The GEO Group, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are included below where useful. GEO is a REIT providing correctional, detention, re-entry, youth, electronic-monitoring and related services in the U.S. and internationally. At year-end it reported approximately 87,000 beds across 104 facilities and community supervision services for more than 139,000 people.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1.843 billion | $1.692 billion | +9.0% |
| Operating income | $235.7 million | $234.7 million | +0.4% |
| Operating margin | 12.8% | 13.9% | Down approximately 1.1 percentage points |
| Income from continuing operations | $139.3 million | $143.8 million | −3.1% |
| Diluted continuing-operations EPS | $1.88 | $1.98 | −5.1% |
| Net cash from operating activities | $142.2 million | $202.5 million | −29.8% |
| Adjusted FFO (non-GAAP) | $248.4 million | $232.9 million | +6.7% |
Fourth-quarter 2015 revenue was $500.1 million, operating income $66.7 million, net income attributable to GEO $44.1 million, and diluted EPS $0.59. Operating expenses, depreciation and amortization, and general and administrative expenses totaled 87.2% of revenue in 2015, versus 86.1% in 2014. Interest expense rose to $106.1 million from $87.4 million; the increase reflected debt used for acquisitions and Ravenhall construction, among other factors.
Year-end cash and cash equivalents were $59.6 million, up from $41.3 million. Current assets were $438.3 million and current liabilities $278.6 million. The filing does not present a conventional current ratio as a highlighted measure. Total assets were $3.50 billion and shareholders’ equity $1.01 billion. Cash from operations fell in part because the Ravenhall contract receivable increased by $114.1 million; this unbilled balance was $174.1 million at year-end and is expected to be settled after facility completion and acceptance.
Reported long-term debt, including current portion and excluding non-recourse debt and capital leases, was approximately $1.879 billion, compared with $1.466 billion in 2014. Total debt including non-recourse debt and capital leases was approximately $2.136 billion. Revolver borrowings were $485.0 million; the company reported $160.7 million of remaining revolver capacity after covenant limitations and letters of credit. The company was in compliance with its financial covenants at year-end. A 1-percentage-point increase in the variable rate on senior-credit-facility borrowings was estimated to increase annual interest expense by about $8 million.
Changes and operating developments
- Revenue growth was led by U.S. Corrections & Detention, up 11.9%, and Facility Construction & Design, up 91.2%. GEO Care revenue rose 3.5%; International Services revenue fell 21.8%.
- U.S. Corrections & Detention benefited from facility activations, the February 2015 purchase of eight LCS facilities (more than 6,500 beds) for $307.4 million, and increased populations and rates at certain facilities. LCS contributed $55.5 million revenue and $8.5 million earnings after acquisition.
- U.S. facility occupancy declined to 91.5% from 96.3%, primarily because the newly acquired LCS facilities had historically lower utilization. Management expected occupancy to rise as integration progressed.
- International revenue was reduced by approximately $29.8 million from foreign-exchange movements and by the winding down of the U.K. Harmondsworth contract. Facility Construction revenue increased with Ravenhall project activity.
- GEO acquired Soberlink, a mobile alcohol-monitoring business, for $24.4 million. Its reported contribution after acquisition was not significant.
- Cash dividends paid increased to $187.0 million from $170.2 million. Regular dividends declared for 2015 totaled $2.51 per share, versus $2.33 in 2014.
Outlook, risks and unusual items
- Management described continued domestic and international bidding opportunities, but gave no specific consolidated revenue or EPS forecast in the provided filing text. It estimated a 2016 effective tax rate of approximately 8%–9%, excluding non-recurring items.
- Management expected 2016 general and administrative expense as a percentage of revenue to remain consistent or decrease. Start-up costs and carrying costs for vacant facilities could affect 2016 operating expenses.
- Approximately 3,300 beds at four idle facilities had no firm activation commitments. Estimated 2016 carrying costs were $12.7 million. If all were activated at assumed average rates and occupancy, management estimated about $70 million in incremental annual revenue and $0.20–$0.25 in EPS; these are scenario estimates, not guidance.
- Remaining estimated capital requirements for projects under development were approximately $100 million, expected to be spent in 2016–2017. This includes an AUD 115 million (about $84 million at year-end exchange rates) Ravenhall contribution expected in January 2017. Ravenhall completion was expected toward the end of 2017.
- Contract and customer concentration are material: U.S. federal agencies represented 45% of 2015 revenue; the Bureau of Prisons, ICE and U.S. Marshals Service represented 44.9% combined. Thirty-six facility-management contracts representing 29.3% of 2015 revenue were scheduled to expire by year-end 2016 unless renewed. Eight contracts representing $160 million, or 8.7% of revenue, were subject to competitive re-bid in 2016.
- Key risks include government funding and policy changes, contract termination/non-renewal or lost re-bids, occupancy and per-diem exposure, public opposition to privatized services, REIT qualification and distribution requirements, leverage and covenant limits, floating-rate exposure, construction cost/timing risk, foreign exchange, litigation and insurance claims, and goodwill or facility impairment.
- Unusual or important items include $4.6 million of lease-exit charges, $3.0 million of acquisition-related professional fees, elevated interest expense, and a $174.1 million Ravenhall contract receivable. Insurance reserves for workers’ compensation, general liability and auto claims were $52.8 million, up from $49.5 million. Management did not expect pending litigation to have a material adverse effect. The financial statement and internal-control audit opinions were unqualified.
Investor verification priorities
- Confirm progress in raising occupancy and earnings contribution at the LCS facilities and the timing of the Kingman facility ramp-up.
- Track 2016 contract renewals and re-bids, especially the contracts representing 29.3% of 2015 revenue scheduled to expire by year-end 2016.
- Reconcile operating cash flow and liquidity against Ravenhall’s growing receivable, construction spending, dividends and acquisition-related borrowing.
- Review leverage, revolver availability, covenant headroom, variable-rate exposure and the substantial scheduled debt maturities disclosed in the filing.
- Assess whether the idle beds can be activated without additional material investment, and monitor carrying costs and impairment assumptions.
- Verify REIT compliance, dividend capacity and the assumptions underlying management’s 2016 tax-rate estimate and idle-capacity scenario.