The GEO Group, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY2018. The filing also reports fourth-quarter results. GEO is a REIT operating secure facilities, community reentry and youth services, electronic monitoring, and facility construction and design businesses in the U.S. and several international markets.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $2.478 billion | $2.331 billion | +6.3% |
| Operating income | $300.4 million | $264.7 million | +13.5% |
| Operating margin | 12.1% | 11.4% | +0.7 percentage points |
| Net income attributable to GEO | $166.6 million | $145.1 million | +14.8% |
| Diluted EPS | $1.40 | $1.20 | +$0.20 |
| Operating cash flow | $338.1 million | $274.5 million | +$63.7 million |
| Capital expenditures | $117.2 million | $195.7 million | -$78.4 million |
| Cash, cash equivalents and restricted cash | $67.5 million | $84.5 million | -$17.0 million |
- Fourth-quarter 2019 revenue was $621.7 million, operating income $66.3 million, and diluted EPS $0.32; fourth-quarter 2018 comparatives were $599.4 million, $63.5 million, and $0.28, respectively.
- FY2019 adjusted funds from operations (AFFO), a non-GAAP measure, was $328.4 million versus $297.8 million. Normalized FFO was $260.7 million versus $234.3 million.
- At year-end, current assets were $547.8 million and current liabilities $395.9 million. The balance sheet reported total assets of $4.318 billion and shareholders’ equity of $996.0 million.
- Total debt reported in the debt note was $2.745 billion, including $328.2 million of non-recourse debt and finance leases; long-term debt was $2.408 billion. Term-loan borrowings were $778.0 million and revolver borrowings $520.7 million. The company reported $317.0 million of additional revolver capacity after covenant limitations and outstanding letters of credit.
- Quarterly dividends were $0.48 per share in 2019, or $1.92 for the year. Cash dividends paid totaled $232.5 million.
Changes versus FY2018
- U.S. Secure Services revenue grew 7.3% to $1.602 billion, supported by population, transportation and rate increases and facility activations, including North Lake, South Louisiana, Eagle Pass and the Reeves County contracts.
- GEO Care revenue rose 5.8% to $614.2 million, primarily from increased ISAP and electronic-monitoring participation and higher census at certain community-based centers; closures and contract terminations partially offset growth.
- International Services revenue declined 8.6% to $232.0 million, reflecting the Parklea contract transition and $18.2 million of adverse foreign-exchange effects.
- Facility Construction & Design revenue increased to $30.0 million from $4.2 million, largely from the Fulham expansion project. Operating cash flow improved while capital expenditures declined.
- Interest expense was broadly stable at $151.0 million. Interest income fell to $28.9 million from $34.8 million, principally because of a lower Ravenhall contract-receivable balance. FY2019 included a $4.8 million loss on extinguishment of debt.
Outlook, risks and unusual items
- Management said it was encouraged by growth opportunities and planned to bid selectively, emphasizing profitability and operational risk. It did not provide consolidated revenue or EPS guidance in the supplied filing text.
- Management estimated approximately $100 million of 2020 capital expenditures, including about $24 million for facility maintenance. Committed projects were estimated to require $33 million more through 2020; additional self-financed projects could increase capital needs.
- Management expected G&A as a percentage of revenue to remain consistent or decrease in 2020. Two idle facilities totaling approximately 1,100 beds had estimated 2020 carrying costs of $3.0 million; there were no firm activation agreements.
- California legislation enacted in 2019 aimed to phase out certain private facility contracts. GEO expected its remaining California Department of Corrections and Rehabilitation contracts at Desert View and Golden State to end in March and May 2020, respectively, but had signed ICE contracts covering those sites and Central Valley. GEO and the U.S. Department of Justice separately challenged the law; outcomes and timing were uncertain.
- Contract concentration is material: U.S. federal agencies accounted for 53% of FY2019 revenue; BOP, ICE and the U.S. Marshals Service together accounted for 51.2%. The filing states that 37 management contracts representing about 25% of revenue were due to expire by year-end 2020 unless renewed. It also reports 38 contracts potentially subject to competitive rebid in 2020, with differing revenue totals in separate sections.
- Other principal risks include government appropriations and policy changes, contract nonrenewals and occupancy, public resistance to public-private partnerships, labor and insurance costs, litigation, and access to financing. Six lenders had indicated they would not provide new financing to GEO but remained contractually committed on existing facilities. A 1% increase in the rate on senior-credit-facility borrowings would raise annual interest expense by about $13 million; the company had no interest-rate protection for those borrowings.
- Contingencies include class actions involving detainee work programs and wage claims, with no accrual recorded because losses were not considered probable or reasonably estimable at that stage; and a disputed state tax assessment of approximately $18.9 million, for which GEO had recorded a reserve based on its estimated probable loss. Insurance reserves were $68.2 million at year-end.
- FY2019 included refinancing of Ravenhall non-recourse debt, a $4.5 million related extinguishment loss, and repurchases of about $56 million principal of 2022 notes. The lease-accounting standard adopted in 2019 added operating lease right-of-use assets and liabilities to the balance sheet but had no reported impact on operations or cash flows. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the differing 2020 rebid exposure figures: the filing cites 38 contracts and $445.2 million, or 18% of revenue, in one section, versus $412.0 million, or 11.3%, in another.
- Review the timing, renewals, occupancy assumptions and realized economics of new federal contracts, particularly the California ICE agreements and reactivated facilities.
- Assess debt maturities, covenant headroom, revolver availability and refinancing access, including the 2022 senior notes and the large 2024 credit-facility maturities.
- Monitor cash available for dividends and capital investment after debt service, committed projects, and the REIT distribution requirement; dividends remain subject to Board discretion and debt restrictions.
- Track California litigation and legislation, detainee work-program lawsuits, the state tax assessment, and potential changes in insurance claims and reserves.