The GEO Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing was signed February 16, 2021. GEO is a REIT providing secure-facility management, community-based and youth services, electronic monitoring, transportation, and facility construction in the U.S. and internationally. It reported operations involving approximately 93,000 beds and supervision services for more than 210,000 people.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $2.350 billion | $2.478 billion |
| Operating income | $222.6 million | $300.4 million |
| Net income attributable to GEO | $113.0 million | $166.6 million |
| Diluted earnings per share | $0.94 | $1.40 |
| Cash provided by operating activities | $441.7 million | $338.1 million |
| Capital expenditures | $108.8 million | $117.2 million |
- Revenue declined 5.2%; operating income fell 25.9%. Operating margin was approximately 9.5%, versus 12.1% in 2019. Net margin was approximately 4.8%, versus 6.7%.
- Operating cash flow less capital expenditures was approximately $332.9 million. Cash generation included favorable working-capital movements and about $42 million of deferred employer Social Security taxes under the CARES Act; those factors should be distinguished from recurring operating performance.
- Cash and cash equivalents were $283.5 million at year-end; including restricted cash and investments, the cash-flow statement total was $311.9 million. Current assets were $711.3 million and current liabilities $411.3 million.
- Year-end borrowings under the term loan and revolver were $770.0 million and $704.4 million, respectively; remaining revolver capacity was $136.0 million after covenant limits and letters of credit. Total consolidated indebtedness was approximately $2.6 billion excluding non-recourse debt and finance leases; the balance sheet reports total debt of $2.915 billion including non-recourse debt and finance leases.
- Interest expense was $126.8 million, down from $151.0 million. A 1 percentage-point increase in the senior credit facility interest rate was estimated to add approximately $15 million in annual interest expense.
- Adjusted FFO was $300.6 million, down from $328.4 million; Normalized FFO was $229.3 million, down from $260.7 million. These are company-defined non-GAAP measures.
Material changes and unusual items
- U.S. Secure Services revenue declined 1.9%, GEO Care declined 10.2%, International Services declined 8.8%, and Facility Construction and Design declined 46.9%. COVID-related population declines, contract discontinuations, and the transfer of an Australian facility to government operation weighed on results.
- Company-wide facility occupancy averaged 86.6%, down from 92.4%; secure-services occupancy was 89.3%, down from 94.9%. Secure-services compensated mandays declined to approximately 21.7 million from 23.5 million.
- GEO recorded a $21.1 million goodwill impairment in community-based services, attributed primarily to lower projected cash flows during the pandemic, and a $5.7 million impairment on a leased facility. It also recognized a $5.3 million gain on extinguishment of debt from discounted note repurchases.
- Fourth-quarter 2020 revenue was $578.1 million, operating income $38.0 million, and net income attributable to GEO $11.9 million, versus $621.7 million, $66.3 million, and $38.1 million, respectively, in fourth-quarter 2019. The filing attributes the quarterly earnings decline primarily to the goodwill impairment.
- GEO drew an additional $250 million under its credit facility in November 2020 as a precautionary liquidity measure and said it planned to retain the cash.
Outlook, risks, and contingencies
- In October 2020, the quarterly dividend was reduced from $0.48 to $0.34 per share; in January 2021 it was reduced again to $0.25 per share. Management said the reductions support debt repayment and balance-sheet management. Future dividends remain subject to Board approval and may be changed or eliminated.
- After year-end, a January 26, 2021 executive order directed the Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, consistent with applicable law. GEO expected certain BOP contracts may not be renewed; its BOP contracts represented approximately 12% of 2020 revenue, and USMS contracts and agreements approximately 13%. The effect on USMS arrangements was uncertain.
- The BOP had already decided not to rebid D. Ray James and Rivers facilities and not to renew Moshannon Valley. Together, these contracts generated approximately $145 million in annualized revenue. Additional BOP contracts were subject to renewal through 2022. The filing also identifies California restrictions, proposed similar state legislation, and possible transition of the George W. Hill facility to public operation as risks.
- COVID-19 reduced occupancy and activity and increased expenses for protective equipment, testing, medical care, and sanitation. GEO reported pandemic-related revenue declines of approximately 10% in secure services and 12% in reentry services, and said effects could continue into 2021; it provided no clear full-year 2021 earnings or revenue guidance.
- Management estimated approximately $104 million of 2021 capital expenditures, including about $26 million for maintenance, and $19.5 million remaining on committed projects expected to be completed in 2021. These figures address different scopes; the filing also notes that new self-financed projects could increase capital needs.
- Major risks include customer and contract concentration, occupancy sensitivity, high leverage and refinancing access, debt covenants, variable-rate exposure, government budget constraints, REIT qualification and distribution requirements, and legal and insurance exposure. Six lending syndicate banks representing 54% of revolver commitments had said they would not renew commitments when they expire in 2024.
- Contingencies include shareholder securities litigation, detainee labor-related lawsuits, litigation challenging California law, and an approximately $19.8 million state tax assessment under appeal; the filing says a reserve was recorded for the tax matter. GEO disclosed a 2020 ransomware attack affecting limited personal and health information, but stated it had no known misuse and expected no material impact.
- Management and the independent auditor reported effective internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements.
Investor verification priorities
- Track renewal, termination, and replacement outcomes for BOP, USMS, ICE, and other material contracts, including the revenue impact of facilities already identified for closure or non-renewal.
- Confirm actual occupancy, mandays, and pandemic-related operating costs against management’s expectations for 2021.
- Review debt maturities, covenant headroom, available revolver capacity, refinancing plans, and the cash-flow effect of interest-rate changes.
- Assess whether operating cash flow is repeatable after working-capital movements and CARES Act payroll-tax deferrals, and compare capital spending with cash generation.
- Monitor dividend decisions, REIT distribution requirements, and the allocation of cash between debt reduction, capital expenditure, and shareholder distributions.
- Follow the cited litigation and tax assessment, insurance-reserve development, and any additional cybersecurity disclosures.