GEO Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparison is with Q1 2020. GEO is a global provider of secure facility management, community reentry and supervision, electronic monitoring, and related services. At quarter-end it managed or owned approximately 92,000 beds at 116 facilities and provided community supervision to more than 210,000 people.
Financial performance and condition
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $576.4 million | $605.0 million |
| Operating income | $65.6 million | $56.2 million |
| Operating margin | 11.4% | 9.3% |
| Net income attributable to GEO | $50.5 million | $25.2 million |
| Diluted EPS | $0.41 | $0.21 |
| Cash provided by operations | $124.9 million | $128.3 million |
| Capital expenditures | $27.3 million | $30.7 million |
Net income included a $13.3 million gain on real estate sales and a $3.0 million reported gain on debt extinguishment. Revenue declined 4.7%, while operating income rose 16.9%, helped by lower operating and general and administrative expenses. Net income also benefited from the real estate sale gains and lower interest expense. Operating cash flow was slightly lower year over year; cash flow less capital expenditures was approximately $97.6 million, calculated from reported amounts.
At March 31, cash and cash equivalents were $289.4 million, with another $29.3 million of current restricted cash. Total current assets were $701.0 million and current liabilities $423.1 million. Total debt, including non-recourse debt and finance lease liabilities, was $2.843 billion; long-term debt on the balance sheet was $2.495 billion. GEO reported $209 million of remaining revolver borrowing capacity after borrowings and letters of credit. After quarter-end it drew an additional $170 million under its credit facility and said it planned to retain the proceeds as liquidity.
Changes versus the prior period
- Revenue fell $28.6 million. U.S. Secure Services revenue decreased 2.8%, GEO Care decreased 6.2%, International Services decreased 5.9%, and Facility Construction & Design decreased 92.9% as the Fulham expansion neared completion.
- Company-wide occupancy was 84.6%, down from 90.2%; management attributed the decline primarily to COVID-19 and the effects of the Executive Order. U.S. Secure Services occupancy, excluding idle facilities, was 88.5%, versus 92.0%.
- Operating expenses declined 7.3% and general and administrative expenses declined 9.9%. Lower activity and contract exits reduced expenses; COVID-related costs and facility start-up or carrying costs remain relevant.
- GEO issued $230 million of 6.50% exchangeable notes due 2026 and used proceeds to redeem approximately $194 million of 5.875% notes due 2022, repurchase other notes, and fund fees and general corporate purposes. It also repurchased $20.2 million principal amount of 2023 and 2024 notes during the quarter.
- GEO paid a $0.25-per-share dividend in Q1. On April 7, 2021, the Board suspended quarterly dividends to prioritize debt repayment, deleveraging, and internal funding of growth.
Outlook, risks, and unusual items
- Federal contract exposure: A January 2021 Executive Order directs the Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, consistent with applicable law. The BOP declined to renew the 1,940-bed Great Plains contract and notified GEO it would terminate the Reeves I & II contract. The USMS did not renew the Queens facility contract. GEO said BOP contracts represented approximately 12% of Q1 revenue, USMS direct contracts and intergovernmental agreements 15%, and ICE processing-center contracts 23%. Six BOP-related facilities identified in the filing generated approximately $145 million of 2020 revenue. These exposures are not equivalent to a certain loss of all related revenue; contract outcomes, timing, and replacement use remain uncertain.
- GEO also lost the recent rebid for three Florida managed-only facilities and filed a protest. It reported that the contracts generated approximately $65 million in annualized revenue. The filing discusses potential further government policy changes, contract nonrenewals, lower populations, and budget constraints.
- COVID-19: Management expected reduced operating capacity and program referrals to persist into early 2021, with a slow recovery toward more normal operations by year-end. It cautioned that the duration and financial impact were uncertain; outbreaks, mitigation costs, and reduced referrals could adversely affect results and cash flows.
- Capital structure and REIT status: The Board was evaluating the company’s REIT and capital structure, with an expected conclusion in Q4 2021. If GEO retains REIT status, it noted a possible need for an additional distribution before year-end to meet minimum tax requirements. No formal earnings guidance is provided in the supplied filing text.
- GEO reported compliance with debt covenants at quarter-end and expected continued compliance, but highlighted refinancing, cash generation, interest-rate, and covenant risks. S&P and Moody’s downgraded GEO’s ratings to B and B2, respectively, in March. A 1 percentage-point rise in the average rate on credit-facility borrowings would increase annual interest expense by approximately $14 million, based on quarter-end balances.
- Goodwill testing following the Executive Order found no impairment, but U.S. Secure Services fair value exceeded carrying value by only approximately 6%. The filing estimated that a 1 percentage-point increase in the discount rate could trigger an approximately $76 million impairment.
- Material legal matters include shareholder litigation, detainee labor-related lawsuits, and challenges to state laws affecting private detention contracts. GEO said it had not accrued for the detainee lawsuits because loss was not considered probable or reasonably estimable at that stage. It had reserved for a separate state tax assessment of approximately $19.4 million.
Key facts for investors to verify
- Developments and revenue effects from BOP and USMS contract terminations, nonrenewals, and remaining renewals, as well as outcomes of the Florida contract protest.
- Whether lower occupancy and COVID-related impacts improve as management expected, and whether idle facilities can be reactivated, sold, or repurposed.
- Post-quarter borrowings, available revolver capacity, debt maturities and interest costs, covenant headroom, and progress toward deleveraging.
- The Board’s decision on dividends, REIT status, and capital-structure alternatives, including any required distribution.
- Goodwill valuation assumptions and impairment sensitivity, and material developments in litigation and the state tax assessment.