The GEO Group, Inc. — Q3 2014 Form 10-Q
Business context and period. GEO operates correctional, detention, re-entry, community-services and monitoring businesses in the U.S. and internationally, and reports as a REIT. This unaudited filing covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $457.9 | $379.8 | $1,263.9 | $1,138.5 |
| Operating income | $63.3 | $44.8 | $172.8 | $137.5 |
| Operating margin | 13.8% | 11.8% | 13.7% | 12.1% |
| Net income attributable to GEO | $39.0 | $29.9 | $105.9 | $87.5 |
| Diluted EPS | $0.54 | $0.42 | $1.47 | $1.22 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $164.6 | $157.8 |
Q3 revenue rose 20.6% and nine-month revenue rose 11.0%. Operating income and diluted EPS also increased in both comparisons. Nine-month net income attributable to GEO was $105.9 million, versus $87.5 million. The 2013 comparison included a $2.3 million discontinued-operations loss and a $7.0 million debt-extinguishment loss; Q3 2013 also included a tax benefit, so reported tax expense increased in 2014.
- Cash flow and investment: Nine-month operating cash flow was $164.6 million, up from $155.6 million from continuing operations in 2013. Investing used $96.3 million, including $77.7 million of capital expenditures and $13.0 million for the Protocol acquisition. Cash increased by $0.6 million to $52.7 million.
- Liquidity: Current assets were $393.3 million and current liabilities $263.6 million, a current ratio of approximately 1.49. The $700 million revolving facility had $599 million of additional borrowing capacity after $40 million drawn and approximately $61 million of letters of credit.
- Debt: Total debt, including capital leases and non-recourse debt, was $1.601 billion versus $1.585 billion at year-end 2013; long-term debt was $1.433 billion. Cash was $52.7 million. GEO issued $250 million of 5.875% senior notes due 2024 in September and amended its credit agreement in August. The company reported compliance with credit and note covenants at quarter-end.
- REIT measures and distributions: Nine-month NAREIT FFO was $145.4 million and AFFO was $173.2 million, versus $128.2 million and $153.7 million, respectively, in 2013. Dividends declared were $1.71 per share for the first nine months. After quarter-end, the board declared a $0.62 dividend per share.
- Margins and segments: U.S. Corrections & Detention and GEO Community Services drove much of the growth. Q3 segment revenue was $281.6 million and $86.6 million, respectively. International Services revenue was $50.9 million; segment operating income fell to $0.1 million, with bid costs in the U.K. and a derivative mark-to-market adjustment cited. Ravenhall construction contributed $38.9 million in Q3 revenue.
Material changes, outlook and risks
- New contracts, facility activations and higher populations lifted U.S. corrections revenue; higher electronic-monitoring and ISAP counts and the Protocol acquisition supported Community Services. Overall company-wide occupancy averaged 96.1% for the nine-month period, excluding marketed idle beds.
- GEO began the Ravenhall, Australia prison project in September. It is planned as a 1,000-bed facility with capacity for 1,300, expected to complete toward the end of 2017, followed by a 25-year operating contract. The State is expected to make a AUD 310 million payment upon completion and acceptance. Construction accounting created a $52.0 million contract receivable and a $54.7 million operating-cash-flow use; the receivable is expected to grow before settlement.
- Management said cash on hand, operating cash flow and revolver availability should support capital requirements in 2014 and 2015. This is not a numerical earnings or revenue forecast. Existing capital projects were estimated at $224.0 million, with $161.5 million remaining through 2015; a Ravenhall equity contribution of approximately AUD 115 million is expected in January 2017.
- Management cited government budget pressure, potential rate or service reductions, contract termination or non-renewal, occupancy and labor costs, facility start-up expenses, REIT qualification and dividend constraints, debt service, financing availability, foreign-exchange exposure, litigation and regulatory requirements as risks. Approximately 5,800 beds at five idle facilities were being marketed; their carrying value was $185.0 million and estimated 2014 carrying cost was $21.2 million. No firm activation commitments were disclosed.
- Ravenhall brings construction, financing, timing and interest-rate risks. The project had $74.2 million of non-recourse construction debt drawn and approximately $186.8 million of Australian performance guarantees secured by letters of credit. The filing also discloses other international guarantees and commitments. Management did not expect pending litigation to materially adversely affect financial condition, results or cash flows.
- Management estimated an annual effective tax rate of approximately 10%, excluding non-recurring items. It attributed the higher 2014 provision versus 2013 largely to discrete tax benefits in the prior-year period that did not recur.
Most important facts for investors to verify
- Whether Ravenhall construction progresses on schedule and within estimated cost, and when the State payment and contract receivable will convert to cash.
- Whether revenue gains from new contracts and occupancy persist, and whether the roughly 5,800 idle beds can be reactivated without material additional costs.
- Debt maturities, interest-rate sensitivity, revolver availability, covenant headroom and the extent of guarantees or other project funding obligations.
- Whether operating cash generation covers dividends, capital spending and the planned Ravenhall equity contribution, particularly given the construction receivable’s cash-flow effect.
- How international bid costs, currency movements and derivative valuations affect segment profitability; GEO estimated a 10% currency-rate change could affect financial position by about $5.1 million.
- Dividend sustainability and REIT compliance: future dividends remain subject to board discretion, cash flows, debt restrictions and REIT requirements.