The GEO Group, Inc. — 2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed March 3, 2014. Quarterly figures below refer to the fourth quarter of 2013. GEO became a REIT effective January 1, 2013 and changed to a calendar fiscal year; 2012 comparisons are the company’s reported comparable period. Unless stated otherwise, amounts are in U.S. dollars.
Business context
GEO owns, leases and manages correctional, detention and re-entry facilities and provides community, youth, electronic-monitoring and transportation services in the U.S. and selected international markets. At year-end it reported approximately 77,000 beds across 98 facilities, including idle facilities and projects under development, and monitored more than 70,000 people for approximately 900 U.S. agencies. Its four reporting segments are U.S. Corrections & Detention, GEO Community Services, International Services and Facility Construction & Design; the construction segment had no activity in 2013.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $1,522.1 million | $1,479.1 million |
| Operating income | $185.5 million | $184.4 million |
| Operating margin | 12.2% | 12.5% |
| Income from continuing operations | $117.5 million; $1.64 diluted EPS | $144.6 million; $2.37 diluted EPS |
| Net income attributable to GEO | $115.1 million | $134.8 million |
| Operating cash flow | $192.2 million | $255.2 million |
| Capital expenditures | $117.6 million | $107.5 million |
| Cash and cash equivalents at year-end | $52.1 million | $31.8 million |
| Current assets / current liabilities | $384.3 million / $223.1 million | $337.2 million / $259.9 million |
Fourth-quarter 2013 revenue was $383.5 million, operating income $48.0 million and income from continuing operations $27.6 million; diluted continuing-operations EPS was $0.38. Fourth-quarter 2012 revenue was $378.7 million and operating income $39.3 million. The much higher 2012 quarterly continuing income of $95.4 million included a substantial REIT-related tax benefit, so it is not a straightforward operating comparison.
At December 31, 2013, total debt including non-recourse debt and capital leases was $1.585 billion; the company reported approximately $1.5 billion of consolidated indebtedness excluding non-recourse debt and capital leases. Senior Credit Facility borrowings were $638.5 million, with $299.0 million of revolver availability after letters of credit. Current ratio was approximately 1.72. The filing states that the company was in compliance with debt covenants at year-end.
2013 operating cash flow declined by $63.0 million year over year, with working-capital changes among the stated drivers. Cash dividends paid were $147.2 million, including quarterly distributions totaling $2.05 per share. The board’s stated dividend objective was to distribute at least 75% of adjusted funds from operations over time; future amounts remain discretionary and subject to debt restrictions.
Material changes versus 2012
- Revenue rose 2.9%, driven mainly by facility activations, higher populations and rates in U.S. Corrections & Detention and growth in community services. International revenue fell 2.0%, largely because of foreign-exchange effects.
- Operating income increased only 0.6%, while operating margin declined. U.S. operating costs included higher staffing, medical and variable costs, a $6.1 million additional insurance-reserve charge, and the absence of approximately $10 million in prior-year operating tax refunds.
- Income from continuing operations fell 18.7%; diluted continuing-operations EPS fell from $2.37 to $1.64. 2013 included $20.7 million of debt-extinguishment losses, versus $8.5 million in 2012. The 2013 tax benefit was $26.1 million; the 2012 benefit of $40.6 million included a larger REIT-conversion benefit.
- Operating cash flow fell from $255.2 million to $192.2 million. Capital spending increased by $10.0 million.
- GEO issued $300 million of 5.125% senior notes due 2023 and $250 million of 5⅞% notes due 2022, refinanced its credit facility, and repurchased or redeemed all $250 million of 7¾% notes due 2017. The refinancing and tender/redemption contributed to reported extinguishment losses.
- The company defeased $17.2 million outstanding on the South Texas Local Development Corporation bonds, paid a $1.5 million extinguishment loss and took title to the facility. It also completed its REIT conversion and had divested Residential Treatment Services at the end of 2012; RTS is presented in discontinued operations.
Outlook, risks and unusual items
- Outlook: Management described continued bidding opportunities but provided no clear consolidated 2014 revenue or earnings guidance. It expected 2014 facility-maintenance capital expenditures of approximately $23.0 million and approximately $49.1 million of remaining committed project spending across 2014–2015.
- Idle capacity: Approximately 6,000 vacant beds at six facilities had a $193.6 million net book value. Estimated 2014 carrying costs were $21.9 million, including $5.9 million depreciation; there were no firm activation commitments. Management estimated that full activation at assumed occupancy and rates could add about $125 million in revenue and $0.35–$0.40 per share, but this was an illustrative scenario, not guidance.
- Contract exposure: 46 facility-management contracts representing about 26,700 beds and 39.4% of 2013 revenue were scheduled to expire by year-end 2014, subject to renewal or other agreements. Nine contracts representing $160.5 million, or 10.5% of revenue, were identified for competitive re-bid in 2014. The federal ISAP contract, with $41.9 million of 2013 revenue, was also subject to re-bid.
- Customer and policy risks: Various U.S. federal agencies generated 45% of revenue; BOP, ICE and U.S. Marshals Service together represented 44.6%. Government appropriations, occupancy, contract renewals, re-bids, budget-driven rate reductions, changes in sentencing or immigration policy, and public resistance to privatization could affect results.
- Balance-sheet and REIT risks: Significant leverage, variable-rate borrowings without interest-rate protection on the Senior Credit Facility, covenant restrictions and substantial capital commitments could constrain liquidity. A 1% increase in the facility’s interest rate was estimated to raise annual interest expense by $3.0 million. REIT qualification depends on continuing compliance with complex tax and distribution rules; GEO had limited experience operating as a REIT.
- Other exposures: Insurance reserves were $47.6 million, up from $45.1 million. General and medical liability coverage has stated limits, substantial deductibles apply, and employment claims are uninsured. Foreign currency, construction cost overruns, joint-venture support, litigation and possible impairment of goodwill or idle facilities are additional risks.
- Subsequent developments: In February 2014, GEO began managing three Florida facilities and expanded Rio Grande Detention Center’s contracted capacity. It also declared a $0.57-per-share quarterly dividend. These events occurred after the reporting date.
Grant Thornton LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end. GEO stated that pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether 2014 renewals and competitive re-bids preserved contract revenue and pricing, particularly the contracts representing 39.4% of 2013 revenue due to expire.
- Actual occupancy, activation timing and carrying costs for idle facilities, and whether management’s illustrative revenue and EPS opportunity is attainable.
- Operating cash flow and working-capital trends relative to capital spending, dividends and debt service.
- Debt balances, revolver availability, covenant headroom, refinancing requirements and sensitivity to interest-rate changes.
- REIT qualification, taxable REIT subsidiary results, distribution requirements and the sustainability of dividends within debt restrictions.
- Insurance claims development and reserves, government funding or rate changes, and any subsequent material litigation or impairment indicators.