The GEO Group, Inc. — Q1 2014 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. GEO is a REIT operating correctional, detention, re-entry, community-services and monitoring businesses in the U.S. and internationally. At quarter-end it managed or owned approximately 77,000 beds at 98 facilities and monitored more than 70,000 people.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $393.1 | $377.0 | +4.3% |
| Operating income | $48.6 | $41.3 | +17.7% |
| Operating margin | 12.4% | 10.9% | +1.4 percentage points |
| Net income attributable to GEO | $28.0 | $23.4 | +19.5% |
| Diluted EPS | $0.39 | $0.33 | +$0.06 |
| Operating cash flow | $63.2 | $45.4 | +$17.7 |
| Capital expenditures | $17.5 | $11.4 | +$6.1 |
- Operating expenses were $291.9 million, or 74.3% of revenue, versus $280.8 million, or 74.5%, a year earlier. Depreciation and amortization was $24.1 million versus $22.9 million; general and administrative expense fell to $28.5 million from $32.0 million.
- Interest expense increased to $20.7 million from $19.3 million. Income before taxes and equity earnings was $28.7 million versus $23.1 million. The tax provision was $2.1 million versus $0.9 million; the effective tax rate was 7.5% versus 3.8%.
- Cash and equivalents were $38.1 million at March 31, down from $52.1 million at year-end 2013. Current assets were $388.7 million and current liabilities $240.6 million; the current ratio was approximately 1.62.
- Total debt, including capital leases and non-recourse debt, was $1.578 billion, down from $1.585 billion at year-end. Long-term debt was $1.480 billion. Revolver borrowings were $335.0 million, with about $61.0 million of letters of credit and $304.0 million of remaining capacity; the stated weighted-average credit-facility rate was 2.9%.
- Investing used $33.6 million, including $13.0 million for the Protocol acquisition and $17.5 million of capital expenditures. Financing used $44.6 million, including $41.1 million of dividends. Cash declined by $14.1 million during the quarter.
Material changes and operating developments
- U.S. Corrections & Detention revenue rose 7.2% to $266.7 million, driven mainly by new/activated facilities and higher populations. Average occupancy in active U.S. facilities was 96.1%, versus 96.0%.
- GEO Community Services revenue increased 3.7% to $76.7 million, supported by monitoring contracts and the Protocol acquisition; operating costs rose faster than revenue, partly due to youth-facility census declines and fixed overhead.
- International Services revenue fell 8.4% to $49.8 million, primarily from a $6.2 million foreign-exchange headwind, partly offset by Australian population and contractual increases. Segment operating income increased to $2.6 million from $1.8 million.
- GEO paid $13.0 million in cash to acquire certain Protocol assets in February. Preliminary purchase accounting included $7.4 million of intangible assets and $3.7 million of goodwill; the allocation remained provisional.
- GEO assumed management of three Florida facilities totaling 3,854 beds effective February 1 and expanded contracted capacity at its Rio Grande facility from 1,500 to 1,900 beds. Subsequent to quarter-end, it announced the McFarland reactivation and a 640-bed Adelanto expansion.
- GEO Care Holdings paid $6.5 million to terminate services and license agreements; GEO is recognizing the payment as deferred revenue through June 30, 2015.
Outlook, risks and contingencies
- No consolidated full-year earnings or revenue guidance is provided. Management estimated an annual effective tax rate of approximately 8%, excluding non-recurring items. It expected $40.7 million of remaining spending on committed capital projects through 2014 and approximately $22 million of 2014 maintenance capital expenditures.
- Management said cash, operating cash flow and available credit were expected to support 2014 capital needs. It also cautioned that acquisitions or new projects could require additional financing, which might not be available on acceptable terms.
- Management cited potential opportunities in corrections, detention, re-entry and monitoring, but warned that government budget constraints could lead to lower rates, reduced services, delayed projects, non-renewals or contract losses. Labor, medical and facility start-up costs, occupancy, REIT qualification, financing and foreign exchange are also risks.
- Five idle facilities had approximately 5,800 vacant beds and a $181 million carrying value. Estimated 2014 carrying costs were $21.2 million; GEO had no firm activation commitments. Management estimated activation of all such beds could yield about $125 million in annualized revenue and $0.35–$0.40 of annualized EPS, based on stated occupancy and margin assumptions.
- The credit agreement limits leverage and requires minimum interest coverage. GEO reported compliance with its debt covenants at March 31. A 1-percentage-point increase in the average rate on the senior credit facility would increase annual interest expense by approximately $6.3 million.
- GEO disclosed ordinary-course litigation and claims, including facility-condition, employment and personal-injury matters, but did not expect pending matters to have a material adverse effect. It also had international guarantees, joint-venture support obligations and project commitments. The company stated that $20.0 million was outstanding under its GEOAmey working-capital line.
- As a REIT, GEO generally must distribute at least 90% of REIT taxable income. The Board declared a $0.57-per-share dividend payable in May 2014; future distributions remain subject to Board discretion, cash flow and debt restrictions.
Important facts for investors to verify
- Whether new and expanded facility contracts reach expected occupancy and revenue, and whether idle beds can be reactivated without significant cost.
- Collection timing and receivables quality: accounts receivable increased to $275.8 million from $250.5 million at year-end, and the doubtful-account allowance increased to $3.3 million from $2.5 million.
- Debt capacity, covenant headroom, refinancing needs and sensitivity to variable interest rates, alongside the cash demands of dividends, capital projects and acquisitions.
- The final Protocol purchase-price allocation and the economics of the acquisition; also monitor the deferred recognition of the $6.5 million GEO Care termination payment.
- International foreign-exchange exposure, joint-venture support requirements, and the effect of government budget constraints on contract renewals, rates and customer payments.