The GEO Group, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. GEO is a global operator of secure facilities, reentry and community-based services, electronic monitoring, and secure transportation. This filing reports the quarter and six months ended June 30, 2021. At quarter-end, GEO managed or owned approximately 90,000 beds at 114 facilities, including idle facilities, and provided community supervision services to more than 200,000 people.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $565.4 million | $587.8 million | $1,141.8 million | $1,192.8 million |
| Operating income | $72.4 million | $64.8 million | $138.0 million | $121.0 million |
| Net income attributable to GEO | $42.0 million | $36.7 million | $92.5 million | $61.9 million |
| Basic / diluted EPS | $0.29 / $0.29 | $0.31 / $0.31 | $0.71 / $0.70 | $0.52 / $0.52 |
| Operating cash flow | Not separately provided for the quarter | $205.6 million | $256.8 million | |
| Capital expenditures | Not separately provided for the quarter | $44.3 million | $53.5 million |
Margins and trends. Operating margin was approximately 12.8% in Q2, versus 11.0% a year earlier; for the first half it was 12.1%, versus 10.1%. GEO’s net income attributable to GEO increased year over year in both periods, although Q2 EPS declined to $0.29 from $0.31. Q2 revenue fell 3.8%; first-half revenue fell 4.3%. Operating income improved despite lower revenue, reflecting lower operating expenses, including savings from facility closures and deactivations. General and administrative expense rose $9.1 million in Q2, including $7.5 million of one-time employee restructuring costs.
Segments. Q2 U.S. Secure Services revenue decreased 5.5% to $368.4 million, while GEO Care revenue rose 2.7% to $141.9 million and International Services revenue rose 3.1% to $54.9 million. Facility Construction & Design revenue declined as the Fulham expansion project neared completion. Management cited contract closures and facility deactivations in secure services, partly offset by new or reactivated facilities and higher U.S. Marshals populations. GEO Care benefited from new programs and increased electronic monitoring and ISAP participants, while COVID-related referral and census declines continued to weigh on reentry services.
Cash, debt and liquidity
- Cash and cash equivalents were $483.0 million at June 30, 2021, up from $283.5 million at year-end 2020. Cash, cash equivalents and restricted cash totaled $517.1 million.
- Total debt, including non-recourse debt and finance leases, was $2.974 billion, compared with $2.915 billion at December 31, 2020. Long-term debt reported on the balance sheet was $2.632 billion; non-recourse debt was $311.4 million long term, plus its current portion.
- GEO had $1.555 billion outstanding under its senior credit facility, $68.3 million in letters of credit, and approximately $42.3 million of additional revolver capacity. The weighted-average rate on credit-facility borrowings was 2.54%. Management reported compliance with debt covenants at quarter-end.
- First-half operating cash flow declined by $51.2 million year over year. Investing cash outflow was $32.3 million, while financing provided $32.5 million, including $435.0 million of debt proceeds and $356.8 million of long-term debt payments.
- GEO drew $170 million on its revolver in 2021 as a precautionary measure to preserve liquidity and financial flexibility. Moody’s downgraded GEO to B2 in March and S&P downgraded it to CCC+ in May.
Material changes, outlook and risks
- Federal contract exposure: A January 2021 executive order directed the Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, consistent with applicable law. GEO reported that BOP and USMS contracts represented approximately 10% and 16% of first-half revenue, respectively; ICE processing-center contracts represented approximately 24%. The BOP declined to renew Great Plains and terminated the Reeves County I & II contract; the USMS did not renew Queens. Additional BOP and USMS renewals remain at risk.
- Other contract losses: GEO lost the Florida Bay and Graceville facility rebids, with transitions expected after extensions through July and August 2021. GEO retained Moore Haven after a protest. It also expected to transition the U.K. Dungavel contract in October 2021 and had transitioned Arthur Gorrie in Australia in 2020.
- Idle facilities: Nine idle facilities representing approximately 9,500 beds had a combined net book value of $225.5 million. GEO estimated 2021 net carrying costs of $8.0 million. Management stated that activation of these facilities at assumed average rates and occupancy could produce approximately $220 million of annualized revenue and $0.20–$0.25 of annualized EPS; this is a scenario, not committed guidance.
- COVID-19: Management expected reduced operating capacity and program declines to persist into the first part of 2021, with a slow recovery toward more normalized operations by year-end. The filing cites facility transmission, staffing and health costs, agency referrals, court activity, and detention restrictions as uncertainties.
- Dividends and REIT status: The Board suspended quarterly dividends on April 7 to prioritize debt repayment, deleveraging and internal funding. GEO was evaluating its REIT and capital structure, with an expected conclusion in Q4 2021. If it remains a REIT, a further distribution may be required by year-end to meet minimum distribution rules. Management estimated an annual effective tax rate of approximately 11%–13%, excluding discrete items.
- Debt and interest risk: Most credit-facility borrowings have variable rates; GEO estimated each 1 percentage-point rate increase would raise annual interest expense by approximately $16 million. Refinancing access, covenant headroom, high leverage and limited revolver availability are key liquidity considerations.
- Unusual items and legal matters: First-half results included a $10.4 million gain on real estate dispositions and a $4.7 million gain on debt extinguishment. A Washington detainee labor trial ended in a mistrial in June, with retrial set for October 2021. Shareholder litigation, detainee labor claims, state-law challenges and a $19.5 million state tax assessment appeal remain disclosed contingencies; GEO had not accrued for the principal lawsuits described, stating losses were not considered probable and reasonably estimable.
- Management and portfolio changes: Jose Gordo became CEO effective July 1, 2021, with George Zoley moving to Executive Chairman. GEO also completed the sale of certain youth-division non-real-estate assets for $10 million on July 1, retaining the real estate and leasing six youth facilities to the new nonprofit operator.
Management said it had reduced or deferred planned 2021 capital spending where possible and believed cash, operating cash flow and credit-facility availability would support 2021 requirements. Estimated remaining spending on active capital projects was $9.1 million through year-end. The filing does not provide a clear full-year revenue or earnings forecast.
Important facts for investors to verify
- Progress and financial impact of DOJ contract non-renewals, other facility transitions, and potential replacement uses or customers for idle facilities.
- Available revolver capacity, debt maturities and refinancing options, covenant headroom, interest expense sensitivity, and implications of the credit-rating downgrades.
- Cash generation after working-capital movements and capital spending, and whether suspended dividends remain suspended or a REIT-required distribution is made.
- Whether the board maintains REIT status and the resulting tax, distribution and capital-structure consequences.
- Actual pace of recovery from COVID-19-related operating and referral disruptions, and performance of newly activated facilities and GEO Care programs.
- Developments in litigation and tax contingencies, including the Washington retrial, California and Washington legal challenges, and the state tax assessment appeal.