The GEO Group, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the company changed to a calendar-year reporting cycle. The filing also reports fourth-quarter 2012 results. GEO operates correctional, detention, re-entry, youth, and electronic-monitoring services in the U.S. and internationally. Effective January 1, 2013, it began operating as a REIT for federal income tax purposes and divested its residential treatment services business.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $1.479 billion | $1.407 billion |
| Operating income | $184.4 million | $179.6 million |
| Operating margin | 12.5% | 12.8% |
| Income from continuing operations | $144.6 million | $69.6 million |
| Net income attributable to GEO | $134.8 million | $78.6 million |
| Diluted EPS from continuing operations | $2.37 | $1.11 |
| Operating cash flow, continuing operations | $255.2 million | $185.7 million |
| Capital expenditures | $107.5 million | $222.0 million |
Revenue rose 5.1%. Operating income increased 2.6%, while operating margin edged down. The 2012 tax benefit was unusually large: the REIT conversion produced an approximately $79.0 million tax benefit from reversing deferred tax liabilities. Excluding the conversion-related items, management reported a 38.3% effective tax rate. Interest expense was $82.2 million, up from $75.4 million, and GEO recorded an $8.5 million loss on early extinguishment of MCF debt.
Fourth-quarter revenue was $378.7 million and operating income was $39.3 million. Continuing-operations income was $95.4 million, substantially affected by the REIT-related tax benefit; discontinued operations recorded a $13.8 million loss, including the RTS divestiture loss.
At year-end, cash and cash equivalents were $31.8 million; current assets were $337.2 million and current liabilities $259.9 million. Total assets were $2.839 billion and shareholders’ equity $1.047 billion. Debt excluding non-recourse debt and capital leases was $1.352 billion; the filing reports total debt including those items of $1.488 billion. The $500 million revolver had $235.0 million drawn, $61.3 million in letters of credit, and $203.7 million of stated remaining availability, subject to borrowing conditions and covenants. Senior Credit Facility borrowings carried a 3.2% weighted-average rate.
Business changes and comparisons
- U.S. Corrections & Detention revenue increased 5.4% to $975.4 million, primarily reflecting new or expanded operations at Adelanto, Riverbend, and Karnes. Segment operating income was $222.7 million.
- GEO Community Services revenue increased 4.2% to $291.9 million, including a full year of BI revenue; segment operating income was $65.4 million.
- International Services revenue increased 5.1% to $211.7 million, but segment operating income fell to $10.0 million from $12.9 million, with higher operating costs among the factors.
- GEO sold residential treatment services on December 31 for a gross price of $36.0 million and net proceeds of approximately $33.3 million. The business generated $167.2 million of 2012 revenue before disposal; its results and disposal loss are reported in discontinued operations.
- GEO acquired the remaining MCF partnership interests for $35.2 million, redeemed its bonds, and funded the transaction with a $100 million incremental term loan. The redemption resulted in the $8.5 million extinguishment loss.
- Average company-wide occupancy was 95.7%, excluding idle beds. Approximately 6,000 beds at seven idle facilities remained uncontracted.
Outlook, risks, and unusual items
- GEO described potential domestic and international contract opportunities, but provided no specific consolidated earnings or revenue guidance. It estimated $121.7 million of remaining committed project spending through 2014 and $30.0 million of 2013 maintenance capital expenditures.
- Idle facilities had a $240.2 million net book value and were expected to cost $14.4 million to carry in 2013, including depreciation. GEO estimated that full activation could add about $125 million in revenue and $0.35–$0.40 per share, but said it had no firm activation commitments.
- The company declared a $352.2 million special pre-REIT dividend ($5.68 per share), paid partly in 9.69 million shares and partly in $77.8 million cash. REIT rules generally require annual distributions of at least 90% of REIT taxable income. A $0.50 quarterly dividend was declared in January 2013.
- Key risks include reliance on government appropriations and a concentrated customer base; contract termination, renewal, and rebid exposure; occupancy and idle-capacity risk; substantial leverage, floating-rate debt, covenant restrictions, and capital needs; and the ability to maintain REIT qualification. A 1% increase in Senior Credit Facility rates was estimated to increase annual interest expense by $5.6 million.
- Forty-eight facility management contracts covering approximately 22,000 beds were due to expire on or before year-end 2013. The filing gives differing estimates of their share of 2012 revenue (27% in one discussion and 29% in another). Thirteen contracts representing $80.1 million, or 5.4% of revenue, were subject to competitive rebid in 2013; the ICE ISAP contract, representing $255.6 million or 17.3% of revenue, was subject to rebid in 2014.
- Material litigation includes an appealed $8.4 million wrongful-death judgment, with GEO responsible for the first $3.0 million under its insurance plan, and an uninsured Australian property-damage claim seeking up to approximately $18.7 million plus interest. GEO stated an unfavorable outcome in the Australian matter could materially affect results or cash flows.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether GEO satisfies REIT asset, income, distribution, and ownership requirements, and the tax consequences if it does not.
- How much of reported earnings growth reflects the one-time REIT tax benefit, discontinued operations, and other unusual items.
- The status and renewal or rebid outcomes of contracts expiring in 2013 and 2014, particularly the ISAP contract, and reconciliation of the filing’s 27% versus 29% expiration-revenue disclosures.
- Actual occupancy, activation prospects, carrying costs, and impairment assumptions for idle facilities.
- Liquidity after dividends and capital commitments, covenant headroom, refinancing needs, and exposure to variable interest rates.
- Reserves and potential outcomes for the Australian litigation and other insurance or legal contingencies.