The GEO Group, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This annual filing reports full-year results, not standalone fourth-quarter results. GEO operates secure correctional and detention facilities, reentry programs, electronic monitoring and supervision services, and international operations.
Business context and financial performance
- At year-end, GEO managed or owned approximately 86,000 beds at 106 facilities, including idle facilities, and provided reentry and monitoring services to more than 250,000 individuals. The company reported four segments: U.S. Secure Services, Electronic Monitoring and Supervision Services, Reentry Services, and International Services.
- Revenue declined 4.0% to $2.257 billion from $2.350 billion in 2020. Segment revenue was $1.489 billion for U.S. Secure Services (down 5.2%), $278.9 million for Electronic Monitoring and Supervision (up 15.3%), $274.9 million for Reentry Services (down 11.2%), and $213.8 million for International Services (down 6.0%).
- Operating income rose to $288.1 million from $229.4 million; operating margin was approximately 12.8%, versus 9.8%. Net income attributable to GEO fell to $77.4 million from $113.0 million; diluted EPS was $0.58 versus $0.94. The 2021 effective tax rate was 63.6%.
- Net cash from operating activities was $282.6 million, down from $441.7 million. Capital expenditures were $69.4 million, versus $108.8 million. Cash, cash equivalents and restricted cash totaled $548.3 million at year-end; balance-sheet cash and cash equivalents were $506.5 million.
- Total debt reported on the balance sheet was $2.944 billion, including $310.1 million of non-recourse debt and finance leases. Recourse borrowings under the senior credit facility were $1.547 billion; the company reported approximately $2.7 billion of consolidated indebtedness excluding non-recourse debt. Only $19.3 million remained available under the revolver after letters of credit and covenant limitations.
- Current assets were $943.9 million and current liabilities $378.8 million. These figures imply a current ratio of about 2.5, though cash availability is affected by restricted balances and the company’s debt and covenant obligations.
- Management’s non-GAAP Adjusted Funds from Operations was $299.3 million, compared with $300.6 million in 2020. GEO cautions that its FFO measures are supplemental and not substitutes for GAAP results.
Material changes versus 2020
- U.S. Secure Services revenue decreased mainly due to facility contract terminations, non-renewals and deactivations; compensated mandays fell to approximately 18.7 million from 21.4 million. Reported average occupancy, excluding idle facilities, was 88.2%, versus 88.3%.
- Electronic monitoring revenue increased with higher client and participant counts. Reentry revenue fell due to the youth-business divestiture, facility closures and lower agency referrals. International revenue decreased primarily after the Arthur Gorrie facility in Australia transitioned to government operation, partly offset by favorable currency movements.
- GEO terminated its REIT election and became a taxable C corporation effective for 2021. The change created a one-time, non-cash deferred tax charge of approximately $70.8 million. The filing also cites approximately $29.3 million of incremental fourth-quarter tax expense from the higher corporate tax rate, including a $16.8 million catch-up for the first three quarters.
- The Board discontinued quarterly dividends and prioritized free cash flow for debt reduction. GEO paid $30.5 million in dividends during 2021, compared with $216.1 million in 2020.
- GEO drew significantly on its revolver to preserve liquidity. It issued $230 million of 6.50% exchangeable notes due 2026, redeemed approximately $194 million of 5.875% notes due 2022, and repurchased other senior notes. Interest expense increased to $129.5 million from $126.8 million.
- The youth division was divested on July 1, 2021; GEO retained ownership of six facilities and leased them to the successor organization. The transaction produced a reported loss on divestiture of approximately $4.5 million; GEO received $8 million in settlement of the related term note.
Outlook, risks and unusual items
- Outlook: No formal revenue or earnings guidance is provided in the filing. Management estimated 2022 capital expenditures of $76–$79 million, including $31–$32 million for facility maintenance and about $10 million for an electronic-monitoring transition to LTE. The estimated 2022 effective tax rate was 27%–29%, excluding discrete items.
- Management estimated carrying costs of $22.0 million in 2022 for nine idle facilities, which had about 10,900 vacant beds and combined net book value of roughly $282 million. No firm activation commitments were in place. Management’s illustrative estimate of potential incremental revenue and EPS if all were activated is not a forecast.
- The January 2021 presidential executive order directed the Attorney General not to renew DOJ contracts with privately operated criminal detention facilities. GEO reported that contracts with the BOP and USMS represented approximately 8% of 2021 revenue and faced renewal or option expirations. The filing also describes BOP non-renewals and other contract losses; certain facility expiration dates are stated inconsistently in the filing.
- Customer and policy concentration is material: ICE, BOP and USMS together accounted for 57.5% of 2021 revenue; U.S. federal agencies overall accounted for 58%. Contract renewals, re-bids, occupancy, government appropriations and political decisions may materially affect results.
- Debt refinancing is a significant risk. Term-loan and revolver maturities are in 2024; senior notes mature in 2023, 2024 and 2026. GEO disclosed discussions with creditors about a potential refinancing, exchange or recapitalization, but had no agreement as of filing. Six of 65 lending-syndicate banks, representing 54% of revolver commitments, said they would not renew commitments when they expire in 2024.
- In a Washington retrial, GEO received an unfavorable verdict and combined judgments of $23.2 million. The company disputes the result and intends to appeal; it recorded no accrual because it did not consider a loss probable following appeal. Other shareholder and detainee litigation remains pending. A separate state tax assessment is approximately $19.8 million; GEO says it has recorded a reserve based on its estimated probable loss.
- COVID-19 continued to disrupt facility populations and reentry referrals and increased spending on testing, protective equipment, medical care and sanitation. Other risks include labor shortages and wage inflation, interest-rate exposure, insurance and self-insurance claims, technology and supplier issues, and potential impairment of idle facilities or goodwill.
- GEO formed a captive insurer in October 2021. Self-insurance reserves were $74.2 million at year-end, and management notes that actual claims may differ from actuarial estimates. The company also disclosed a 2020 ransomware incident affecting limited employee and health information; it reported no material operating or financial-reporting impact.
Important facts for investors to verify
- Near-term debt maturities, available covenant-compliant borrowing capacity, refinancing progress, and the ability to generate cash sufficient for debt service.
- Status and economics of federal and state contract renewals, re-bids and terminations, including the effects of the DOJ executive order and facility-date inconsistencies in the filing.
- Whether idle facilities can be reactivated or sold, and whether the related carrying values and impairment assumptions remain supportable.
- Cash flow quality and sustainability, including working-capital movements, required capital spending, restricted cash and the effect of discontinued dividends.
- Outcome and potential financial exposure from the Washington judgments, the state tax assessment and other litigation; also verify future tax expense after the REIT transition.
Grant Thornton LLP issued unqualified opinions on the 2021 consolidated financial statements and internal control over financial reporting.