The GEO Group, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. GEO is a REIT providing correctional, detention, reentry, community supervision, monitoring and youth services, principally for government customers. This unaudited filing covers the quarter and nine months ended September 30, 2018, compared with the same periods in 2017. At quarter-end, GEO reported about 96,000 beds at 136 facilities and community supervision services for more than 192,000 people.
Financial performance
Amounts are in millions of dollars except per-share data. Margins are approximate calculations from reported figures.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $583.5 | $566.8 | $1,732.0 | $1,694.4 |
| Operating income | $69.8 | $62.9 | $201.2 | $181.8 |
| Operating margin | 12.0% | 11.1% | 11.6% | 10.7% |
| Net income attributable to GEO | $39.3 | $38.5 | $111.7 | $109.9 |
| Diluted EPS | $0.33 | $0.31 | $0.92 | $0.91 |
| Interest expense | $38.0 | $38.7 | $110.8 | $109.7 |
- Cash flow: Nine-month operating cash flow was $220.2, versus $57.9 a year earlier. Investing activities used $152.0, including $161.5 of capital expenditures; financing activities used $69.6. Operating cash flow less capital expenditures was approximately $58.7, compared with negative $46.2 in 2017, calculated from the filed figures.
- Liquidity: September 30 cash was $66.0, with restricted cash and cash equivalents of $54.9. Cash, cash equivalents and restricted cash included in the cash flow statement totaled $126.7. Current assets were $571.6 versus current liabilities of $673.5.
- Debt: Total debt was $2.731 billion, compared with $2.582 billion at year-end 2017. GEO had approximately $788 million outstanding on its term loan and $456 million on its revolver; after about $70 million of letters of credit, approximately $374 million of revolver capacity remained. Weighted-average credit-facility borrowing cost was 4.3%.
- Distributions and REIT measures: The quarterly dividend remained $0.47 per share; $172.3 was paid in the first nine months. Nine-month NAREIT FFO was $166.9, Normalized FFO $173.2 and AFFO $219.9, compared with $158.3, $172.3 and $225.7, respectively, in 2017. These are non-GAAP measures.
Material changes versus prior comparable periods
- Q3 revenue rose 3.0% and nine-month revenue rose 2.2%. Nine-month segment growth included U.S. Corrections & Detention up 3.1%, GEO Care up 14.3%, and International Services up 48.3%. GEO attributed growth to CEC acquisition effects, federal client populations and rates, higher monitoring-service counts, and Ravenhall operations.
- Ravenhall facility construction revenue ended after the project was completed in late 2017. International operating revenue increased as the facility entered service; the State of Victoria’s approximately $224 million payment reduced the related contract receivable and construction debt, also lowering interest income.
- Q3 operating income increased while general and administrative expense fell 2.9%, partly because prior-year CEC acquisition costs did not recur. Nine-month operating expenses increased 1.8%, below revenue growth, while nine-month interest expense increased 1.0%.
- Nine-month operating cash flow improved substantially from 2017, when construction-period Ravenhall contract-receivable growth had used significant cash. Capital expenditures increased to $161.5 from $104.1.
- GEO repurchased 3.12 million shares for $70.4 million during the first nine months under a $200 million authorization. The balance sheet shows $70.4 million of treasury stock; no publicly announced-program repurchases occurred in Q3.
Outlook, commentary, risks and unusual items
- Management said it remained encouraged by growth opportunities and expected cash on hand, operating cash flow and credit availability to support 2018–2019 capital needs. The filing does not provide a consolidated revenue or earnings forecast. Management estimated an annual effective tax rate of approximately 10%–12%, excluding discrete items.
- GEO was negotiating refinancing of the Ravenhall non-recourse construction facility, with about $328 million outstanding and maturity in September 2019. Because no refinancing agreement was in place at September 30, the debt was presented as current; management anticipated completion in Q1 2019.
- GEO estimated $40.7 million of remaining spending through 2019 on existing capital projects. It was marketing about 4,700 idle U.S. beds, with estimated 2018 carrying costs of $17.6 million. Management described possible annualized incremental revenue of about $105 million and EPS of $0.15–$0.20 if all such beds were activated, but reported no firm activation commitments.
- Contract developments included a two-year Idaho contract expected to generate about $17 million in annualized revenue, and a Scottish prisoner-transport contract expected to average about $39 million annually from January 2019. GEO lost the Parklea rebid and expected transition in March 2019; its Allen, Louisiana contract ended in April 2018.
- After September 30, Hurricane Michael damaged the Bay Correctional Facility in Florida; residents were relocated. Insurance coverage is being assessed, but proceeds and timing are uncertain, may not cover all losses, and management expected near-term adverse operating effects at the facility.
- Key risks include dependence on government budgets and contract awards, renewals and utilization; labor, medical and operating costs; high debt and variable interest rates; access to refinancing and covenant compliance; foreign exchange exposure; litigation; and REIT distribution and qualification requirements. A 1% increase in credit-facility rates was estimated to add about $12 million to annual interest expense.
- Legal matters include class actions concerning detainee work programs and wage-related claims in Colorado, Washington and California. GEO said losses were not considered probable or reasonably estimable for those matters and no accrual was recorded. A separate state tax assessment was about $19.6 million; GEO had reserved its estimated most-probable loss and was contesting the assessment. The Mississippi case settled in July 2018 without admission of liability and without material financial impact.
Most important facts for investors to verify
- Whether the Ravenhall refinancing was completed on expected timing and terms, and how its maturity classification and debt service changed.
- Whether cash generation can support capital spending, dividends and share repurchases while managing leverage and covenant headroom.
- Actual activation, occupancy and economics of idle beds, and performance and renewal outcomes for major government contracts.
- The ultimate insurance recovery and operating impact from Hurricane Michael, and the development of wage-related litigation and the tax assessment.
- How recurring operating performance compares with the reported non-GAAP FFO, Normalized FFO and AFFO adjustments.