The GEO Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. GEO operates secure facilities, electronic monitoring and supervision, reentry services, and international services. At quarter-end, it managed or owned approximately 82,000 beds at 102 facilities and provided community supervision services for more than 400,000 people on average.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $588.2 | $565.4 | $1,139.4 | $1,141.8 |
| Operating income | $95.1 | $72.4 | $176.6 | $138.0 |
| Operating margin | 16.2% | 12.8% | 15.5% | 12.1% |
| Net income attributable to GEO | $53.7 | $42.0 | $91.9 | $92.5 |
| Diluted EPS | $0.37 | $0.29 | $0.63 | $0.70 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $172.0 | $205.6 |
- Q2 revenue increased 4.0% and operating income increased 31.3% year over year. Six-month revenue was nearly flat, while operating income rose 27.9%.
- Q2 net income attributable to GEO rose year over year, but six-month net income and diluted EPS were lower than in 2021. The six-month effective tax rate increased to 29.3% from 12.8%, principally because GEO ended its REIT status and became a taxable C corporation.
- Cash provided by operations fell $33.6 million year over year for the first half, partly reflecting less favorable working-capital timing than in 2021. Investing activities used $19.3 million, including $36.1 million of capital expenditures; financing activities used $59.9 million, primarily for debt payments.
Segments and material changes
- Electronic Monitoring and Supervision: Q2 revenue grew 87.4% to $121.5 million, principally from higher average participant counts in the Intensive Supervision and Appearance Program (ISAP). Segment operating income rose to $54.2 million from $29.0 million.
- U.S. Secure Services: Q2 revenue declined 4.1% to $353.4 million, with deactivations and ramp-downs partly offset by new or expanding contracts and higher rates and occupancy. Six-month revenue decreased 6.7%. U.S. facility occupancy, excluding idle facilities, was 89.6% for the first half versus 90.5% in 2021.
- Reentry Services: Q2 revenue declined 14.7% to $65.7 million, largely due to the July 2021 sale of the youth business, partly offset by new or reactivated programs and higher census at certain centers.
- International Services: Q2 revenue declined 13.7% to $47.6 million, reflecting foreign-exchange effects and the transfer of the Dungavel contract to the U.K. government.
- G&A declined 9.9% in Q2, partly because 2021 included $7.5 million of one-time restructuring expense. Q2 included a $3.7 million gain from selling the Perry County facility; first-half 2021 included $4.7 million of debt-extinguishment gains, with no comparable gain in 2022.
Financial position, debt and liquidity
- At June 30, cash and cash equivalents were $587.9 million; cash, cash equivalents and restricted cash reported for cash-flow purposes totaled $636.8 million. Current assets were $1,023.4 million and current liabilities were $389.2 million.
- Total debt, including non-recourse debt and finance leases, was $2,871.7 million, compared with $2,944.4 million at December 31, 2021. Long-term debt on the balance sheet was $2,574.1 million. Debt includes $1,493.0 million borrowed under the senior credit facility and notes with stated maturities in 2023, 2024 and 2026.
- The $900 million revolver had approximately $735 million drawn and approximately $99 million of letters of credit outstanding, leaving about $66 million of additional borrowing capacity. The weighted-average rate on credit-facility borrowings was 3.20%. Management noted that a 1 percentage-point increase in the facility’s average interest rate would add approximately $16 million to annual interest expense.
- GEO discontinued its quarterly dividend following its 2021 REIT termination. No dividends were declared in the first half of 2022.
Outlook, risks and unusual items
- Debt restructuring: After quarter-end, on July 18, 2022, GEO signed a transaction support agreement to address debt maturities. Proposed steps include extending approximately 81% of specified credit-facility commitments and term loans to March 2027, exchanging 2023 and 2024 notes, and exchanging approximately $239 million of 2026 notes for 9.5% second-lien notes due 2028. Completion is subject to conditions; GEO cautioned there is no assurance the transaction will close. July rating downgrades to Caa2 by Moody’s and CC by S&P were attributed to rating methodologies concerning the proposed transaction.
- Management outlook: GEO estimated a 2022 annual effective tax rate of approximately 27%–29%, excluding discrete items. It planned approximately $30.3 million for active capital projects, of which $9.5 million had been spent in the first half, and said the remaining $20.8 million was expected to be spent during the rest of 2022. The filing does not provide clear full-year revenue or earnings guidance.
- Idle facilities: Nine facilities with 10,361 vacant beds had a combined net book value of $272.6 million. GEO estimated 2022 annual net carrying costs of $21.8 million and reported no firm activation commitments. Management’s estimate of potential annual revenue and EPS if all were activated is an illustrative scenario, not contracted guidance.
- Government and operating risks: The 2021 executive order directs the Attorney General not to renew DOJ contracts with privately operated criminal detention facilities, consistent with applicable law. Three GEO facilities under direct USMS contracts had option periods expiring between February and September 2023; together they represented about 6% of 2021 revenue. The filing also describes COVID-19-related utilization impacts, government budget and contract risks, inflation and labor costs, and foreign-exchange exposure.
- Legal contingencies: Washington litigation produced a combined $23.2 million judgment, later increased by $12.7 million for fees, costs and interest. Enforcement was stayed pending appeal; GEO did not accrue the judgment because it considered a loss not probable. Other disclosed matters include detainee work-program litigation and the ongoing en banc appeal concerning California’s AB-32 law. A further similar California lawsuit was filed in July 2022.
- GEO reported disclosure controls were effective and no significant changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, conditions and final terms of the proposed debt exchanges and credit-facility refinancing, including cash costs, interest rates, maturities, collateral and covenant implications.
- Cash generation, revolver availability and covenant compliance as debt maturities approach and variable interest rates rise.
- Whether higher ISAP participation offsets continued pressure from lower secure-services activity, idle facilities and contract transitions.
- Developments in the Washington judgment appeal, detainee work-program cases, and California and Washington restrictions on private detention contracts.
- Actual utilization and carrying costs of idle facilities, and whether any new contract activations are secured.