The GEO Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. GEO operates secure facilities, reentry centers, community supervision and monitoring services, and secure transportation in the U.S. and internationally. At quarter-end, it managed or owned approximately 93,000 beds at 123 facilities and provided community supervision services to more than 210,000 people.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $579.1 million | $631.6 million | $1,772.0 million | $1,856.2 million |
| Operating income | $64.5 million | $78.2 million | $184.6 million | $234.1 million |
| Net income attributable to GEO | $39.2 million | $45.9 million | $101.1 million | $128.6 million |
| Diluted EPS | $0.33 | $0.39 | $0.84 | $1.08 |
| Operating margin | 11.1% | 12.4% | 10.4% | 12.6% |
Revenue declined 8.3% in Q3 and 4.5% year to date. Operating income and GEO-attributable net income also fell in both comparisons. Interest expense declined to $30.7 million in Q3 from $36.6 million, and to $95.5 million year to date from $115.9 million. Debt repurchases generated a $3.0 million year-to-date gain on extinguishment of debt.
Cash flow: Nine-month operating cash flow was $358.1 million, versus $323.0 million; capital expenditures were $83.8 million, versus $90.8 million. Dividends paid were $174.1 million. Cash, cash equivalents and restricted cash totaled $89.1 million at September 30, compared with $95.0 million a year earlier.
Liquidity and debt: Total debt, including non-recourse debt and finance leases, was $2.68 billion, down from $2.74 billion at December 31, 2019. Cash and cash equivalents were $53.7 million; $27.2 million of current cash was restricted. Revolver borrowings were $472.1 million, with approximately $368.3 million of additional borrowing capacity after letters of credit. GEO reported compliance with its debt covenants. Its current ratio was approximately 1.19.
Changes, outlook and material developments
- COVID-19 reduced facility populations and referrals, while increasing costs for protective equipment, testing, medical care and sanitation. Average company-wide occupancy was 87.0% for the first nine months of 2020, versus 93.1% a year earlier. Secure Services occupancy excluding idle facilities was 89.5%, versus 95.7%.
- Management estimated 2020 revenue declines of approximately 10% in GEO Secure Services and 11% in GEO Reentry Services due to pandemic-related impacts. GEO stated it could not predict the pandemic’s overall future financial effect.
- Management reduced the quarterly dividend from $0.48 to $0.34 per share beginning with the October 2020 payment, citing capital preservation and debt reduction. It anticipated applying $100 million of cash flow to debt repayment in 2020 and an average of $50 million to $100 million annually thereafter.
- Lower population, contract terminations and the transition of Australia’s Arthur Gorrie facility to government operation weighed on revenue. GEO cited contract activations that partly offset declines. It also reported a five-year ICE ISAP contract and a ten-year renewal for its South Texas ICE Processing Center.
- The Bureau of Prisons did not rebid GEO’s D. Ray James contract, which generated about $60 million of annualized revenue. A four-month extension runs through January 31, 2021. Other BOP contract renewals and possible limits on private operation of facilities remain risks.
- On October 6, 2020, the board declared the reduced $0.34 dividend, paid October 23. The filing also disclosed an October 30 automatic shelf registration permitting future securities offerings.
Risks, contingencies and unusual items
- COVID-19 transmission at facilities, lower occupancy, additional operating costs, government budget pressures and potential contract reductions or nonrenewals could materially affect results, liquidity and cash flows.
- GEO disclosed a shareholder class action alleging misleading statements about its COVID-19 response. The company said it would defend the case. Various detainee labor-related lawsuits remain pending; GEO had recorded no accrual because a loss was not considered probable or reasonably estimable.
- California’s AB-32 litigation resulted in an October 2020 ruling that barred enforcement against U.S. Marshals facilities but did not bar enforcement against ICE contracts. The ruling’s effects on GEO’s California operations and contracts warrant monitoring.
- A November 3 ransomware incident affected part of GEO’s IT systems and a limited amount of personal and health information. GEO said it recovered critical operating data, had no known misuse of information and did not expect a material financial impact; the investigation and notifications were ongoing.
- GEO deferred approximately $27.6 million of employer Social Security taxes under the CARES Act, payable in two installments in 2021 and 2022. A separate state tax assessment totaled approximately $19.4 million; GEO disputed it and had established a reserve based on its estimate of the probable loss.
- Variable-rate debt exposes GEO to interest-rate risk: management estimated a 1 percentage-point increase would add about $12 million to annual interest expense. Management also cited foreign-exchange exposure and a negative outlook revision by S&P, while affirming the existing rating.
Important facts for investors to verify
- Whether occupancy, referrals and facility populations recover, and whether management’s estimated 2020 revenue declines prove accurate.
- The status and renewal outcomes of the D. Ray James extension and other significant contracts, including BOP facilities and California operations.
- Debt repayment progress, covenant headroom, borrowing availability, and the sustainability of the reduced dividend and planned cash allocation.
- Developments in the shareholder, detainee labor, tax-assessment and AB-32 matters, including any change in estimated exposure.
- The outcome and any costs or liabilities arising from the ransomware incident and related data notifications.
- The filing gives inconsistent capital-project figures: one disclosure estimates $62 million of costs with $42 million spent and $20 million remaining; another estimates $67 million, $38 million spent and $29 million remaining. Investors should confirm the applicable project budget and remaining commitment.