The GEO Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparative periods are Q2 and first half 2019. GEO is a REIT providing secure-facility, reentry, monitoring and related services. At quarter-end, it reported approximately 93,000 beds at 125 facilities and community supervision services for more than 210,000 people.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $587.8 million | $614.0 million | $1,192.8 million | $1,224.6 million |
| Operating income | $63.5 million | $81.2 million | $120.1 million | $156.0 million |
| Net income attributable to GEO | $36.7 million | $41.9 million | $61.9 million | $82.6 million |
| Diluted EPS | $0.31 | $0.35 | $0.52 | $0.69 |
| Operating cash flow | Not separately provided | Not separately provided | $256.8 million | $217.1 million |
- Q2 revenue fell 4.3% and operating income fell 21.8% year over year; first-half revenue declined 2.6% and operating income declined 23.0%. Operating margin was approximately 10.8% in Q2 versus 13.2% a year earlier.
- Q2 segment revenue declines included GEO Care, down 11.1%, and GEO Secure Services, down 2.4%. First-half GEO Care revenue decreased 8.6%; International Services revenue decreased 7.2%, including adverse foreign-exchange effects.
- First-half operating cash flow increased year over year, supported in part by favorable timing of collections and payments. Investing activities used $49.2 million, including $53.5 million of capital expenditures. Financing activities used $167.4 million, including $116.2 million in dividends and $262.4 million in long-term debt payments, partly offset by $225.6 million of debt proceeds.
- Cash and cash equivalents were $75.7 million; restricted cash and cash equivalents were $28.3 million. Total debt was approximately $2.70 billion, including $2.37 billion of long-term debt. Revolver borrowings were $491.7 million, with approximately $344.6 million of additional capacity available. The company reported compliance with debt covenants at June 30.
- First-half dividends were $0.96 per share. The Board declared a further $0.48 dividend in July, but management expects quarterly dividends to fall to $0.34 beginning with the October 2020 payment, directing excess cash toward debt reduction.
Material changes and operating developments
- Management attributed lower occupancy and demand to COVID-19, including fewer border crossings and apprehensions, reduced federal court sentencing, government efforts to reduce custody populations, and fewer referrals to reentry programs. Average company-wide occupancy was 88.4% in the first half, compared with 93.3% in 2019.
- GEO Secure Services Q2 compensated mandays fell to approximately 5.4 million from 6.0 million; segment occupancy excluding idle facilities was 89.2%, versus 96.2%. New and reactivated contracts partly offset terminations and lower populations.
- GEO Care revenue was also affected by contract closures, lower ISAP participant counts and reduced referrals. International revenue reflected currency headwinds.
- The Federal Bureau of Prisons will not rebid the 1,900-bed D. Ray James facility contract when it expires September 30, 2020; the contract generated approximately $60 million in annualized revenue. GEO also reported transitions of certain Australian operations and the discontinuation of California contracts.
- GEO reported a five-year ICE ISAP contract expected to serve 90,000–100,000 participants daily, with a competitor’s protest denied in July. It also reported a ten-year rebid award for its South Texas ICE Processing Center.
Outlook, risks and contingencies
- Management estimated COVID-related 2020 revenue declines of approximately 9% in GEO Secure Services and 10% in GEO Reentry Services. These estimates are subject to substantial uncertainty; the filing provides no comprehensive full-year revenue or earnings forecast.
- COVID-related costs include personal protective equipment, testing, medical expenses, sanitation and facility modifications. GEO reported $3.9 million of COVID-related expenses in Q2 and $4.8 million for the first half, as defined in its non-GAAP reconciliation, and expected several million dollars of such costs during 2020.
- Management said it would defer capital projects where possible, review costs and consider selling company-owned facilities. It estimated $29 million of remaining spending on active capital projects during the rest of 2020. It expected cash, operating cash flow and revolver availability to meet 2020 requirements, while noting uncertainty from the pandemic and government budgets.
- Management targeted approximately $100 million of debt reduction during 2020 and an average of $50–$100 million annually thereafter from excess cash flow. S&P revised its outlook to negative in May while affirming GEO’s rating.
- Material risks include continued COVID-19 outbreaks, lower facility use, contract nonrenewals or cancellations, government budget constraints, high leverage and refinancing access, interest-rate and foreign-exchange exposure, and policy or legislative restrictions on private operators.
- Legal matters include a shareholder class action filed July 7 alleging misleading statements about COVID-19 response procedures; wage and detainee-work-program litigation; a California permitting case in which a temporary restraining order was issued; and litigation challenging California’s AB-32. GEO recorded no accrual for these matters because losses were not considered probable or reasonably estimable at the reporting stage. A separate state tax assessment of approximately $19.2 million is reserved and disputed.
- GEO deferred approximately $15 million of employer Social Security taxes under the CARES Act. The filing also reports $67 million of active capital project commitments, of which $38 million had been spent by June 30.
Important facts for investors to verify
- Whether occupancy, border activity, court sentencing and reentry referrals recover, and how actual results compare with management’s estimated COVID-related revenue declines.
- The financial effect of the D. Ray James contract expiration and any further government contract changes or facility closures.
- Cash generation after working-capital timing effects, scheduled debt service, covenant headroom and actual revolver availability.
- The timing and execution of the announced dividend reduction and planned debt repayments.
- Developments in the COVID-19-related shareholder suit, detainee litigation, California proceedings and the disputed tax assessment.