Business context and reporting period
The GEO Group, Inc. is a REIT providing secure-facility, reentry, monitoring, transportation and related services to government customers in the U.S. and internationally. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same period in 2019. At quarter-end, GEO reported approximately 94,000 beds at 126 facilities and community supervision services for more than 210,000 individuals.
Financial performance and position
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q1 2020 | Q1 2019 / comparator |
|---|---|---|
| Revenue | $605.0 | $610.7 |
| Operating income | $56.6 | $74.8 |
| Operating margin | 9.4% | 12.3% |
| Net income attributable to GEO | $25.2 | $40.7 |
| Diluted EPS | $0.21 | $0.34 |
| Operating cash flow | $128.3 | $99.0 |
| Capital expenditures | $30.7 | $28.1 |
| Cash dividends paid | $57.7 | $57.9 |
Operating income declined 24%; attributable net income fell about 38%. Higher operating expenses and G&A more than offset lower depreciation and interest expense. Operating cash flow increased, helped by a $53.2 million decrease in accounts receivable, prepaid expenses and other assets, primarily reflecting billing and collection timing. Cash used in investing activities was $25.7 million; cash used in financing activities was $100.1 million. Cash, cash equivalents and restricted cash totaled $62.6 million at March 31, 2020, versus $123.8 million at March 31, 2019.
At March 31, 2020, total debt was $2.668 billion, including finance leases and non-recourse debt; long-term debt on the balance sheet was $2.371 billion and non-recourse debt was $270.5 million. GEO had $32.4 million of unrestricted cash and approximately $348.4 million of additional revolver borrowing capacity. The $900 million revolver matures in 2024; reported average interest on Credit Agreement borrowings was 3.08%. Current assets were $476.5 million and current liabilities $385.3 million.
GEO declared $0.48 per share in dividends in Q1 and declared another $0.48 per share on April 6, payable April 24. The Q1 dividend was paid February 21.
Material changes versus the prior comparable period
- Revenue decreased 0.9%. GEO Secure Services revenue grew 1.9%, while GEO Care fell 6.1% and International Services fell 11.5%; Facility Construction & Design revenue increased from a small base.
- Company-wide average occupancy was 90.2%, compared with 93.4% a year earlier. Secure Services occupancy was 92.0% versus 95.8%, excluding idle facilities.
- Operating expenses rose 0.9% and G&A rose 15.8%, including higher stock-based compensation and other personnel, professional and administrative costs.
- Interest expense declined 15.1%, primarily due to lower debt balances and lower variable rates. GEO recorded a $1.6 million gain after repurchasing $5.5 million principal of its 5.125% notes due 2023 for $3.9 million.
- GEO repurchased 553,665 shares for $9.0 million under its buyback program and contributed the shares to trusts funding the CEO’s retirement benefit. The agreement records a $8.9 million benefit payable in company stock upon retirement.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had not significantly disrupted Q1, but effects began in late March and early April. Lower border crossings and apprehensions, reduced federal court sentencing, and fewer referrals to reentry programs were expected to result in estimated 2020 revenue declines of 8% for the affected ICE and U.S. Marshals business and 4% for GEO Care reentry services. These are segment/business estimates, not consolidated guidance. Management said the duration and total financial impact were uncertain; cases had occurred at a small number of facilities in Q2.
- Management reduced planned 2020 capital spending by deferring projects where possible and said cash, operating cash flow and revolver availability were expected to support 2020 capital requirements. It anticipated several million dollars of additional 2020 costs for PPE, testing and medical care.
- GEO expected approximately $20 million of remaining spending in 2020 on committed capital projects. It also reported a five-year ICE ISAP contract effective April 1, expected to serve 90,000–100,000 participants daily; a competitor protested the award, and GEO could not guarantee it would prevail.
- Key business risks include government budget constraints, changes to public-private partnerships, contract loss or nonrenewal, occupancy declines, COVID-19 transmission, financing and covenant requirements, interest-rate and currency exposure, and litigation. A California law challenge and multiple detainee wage/TVPA lawsuits were pending. GEO recorded no accrual for the wage-related lawsuits because loss was not considered probable or reasonably estimable. A separate state non-income tax assessment totaled approximately $19.1 million; GEO had established a reserve, but the filing text does not provide a clear reserve amount.
- GEO reported no material impact from adoption of the accounting standards described in the filing. Management stated disclosure controls were effective and there were no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent quarterly revenue, occupancy and cash collection trends, particularly in ICE, U.S. Marshals and GEO Care operations, against management’s pandemic estimates.
- The outcome of the ISAP contract protest and any resulting effect on contract commencement or revenue.
- Liquidity, revolver availability, debt covenant headroom and the ability to service debt if operating performance weakens.
- Whether the $0.48 quarterly dividend remains sustainable given cash flow, debt obligations and REIT distribution requirements.
- Developments in the pending detainee litigation, California law challenge and state tax assessment, including any changes to loss estimates or reserves.