The GEO Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited results compared with Q1 2016. GEO is a REIT providing correctional, detention, reentry, community-supervision, monitoring and related services in the U.S. and internationally. Per-share and share amounts reflect a 3-for-2 stock split.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $550.6 million | $510.2 million | +7.9% |
| Operating income | $64.4 million | $59.2 million | +8.8% |
| Operating margin | 11.7% | 11.6% | +0.1 percentage point |
| Net income attributable to GEO | $40.4 million | $32.4 million | +24.9% |
| Basic / diluted EPS | $0.36 / $0.35 | $0.29 / $0.29 | Basic +24.1% |
| Operating cash flow | $47.9 million | $(17.5) million | Improved $65.4 million |
| Capital expenditures | $34.4 million | $28.4 million | +$6.0 million |
| Cash dividends paid | $52.5 million | $48.5 million | +$4.0 million |
Revenue growth reflected increases across all segments: U.S. Corrections & Detention revenue rose 2.8% to $347.9 million; GEO Care rose 11.1% to $103.8 million; International Services rose 11.0% to $41.7 million; and Facility Construction & Design rose 40.1% to $57.2 million. The latter primarily reflects Ravenhall prison construction in Australia, which GEO said carries little to no margin. Company-wide average occupancy was 93.7%, versus 93.3% a year earlier; U.S. Corrections & Detention occupancy excluding idle facilities was 94.3%, versus 93.5%.
Operating expenses increased 6.7% to $414.7 million, below revenue growth. General and administrative expenses rose 25.0% to $42.6 million, including $2.6 million of CEC acquisition-related costs. Interest expense increased 19.2% to $35.0 million, primarily due to Ravenhall construction-loan interest; interest income increased to $12.0 million, largely from the Ravenhall contract receivable. The income-tax provision was $2.5 million, with a 6.0% effective rate; management estimated an annual rate of approximately 8%–9%, excluding discrete items.
Supplemental non-GAAP measures were FFO of $55.5 million, Normalized FFO of $58.1 million and AFFO of $74.0 million, compared with $47.5 million, $48.7 million and $62.4 million, respectively, in Q1 2016. These measures are not GAAP net income or cash flow.
Liquidity, debt and cash flow
At March 31, 2017, cash and cash equivalents were $434.6 million, up from $68.0 million at year-end. Current assets were $1.03 billion and current liabilities $511.2 million. Total debt, including non-recourse debt and capital leases, was $2.58 billion, versus $2.42 billion at December 31, 2016. Long-term debt was $2.09 billion; non-recourse debt was $469.7 million in total, including current portions.
The March credit agreement established an $800 million term loan and a $900 million revolver. At quarter-end, $800 million was outstanding under the term loan and $173.7 million under the revolver; after approximately $53.6 million of letters of credit, reported additional revolver capacity was $672.7 million. The weighted-average rate on credit-facility borrowings was 3.3%. The agreement includes leverage and interest-coverage covenants and secured domestic assets.
Q1 financing cash flow was $350.2 million, including $1.08 billion of long-term debt proceeds and $276.0 million of net proceeds reported from the common-stock offering, offset by $918.5 million of long-term debt repayments and $52.5 million of dividends. Operating cash flow benefited from collections and timing of receivables, but was reduced by a $69.1 million increase in contract receivable related to Ravenhall. Management expects that receivable to grow during construction and remain a cash-flow use until settlement under the contract.
Material changes, outlook and risks
- Financing and dilution: GEO completed an offering of 10.35 million shares in March, receiving gross proceeds of approximately $288.1 million; net proceeds were used to repay revolver borrowings and for general corporate purposes. The board declared a quarterly dividend of $0.47 per share, also declared for payment after quarter-end.
- Acquisition after quarter-end: On April 5, GEO acquired Community Education Centers for $360 million cash plus $4.1 million of transaction expenses, with no debt assumed. CEC’s results are not included in Q1. Purchase accounting and pro forma information were not yet available in this filing.
- Contract award: GEO announced an ICE contract for a company-owned 1,000-bed Texas detention facility, under a 10-year contract including renewal options; completion was scheduled for Q4 2018.
- Capital projects and idle facilities: Remaining committed capital-project spending was estimated at $141.9 million through 2018. GEO was marketing approximately 3,600 vacant beds at four idle facilities, with an estimated 2017 annual carrying cost of $12.5 million; there were no firm activation commitments. Management estimated full activation could add about $70 million in annual revenue, but this is a scenario, not guidance.
- Outlook: GEO cited potential growth opportunities but warned that government budget constraints, lower rates or service levels, contract changes, non-renewals and reduced use of public-private partnerships could affect results. Management believed cash, operating cash flow and credit-facility availability would support 2017 capital requirements; the filing provides no consolidated revenue or earnings guidance.
- Contingencies: Mississippi’s attorney general sued GEO and others over alleged conduct relating to state contracts and sought damages and other relief; GEO said it would defend the case and had not accrued a loss because it was not considered probable or reasonably estimable at that stage. A separate state tax assessment totaled approximately $19.6 million, including penalties and interest; GEO disputed it and recorded a reserve based on its estimated most probable loss. In the Colorado detainee-work-program case, class certification was granted and the appeals court agreed to hear GEO’s appeal; GEO had not accrued a loss. GEO also disclosed broad litigation and operational risks, including potential facility, employment, medical, safety and contract claims.
- Other risks: The Ravenhall contract receivable and construction financing create cash-flow and execution exposure. A 1% increase in credit-facility rates was estimated to raise annual interest expense by $1.0 million. A 10% foreign-exchange rate change was estimated to affect financial position by about $2.1 million and quarterly results by about $0.5 million.
Key facts for investors to verify
- CEC integration, acquisition accounting, realized synergies and the effect of the $360 million purchase price on leverage and cash generation.
- Ravenhall construction progress, ultimate commercial acceptance and timing of the State’s approximately $237 million payment; track contract-receivable growth and its cash-flow impact.
- Revolver usage, debt maturities, covenant headroom and interest-rate exposure following the credit-agreement refinancing.
- Developments in the Mississippi, Colorado and state tax-assessment matters, including any changes to accruals or potential exposure.
- Occupancy, contract renewals, idle-bed activation and government budget or procurement decisions that could affect facility utilization and rates.
- Whether the announced ICE facility proceeds on schedule and how future capital commitments and dividends are funded.