The GEO Group, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
GEO is a REIT that owns, leases and operates correctional, detention and reentry facilities and provides community supervision, monitoring and related services in the U.S. and internationally. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are as of March 31, 2019, compared with December 31, 2018. At quarter-end, GEO reported approximately 95,000 beds at 134 facilities and community supervision services for more than 210,000 people.
Financial performance and liquidity
- Revenue: $610.7 million, up 8.1% from $564.9 million. U.S. Corrections & Detention revenue rose 8.9% to $390.5 million; GEO Care rose 9.8% to $153.8 million; International Services fell 2.9% to $64.2 million.
- Operating results: Operating income was $74.8 million versus $64.5 million; operating margin was approximately 12.2%, compared with 11.4%. Operating expenses were $457.0 million, or 74.8% of revenue, versus 75.5% a year earlier. G&A increased 11.0% to $46.4 million.
- Profit: Net income attributable to GEO was $40.7 million, or $0.34 per diluted share, versus $35.0 million, or $0.29 per share. Interest expense rose 12.3% to $40.3 million. The effective tax rate was 11.3%, down from 12.6%.
- Cash flow: Operating cash flow was $99.0 million versus $69.7 million. Capital expenditures were $28.1 million versus $52.1 million; operating cash flow less capital expenditures was approximately $70.9 million versus $17.5 million. Financing used $30.7 million, including $57.9 million of dividends; debt proceeds partly offset debt repayments.
- Cash and liquidity: Cash and cash equivalents were $67.7 million; cash, cash equivalents and restricted cash totaled $123.8 million. Current assets were $604.6 million and current liabilities $708.8 million. GEO reported approximately $308 million of remaining availability on its $900 million revolver after borrowings and letters of credit. Restricted cash is not necessarily available for general use.
- Debt: Total debt, including finance lease liabilities, was $2.786 billion, up from $2.749 billion at year-end. Long-term debt on the balance sheet was $2.433 billion. Credit-facility borrowings were approximately $1.314 billion, with a 4.6% weighted-average rate; approximately $318 million remained outstanding under the Australian Ravenhall non-recourse construction facility.
- Dividend: GEO declared and paid $0.48 per share in Q1, versus $0.47 in Q1 2018. A further $0.48 quarterly dividend was declared in April and paid April 22, 2019.
Changes versus the prior comparable period
- Revenue growth was driven by federal-client population and transportation activity, activation of Eagle Pass and Montgomery facilities, and growth in GEO Care’s monitoring and community-based services. U.S. Corrections & Detention occupancy, excluding idle facilities, increased to 96.5% from 94.0%.
- Operating income and earnings improved, while interest expense increased due to higher rates and higher overall debt. The share count declined year over year, contributing to higher per-share earnings.
- International revenue declined, reflecting the transition of Parklea Correctional Centre to a new operator and a $7.1 million adverse foreign-exchange effect, partly offset by Ravenhall’s ramp-up.
- Operating cash flow increased, while capital expenditures fell. GEO paid no shares under its repurchase program in the quarter; 2018 included $40.2 million of repurchases.
- GEO adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. The balance-sheet comparison is therefore not on a fully comparable accounting basis; adoption had no material effect on reported earnings or cash flows.
Outlook, commentary and risks
- Management said cash on hand, operating cash flow and credit-facility availability were expected to support 2019 capital requirements. GEO estimated $23 million of remaining spending on existing capital projects during 2019. The filing does not provide clear consolidated revenue or earnings guidance.
- Post-quarter contract announcements included reactivation of the 1,000-bed South Louisiana ICE Processing Center, expected to generate approximately $25 million in incremental annualized revenue, and a ten-year BOP contract to reactivate the 1,800-bed North Lake facility, expected to generate approximately $37 million. GEO also announced two BOP contracts for Reeves County facilities, where GEO provides consulting and support services; no incremental revenue estimate for these contracts is provided here.
- Management estimated an annual effective tax rate of approximately 9%–11%, excluding discrete items. It expected G&A as a percentage of revenue to remain consistent or decrease, while start-up costs and carrying costs at vacant facilities could affect operating expenses.
- Management cited risks from government budget constraints, changes in public-private partnership use, contract losses or non-renewals, occupancy, labor and medical costs, debt service and refinancing, and the ability to fund dividends and capital needs. The Ravenhall construction facility was due in September 2019; GEO intended to refinance it before maturity. A one-percentage-point increase in credit-facility rates was estimated to increase annual interest expense by about $13 million.
- Four related lawsuits involving detainee work programs and wage claims remained pending; GEO said loss was not probable or reasonably estimable and had recorded no accrual. A separate state tax assessment totaled approximately $19.6 million, for which GEO had established a reserve and filed a protest. The filing also noted public resistance to private correctional partnerships, including announcements by major banks that they would not renew or enter certain related agreements.
- GEO reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Progress, financing terms and maturity risks for refinancing the approximately $318 million Ravenhall facility, and the company’s overall debt and covenant position.
- Whether announced facility reactivations begin on schedule, achieve expected occupancy and revenue, and generate acceptable margins after start-up costs.
- Government contract renewals, utilization and payment capacity, particularly given political opposition to public-private partnerships and the Parklea transition and planned Arthur Gorrie transition.
- Cash available for dividends and capital spending after accounting for restricted cash, debt service, project commitments and REIT distribution requirements.
- Developments in detainee wage litigation and the disputed $19.6 million state tax assessment, including any change in loss estimates or reserves.