The GEO Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
GEO is a global provider and owner/operator of secure facilities, processing and reentry centers, community supervision, electronic monitoring and transportation services. At September 30, 2021, it reported approximately 86,000 beds at 107 facilities and community supervision services for more than 200,000 individuals. Results reflect reduced federal detention contracts, COVID-19 impacts, new and expanded contracts, and the July 2021 divestiture of its youth business.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $557.3 | $579.1 | $1,699.1 | $1,772.0 |
| Operating income | $74.0 | $64.7 | $212.1 | $185.7 |
| Net income attributable to GEO | $34.7 | $39.2 | $127.2 | $101.1 |
| Diluted EPS | $0.24 | $0.33 | $0.94 | $0.84 |
| Operating margin | 13.3% | 11.2% | 12.5% | 10.5% |
Q3 revenue fell 3.8% year over year, while operating income rose 14.3%; net income attributable to GEO declined 11.5%. For the nine-month period, revenue decreased 4.1%, while operating income increased 14.2% and GEO-attributable net income increased 25.8%. Lower operating costs and real-estate disposition gains contributed to the year-to-date improvement. GEO reported no dividend for Q3 2021; it declared $0.25 per share for the first quarter, compared with $1.44 per share for the first nine months of 2020.
- Cash flow: Nine-month operating cash flow was $289.5, down from $358.1. Investing activities used $40.5, including $57.4 of capital expenditures; financing activities provided $28.4. Operating cash flow less capital expenditures was approximately $232.1, versus $274.3 in 2020.
- Cash and liquidity: September 30 cash and cash equivalents were $537.1; cash, cash equivalents and restricted cash totaled $585.4. Current assets were $933.0 and current liabilities $420.6. The company reported only about $23.6 of additional borrowing capacity on its $900 million revolver after borrowings and letters of credit.
- Debt: Total debt, including finance leases and non-recourse debt, was $2,955.6, compared with $2,915.3 at year-end 2020. Long-term debt on the balance sheet was $2,629.0. Senior credit facility borrowings were approximately $1,551.1, and its weighted-average interest rate was 2.70%. A 1 percentage-point increase in the facility’s average rate would increase annual interest expense by approximately $16 million.
- Other metrics: Average facility occupancy, excluding idle facilities, was 86.5% for the first nine months, versus 87.4% a year earlier. GEO reported $210.9 of carrying value for seven idle facilities. The filing defines Adjusted FFO, a non-GAAP measure, as $235.3 for the first nine months, versus $226.0 in 2020.
Material changes and significant developments
- DOJ contract changes and facility closures weighed on U.S. Secure Services. GEO reported non-renewal or termination of contracts for Great Plains, Big Spring, Flightline, Reeves County Detention Center I & II and Queens; Big Spring and Flightline had generated approximately $68 million in combined annualized revenue. BOP contracts represented about 9% and USMS contracts about 16% of nine-month 2021 revenue.
- GEO issued $230 million of 6.50% exchangeable notes due 2026, using proceeds in part to redeem its 2022 notes and repurchase other debt. It repurchased $39.7 million principal amount of 2023 and 2024 notes during the nine months and recorded a $4.7 million gain on debt extinguishment.
- The Board suspended quarterly dividends in April to prioritize debt repayment, deleveraging and internally funded growth. It was evaluating GEO’s REIT and corporate tax structure, with a decision expected in Q4 2021. Maintaining REIT status could require an additional distribution before year-end.
- GEO completed the youth-business divestiture on July 1 for a $10 million unsecured term note and recorded a $5.0 million loss. A subsequent October agreement provided for settlement of the note for $8 million, subject to specified conditions and payment no later than December 31, 2021.
Outlook, risks and contingencies
Management said cash on hand, operating cash flows and credit-facility availability were expected to support 2021 capital requirements, and planned to reduce capital spending where possible. Management anticipated COVID-related operational constraints and reduced referrals would recover slowly into 2022. It estimated an annual effective tax rate of approximately 11%–13%, excluding discrete items. These statements are forward-looking and are not guarantees.
- Policy and contract concentration: The 2021 Executive Order directs the Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, consistent with applicable law. The company cited further risk from federal policy changes, reduced populations, contract losses, rebids and government budget constraints. ICE is not covered by the order, but GEO noted that similar action could be taken.
- Washington litigation: After quarter-end, a jury returned an unfavorable verdict and combined $23.2 million judgments in two Washington cases involving detainee work programs. GEO planned to appeal and recorded no accrual, stating it believed loss was not probable. The outcome and potential financial impact remain uncertain.
- Other legal and financial exposures: Shareholder litigation and a derivative suit remained pending; a state tax assessment was approximately $19.6 million, with GEO appealing and maintaining a reserve. Deferred payroll taxes were approximately $20 million at quarter-end. Litigation, insurance adequacy, labor availability, COVID-19, REIT qualification and debt refinancing are among the disclosed risks.
- Goodwill sensitivity: The first-quarter impairment test found no U.S. Secure Services goodwill impairment, but estimated fair value exceeded carrying value by only about 6%. Management disclosed that a 1 percentage-point higher discount rate would have resulted in an estimated impairment of approximately $76 million.
Most important facts for investors to verify
- Whether GEO can refinance or repay upcoming debt maturities and maintain adequate liquidity given the limited remaining revolver capacity.
- Actual contract and revenue effects of DOJ policy, BOP non-renewals, USMS renewals, and any further customer or government action.
- The status and appeal outcome of the $23.2 million Washington judgments, and whether accruals or additional litigation costs become necessary.
- The Board’s decision on REIT status and capital structure, including any required distribution, and the company’s ability to sustain its dividend policy.
- Progress in reactivating idle facilities, occupancy recovery, and receipt of the $8 million youth-business note settlement.