The GEO Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated.
Business context and reporting period
GEO is a REIT providing secure facility management, reentry and community-based services, electronic monitoring, transportation, and facility development in the U.S. and internationally. At quarter-end, it managed or owned approximately 96,000 beds at 130 facilities and provided community supervision to more than 210,000 individuals. The filing is unaudited.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $631.6 | $583.5 | $1,856.2 | $1,732.0 |
| Operating income | $78.2 | $69.8 | $234.1 | $201.2 |
| Operating margin | 12.4% | 12.0% | 12.6% | 11.6% |
| Net income attributable to GEO | $45.9 | $39.3 | $128.6 | $111.7 |
| Diluted EPS | $0.39 | $0.33 | $1.08 | $0.92 |
| Operating cash flow | Not separately provided | Not separately provided | $323.0 | $220.2 |
Q3 net margin was approximately 7.3%, versus 6.7% a year earlier. Nine-month operating cash flow increased by $102.7 million; management attributed part of the improvement to the timing of billings, collections and payments, as well as lower capital spending. Investing activities used $77.6 million, including $90.8 million in capital expenditures. Financing activities used $232.8 million, including $174.3 million in dividends. Cash, cash equivalents and restricted cash totaled $95.0 million at September 30, compared with $126.7 million a year earlier.
At September 30, total debt was $2,689.6 million, compared with $2,748.8 million at December 31, 2018. Cash and cash equivalents were $54.0 million; additional restricted cash and investments are subject to restrictions. Current assets were $517.6 million and current liabilities $408.6 million. The company reported approximately $393 million of remaining Revolver capacity after borrowings and letters of credit. Its weighted-average Credit Agreement borrowing rate was 4.1%.
GEO declared dividends of $0.48 per share in each of the first three quarters of 2019, versus $0.47 per share in 2018. It paid no shares under its buyback program during the first nine months of 2019.
Material changes versus the prior comparable period
- Q3 revenue grew 8.2%; nine-month revenue grew 7.2%. Growth was led by Secure Services and GEO Care, including facility activations, higher federal-client populations and increased monitoring and community-service counts.
- International Services revenue declined 7.6% in Q3 and 8.7% for the nine months, affected by the Parklea contract transition and unfavorable foreign exchange.
- Q3 operating income increased 12.0%; nine-month operating income increased 16.4%. Operating expenses grew more slowly than revenue for the nine-month period, while launch and start-up costs remained a factor.
- Nine-month interest expense rose 5.1%, primarily because of higher average Revolver borrowings. Nine-month net income also included a $5.1 million loss on debt extinguishments, principally related to the Ravenhall refinancing and credit-agreement amendment.
- Operating cash flow improved substantially year over year, while capital expenditures fell to $90.8 million from $161.5 million in the first nine months of 2018.
Outlook, management commentary, risks and unusual items
- Management said it believes cash on hand, operating cash flow and Revolver availability will meet 2019 capital requirements. It estimated existing company-financed projects at approximately $193 million, with $143 million spent and $50 million remaining to be spent through year-end.
- The filing does not provide a full-year revenue or earnings forecast. Management estimated an annual effective tax rate of approximately 9%–11%, excluding discrete items.
- New or expanded business included the North Lake facility, activated October 1 and expected to contribute about $37 million in annualized revenue; the South Louisiana facility, expected to contribute about $25 million; and the Montgomery Processing Center expansion, expected to contribute about $10 million. A proposed 300-bed Ravenhall expansion was expected to generate about $19 million in annualized revenue. GEO Amey’s ten-year UK transportation contract renewal was expected to generate approximately $760 million in revenue over the contract period.
- GEO reported that California discontinued its Central Valley contract at the end of September 2019 and expected the Desert View and Golden State contracts to end by April 1 and July 1, 2020, respectively. It also expected Queensland’s Arthur Gorrie facility to transition to government operation between late 2019 and Q1 2020. These changes may offset growth elsewhere.
- Approximately 3,000 beds at four idle facilities were being marketed. Management estimated annual carrying costs of $10.6 million and said activation could add approximately $70 million in annualized revenue and $0.05–$0.10 to EPS, assuming stated occupancy and average per-diem conditions; no firm activation commitments were reported.
- Litigation includes class and other lawsuits concerning detainee work programs and wage-related claims in Colorado, Washington and California. GEO said it had recorded no accrual because a loss was not considered probable or reasonably estimable at that stage; an unfavorable outcome could materially affect results. A separate state tax assessment, including tax, penalties and interest of approximately $18.8 million, is being contested and is reserved based on management’s estimate of the probable loss.
- Public resistance to private correctional services, customer contract reductions or nonrenewals, government budgets, high debt, refinancing access and covenant compliance are key risks. Six lenders had indicated they would not provide new financing, although they remained committed under existing agreements; management did not expect this to impair current financial flexibility.
- Interest-rate sensitivity: management estimated that a 1 percentage-point increase in rates on Credit Agreement borrowings would raise annual interest expense by about $13 million. A 10% change in historical foreign currency rates was estimated to affect financial position by about $4.5 million and nine-month results by about $0.4 million.
- GEO adopted lease accounting on January 1, 2019, recording approximately $140 million of operating lease assets and $147 million of operating lease liabilities at adoption. Management said adoption materially affected the balance sheet, but not the income statement or cash flows.
Most important facts for investors to verify
- Whether the growth from facility activations and federal-client populations offsets California and international contract losses, and whether announced contract ramps meet expected timing and revenue.
- Cash generation after dividends and capital expenditures, the availability of Revolver capacity, debt maturities and covenant headroom, and the effect of variable interest rates.
- The status and potential financial exposure of detainee-work litigation and the contested $18.8 million state tax assessment.
- Whether idle facilities are reactivated, and whether the projected revenue and EPS contribution can be achieved without additional start-up or carrying costs.
- Whether the $0.48 quarterly dividend remains supportable given REIT distribution requirements, operating cash flow, debt restrictions and financing needs.