The GEO Group, Inc. — 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing also reports fourth-quarter results; it is an annual report, not a quarterly filing. Unless otherwise noted, financial amounts are in U.S. dollars.
Business context
GEO is a REIT operating correctional, detention, reentry, youth-services and electronic-monitoring businesses in the United States and internationally. At year-end, it reported 141 facilities and approximately 96,000 beds, including idle facilities and projects under development, and community supervision services for more than 192,000 people. Its four segments are U.S. Corrections & Detention, GEO Care, International Services, and Facility Construction & Design.
Financial results and liquidity
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $2.263 billion | $2.179 billion | Up 3.9% |
| Operating income | $248.3 million | $265.6 million | Down 6.5% |
| Net income attributable to GEO | $146.2 million | $148.7 million | Down 1.7% |
| Diluted EPS | $1.21 | $1.33 | Down 9.0%; average diluted shares rose to 120.8 million from 111.5 million |
| Operating margin | 11.0% | 12.2% | Calculated from reported revenue and operating income |
| Operating cash flow | $381.0 million | $(28.0) million | 2017 benefited from a $40.5 million reduction in Ravenhall contract receivable; 2016 had a $280.6 million increase in that receivable |
| Capital expenditures | $148.4 million | $81.6 million | 2017 operating cash flow less capital expenditures was approximately $232.6 million |
| Cash and cash equivalents | $81.4 million | $68.0 million | Restricted cash is additional but not generally available for operations |
Current assets were $579.7 million and current liabilities $369.6 million, giving a current ratio of approximately 1.57. Total assets were $4.227 billion and shareholders’ equity was $1.199 billion.
At year-end, long-term debt including its current portion was approximately $2.217 billion, excluding $394.0 million of non-recourse debt and $7.4 million of capital leases. Separately, the debt note reports total debt of $2.582 billion, including non-recourse debt, capital leases and other debt. Revolver borrowings were $270.6 million; disclosed additional revolver capacity was $559.3 million after covenant limitations and outstanding letters of credit. A 1 percentage-point increase in the rate on the $1.065 billion Senior Credit Facility borrowings would increase annual interest expense by approximately $10.6 million. Interest expense was $148.0 million, versus $128.7 million in 2016.
Reported non-GAAP measures were FFO of $211.7 million, Normalized FFO of $236.1 million and AFFO of $307.7 million. These measures include adjustments defined by GEO and should be considered alongside GAAP results. The company declared $1.88 per share in cash dividends for 2017 and paid $227.5 million in dividends.
Material changes versus 2016
- CEC was acquired on April 5, 2017 for approximately $353.6 million, net of cash acquired. It added over 12,000 beds; its post-acquisition operations contributed approximately $171 million of revenue and $22 million of earnings, as reported in the filing.
- GEO Care revenue grew 30.4% to $514.2 million, primarily reflecting CEC. U.S. Corrections & Detention revenue rose 4.6% to $1.438 billion, with CEC and the Folkston ICE facility activation contributing to growth.
- International Services revenue rose 24.4% to $195.8 million, partly from Ravenhall commencing operations in the fourth quarter. Facility Construction & Design revenue fell 54.3% to $115.4 million as Ravenhall construction activity wound down.
- General and administrative expense increased 28.0% to $190.3 million. The company cited $19.1 million in CEC transaction and transition costs, higher stock-based compensation, and other personnel and administrative costs.
- Average occupancy in U.S. Corrections & Detention facilities, excluding idle facilities, was 93.1%, compared with 93.9%. Company-wide occupancy was 91.2%, compared with 93.4%.
- GEO issued 10.35 million shares in a public offering, generating $275.9 million in net proceeds, primarily used to repay revolver borrowings and for general corporate purposes. A 3-for-2 stock split was completed in April 2017; reported historical per-share data reflects the split.
Outlook, risks and unusual items
- Management described growth opportunities but cautioned that government budgets, policy changes and public acceptance of private correctional partnerships could constrain new awards, rates, renewals and occupancy. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- For 2018, management estimated an effective tax rate of approximately 8%–10%, excluding discrete items; expected G&A as a percentage of revenue to remain consistent or decline; and estimated maintenance capital expenditures of approximately $23 million.
- GEO was marketing approximately 5,400 idle beds at five facilities, with an estimated 2018 carrying cost of $18.8 million and year-end net book value of $139.6 million. No firm activation commitments were in place. Management’s illustrative estimate of up to $118 million in annual revenue and $0.15–$0.20 in EPS if all beds were activated is not a forecast.
- Committed development projects were estimated to require a further $149.4 million through 2019. Ravenhall’s design and construction phase was completed in November 2017; the State made a $242.0 million lump-sum payment, with the remaining contract-receivable balance to be paid over the 25-year operating term. Ravenhall non-recourse debt stood at $364.0 million.
- Contract exposure is material: 69 facility-management contracts covering approximately 36,000 beds were scheduled to expire on or before December 31, 2018, representing 30.5% of 2017 revenue. Separately, 51 contracts representing $287.4 million, or 12.7% of revenue, could be competitively rebid in 2018. Renewals and rebids are not assured.
- The company recorded a $9.6 million tax expense from provisional remeasurement of deferred tax assets following the Tax Cuts and Jobs Act. The filing says the tax accounting was to be completed in 2018 and adjustments could affect tax expense.
- Legal matters include Mississippi litigation alleging misconduct in public contracting and class actions concerning detainee work and wage practices in Colorado, Washington and California. GEO stated that losses were not considered probable or reasonably estimable at that stage and recorded no accrual for those matters. A separate state tax assessment was approximately $19.6 million; GEO disputed it and had established a reserve, but the reserve amount is not clearly stated in the filing text.
- Other material risks include leverage and covenant limits, variable-rate interest exposure, dependence on government appropriations and a small set of government agencies, insurance claims and reserves, labor costs, construction overruns, and REIT qualification and distribution requirements.
- After year-end, the board authorized a share repurchase program of up to $200 million through October 20, 2020. The program is discretionary; the company disclosed approximately $120 million of immediate capacity under its revolver for repurchases.
Most important facts for investors to verify
- Whether CEC integration produces the expected operating efficiencies and improves GEO Care margins after acquisition-related costs.
- Renewal and rebid outcomes for the contracts expiring or facing competitive rebid in 2018, and the related impact on occupancy and revenue.
- Cash conversion and Ravenhall receivable collections, including the scheduled repayment of Ravenhall non-recourse debt.
- Debt covenant headroom, revolver availability, floating-rate exposure, and funding needs for committed and prospective projects.
- Progress in activating idle beds, while distinguishing management’s illustrative revenue and EPS scenario from committed guidance.
- Developments in the cited litigation and tax assessment, and any resulting accruals, settlements or changes in disclosure.
- Dividend sustainability and the actual pace and funding of any share repurchases.