The GEO Group, Inc. — Q3 2012 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2012, compared with the corresponding periods ended October 2, 2011. Amounts below are in millions of dollars, except per-share data. GEO provides government-outsourced correctional, detention, mental health, residential treatment, re-entry, monitoring and transportation services. At quarter-end, it managed or owned approximately 75,000 beds at 108 facilities and monitored more than 70,000 people in the community.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $411.5 | $395.7 | $1,225.1 | $1,172.8 |
| Operating income | $54.7 | $50.2 | $153.6 | $139.0 |
| Income from continuing operations | $16.5 | $20.7 | $54.5 | $56.6 |
| Net income attributable to GEO | $15.6 | $21.5 | $53.1 | $59.9 |
| Diluted EPS attributable to GEO | $0.25 | $0.34 | $0.87 | $0.93 |
| Cash provided by operating activities | Not presented for the quarter | $226.4 | $164.1 | |
| Cash and cash equivalents at period end | — | $69.1 | $44.0 |
Operating margin was approximately 13.3% in Q3 and 12.5% for the nine-month period, versus 12.7% and 11.9%, respectively, in the comparable periods. Nine-month operating cash flow included favorable working-capital movements. Capital expenditures were $92.4 million, and cash used in investing activities was $80.5 million. Cash used in financing activities was $121.6 million.
At September 30, cash was $69.1 million, current assets were $398.6 million and current liabilities were $286.8 million. Total debt, including capital leases and non-recourse debt, was $1.498 billion; long-term debt was $1.325 billion. The $500 million revolving facility had $230 million drawn and $56.4 million of letters of credit, leaving $213.6 million available. GEO reported compliance with its debt covenants. Restricted cash and investments are not necessarily freely available for general use.
Changes versus the prior comparable periods
- Q3 revenue increased 4.0%; nine-month revenue increased 4.5%. Growth reflected facility activations and population or service increases, partly offset by contract terminations, lower populations at some facilities and foreign exchange effects.
- Operating income increased in both periods, while attributable net income and diluted EPS declined. Q3 results included an $8.5 million loss on early debt extinguishment; interest expense also rose. The nine-month period additionally had higher depreciation and amortization.
- Nine-month operating cash flow rose to $226.4 million from $164.1 million. Investing cash use fell substantially from the prior period, which included the $409.6 million BI acquisition.
- Total debt declined from $1.594 billion at January 1, 2012, principally reflecting redemption of MCF non-recourse bonds, while GEO’s long-term debt balance increased modestly. The company acquired the remaining MCF partnership interests for $35.2 million and redeemed approximately $77.9 million of MCF bonds, financed in part with a new $100 million term loan.
Management commentary, outlook and significant items
- Operations and growth: Average occupancy in U.S. Corrections and Detention facilities, excluding idle facilities, was 96.6% in Q3 and 96.3% for the first nine months. GEO cited new or expanded operations including Adelanto, Riverbend and Karnes. It was pursuing domestic and international procurement opportunities; awards and timing were uncertain.
- Contracts and unused capacity: GEO discontinued three Mississippi managed-only contracts during 2012 and reported approximately 6,000 vacant beds at seven idle facilities, with a carrying value of $241.6 million. Management estimated 2012 carrying costs for these beds at $14.6 million, including $7.5 million of depreciation. The Guantanamo contract also ended, without material financial impact.
- Capital spending and liquidity: Existing development projects were estimated to require $41.5 million more through 2014. 2012 maintenance capital expenditures were expected to be $30–35 million. Management believed cash, operating cash flow and credit availability would cover stated needs through 2014, but warned that further projects or acquisitions could increase funding needs and require additional financing.
- Dividends and tax: GEO paid a $0.20-per-share dividend in September and declared another $0.20 dividend for November 2012. Management expected a 2012 effective tax rate of 40–41%; no specific revenue or EPS guidance was provided.
- REIT review: GEO was evaluating a possible REIT conversion and had requested an IRS private letter ruling. A January 2013 conversion was under consideration, with January 2014 identified as a possible later date; no decision to convert had been made.
- Unusual debt item: The MCF bond redemption generated an $8.5 million accounting loss, including a $14.9 million make-whole payment and redemption costs, partly offset by an unamortized bond premium.
- Contingencies: GEO was appealing an $8.4 million wrongful-death judgment, with the company responsible for the first $3 million under its insurance plan. A separate Australian property-damage lawsuit seeks up to approximately AUD 18 million plus interest; the company is uninsured for this claim and says an unfavorable outcome could materially affect financial condition, results or cash flows.
- Other risks: Management highlighted government budget constraints, contract losses or non-renewals, occupancy and labor costs, debt service and refinancing, foreign exchange, litigation and claims, and the possibility that new self-financed projects could materially increase capital requirements. A 1% increase in rates on Senior Credit Facility borrowings was estimated to raise annual interest expense by $8.0 million.
- Subsequent developments: After quarter-end, GEO announced contracts or extensions for Aurora, Golden State and Blackwater River. These announcements should be distinguished from results earned during the reported quarter.
Investor verification priorities
- Reconcile reported earnings and EPS to continuing operations, discontinued operations and the $8.5 million MCF debt-extinguishment loss.
- Assess whether new facility activations and contract awards can offset the Mississippi terminations and monetise the approximately 6,000 idle beds.
- Verify liquidity available for general corporate purposes, covenant headroom, debt maturities and exposure to variable interest rates.
- Review the status and potential exposure of the Australian litigation and the wrongful-death appeal, including insurance and recorded reserves.
- Track capital spending, the declared dividends, and any board decision or IRS ruling affecting the potential REIT conversion.