The GEO Group, Inc. — Q3 2013 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. GEO owns, leases and operates correctional, detention and re-entry facilities and provides community-based, monitoring and related services. At quarter-end it reported approximately 73,000 beds across 96 facilities and monitoring services for more than 70,000 people. GEO began operating as a REIT for tax purposes on January 1, 2013; non-real-estate activities are generally held in taxable REIT subsidiaries.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $379.8m | $369.1m | $1,138.5m | $1,100.3m |
| Operating income | $44.8m | $51.6m | $137.5m | $145.0m |
| Operating margin | 11.8% | 14.0% | 12.1% | 13.2% |
| Income from continuing operations | $32.2m | $14.5m | $89.8m | $49.1m |
| Net income attributable to GEO | $29.9m | $15.6m | $87.5m | $53.1m |
| Diluted EPS | $0.42 | $0.25 | $1.22 | $0.87 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $157.8m | $227.6m |
Revenue grew 2.9% in Q3 and 3.5% for the first nine months. Operating income declined 13.1% in Q3 and 5.2% year to date as operating costs and general and administrative expenses rose. Net income attributable to GEO increased despite lower operating income, helped substantially by the change from income tax expense in 2012 to tax benefit in 2013. The tax benefit was $7.8m for Q3 and $14.1m for the nine-month period; the company attributed it to the REIT conversion, nonrecurring items and, year to date, a $6.4m release of tax reserves following IRS audit settlements. Q3 and nine-month 2013 discontinued operations included a $2.3m insurance-claims charge.
Segment revenue for the first nine months increased in U.S. Corrections & Detention to $756.2m (up 4.4%) and GEO Community Services to $225.9m (up 3.8%); International Services revenue was $156.4m (down 1.0%), including foreign-exchange headwinds. Company-wide average facility occupancy was 94.8% for the nine months, compared with 95.8% in 2012; U.S. Corrections & Detention occupancy was 95.5%, compared with 96.3%.
Financial position, liquidity and debt
- Cash and cash equivalents were $53.2m at September 30, 2013, versus $31.8m at December 31, 2012. Current assets were $373.8m and current liabilities $231.1m.
- Total debt, including capital leases and non-recourse debt, was $1.56bn, compared with $1.49bn at year-end 2012. Long-term debt on the balance sheet was $1.45bn. Senior credit facility borrowings were $599.3m; $341.8m of revolver capacity remained after letters of credit.
- GEO issued $300m of 5.125% senior notes due 2023 and refinanced its credit agreement in 2013. The new facility includes a $300m term loan due 2020 and a $700m revolver due 2018. The company reported compliance with debt covenants at quarter-end.
- For the nine months, operating cash flow was $157.8m, down from $227.6m. Capital expenditures were $101.5m; investing cash use was $86.3m. Financing cash use was $47.1m, including $107.5m of dividends paid.
- GEO paid quarterly dividends of $0.50 per share in each of the first three quarters. After quarter-end, the board declared a $0.55 dividend per share, payable November 26, 2013.
Changes, outlook and risks
- GEO completed the $65m purchase of the 1,287-bed Joe Corley Detention Center in June, converting a managed-only operation to a company-owned facility. It also defeased $17.2m of South Texas non-recourse bonds, recording a $1.5m extinguishment loss.
- After quarter-end, GEO tendered and redeemed its remaining 7.75% senior notes, financing the transaction with a new $250m offering of 5.875% notes due 2022 and cash. The filing reports a $17.4m loss associated with the tender and redemption, partly offset by swap settlement proceeds.
- New awards included a 400-bed ICE transfer center in Louisiana, expected to open in late 2014 and generate approximately $8.5m in annualized revenue, and California contracts for 1,400 inmates at previously idle facilities, expected to generate $30.7m at full occupancy. Post-quarter awards in Florida cover three facilities and approximately 3,854 beds, with estimated combined annualized revenue of $56.3m at full occupancy. These are stated estimates, not guaranteed results.
- Management said cash on hand, operating cash flow and revolver availability should support 2013 capital requirements. It estimated $44.5m of remaining spending on committed projects through year-end and $30m–$35m of 2013 maintenance capital expenditures. No full-year earnings or revenue guidance is provided.
- Approximately 6,000 beds at six idle facilities were being marketed; their carrying value was $193.6m and estimated 2013 annual carrying costs were $20.4m. Management gave a hypothetical annual revenue and EPS benefit if all were activated, but stated there were no firm activation commitments.
- Risks include government budget constraints and reduced contract rates or service scope, contract loss or non-renewal, occupancy and labor-cost pressures, REIT qualification and tax matters, foreign-exchange exposure, leverage and refinancing needs, and litigation and insurance claims. Management did not expect pending litigation to materially affect financial condition, results or cash flow. A 1% rise in rates on credit-facility borrowings was estimated to add about $6.0m to annual interest expense.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus REIT-related tax benefits and reserve releases.
- Whether operating cash flow recovers, given the nine-month decline and $101.5m in capital expenditures and $107.5m in dividends paid.
- Debt and refinancing consequences of the post-quarter note tender, redemption and new 5.875% note issue.
- Actual occupancy, ramp-up and profitability of newly awarded or reactivated facilities, and prospects for the approximately 6,000 idle beds.
- Whether government budgets, contract renewals, insurance reserves, foreign exchange and GEOAmey financing create material changes to cash flow or risk exposure.