The GEO Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. GEO provides secure-facility, reentry, electronic-monitoring, supervision and related services to government customers in the U.S. and internationally. At quarter-end it managed or owned approximately 83,000 beds at 103 facilities and provided community supervision services to more than 300,000 people.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $551.2 million | $576.4 million | Down 4.4% |
| Operating income | $81.5 million | $65.6 million | Up 24.2% |
| Operating margin | 14.8% | 11.4% | Up 3.4 percentage points |
| Net income attributable to GEO | $38.2 million | $50.5 million | Down 24.4% |
| EPS, diluted | $0.26 | $0.41 | Down $0.15 |
| Cash from operating activities | $122.0 million | $124.9 million | Down $3.0 million |
| Adjusted Funds from Operations (AFFO), non-GAAP | $78.1 million | $73.5 million | Up $4.5 million |
Gross cash and cash equivalents were $598.5 million at March 31, 2022, versus $506.5 million at year-end 2021. Cash, cash equivalents and restricted cash totaled $648.6 million. Current assets were $1.023 billion and current liabilities $408.4 million. Capital expenditures were $13.8 million; investing activities used $17.8 million and financing activities used $6.5 million. No dividend was declared or paid in Q1 2022; GEO discontinued its quarterly dividend after ending REIT status.
Total debt, including non-recourse debt and finance leases, was $2.952 billion, compared with $2.944 billion at year-end. Long-term debt on the balance sheet was $2.626 billion. The $900 million revolver had approximately $786.5 million drawn and $96.8 million in letters of credit, leaving approximately $16.7 million of additional borrowing capacity. The weighted-average rate on Credit Agreement borrowings was 2.70%. The company reported compliance with debt covenants at quarter-end.
Material changes and operating trends
- U.S. Secure Services revenue fell 9.2% to $351.2 million, primarily reflecting facility ramp-downs and deactivations; segment operating income nevertheless rose to $74.1 million from $71.5 million as operating costs declined.
- Electronic Monitoring and Supervision revenue increased 45.6% to $87.9 million, mainly from higher client and participant counts; segment operating income rose to $38.9 million from $25.5 million.
- Reentry Services revenue declined 18.2% to $61.4 million, largely due to the July 2021 sale of the youth business. International Services revenue declined 6.1% to $50.6 million, principally due to foreign exchange and the Dungavel contract transition.
- Consolidated operating expenses declined 10.0% to $385.2 million, while depreciation and amortization increased 5.3% to $35.9 million. G&A was essentially unchanged at $48.6 million.
- Net income declined despite higher operating income, in part because the income-tax provision rose to $18.0 million from $7.9 million. GEO became a taxable C corporation effective January 1, 2021; Q1 2022’s effective tax rate was 32.7%.
- Average company-wide occupancy was 85.2%, versus 85.8% a year earlier, excluding idle beds. GEO attributed lower overall occupancy to COVID-19 and the federal executive order. Nine idle facilities, with approximately 10,400 beds and $272.4 million in carrying value, were being marketed.
Outlook, risks and unusual items
- GEO estimated a 2022 annual effective tax rate of approximately 28%–30%, excluding discrete items. It said cash on hand, operating cash flow and Credit Facility availability should support 2022 capital requirements, and planned to defer capital spending where possible. No consolidated revenue, earnings or EPS guidance was provided in the filing text.
- Management estimated $16.1 million of spending for active capital projects, including $10.4 million expected over the remainder of 2022. It estimated 2022 annual net carrying costs of idle facilities at $21.8 million, including $12.3 million of depreciation. Potential revenue and EPS from activating idle facilities are conditional estimates, not guidance.
- Negotiations with creditor groups over a potential refinancing, exchange or other transaction had not produced a definitive agreement by May 2, 2022. GEO said discussions would continue and it was also evaluating other options to address funded recourse debt and nearer-term maturities. Completion and terms were uncertain.
- The January 2021 executive order restricts renewal of DOJ contracts with privately operated criminal detention facilities, subject to applicable law. GEO identified one BOP facility contract option expiring September 2022 and three USMS facility options expiring from June 2022 to September 2023; together, these facilities represented about 8% of 2021 revenue.
- A Washington jury verdict and subsequent awards totaled approximately $35.9 million, including fees, costs and interest. Enforcement was stayed while GEO appealed. GEO also faced other litigation and legal proceedings; outcomes and potential effects were uncertain.
- The Ninth Circuit’s earlier ruling against California’s AB-32 law was vacated after the court granted an en banc rehearing petition on April 26, 2022. GEO’s challenge to a similar Washington law was stayed pending the AB-32 litigation.
- COVID-19, labor shortages, inflation, medical and insurance costs, government budget pressures, contract losses or non-renewals, and interest-rate and foreign-exchange movements were identified risks. A 1-percentage-point increase in Credit Facility rates would increase annual interest expense by approximately $16 million, based on quarter-end balances.
- After quarter-end, GEO sold the Perry County facility for approximately $15 million on April 19, 2022. Delaware County, Pennsylvania assumed management of the George W. Hill facility effective April 6, 2022; GEO reported approximately $47 million in annualized revenue from that contract.
Important facts for investors to verify
- Progress, terms and timing of any debt transaction, and the company’s ability to refinance or address its 2023–2024 maturities given limited revolver availability.
- Results of the Washington appeal, the AB-32 en banc proceeding and other material litigation, including whether additional loss accruals become necessary.
- Renewal or termination outcomes for federal contracts and the revenue and earnings effects of the executive order, idle facilities and the George W. Hill transition.
- Whether monitoring-services growth and operating-cost reductions can offset lower secure-services and reentry revenue, and how occupancy and labor costs develop.
- Cash conversion and the quality of operating cash flow, including working-capital timing; AFFO is a non-GAAP measure and should be assessed alongside GAAP cash flows.