The GEO Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 25, 2019. GEO is a REIT providing correctional, detention, reentry, youth, community-supervision, electronic-monitoring and transportation services. It reported approximately 96,000 beds at 135 facilities and supervision services for more than 210,000 people.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2.331 billion | $2.263 billion | +3.0% |
| Operating income | $264.7 million | $248.3 million | +6.6% |
| Operating margin | 11.4% | 11.0% | +0.4 percentage points |
| Net income | $144.8 million | $146.0 million | -0.8% |
| Net income attributable to GEO | $145.1 million | $146.2 million | -0.8% |
| Diluted EPS | $1.20 | $1.21 | -0.8% |
| Operating cash flow | $274.5 million | $381.0 million | -$106.6 million |
| Capital expenditures | $195.7 million | $148.4 million | +$47.3 million |
Operating cash flow less capital expenditures was approximately $78.8 million, versus $232.6 million in 2017. Cash, cash equivalents and restricted cash totaled $84.5 million at year-end, including $31.3 million of unrestricted cash. Current assets were $591.1 million and current liabilities $694.6 million, a $103.5 million working-capital deficit.
Reported corporate debt was approximately $2.429 billion, excluding $341.1 million of non-recourse debt and $6.1 million of capital leases. Total debt including non-recourse debt and leases was approximately $2.749 billion. Revolver borrowings were $490.8 million; reported remaining revolver capacity after covenant limits and letters of credit was $346.9 million. Shareholders’ equity declined to $1.040 billion from $1.199 billion.
GEO declared dividends of $1.88 per share for 2018, unchanged from 2017, and paid $229.5 million in cash dividends. It repurchased 4.21 million shares for $95.2 million, primarily using revolver proceeds. NAREIT FFO was $220.0 million versus $211.7 million; Normalized FFO was $234.3 million versus $236.1 million; AFFO was $297.8 million versus $307.7 million.
Quarterly results and changes
Fourth-quarter 2018 revenue was $599.4 million, operating income $63.5 million, net income $33.4 million, and diluted EPS $0.28. Compared with fourth-quarter 2017, revenue rose 5.4%, while operating income fell 4.5% and net income attributable to GEO fell 8.2%.
- GEO Care revenue increased 12.9% to $580.3 million, reflecting CEC acquisition contributions and growth in immigration supervision and electronic monitoring.
- International Services revenue rose 29.7% to $253.9 million, primarily as the Ravenhall facility operated for a full year; foreign-exchange movements partially offset growth.
- U.S. Corrections & Detention revenue increased 3.8% to $1.493 billion; average occupancy excluding idle facilities increased to 95.4% from 93.1%.
- Facility Construction & Design revenue fell to $4.2 million from $115.4 million as Ravenhall construction ended in 2017. 2018 included Fulham expansion work, reported with no margin.
- Net income was pressured by lower interest income on the Ravenhall contract receivable and higher interest expense. The 2017 comparison also included a $9.6 million Tax Act-related tax charge; the 2018 tax provision was $14.1 million, with a 9.5% effective rate.
Outlook, developments and risks
- Management described business-development opportunities as encouraging but warned that budget pressure, changes in government policy, lower per-diem rates and reduced use of public-private partnerships could impair results. No consolidated revenue or EPS guidance was provided. Management estimated a 2019 effective tax rate of 9%–11%, excluding discrete items, and approximately $28 million of 2019 maintenance capital expenditures.
- GEO expects approximately $44.5 million of remaining committed project spending through 2020. Existing projects were estimated to cost $255.3 million in total, of which $210.8 million had been spent by year-end 2018. The company noted that new self-financed awards could materially increase capital needs.
- Four idle U.S. facilities represent approximately 4,700 beds, with a $126.0 million carrying value and estimated 2019 carrying costs of $17.3 million. There were no firm activation commitments. Management estimated potential annual revenue of $106 million and EPS benefit of $0.15–$0.20 if activated at assumed occupancy and rates; this is a scenario, not guidance.
- Contract exposure is substantial: 70 facility-management contracts covering about 31,000 beds and representing 33.0% of 2018 revenue were scheduled to expire by the end of 2019 unless renewed. Contracts subject to 2019 competitive re-bids represented $412.0 million, or 17.7%, of 2018 revenue. Government customers may terminate many contracts on 30–180 days’ notice.
- GEO lost the Parklea contract in Australia, with transition planned for March 2019 and approximately $3 million of reserved transition costs. The Allen Correctional Facility contract ended in April 2018. New or extended awards included Delaware County, Junee, Idaho placements and Scottish prisoner-escort services.
- The $318.1 million Ravenhall non-recourse construction facility was due for refinancing in 2019. No refinancing agreement was in place at year-end; the balance was classified as current. GEO also cited floating-rate exposure: a one-percentage-point rate increase on senior-credit-facility borrowings would add about $12.8 million in annual interest expense.
- Federal agencies accounted for 50% of revenue; BOP, ICE and the U.S. Marshals Service together accounted for 49.2%. The federal shutdown caused material payment delays. The business also faces occupancy, labor-cost, operational, regulatory, political and reputational risks, plus REIT qualification and debt-covenant constraints.
- Litigation includes class and other suits alleging wage-law and trafficking-statute violations related to detainee work programs; GEO recorded no accrual because loss was not considered probable or reasonably estimable at that stage. A separate state tax assessment was approximately $19.6 million; GEO disputed it and recorded a reserve based on its estimate of the probable loss.
- Auditors issued unqualified opinions on the financial statements and internal controls. The filing reported effective disclosure controls and internal control over financial reporting.
Key investor verification points
- Confirm the status, terms and funding cost of the Ravenhall debt refinancing, and whether its classification or repayment schedule changes.
- Track 2019 contract renewals and re-bids, especially the $412.0 million revenue exposure, as well as Parklea transition effects and new contract ramp-up.
- Assess whether operating cash flow can sustain capital spending, dividends, buybacks and debt service; distinguish restricted cash from cash available for corporate use.
- Monitor idle-bed utilization, associated carrying costs and potential impairment, rather than treating management’s activation scenario as committed revenue.
- Review debt covenants, variable-rate exposure, government payment delays, litigation and the state tax assessment for changes that could affect liquidity or earnings.