
On March 1, 2021, the Company granted approximately 478,000 options to certain employees which had a per share grant date fair value of $0.79. For the nine months ended September 30, 2021 and 2020, the amount of stock-based compensation expense related to stock options was $0.6 million and $0.8 million, respectively. As of September 30, 2021, the Company had $1.0 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.2 years.
Restricted Stock
Compensation expense for nonvested stock awards is recorded over the vesting period based on the fair value at the date of grant. Generally, the restricted stock awards vest in equal increments generally over either a three or four-year period. The fair value of restricted stock awards, which do not contain a market-based vesting condition, is determined using the closing price of the Company's common stock on the date of grant. The Company has historically issued share-based awards with service-based, performance-based and market-based vesting criteria.
A summary of the activity of restricted stock outstanding is as follows for the nine months ended September 30, 2021:
|
|
Shares
|
|
|
Wtd. Avg.
Grant Date
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
Restricted stock outstanding at January 1, 2021
|
|
|
2,154
|
|
|
$
|
20.61
|
|
Granted
|
|
|
1,551
|
|
|
|
6.95
|
|
Vested
|
|
|
(929
|
)
|
|
|
20.54
|
|
Forfeited/canceled
|
|
|
(154
|
)
|
|
|
10.58
|
|
Restricted stock outstanding at September 30, 2021
|
|
|
2,622
|
|
|
$
|
12.55
|
|
During the nine months ended September 30, 2021, the Company granted approximately 1,551,000 shares of restricted stock to certain employees and executive officers. Of these awards, 919,000 are market and performance-based awards which will be forfeited if the Company does not achieve certain annual metrics during 2021, 2022 and 2023.
The vesting of these performance-based restricted stock grants are subject to the achievement by GEO of two annual performance metrics as follows: (i) up to 50% of the shares of restricted stock ("TSR Target Award") can vest at the end of a three year performance period if GEO meets certain total shareholder return ("TSR") performance targets, as compared to the total shareholder return of a peer group of companies, over a three year period from January 1, 2021 to December 31, 2023 and (ii) up to 50% of the shares of restricted stock ("ROCE Target Award") can vest at the end of a three year period if GEO meets certain return on capital employed ("ROCE") performance targets over a three year period from January 1, 2021 to December 31, 2023. Certain of these performance-based restricted stock grants can vest over a one-year period if GEO meets certain performance targets, as mentioned above, over three one-year periods from January 1, 2021 to December 31, 2021, January 1, 2022 to December 31, 2022 and January 1, 2023 to December 31, 2023. These market and performance awards can vest at between 0% and 200% of the target awards for both metrics. The number of shares shown for the performance-based awards is based on the target awards for both metrics.
The metric related to ROCE is considered to be a performance condition. For share-based awards that contain a performance condition, the achievement of the targets must be probable before any share-based compensation expense is recorded. The Company reviews the likelihood of which target in the range will be achieved and if deemed probable, compensation expense is recorded at that time. If subsequent to initial measurement there is a change in the estimate of the probability of meeting the performance condition, the effect of the change in the estimated quantity of awards expected to vest is recognized by cumulatively adjusting compensation expense. If ultimately the performance targets are not met, for any awards where vesting was previously deemed probable, previously recognized compensation expense will be reversed in the period in which vesting is no longer deemed probable. The fair value of these awards was determined based on the closing price of the Company's common stock on the date of grant.
The metric related to TSR is considered to be a market condition. For share-based awards that contain a market condition, the probability of satisfying the market condition must be considered in the estimate of grant-date fair value and previously recorded compensation expense is not reversed if the market condition is never met. The fair value of these awards was determined based on a Monte Carlo simulation, which calculates a range of possible outcomes and the probabilities that they will occur, using the following weighted average key assumptions: (i) volatility of 48.2%; (ii) beta of 0.79; and (iii) risk free rate of 0.22%.
For the nine months ended September 30, 2021 and 2020, the Company recognized $15.2 million and $18.3 million, respectively, of compensation expense related to its restricted stock awards. As of September 30, 2021, the Company had $19.3 million of unrecognized compensation costs related to non-vested restricted stock awards, including non-vested restricted stock awards with performance-based and market-based vesting, that are expected to be recognized over a weighted average period of 2.2 years.
Employee Stock Purchase Plan
The Company previously adopted The GEO Group Inc. 2011 Employee Stock Purchase Plan (the “Plan or "ESPP”) effective July 9, 2011. The Company has since amended and restated the Plan (the “Amended ESPP”) which was approved by the Company’s
16
Table of Contents
shareholders on April 28, 2021 and became effective on July 9, 2021. The purpose of the Amended ESPP, which is qualified under Section 423 of the Code, is to encourage stock ownership through payroll deductions by the employees of GEO and designated subsidiaries of GEO in order to increase their identification with the Company’s goals and secure a proprietary interest in the Company’s success. These deductions are used to purchase shares of the Company’s common stock at a 5% discount from the then current market price. The maximum number of shares of common stock reserved for issuance over the term of the Amended ESPP on the amended effective date shall not exceed 506,023 shares.
The Amended ESPP is considered to be non-compensatory. As such, there is no compensation expense required to be recognized. Share purchases under the Amended ESPP are made on the last day of each month. During the nine months ended September 30, 2021, 35,314 shares of the Company's common stock were issued in connection with the Amended ESPP.
8. EARNINGS PER SHARE
Basic earnings per share of common stock is computed by dividing the net income attributable to The GEO Group, Inc. available to common stockholders by the weighted-average number of common shares outstanding for the period. Net income attributable to The GEO Group, Inc. available to common stockholders represents net income attributable to The GEO Group reduced by an allocation of earnings to participating securities. The 6.50% Exchangeable Notes due 2026, which contain non-forfeitable rights to dividends declared and paid on the shares of common stock, are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Diluted EPS is calculated under the if-converted method and the two-class method for each class of shareholders using the weighted average number of shares attributable to each class. The calculation that results in the lowest diluted earnings per share amount for common stock is reported in the Company’s financial statements. The if-converted method includes the dilutive effect of potential common shares related to the 6.50% Exchangeable Notes due 2026, if any. Basic and diluted earnings per share were calculated for the three and nine months ended September 30, 2021 and 2020 as follows (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
Net income
|
|
$
|
34,641
|
|
|
$
|
39,172
|
|
|
$
|
127,057
|
|
|
$
|
100,947
|
|
Net loss attributable to noncontrolling interests
|
|
|
69
|
|
|
|
48
|
|
|
|
157
|
|
|
|
174
|
|
Less: Undistributed income allocable to participating securities
|
|
|
(5,949
|
)
|
|
|
-
|
|
|
|
(13,624
|
)
|
|
|
-
|
|
Net income attributable to The GEO Group, Inc. available to common stockholders
|
|
|
28,761
|
|
|
|
39,220
|
|
|
|
113,590
|
|
|
|
101,121
|
|
Basic earnings per share attributable to The GEO Group,
Inc. available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
120,525
|
|
|
|
119,826
|
|
|
|
120,326
|
|
|
|
119,677
|
|
Per share amount
|
|
$
|
0.24
|
|
|
$
|
0.33
|
|
|
$
|
0.94
|
|
|
$
|
0.84
|
|
Diluted earnings per share attributable to The GEO Group,
Inc. available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
120,525
|
|
|
|
119,826
|
|
|
|
120,326
|
|
|
|
119,677
|
|
Dilutive effect of equity incentive plans
|
|
|
347
|
|
|
|
206
|
|
|
|
257
|
|
|
|
287
|
|
Weighted average shares assuming dilution
|
|
|
120,872
|
|
|
|
120,032
|
|
|
|
120,583
|
|
|
|
119,964
|
|
Per share amount
|
|
$
|
0.24
|
|
|
$
|
0.33
|
|
|
$
|
0.94
|
|
|
$
|
0.84
|
|
For the three months ended September 30, 2021, 1,987,513 weighted average shares of common stock underlying options were excluded from the computation of diluted earnings per share ("EPS") because the effect would be anti-dilutive. There were 805,532 common stock equivalents from restricted shares that were anti-dilutive for the period.
For the three months ended September 30, 2020, 1,996,201 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. There were 1,810,572 common stock equivalents from restricted shares that were anti-dilutive for the period.
For the nine months ended September 30, 2021, 2,096,927 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. There were 1,171,930 common stock equivalents from restricted shares that were anti-dilutive for the period.
For the nine months ended September 30, 2020, 1,921,600 weighted average shares of common stock underlying options were excluded from the computation of diluted EPS because the effect would be anti-dilutive. There were 1,610,107 common stock equivalents from restricted shares that were anti-dilutive for the period.
17
Table of Contents
On February 24, 2021, the Company’s 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. Refer to Note 10 – Debt for additional information. As of September 30, 2021, conditions had not been met to exchange the 6.50% Exchangeable Notes due 2026 into shares of the Company’s common stock. Approximately 24.9 million and 19.7 million shares of potential common shares associated with the conversion option embedded in the convertible notes were excluded from the computation for the three and nine months ended September 30, 2021, respectively, as the Company’s average stock price during the period was lower than the exchange price.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in interest rates. The Company measures its derivative financial instruments at fair value.
In August 2019, the Company entered into two interest rate swap agreements in the aggregate notional amount of $44.3 million to fix the interest rate on certain of its variable rate debt to 4.22%. The Company has 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. The Company has 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, the Company records the change in fair value of the interest rate swaps as accumulated other comprehensive income, net of applicable taxes. Total unrealized gains recorded in other comprehensive income, net of tax, related to these cash flow hedges was $2.1 million during the nine months ended September 30, 2021. The total fair value of the swap liabilities as of September 30, 2021 was $3.4 million and is recorded as a component of Other Non-Current liabilities within the accompanying consolidated balance sheet. There was no material ineffectiveness for the period presented. The Company does 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 10 - Debt for additional information.
.
18
Table of Contents
10. DEBT
Debt outstanding as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands):
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
764,000
|
|
|
$
|
770,000
|
|
Unamortized discount on term loan
|
|
|
(1,290
|
)
|
|
|
(1,705
|
)
|
Unamortized debt issuance costs on term loan
|
|
|
(3,059
|
)
|
|
|
(4,043
|
)
|
Revolver
|
|
|
787,073
|
|
|
|
704,437
|
|
Total Senior Credit Facility
|
|
|
1,546,724
|
|
|
|
1,468,689
|
|
6.50% Exchangeable Senior Notes:
|
|
|
|
|
|
|
|
|
Notes Due in 2026
|
|
|
230,000
|
|
|
|
—
|
|
Unamortized debt issuance costs
|
|
|
(8,665
|
)
|
|
|
—
|
|
Total 6.50% Exchangeable Senior Notes Due in 2026
|
|
|
221,335
|
|
|
|
—
|
|
6.00% Senior Notes:
|
|
|
|
|
|
|
|
|
Notes Due in 2026
|
|
|
350,000
|
|
|
|
350,000
|
|
Unamortized debt issuance costs
|
|
|
(3,257
|
)
|
|
|
(3,709
|
)
|
Total 6.00% Senior Notes Due in 2026
|
|
|
346,743
|
|
|
|
346,291
|
|
5.875% Senior Notes:
|
|
|
|
|
|
|
|
|
Notes Due in 2024
|
|
|
225,293
|
|
|
|
242,500
|
|
Unamortized debt issuance costs
|
|
|
(1,526
|
)
|
|
|
(2,000
|
)
|
Total 5.875% Senior Notes Due in 2024
|
|
|
223,767
|
|
|
|
240,500
|
|
5.125% Senior Notes:
|
|
|
|
|
|
|
|
|
Notes Due in 2023
|
|
|
259,275
|
|
|
|
281,783
|
|
Unamortized debt issuance costs
|
|
|
(1,388
|
)
|
|
|
(2,033
|
)
|
Total 5.125% Senior Notes Due in 2023
|
|
|
257,887
|
|
|
|
279,750
|
|
5.875% Senior Notes:
|
|
|
|
|
|
|
|
|
Notes Due in 2022
|
|
|
—
|
|
|
|
193,958
|
|
Unamortized debt issuance costs
|
|
|
—
|
|
|
|
(710
|
)
|
Total 5.875% Senior Notes Due in 2022
|
|
|
—
|
|
|
|
193,248
|
|
Non-Recourse Debt
|
|
|
317,671
|
|
|
|
344,614
|
|
Unamortized debt issuance costs on non-recourse debt
|
|
|
(4,624
|
)
|
|
|
(5,237
|
)
|
Unamortized discount on non-recourse debt
|
|
|
—
|
|
|
|
(25
|
)
|
Total Non-Recourse Debt
|
|
|
313,047
|
|
|
|
339,352
|
|
Finance Lease Liabilities
|
|
|
4,460
|
|
|
|
5,029
|
|
Other debt
|
|
|
41,660
|
|
|
|
42,413
|
|
Total debt
|
|
|
2,955,623
|
|
|
|
2,915,272
|
|
Current portion of finance lease liabilities, long-term debt and
non-recourse debt
|
|
|
(27,010
|
)
|
|
|
(26,180
|
)
|
Finance Lease Liabilities, long-term portion
|
|
|
(2,147
|
)
|
|
|
(2,988
|
)
|
Non-Recourse Debt, long-term portion
|
|
|
(297,456
|
)
|
|
|
(324,223
|
)
|
Long-Term Debt
|
|
$
|
2,629,010
|
|
|
$
|
2,561,881
|
|
Amended Credit Agreement
On June 12, 2019, GEO entered into Amendment No. 2 to Third Amended and Restated Credit Agreement (the "Credit Agreement") by and among the refinancing lenders party thereto, the other lenders party thereto, GEO and GEO Corrections Holdings, Inc. and the administrative agent. Under the amendment, the maturity date of the revolver component of the Credit Agreement was extended to May 17, 2024. The borrowing capacity under the amended revolver remains at $900.0 million, and its pricing remains unchanged currently bearing interest at LIBOR plus 2.25%. As a result of the transaction, the Company incurred a loss on extinguishment of debt of $1.2 million during 2019 related to certain unamortized deferred loan costs. Additionally, loan costs of $4.7 million were incurred and capitalized in connection with the transaction.
19
Table of Contents
The Credit Agreement evidences a credit facility (the "Credit Facility") consisting of a $764.0 million term loan bearing interest at LIBOR plus 2.00% (with a LIBOR floor of 0.75%), and a $900.0 million revolver initially bearing interest at LIBOR plus 2.25% (with no LIBOR floor) together with AUD275 million, or $198.3 million, based on exchange rates as of September 30, 2021, available solely for the issuance of financial letters of credit and performance letters of credit, in each case denominated in Australian Dollars under the Australian Dollar Letter of Credit Facility (the "Australian LC Facility"). As of September 30, 2021, there were no letters of credit issued under the Australian LC Facility. Amounts to be borrowed by GEO under the Credit Agreement are subject to the satisfaction of customary conditions to borrowing. The term loan component is scheduled to mature on March 23, 2024. The revolving credit commitment component is scheduled to mature on May 17, 2024. The Credit Agreement also has an accordion feature of $450.0 million, subject to lender demand and prevailing market conditions and satisfying the relevant borrowing conditions.
The Credit Agreement contains certain customary representations and warranties, and certain customary covenants that restrict GEO’s ability to, among other things (i) create, incur or assume any indebtedness, (ii) create, incur, assume or permit liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) make certain restricted payments, (vi) issue, sell or otherwise dispose of capital stock, (vii) engage in transactions with affiliates, (viii) allow the total leverage ratio to exceed 6.25 to 1.00, allow the senior secured leverage ratio to exceed 3.50 to 1.00, or allow the interest coverage ratio to be less than 3.00 to 1.00, (ix) cancel, forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value any senior notes, except as permitted, (x) alter the business GEO conducts, and (xi) materially impair GEO’s lenders’ security interests in the collateral for its loans.
Events of default under the Credit Agreement include, but are not limited to, (i) GEO’s failure to pay principal or interest when due, (ii) GEO’s material breach of any representation or warranty, (iii) covenant defaults, (iv) liquidation, reorganization or other relief relating to bankruptcy or insolvency, (v) cross default under certain other material indebtedness, (vi) unsatisfied final judgments over a specified threshold, (vii) certain material environmental liability claims asserted against GEO, and (viii) a change in control.
All of the obligations under the Credit Agreement are unconditionally guaranteed by certain domestic subsidiaries of GEO and the Credit Agreement and the related guarantees are secured by a perfected first-priority pledge of substantially all of GEO’s present and future tangible and intangible domestic assets and all present and future tangible and intangible domestic assets of each guarantor, including but not limited to a first-priority pledge of all of the outstanding capital stock owned by GEO and each guarantor in their domestic subsidiaries.
GEO Australasia Holdings Pty Ltd, GEO Australasia Finance Holdings Pty Ltd as trustee for the GEO Australasia Finance Holding Trust, and together with GEO Australasia Holdings, collectively (the “Australian Borrowers") are wholly owned foreign subsidiaries of GEO. GEO has designated each of the Australian Borrowers as restricted subsidiaries under the Credit Agreement. However, the Australian Borrowers are not obligated to pay or perform any obligations under the Credit Agreement other than their own obligations as Australian Borrowers under the Credit Agreement. The Australian Borrowers do not pledge any of their assets to secure any obligations under the Credit Agreement.
On August 18, 2016, the Company executed a letter of offer providing for a bank guarantee line and bank guarantee/standby sub-facility in an aggregate amount of approximately AUD59 million, or $42.6 million, based on exchange rates in effect as of September 30, 2021 (collectively, the “Bank Guarantee Facility”). The Bank Guarantee Facility allows GEO to provide letters of credit to assure performance of certain obligations of its wholly owned subsidiary relating to its correctional facility in Ravenhall, located near Melbourne, Australia. The Bank Guarantee Facility is unsecured. The issuance of letters of credit under the Bank Guarantee Facility is subject to the satisfaction of the conditions precedent specified in the letter of offer. Letters of credit issued under the bank guarantee lines are due on demand and letters of credit issued under the bank guarantee/standby sub-facility cannot have a duration exceeding twelve months. The Bank Guarantee Facility may be terminated by the lender on 90 days written notice. As of September 30, 2021, there was AUD59 million in letters of credit issued under the Bank Guarantee Facility.
As of September 30, 2021, the Company had approximately $764.0 million in aggregate borrowings outstanding under its term loan, approximately $787.1 million in borrowings under its revolver, and approximately $89.4 million in letters of credit which left approximately $23.6 million in additional borrowing capacity under the Revolver. The weighted average interest rate on outstanding borrowings under the Credit Agreement as of September 30, 2021 was 2.70%.
6.50% Exchangeable Senior Notes due 2026
On February 24, 2021, the Company’s wholly-owned subsidiary, GEOCH, completed a private offering of $230 million aggregate principal amount of 6.50% exchangeable senior unsecured notes due 2026 which included the full exercise of the initial purchasers’ over-allotment option to purchase an additional $30 million aggregate principal amount of Convertible Notes. The Convertible Notes will mature on February 23, 2026, unless earlier repurchased or exchanged. The Convertible Notes bear interest at the rate of 6.50% per year plus an additional amount based on the dividends paid by the Company on its common stock, $0.01 par value per share. Interest on the notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 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 preceding November 25, 2025, but only under the following circumstances: (1) during the
20
Table of Contents
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 the Company’s 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 after November 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, GEO will pay or deliver, as the case may be, cash or a combination of cash and shares of the Company’s common stock. As of September 30, 2021, conditions had not been met to exchange the notes.
Upon conversion, the Company 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 the Company 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.
The Company used the net proceeds from this offering, including the exercise in full of the initial purchasers' over-allotment option to fund the redemption of the then outstanding amount of approximately $194.0 million of the Company’s 5.875% senior notes due 2022, to re-purchase additional senior notes and used remaining net proceeds to pay related transaction fees and expenses, and for general corporate purposes of the Company. As a result of the redemption, deferred loan costs in the amount of approximately $0.7 million were written off to loss on extinguishment of debt during the nine months ended September 30, 2021.
The notes were offered in the United States only to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act, and outside of the United States to non-U.S. persons in compliance with Regulation S under the Securities Act. Neither the notes nor any of the shares of the Company’s common stock issuable upon exchange of the notes, if any, have been, or will be, registered under the Securities Act and, unless so registered, may not be offered or sold in the United States, except pursuant to an applicable exemption from the registration requirements under the Securities Act.
The Company elected to early adopt ASU 2020-06, Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity, on January 1, 2021. The new standard simplifies the accounting for convertible debt by removing the requirements to separately present certain conversion features in equity. In addition, the new standard also simplifies the guidance in ASC 815-40, Derivatives and Hedging – Contract in Entity’s Own Equity, by removing certain criteria that must be satisfied to classify a contract as equity. Finally, the new standard revises the guidance on calculating earnings per share. The Company determined under the guidance of the new standard that the embedded conversion option does not require bifurcation and all proceeds were allocated to the Convertible Notes as a single instrument and is included in Long-Term Debt in the accompanying consolidated balance sheets. The costs incurred in the issuance, including the initial purchasers discount, totaling approximately $9.6 million, are classified as a cash outflow within the financing activities section in the consolidated statement of cash flows, and are also being amortized to expense over the term of the Convertible Notes. The Company did not have any convertible instruments outstanding during 2020.
Because the Company currently intends to settle conversions by paying cash up to the principal amount of the Convertible Notes, with any excess conversion value settled in shares of common stock, the Convertible Notes are being accounted for using the net settlement method (or treasury stock-type method) for the purposes of calculating diluted earnings per share. Using this method, the denominator will be affected when the average share price of the Company's common stock for a given period is greater than the conversion price of approximately $9.225 per share. There was no dilutive impact for the three and nine months ended September 30, 2021.
6.00% Senior Notes due 2026
Interest on the 6.00% Senior Notes accrues at the stated rate. The Company pays interest semi-annually in arrears on April 15 and October 15 of each year. On or after April 15, 2019, the Company may, at its option, redeem all or part of the 6.00% Senior Notes at the redemption prices set forth in the indenture governing the 6.00% Senior Notes. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors.
21
Table of Contents
5.875% Senior Notes due 2024
Interest on the 5.875% Senior Notes due 2024 accrues at the stated rate. The Company pays interest semi-annually in arrears on April 15 and October 15 of each year. On or after October 15, 2019, the Company may, at its option, redeem all or part of the 5.875% Senior Notes due 2024 at the redemption prices set forth in the indenture governing the 5.875% Senior Notes due 2024. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors.
5.125% Senior Notes due 2023
Interest on the 5.125% Senior Notes accrues at the stated rate. The Company pays interest semi-annually in arrears on April 1 and October 1 of each year. On or after April 1, 2018, the Company may, at its option, redeem all or part of the 5.125% Senior Notes at the redemption prices set forth in the indenture governing the 5.125% Senior Notes. The indenture contains certain covenants, including limitations and restrictions on the Company and its subsidiary guarantors.
5.875% Senior Notes due 2022
Interest on the 5.875% Senior Notes due 2022 accrued at the stated rate. The Company paid interest semi-annually in arrears on January 15 and July 15 of each year. On or after January 15, 2017, the Company had a right, at its option, to redeem all or part of the 5.875% Senior Notes due 2022 at the redemption prices set forth in the indenture governing the 5.875% Senior Notes due 2022. The Company redeemed the outstanding amount of 5.875% Senior Notes due 2022 in March 2021.
Debt Repurchases
On August 16, 2019, the Company's Board of Directors authorized the Company 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 the Company's term loan under its Amended Credit Agreement through cash purchases, in open market purchases, privately negotiated transactions, or otherwise, up to an aggregate maximum of $100.0 million, subject to certain limitations through December 31, 2020. During the first quarter of 2021, the 5.875% Senior Notes due 2022 were redeemed in connection with the offering of the Convertible Notes discussed above. On February 11, 2021, the 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 through December 31, 2022.
During the nine months ended September 30, 2021, the Company repurchased $22.5 million in aggregate principal amount of its 5.125% Senior Notes due 2023 at a weighted average price of 90.68% for a total cost of $20.4 million. Additionally, the Company repurchased $17.2 million in aggregate principal amount of its 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, the Company recognized a net gain on extinguishment of debt of $4.7 million, net of the write-off of associated unamortized deferred loan costs.
During the nine months ended September 30, 2020, the Company repurchased $11.0 million in aggregate principal amount of its 5.125% Senior Notes due 2023 at a weighted average price of 75.66% for a total cost of $8.3 million. Additionally, the Company repurchased $2.0 million in aggregate principal amount of its 5.875% Senior Notes due 2024 at a weighted average price of 76.75% for a total cost of $1.5 million. As a result of these repurchases, the Company recognized a net gain on extinguishment of debt of $3.0 million, net of the write-off of associated unamortized deferred loan costs.
Non-Recourse Debt
Northwest ICE Processing Center
The remaining balance of the original debt service requirement under the $54.4 million note payable ("2011 Revenue Bonds") to WEDFA is $8.1 million, all of which is classified as current in the accompanying consolidated balance sheet as of September 30, 2021. The payment of principal and interest on the 2011 Revenue Bonds issued by WEDFA was non-recourse to GEO. The 2011 Revenue Bonds matured in October 2021 and had a fixed coupon rate of 5.25%.
As of September 30, 2021, included in current restricted cash and cash equivalents is $8.6 million of funds held in trust for debt service and other reserves with respect to the above-mentioned note payable to WEDFA.
Australia - Ravenhall
In connection with a design and build project agreement with the State of Victoria, in September 2014, the Company 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 up to AUD791 million, or approximately $570.5 million, based on exchange rates as of September 30, 2021. In accordance with the terms of the contract, upon completion and commercial acceptance of the project in late 2017, the State of Victoria made a lump sum payment of AUD310 million, or approximately $223.6 million, based on exchange rates as of September 30, 2021. The term of the Construction Facility was through September 2020 and bore interest at a variable rate quoted by certain Australian banks plus 200 basis points. On May 22, 2019, the Company completed an offering of AUD461.6 million, or $332.9 million, based on exchange rates as of September 30, 2021, aggregate principal amount of non-recourse senior secured notes due 2042 (the "Non-Recourse Notes"). The amortizing Non-Recourse Notes were issued by Ravenhall Finance Co Pty
22
Table of Contents
Limited in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The Non-Recourse Notes were issued with a coupon and yield to maturity of 4.23% with a maturity date of March 31, 2042. The net proceeds from this offering were used to refinance the outstanding Construction Facility and to pay all related fees, costs and expenses associated with the transaction. As a result of the transaction, the Company incurred a $4.5 million loss on extinguishment of debt related to swap termination fees and unamortized deferred costs associated with the Construction Facility. Additionally, loan costs of approximately $7.5 million were incurred and capitalized in connection with the offering.
Other
In August 2019, the Company entered into two identical Notes in the aggregate amount of $44.3 million which are secured by loan agreements and mortgage and security agreements on certain real property and improvements. The terms of the Notes are through September 1, 2034 and bear interest at LIBOR plus 200 basis points and are payable in monthly installments plus interest. The Company has entered into interest rate swap agreements to fix the interest rate to 4.22%. Included in the balance at September 30, 2021 is $0.7 million of deferred loan costs incurred in the transaction. Refer to Note 9 - Derivative Financial Instruments for further information.
Guarantees
Australia
The Company has entered into a guarantee in connection with the operating performance of a facility in Australia. The obligation amounted to approximately AUD59 million, or $42.6 million, based on exchange rates as of September 30, 2021. The guarantee is secured by outstanding letters of credit under the Company's Revolver.
As of September 30, 2021, the Company also had seven other letters of credit outstanding under separate international facilities relating to performance guarantees of its Australian subsidiary totaling $9.6 million.
Except as discussed above, the Company does not have any off-balance sheet arrangements.
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Litigation, Claims and Assessments
On July 7, 2020, a purported shareholder class action lawsuit was filed against the Company, its then Chief Executive Officer, George C. Zoley (“Mr. Zoley”), and its Chief Financial Officer, Brian R. Evans (“Mr. Evans”), in the U.S. District Court for the Southern District of Florida. On October 1, 2020, the court entered an unopposed order appointing lead plaintiffs, approving the selection of counsel, dismissing the initial complaint, and setting a deadline for the filing of an amended complaint. On November 18, 2020, the lead plaintiffs filed a consolidated class action amended complaint. The amended complaint alleged that the Company and Messrs. Zoley and Evans––as well as J. David Donahue (“Mr. Donahue”), the Company’s former Senior Vice President and President of the U.S. Secure Services division, and Ann M. Schlarb (“Ms. Schlarb”), the Company’s Senior Vice President and President of the GEO Care division––made materially false and misleading statements and/or omissions related to GEO’s business––including quality of operations, corporate social responsibility, competitive strengths, pending litigation, business strategies, health and safety, sources of financing, dividend expectations, and COVID-19 procedures. The amended complaint was brought by lead plaintiffs James Michael DeLoach and Edward Oketola, individually and on behalf of a class consisting of all persons and entities––other than the defendants, the officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which the defendants have or had a controlling interest––who purchased or otherwise acquired the Company’s securities during the alleged class period from November 7, 2018 to August 5, 2020, inclusive. The amended complaint alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and alleged that Messrs. Zoley, Evans, and Donahue and Ms. Schlarb violated Section 20(a) of the Exchange Act. On December 18, 2020, the defendants filed a motion to dismiss the amended complaint. On September 23, 2021, the court granted the motion to dismiss in part, and denied it in part. The court dismissed all claims against Messrs. Evans and Donahue, and Ms. Schlarb. The court also dismissed all claims against GEO and Mr. Zoley other than claims related to GEO's disclosures about pending litigation, and directed plaintiffs to file an amended complaint in conformance with the court's order. On October 4, 2021, plaintiffs filed a second amended complaint. The second amended complaint alleges that GEO and Mr. Zoley violated Sections 10(b) and 20(a) of the Exchange Act by making materially false and misleading statements and/or omissions related to pending litigation, and seeks relief on behalf of a putative class consisting of all persons and entities––other than the defendants, the officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which the defendants have or had a controlling interest––who purchased or otherwise acquired the Company’s securities during the alleged class period from November 9, 2018 to August 5, 2020, inclusive. The amended complaint seeks damages, interest, attorneys’ fees, expert fees, other costs, and such other relief as the court may deem proper. On October 18, 2021, GEO and Mr. Zoley filed a motion to dismiss and/or to strike, arguing that the second amended
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complaint failed to comply with the court's prior dismissal order and contains allegations beyond the disclosures and time period permitted by the court. The motion to dismiss is not yet fully briefed, and remains pending.
On July 1, 2021, a putative shareholder derivative complaint was filed in Palm Beach County, Florida’s Circuit Court against the Company, its then Chief Executive Officer, Mr. Zoley, its Chief Financial Officer, Mr. Evans, Ms. Schlarb, its Senior Vice President and President of GEO Care, and Company directors Richard H. Glanton, Anne N. Foreman, Christopher C. Wheeler, Julie M. Wood, Guido van Hauwermeiren, Scott M. Kernan, Jose Gordo, and Duane Helkowski (collectively, “Defendants”). The complaint alleges breach of fiduciary duty and unjust enrichment claims against the individual Defendants relating to purported healthcare and quality of care deficiencies, an allegedly inadequate response to the COVID-19 pandemic, alleged forced labor by detainees, and alleged exposure to pending litigation, which purportedly led to damage to GEO. On September 28, 2021, Defendants filed a motion to stay, or alternatively motion to dismiss the complaint. The motion has not yet been heard, and remains pending.
As previously reported and described in the Company's periodic reports, including most recently in its Form 10-Q for the quarter ended June 30, 2021, former civil immigration detainees at the Aurora ICE Processing Center filed a class action lawsuit on October 22, 2014, against the Company in the U.S. District Court for the District of Colorado. The complaint alleges that the Company was in violation of the Colorado Minimum Wages of Workers Act and the Federal Trafficking Victims Protection Act (“TVPA”). The plaintiff class claims that the Company was unjustly enriched because of the level of payment the detainees received for work performed at the facility, even though the voluntary work program as well as the wage rates and standards associated with the program that are at issue in the case are authorized by the Federal government under guidelines approved by the United States Congress. On July 6, 2015, the court found that detainees were not employees under the Colorado Minimum Wage Order and dismissed this claim. In February 2017, the court granted the plaintiff-class’ motion for class certification on the TVPA and unjust enrichment claims. The plaintiff class seeks actual damages, compensatory damages, exemplary damages, punitive damages, restitution, attorneys’ fees and costs, and such other relief as the court may deem proper. In the time since the Colorado suit was initially filed, three similar lawsuits have been filed - two in Washington and one in California. The first of the two Washington lawsuits was filed on September 9, 2017 by immigration detainees against the Company in the U.S. District Court for the Western District of Washington. The second lawsuit was filed on September 20, 2017 by the State Attorney General against the Company in the Superior Court of the State of Washington for Pierce County, which the Company removed to the U.S. District Court for the Western District of Washington on October 9, 2017. In California, a class-action lawsuit was filed on December 19, 2017 by immigration detainees against the Company in the U.S. District Court Eastern Division of the Central District of California. All three lawsuits allege violations of the respective state’s minimum wage laws. However, the California lawsuit, like the Colorado suit, also includes claims that the Company violated the TVPA and California's equivalent state statute. The California court certified a nationwide class which would allow the plaintiffs to primarily seek injunctive relief or policy changes at a number of facilities if they are successful on the merits of their claims. On August 9, 2021, the California court conducted a hearing on Defendant’s Motion for Summary Judgment and Motion to Decertify Class, as well as Plaintiffs’ Motion for Partial Summary Judgment. The Motion to Decertify Class was granted. The Plaintiffs’ and Defendant’s Motion for Summary Judgment are pending. On July 2, 2019, the Company filed a Motion for Summary Judgment in the Washington Attorney General’s Tacoma lawsuit based on the Company’s position that its legal defenses prevent the case from proceeding to trial. The federal court in Washington denied the Company's Motion for Summary Judgment on August 6, 2019. However, on August 20, 2019, the DOJ filed a Statement of Interest, which asked the Washington court to revisit its prior denial of the Company's intergovernmental immunity defense in the case. While the Washington court ultimately elected not to dismiss the case at the time, its order importantly declared that the Company's intergovernmental immunity defense was legally viable, to be ultimately determined at trial. After putting the lawsuits on “standby” for most of 2020 due to the COVID-19 pandemic, the trial court entered an order setting both suits for an estimated three-week trial beginning June 1, 2021. The court ordered a remote trial, but with the possibility of in-person proceedings. The order notes the Company’s exception to the remote trial setting. The Company filed a motion for reconsideration of the judge’s order setting a remote trial on April 8, 2021, requesting that the trial date be moved from June 1, 2021 to the earliest possible date after July 1, 2021, when the State of Washington plans to allow in-person trials to resume. On April 9, 2021, the Washington court denied the motion for reconsideration for an in-person trial, ruling that a “hybrid” trial, with some parts being conducted in-person with COVID-19 precautions, would begin on June 1, 2021. On June 1, 2021, the remote Zoom trial began. On June 17, 2021, the trial judge declared a mistrial when the jury was unable to reach a unanimous verdict. The in-person jury re-trial began on October 12, 2021. Refer to Note 15 – Subsequent Events for further information on the results of the jury re-trial. The Company intends to take all necessary steps to vigorously defend itself and has consistently refuted the allegations and claims in these lawsuits.
On December 30, 2019, the Company filed a lawsuit for declaratory and injunctive relief challenging California’s newly enacted law - Assembly Bill 32 (AB-32) - which bars the federal government from engaging the Company or any other government contractors to provide detention services for illegal immigrants. The Company’s claims, as described in the lawsuit, are grounded in authoritative legal doctrine that under the Constitution’s Supremacy Clause, the federal government is free from regulation by any state. By prohibiting federal detention facilities in California, the suit argues AB-32 substantially interferes with the ability of USMS and ICE to carry out detention responsibilities for the federal government. Secondly, because AB-32 creates exceptions to the State of California when using the Company or any government contractors (to alleviate overcrowding), California’s statute unlawfully discriminates against the federal government. On December 31, 2019, GEO filed its motion for a preliminary injunction restraining California’s Governor and Attorney General from enforcing AB-32 against the Company’s detention facilities on behalf of USMS and ICE. On January 24, 2020, the United States filed a lawsuit challenging AB-32. The court heard motions for preliminary injunction from the Company and the United States on July 16, 2020. The court ordered the parties to submit supplemental briefing and indicated it would render an opinion sometime after the filing deadline of August 18, 2020. On July 20, 2020 the court consolidated
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both lawsuits. On October 8, 2020, the court issued an order granting, in part, and denying in part, the Company and the Untied State’s motions and California’s motion to dismiss. Among other findings, the court (1) dismissed the Company’s intergovernmental immunity claims as well as the United States’ preemption claims as applied to ICE facilities; (2) found that the Company and the United States were likely to succeed on the preemption claims as applied to U.S. Marshals’ facilities and enjoined enforcing AB-32 against those facilities; and (3) refused to enjoin California from enforcing AB-32 against ICE contracts with the Company and the United States. The Company and the United States have appealed to the Ninth Circuit Court of Appeals. Oral argument was held on June 7, 2021. On October 5, 2021, the Ninth Circuit Court of Appeals reversed the lower court’s decision, holding that AB-32 conflicted with federal law and could not stand.
On April 29, 2021, the Company filed a lawsuit for declaratory and injunctive relief challenging the State of Washington’s newly enacted law – House Bill 1090 (EHB 1090) – that purports to prohibit the United States from using detention facilities operated by private contractors to house detainees in the custody of U.S. Immigration and Customs Enforcement (ICE).
The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, the results of these claims or proceedings cannot be predicted with certainty, and an unfavorable resolution of one or more of these claims or proceedings could have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company's accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. The Company does not accrue for anticipated legal fees and costs but expenses those items as incurred.
The nature of the Company's business also exposes it to various other third-party legal claims or litigation against the Company, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, 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, indemnification claims by its customers and other third parties, contractual claims and claims for personal injury or other damages resulting from contact with the Company's facilities, programs, electronic monitoring products, personnel or prisoners, including damages arising from a prisoner's escape or from a disturbance or riot at a facility.
Other Assessment
A state non-income tax audit completed in 2016 included tax periods for which the state tax authority had previously processed a substantial tax refund. At the completion of the audit fieldwork, the Company received a notice of audit findings disallowing deductions that were previously claimed by the Company, approved by the state tax authority and served as the basis for the approved refund claim. In early January 2017, the Company received a formal Notice of Assessment of Taxes and Demand for Payment from the taxing authority disallowing the deductions. The total tax, penalty and interest related to the assessment is approximately $19.6 million. The Company is appealing an administrative ruling and disagrees with the assessment and intends to take all necessary steps to vigorously defend its position. The Company has established a reserve based on its estimate of the most probable loss based on the facts and circumstances known to date and the advice of outside counsel in connection with this matter.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allowed employers to defer the deposit and payment of the employer's share of Social Security taxes. The deferral applied to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020 and ending on December 31, 2020. The deferred amounts are due to be paid in two equal installments no later than December 31, 2021 and December 31, 2022. The Company paid the first installment in September 2021. The balance of the deferred payroll taxes is approximately $20.0 million as of September 30, 2021.
Commitments
The Company currently has contractual commitments for a number of projects using Company financing. The Company’s management estimates that the cost of these existing active capital projects will be approximately $16.3 million of which $4.8 million was spent through the first nine months of 2021. The Company estimates the remaining capital requirements related to these capital projects will be $11.5 million which will be spent through the remainder of 2021.
CEO Succession Plan
On June 1, 2021, the Company announced that its Board has determined that it is in the best interests of the Company to implement a succession plan for the Chief Executive Officer position given that the Company’s Founder, Chairman and Chief Executive Officer, George C. Zoley, is 71 years old and has served with the Company for approximately forty years. The primary objectives of the Board in
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initiating a succession plan were to secure Mr. Zoley’s services on a long-term basis to ensure a proper senior management transition, and to retain a new Chief Executive Officer that would succeed Mr. Zoley in that role. This change will allow Mr. Zoley the ability to focus on planning of the Company’s future.
On May 27, 2021, the Board terminated without cause Mr. Zoley’s existing employment agreement, effective as of June 30, 2021, and entered into a new five-year employment agreement with Mr. Zoley as Executive Chairman, in a modified role and at reduced compensation effective July 1, 2021. The new employment agreement with Mr. Zoley will secure Mr. Zoley’s continuous employment, enabling the Company to continue to benefit from Mr. Zoley’s extensive knowledge and experience, and providing for an orderly transition of senior management.
In connection with Mr. Zoley’s termination, the Company and Mr. Zoley entered into a Separation and General Release Agreement as of May 27, 2021 (the “Separation Agreement”). Pursuant to the terms of the Separation Agreement, Mr. Zoley will continue to serve as Chief Executive Officer of the Company through June 30, 2021 (the “Separation Date”) and will receive all accrued wages through the Separation Date. Additionally, pursuant to the terms of Mr. Zoley’s prior employment agreement, Mr. Zoley will receive payments in the amount of $5,851,555, less any applicable taxes and withholdings, which represents the sum of two (2) years of Mr. Zoley’s base annualized salary and two (2) times Mr. Zoley’s current target bonus under GEO’s Senior Management Performance Award Plan. The Company shall also vest any unvested stock options and restricted stock as of the Separation Date; provided that any restricted stock subject to performance-based vesting at the Separation Date shall vest at such time as the performance goals are met if Mr. Zoley is still providing services to GEO under the Executive Chairman Agreement described below. Mr. Zoley will also be paid all accrued dividends on his unvested shares of restricted stock. Lastly, Mr. Zoley is entitled to receive certain fringe benefits for a ten (10) year period as set forth in the Separation Agreement, including payment of health insurance premiums under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) for eighteen (18) months and reimbursement of the cost of health insurance coverage for eight and a half (81⁄2) years following the first eighteen (18) months, life insurance, the use of an executive automobile, and personal use of the Company leased aircraft for thirty (30) hours per year. In the event of Mr. Zoley’s death within such ten (10) year period, the Company will continue to provide the Fringe Benefits to Mr. Zoley’s covered dependents, and, if applicable to Mr. Zoley’s estate.
In order to transition the role of Chief Executive Officer to a successor in an orderly manner, the Board determined it was in the best interests of GEO to create a new officer position for the role of Executive Chairman and appoint Mr. Zoley as Executive Chairman, effective as of July 1, 2021. As a result, the Company and Mr. Zoley entered into on May 27, 2021 an Executive Chairman Employment Agreement effective as of July 1, 2021 (the “Executive Chairman Agreement”). Pursuant to the terms of the Executive Chairman Agreement, Mr. Zoley will serve as Executive Chairman assisting the new Chief Executive Officer in his transition, among other duties and responsibilities, and report directly to the Board of Directors for a term of five years ending on June 30, 2026 and subject to automatic renewals for one-year periods unless either the Company or Mr. Zoley gives written notice at least 1 year prior to the expiration of the term. Under the terms of the Executive Chairman Agreement, Mr. Zoley will be paid an annual base salary of $1.0 million and will be eligible to receive target annual performance awards equal to 100% of base salary in accordance with the terms of any plan governing senior management performance awards. Mr. Zoley will also be entitled to receive an annual equity incentive award with a grant date fair value equal to 100% of base salary and subject to a time-based vesting schedule of one (1) year from the date of grant. Additionally, the Company will credit Mr. Zoley’s account balance under the Amended and Restated Executive Retirement Agreement on an annual basis in an amount equal to 100% of his base salary. Lastly, Mr. Zoley is entitled to participate in all benefits and perquisites available to executive officers of GEO.
The Executive Chairman Agreement provides that upon the termination of the Executive Chairman Agreement by the Company without cause, by Mr. Zoley for good reason or upon Mr. Zoley’s death or disability, Mr. Zoley will be entitled to receive a termination payment equal to two times the sum of his annual base salary and the target bonus. In addition, the unvested portion of any equity award will fully vest and the Company will provide Mr. Zoley and any of his covered dependents with the executive benefits beginning on the date that they are no longer entitled to the Fringe Benefits under the Separation Agreement until the ten (10) year anniversary of the date of termination of the Executive Chairman Agreement.
Upon the termination of the Executive Chairman Agreement by GEO for cause or by Mr. Zoley without good reason, Mr. Zoley will be entitled to only the amount of compensation that is due through the effective date of the termination, including the retirement benefit due to him under his executive retirement agreement. The Executive Chairman Agreement contains restrictive covenants, including a non-competition covenant that runs through the three (3) year period following the termination of the executive’s employment, and customary confidentiality and work product provisions.
Appointment of Jose Gordo as Successor Chief Executive Officer
Jose Gordo, 48, has over 20 years of experience in business management, private equity, corporate finance and business law. Since June 2017, Mr. Gordo has served as the Managing Partner of a general partnership that invests in and actively oversees small and medium-sized privately held companies, with a focus on the healthcare, consumer products and technology industries. From 2013 to early 2017, Mr. Gordo served as the Chief Financial Officer of magicJack Vocaltec Ltd., a publicly-traded company in the telecommunications industry. Prior to that position, Mr. Gordo served as a Managing Director at The Comvest Group, a Florida-based
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private equity firm. Mr. Gordo was also previously a partner at the national law firm of Akerman LLP, where he specialized in corporate law matters, advising public and private companies and private equity firms on mergers and acquisitions and capital markets transactions. He received a J.D. degree from Georgetown University Law Center and a B.A. degree from the University of Miami.
In connection with his appointment, Mr. Gordo and the Company entered into an Executive Employment Agreement (the “Employment Agreement”) on May 27, 2021 to provide that Mr. Gordo will be employed by the Company for a three-year term beginning July 1, 2021. Unless the Employment Agreement is sooner terminated, or not renewed, it will automatically extend upon the end of its initial term for a rolling three-year term. Pursuant to the terms of the Employment Agreement, Mr. Gordo will serve as Chief Executive Officer and report directly to the Executive Chairman. Either Mr. Gordo or the Company may terminate Mr. Gordo’s employment under the Employment Agreement for any reason upon not less than thirty (30) days written notice.
Under the terms of the Employment Agreement, Mr. Gordo will be paid an annual base salary of $900,000, subject to the review and potential increase within the sole discretion of the Compensation Committee. Mr. Gordo will also be entitled to receive a target annual performance award of 85% of Mr. Gordo’s base salary and will also be entitled to participate in the Company’s stock incentive plan and upon the effective date, the Company will grant Mr. Gordo an award of 50,000 performance-shares that will vest ratably over a three-year period.
The Employment Agreement provides that upon the termination of the agreement by Mr. Gordo for good reason, by the Company without cause or upon the death or disability of Mr. Gordo, he will be entitled to receive a termination payment equal to two (2) times the sum of his annual base salary plus target bonus for the fiscal year in which his employment is terminated or, if greater, the target bonus for the fiscal year immediately prior to such termination. The Company will also continue to provide Mr. Gordo and any covered dependents with the Executive Benefits as defined in the Employment Agreement for a period of five (5) years after the date of termination. In the event of Mr. Gordo’s death within such five (5) year period, the Company will continue to provide the Executive Benefits to Mr. Gordo’s covered dependents, and, if applicable to Mr. Gordo’s estate. In addition, the Employment Agreement provides that upon such termination, GEO will transfer all of its interest in any automobile used by the executive pursuant to its employee automobile policy and pay the balance of any outstanding loans or leases on such automobile so that the executive owns the automobile outright. In the event such automobile is leased, the Employment Agreement provides that GEO will pay the residual cost of the lease. In the event the Company does not pay the termination payment by the due date, then any unpaid amount shall bear interest at the rate of eighteen percent (18%) per annum, compounded monthly, until paid. Lastly, all of the outstanding and unvested stock options and restricted stock granted to Mr. Gordo prior to termination will fully vest immediately upon termination; provided, however that any restricted stock that is subject to performance-based vesting shall only vest when and to the extent the Compensation Committee certifies that the performance goals are actually met.
Upon the termination of the Employment Agreement by GEO for cause or by Mr. Gordo without good reason, Mr. Gordo will be entitled to only the amount of compensation that is due through the effective date of the termination. The Employment Agreement includes a non-competition covenant that runs through the three-year period following the termination of the executive’s employment, and customary confidentiality and work product provisions.
Amended and Restated Executive Retirement Agreement
The Company and Mr. Zoley entered into on May 27, 2021, and effective as of July 1, 2021, an Amended and Restated Executive Retirement Agreement (the “Amended and Restated Executive Retirement Agreement”). Pursuant to the terms of the Amended and Restated Executive Retirement Agreement, upon the date that Mr. Zoley ceases to provide services to the Company, the Company will pay to Mr. Zoley an amount equal to $3,600,000 which shall be paid in cash (the “Grandfathered Payment”). The 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 Mr. Zoley is still providing services to the Company pursuant to the Executive Chairman Agreement, the Company 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 Mr. Zoley ceases to provide services to the Company, the Company will pay Mr. Zoley in one lump sum cash payment each of the 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.
Asset Divestiture
On July 1, 2021, the Company completed a divestiture of its youth division, which was organized as a separate independent not-for-profit 501(c)(3) organization (“Abraxas”). The divestiture included the sale of certain non-real estate assets in the Company’s Youth division for total consideration of $10 million which was in the form of an unsecured term note receivable (“Term Note”) and is included in Other Non-Current Assets in the accompanying consolidated balance sheets. The Term Note matures July 1, 2026 and bears annual interest at 5%. Principal payments of $250,000 are due annually each year starting July 1, 2022. After June 30, 2023, an additional payment will be due equal to 50% of the excess cash flow (as defined in the Term Note) in excess of $1,000,000. The remaining balance is due on the maturity date. Additionally, the Company has provided a $4 million working capital line of credit (“Grid Note”) which matures on December 31, 2022 and bears daily interest at prime minus 1%. Each loan under the Grid Note is payable upon the earlier of (i) on demand, (ii) thirty days from the funding date, or (iii) the maturity date. The sale resulted in the assignment of the Company’s youth services management contracts to Abraxas. The Company retained the ownership of the youth services real estate assets and has entered into lease agreements with Abraxas for the six company-owned youth facilities. As a result of the transaction, the Company recorded a loss on asset divestiture of approximately $5 million during the nine months ended September 30, 2021. On October 15, 2021, GEO signed a letter agreement with Abraxas and another unrelated not-for-profit entity for the settlement of the Term Note and termination of the Grid Note. In accordance with the letter agreement, Abraxas will become affiliated with the other unrelated not-for-profit entity and will pay GEO $8 million in full settlement of the Term Note, upon such affiliation, but no later than December 31, 2021.
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Idle Facilities
As of September 30, 2021, the Company was marketing seven of its idle facilities to potential customers. The carrying values of these idle facilities are included in Property and Equipment, Net and Assets for Sale in the accompanying consolidated balance sheets. The following table summarizes each of the idled facilities and their respective carrying values, excluding equipment and other assets that can be easily transferred for use at other facilities. There was no indication of impairment related to the Company's idle facilities as of September 30, 2021.
|
|
|
|
Design
|
|
|
|
|
Net Carrying Value
|
|
Facility
|
|
Segment
|
|
Capacity
|
|
|
Date Idled
|
|
September 30, 2021
|
|
Great Plains Correctional Facility
|
|
Secure Services
|
|
|
1,940
|
|
|
2021
|
|
$
|
69,097
|
|
D. Ray James Correctional Facility
|
|
Secure Services
|
|
|
1,900
|
|
|
2021
|
|
|
53,212
|
|
Rivers Correctional Facility
|
|
Secure Services
|
|
|
1,450
|
|
|
2021
|
|
|
40,081
|
|
McFarland Female Community Reentry Facility
|
|
Secure Services
|
|
|
300
|
|
|
2020
|
|
|
11,665
|
|
Perry County Correctional Facility
|
|
Secure Services
|
|
|
690
|
|
|
2015
|
|
|
11,272
|
|
Cheyenne Mountain Recovery Center [1]
|
|
GEO Care
|
|
|
750
|
|
|
2020
|
|
|
17,298
|
|
Coleman Hall
|
|
GEO Care
|
|
|
350
|
|
|
2017
|
|
|
8,238
|
|
Total
|
|
|
|
|
7,380
|
|
|
|
|
$
|
210,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] Effective October 15, 2021, the Company entered into a five-year contract with ICE for its Aurora ICE Processing Center to provide immigration detention, transportation, security and medical services. In connection with the contract, ICE also has an option to exercise a contract with Cheyenne Mountain Recover Center for any excess capacity needs.
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12. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Operating and Reporting Segments
The Company conducts its business through four reportable business segments: the U.S. Secure Services segment; the GEO Care segment; the International Services segment; and the Facility Construction & Design segment. The Company's segment revenues from external customers and a measure of segment profit are as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Secure Services
|
|
$
|
369,609
|
|
|
$
|
392,384
|
|
|
$
|
1,125,014
|
|
|
$
|
1,180,211
|
|
GEO Care
|
|
|
135,315
|
|
|
|
134,940
|
|
|
|
412,702
|
|
|
|
417,643
|
|
International Services
|
|
|
52,350
|
|
|
|
48,489
|
|
|
|
160,755
|
|
|
|
158,593
|
|
Facility Construction & Design
|
|
|
3
|
|
|
|
3,323
|
|
|
|
602
|
|
|
|
15,535
|
|
Total revenues
|
|
$
|
557,277
|
|
|
$
|
579,136
|
|
|
$
|
1,699,073
|
|
|
$
|
1,771,982
|
|
Operating income from segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Secure Services
|
|
$
|
72,054
|
|
|
$
|
78,347
|
|
|
$
|
219,471
|
|
|
$
|
227,151
|
|
GEO Care
|
|
|
48,317
|
|
|
|
28,617
|
|
|
|
129,124
|
|
|
|
89,166
|
|
International Services
|
|
|
4,123
|
|
|
|
4,400
|
|
|
|
17,014
|
|
|
|
15,316
|
|
Facility Construction & Design
|
|
|
—
|
|
|
|
13
|
|
|
|
98
|
|
|
|
48
|
|
Operating income from segments
|
|
$
|
124,494
|
|
|
$
|
111,377
|
|
|
$
|
365,707
|
|
|
$
|
331,681
|
|
General and Administrative Expenses
|
|
|
(50,475
|
)
|
|
|
(46,644
|
)
|
|
$
|
(153,642
|
)
|
|
|
(145,969
|
)
|
Total Operating Income
|
|
$
|
74,019
|
|
|
$
|
64,733
|
|
|
$
|
212,065
|
|
|
$
|
185,712
|
|
Pre-Tax Income Reconciliation of Segments
The following is a reconciliation of the Company’s total operating income from its reportable segments to the Company’s income before income taxes and equity in earnings of affiliates (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
Operating income from segments
|
|
$
|
124,494
|
|
|
$
|
111,377
|
|
|
$
|
365,707
|
|
|
$
|
331,681
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(50,475
|
)
|
|
|
(46,644
|
)
|
|
|
(153,642
|
)
|
|
|
(145,969
|
)
|
Net interest expense
|
|
|
(26,535
|
)
|
|
|
(24,389
|
)
|
|
|
(78,245
|
)
|
|
|
(78,493
|
)
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
1,472
|
|
|
|
4,693
|
|
|
|
3,035
|
|
Loss on asset divestiture
|
|
|
(5,031
|
)
|
|
|
-
|
|
|
|
(5,031
|
)
|
|
|
-
|
|
(Loss) gain on disposition of real estate
|
|
|
(1,057
|
)
|
|
|
(271
|
)
|
|
|
9,322
|
|
|
|
(1,151
|
)
|
Income before income taxes and equity in earnings of
affiliates
|
|
$
|
41,396
|
|
|
$
|
41,545
|
|
|
$
|
142,804
|
|
|
$
|
109,103
|
|
Equity in Earnings of Affiliates
Equity in earnings of affiliates includes the Company’s 50% owned joint ventures in South African Custodial Services Pty. Limited (“SACS”), located in South Africa, and GEOAmey PECS Limited (“GEOAmey”), located in the United Kingdom. The Company's investments in these entities are accounted for under the equity method of accounting. The Company’s investments in these entities are presented as a component of Other Non-Current Assets in the accompanying consolidated balance sheets.
The Company has recorded $2.7 million in earnings, net of tax, for SACS operations during the nine months ended September 30, 2021, and $2.8 million in earnings, net of tax, for SACS operations during the nine months ended September 30, 2020, which are included in equity in earnings of affiliates, net of income tax provision in the accompanying consolidated statements of operations. As of September 30, 2021, and December 31, 2020, the Company’s investment in SACS was $10.7 million and $11.1 million, respectively, and represents its share of cumulative reported earnings.
The Company has recorded $2.9 million in earnings, net of tax, for GEOAmey's operations during the nine months ended September 30, 2021, and $4.4 million in earnings, net of tax, for GEOAmey's operations during the nine months ended September 30, 2020, which are included in equity in earnings of affiliates, net of income tax provision in the accompanying consolidated statements of
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operations. As of September 30, 2021, and December 31, 2020, the Company’s investment in GEOAmey was $9.4 million and $11.8 million, respectively, and represents its share of cumulative reported earnings.
13. BENEFIT PLANS
The following table summarizes key information related to the Company’s pension plans and retirement agreements (in thousands):
|
|
Nine Months Ended
September 30,
2021
|
|
|
Year Ended
December 31,
2020
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of period
|
|
$
|
33,530
|
|
|
$
|
37,551
|
|
Service cost
|
|
|
1,053
|
|
|
|
1,254
|
|
Interest cost
|
|
|
956
|
|
|
|
1,306
|
|
Actuarial gain
|
|
|
—
|
|
|
|
3,180
|
|
Other reclassification [1]
|
|
|
—
|
|
|
|
(8,925
|
)
|
Benefits paid
|
|
|
(649
|
)
|
|
|
(836
|
)
|
Projected benefit obligation, end of period
|
|
$
|
34,890
|
|
|
$
|
33,530
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Plan assets at fair value, beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Company contributions
|
|
|
649
|
|
|
|
836
|
|
Benefits paid
|
|
|
(649
|
)
|
|
|
(836
|
)
|
Plan assets at fair value, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Unfunded Status of the Plan
|
|
$
|
34,890
|
|
|
$
|
33,530
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
351
|
|
|
$
|
313
|
|
|
$
|
1,053
|
|
|
$
|
940
|
|
Interest cost
|
|
|
319
|
|
|
|
326
|
|
|
|
956
|
|
|
|
979
|
|
Net loss
|
|
|
197
|
|
|
|
135
|
|
|
|
591
|
|
|
|
405
|
|
Net periodic pension cost
|
|
$
|
867
|
|
|
$
|
774
|
|
|
$
|
2,600
|
|
|
$
|
2,324
|
|
[1] The Company has a non-qualified deferred compensation agreement with its former CEO. The agreement provided for a lump sum cash payment upon retirement, no sooner than age 55. As of September 30, 2021, the former CEO had reached age 55 and was eligible to receive the payment upon retirement.
On February 26, 2020, the Company and its former CEO entered into an amended and restated executive retirement agreement that amends the former CEO’s executive retirement agreement.
The amended and restated executive retirement agreement provided that upon the former CEO’s retirement from the Company, the Company would pay a lump sum amount initially equal to $8,925,065 (determined as of February 26, 2020) which was to be paid in the form of a fixed number of shares of the Company’s common stock. The Grandfathered Payment would be delayed for six months and a day following the effective date of the former CEO’s termination of employment in compliance with Section 409A of the Code.
On the Effective Date, an amount equal to the Grandfathered Payment was invested in the Company’s common stock. The number of the Company’s shares of common stock as of the Effective Date was equal to the Grandfathered Payment divided by the closing price of the Company’s common stock on the Effective Date (rounded up to the nearest whole number of shares), which equaled 553,665 shares of the Company’s common stock. Additional shares of the Company’s common stock were credited with a value equal to any dividends declared and paid on the Company’s shares of common stock, calculated by reference to the closing price of the Company’s common stock on the payment date for such dividends (rounded up to the nearest whole number of shares).
The Company had 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 the Company’s creditors in the event of the Company’s insolvency.
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The Company repurchased shares of its outstanding common stock under its stock buyback program and contributed such shares to the trusts in order to fund the retirement benefit under the amended and restated executive retirement agreement. In accordance with Accounting Standards Codification (“ASC”) 710 – Compensation-General, the shares of common stock held in the rabbi trusts were classified as treasury stock. In addition, the amended and restated executive retirement agreement qualified for equity accounting under ASC 710 and therefore, the fair value of the Grandfathered Payment had been reclassified to stockholders’ equity.
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The Company and its former CEO entered into on May 27, 2021, and effective as of July 1, 2021, an Amended and Restated Executive Retirement Agreement which replaced the February 26, 2020 agreement discussed above. Pursuant to the terms of the Amended and Restated Executive Retirement Agreement, upon the date that the former CEO ceases to provide services to the Company, the Company will pay to the former CEO an amount equal to $3,600,000 which shall be paid in cash. As the former CEO’s retirement payment will no longer be settled with a fixed number of shares of GEO’s common stock, $3,600,000 has been reclassed from equity to other non-current liabilities. Refer to Note 11 – Commitments, Contingencies and Other Matters for further information.
The long-term portion of the pension liability as of September 30, 2021 and December 31, 2020 was $34.6 million and $33.2 million, respectively, and is included in Other Non-Current Liabilities in the accompanying consolidated balance sheets.
14. RECENT ACCOUNTING PRONOUNCEMENTS
The Company implemented the following accounting standards during the nine months ended September 30, 2021:
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options”. The guidance in this update simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU also simplify the guidance in ASC 815-40, “Derivatives and Hedging: Contracts in an Entity’s Own Equity” by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or shares. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company elected to early adopt this standard effective January 1, 2021. The adoption of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.
In March 2020, the FASB issued 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 through December 31, 2022, is applicable to all contracts and hedging relationships that reference the London Interbank Offered Rate or any other reference rate expected to be discontinued. The Company is currently evaluating the impact of reference rate reform and the potential application of this guidance.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715.20)" as a part of its disclosure framework project. The amendments in this update remove, modify and add certain disclosures primarily related to amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, explanations for reasons for significant gains and losses related to changes in the benefit obligation for the period, and projected and accumulated benefit obligations. The new standard became effective for the Company on January 1, 2021. The adoption of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or are not expected to, have a material effect on the Company's results of operations or financial position.
15. SUBSEQUENT EVENTS
Litigation
In October 2021, an unfavorable jury verdict and combined $23.2 million judgments were entered against the Company in the retrial of two cases, State of Washington v. GEO Group and Nwauzor et. al. v. GEO Group (the “lawsuits”), in the U.S. District Court for the Western District of Washington. The original trial of the lawsuits resulted in a mistrial in June 2021 as that jury was unable to reach a unanimous verdict. GEO will address the need for a bond for the combined judgments and will request a stay of enforcement of the verdict and judgments while its appeal to the U.S. Court of Appeals for the Ninth Circuit is pending.
GEO strongly disagrees with the verdict and judgments in the retrial of the lawsuits. GEO intends to raise several issues on appeal to the U.S. Court of Appeals for the Ninth Circuit, including the applicability of the state of Washington’s Minimum Wage Act to detainees who participate in the federally mandated Voluntary Work Program at the Northwest ICE Processing Center (the “Center”), and the affirmative defenses that GEO believes were wrongly dismissed in these cases. GEO looks forward to having those and other related issues heard on appeal based on GEO’s belief that the cases were wrongly decided. GEO intends to take all necessary steps to vigorously defend itself.
The lawsuits were filed by the State of Washington Attorney General and a private class of detainee plaintiffs. The plaintiffs claimed that Washington State minimum wage laws should be enforced with respect to detainees who volunteer to participate in a Voluntary Work Program administered by GEO at the Center as required by the U.S. Department of Homeland Security under the terms of
32
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GEO’s contract. The Center houses persons in the custody of federal immigration authorities while their immigration status is being determined by the federal government.
In a similar lawsuit involving a Voluntary Work Program administered by CoreCivic at an ICE Processing Center in New Mexico, Ndambi et al. v. CoreCivic, the U.S. Court of Appeals for the Fourth Circuit ruled in favor of CoreCivic in March 2021. In a unanimous decision in that case, the U.S. Court of Appeals for the Fourth Circuit affirmed a U.S. District Court ruling which dismissed the case and found that detainees who volunteer to participate in the Voluntary Work Program in immigration processing centers are not employees and are not owed wages under the Fair Labor Standards Act and New Mexico’s minimum wage law.
The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company believes that it is more likely than not that it will prevail in an appeal from the judgments in these cases. As such, under ASC 450-20-25, the Company does not believe a loss is probable and the Company has not recorded an accrual relating to those two cases at this time. However, the results of these claims or proceedings cannot be predicted with certainty, and an unfavorable resolution of one or more of these claims or proceedings could have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company's accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. The Company does not accrue for anticipated legal fees and costs but expenses those items as incurred. Refer to Note 11 – Commitments, Contingencies and Other Matters for further information.
Insurance
On October 1, 2021, GEO formed a wholly owned captive insurance subsidiary, Florina Insurance Company, Inc. (“Florina”) to enhance its 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 & officers’ liability as well as procuring insurance policies for its directors’ and officers’ excess liability and excess casualty liability through Florina effective October 1, 2021.
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