The GEO Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015, compared with the three months ended March 31, 2014. GEO operates correctional, detention, reentry, community-based, youth-services and monitoring businesses in the U.S. and internationally, and is a REIT.
Financial performance and position
- Revenue: $427.4 million, up 8.7% from $393.1 million. Operating income was $52.7 million, up 8.4%; operating margin was approximately 12.3%, versus 12.4%.
- Profit: Net income attributable to GEO was $28.8 million, versus $28.0 million, while diluted EPS was unchanged at $0.39. Interest expense increased 19.3% to $24.6 million. The effective tax rate rose to 9.4% from 7.5%.
- Cash flow: Operating cash flow was $60.7 million, down from $63.2 million. Capital expenditures were $34.2 million; operating cash flow less capital expenditures was approximately $26.5 million. Investing cash outflow was $349.0 million, chiefly reflecting the LCS acquisition.
- Liquidity: Cash and cash equivalents were $69.0 million at quarter-end, versus $41.3 million at December 31, 2014. Current assets were $409.1 million and current liabilities $268.9 million. The revolver had $238.0 million of additional borrowing capacity after borrowings and letters of credit.
- Debt: Total debt was $2.0 billion, up from $1.6 billion at year-end, largely due to acquisition financing. Long-term debt was $1.80 billion; non-recourse debt was $170.5 million. GEO reported compliance with credit agreement covenants. Revolver and term-loan borrowings carried a 2.8% weighted-average interest rate at quarter-end.
- Distributions and supplemental measures: GEO paid $0.62 per share in Q1 and declared another $0.62 quarterly dividend after quarter-end. Normalized FFO was $44.2 million versus $41.4 million; AFFO was $52.9 million versus $51.4 million. These are non-GAAP measures.
Material changes and notable items
- On February 17, GEO acquired eight LCS correctional and detention facilities with more than 6,500 beds for approximately $307.4 million in cash. The purchase allocation included $107.3 million of goodwill; the allocation remained preliminary. LCS results since acquisition were not significant. Acquisition-related expenses included approximately $2.1 million recorded in general and administrative expense.
- U.S. Corrections & Detention revenue grew 7.1% to $285.6 million, supported by facility activations, LCS and population gains. Segment occupancy fell to 93.4% from 96.1%, partly because acquired LCS facilities averaged approximately 50% occupancy.
- GEO Care revenue increased 3.5% to $79.4 million. International Services revenue declined 18.3% to $40.7 million, affected by foreign exchange and the wind-down of a U.K. contract. Facility Construction & Design recorded $21.8 million of Ravenhall project revenue, versus none in the prior-year quarter.
- Comprehensive income attributable to GEO declined to $23.1 million from $29.0 million, including a $4.1 million after-tax unrealized loss on Ravenhall interest-rate swaps and foreign-currency translation losses.
Outlook, risks and contingencies
- Management expected to begin intake at the 1,940-bed Great Plains facility in Q2 2015. The Mesa Verde 400-bed facility began intake in March. Together, these two reactivations were expected to generate more than $50 million in annualized revenue.
- Management expected a 640-bed Adelanto expansion and a 626-bed Karnes County expansion to be completed in 2015, with estimated additional annualized revenues of approximately $21 million and $20 million, respectively. GEO also began mobilizing its idle 1,740-bed North Lake facility after quarter-end, but had no contract for it and said activation depended on securing one.
- GEO estimated $166.0 million of remaining spending through 2017 on existing capital projects. Its 2015 liquidity assessment said cash, operating cash flow and available credit were expected to support capital needs; this is not formal earnings guidance.
- Key risks include government budget constraints, contract awards and renewals, occupancy and idle-facility activation, labor and medical costs, debt service and access to financing, REIT qualification and dividend capacity, acquisition integration, foreign exchange and interest-rate exposure. A 1% increase in credit-facility rates was estimated to add about $7.0 million to annual interest expense.
- GEO disclosed litigation and claims arising in the ordinary course and did not expect pending matters to materially adversely affect financial condition, results or cash flows. It had $252.1 million of estimated total project costs, including its Ravenhall capital contribution, and disclosed international guarantees and other commitments.
Important facts for investors to verify
- Whether the acquired LCS facilities improve occupancy and earnings, and whether final purchase-accounting adjustments materially change goodwill or acquired asset values.
- Whether Great Plains, Mesa Verde and planned expansions activate on schedule and achieve the stated revenue expectations; North Lake remained without a contract.
- How Ravenhall construction, contract receivables, project funding and the State’s expected completion payment affect cash flow and debt.
- Whether leverage, variable-rate exposure, covenant headroom and planned capital spending remain manageable alongside REIT distributions.
- Whether government budget conditions, contract changes and international foreign-exchange movements affect occupancy, revenue or margins.