The GEO Group, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. GEO is a REIT providing correctional, detention, reentry, monitoring, youth, and related services in the U.S. and internationally. It reported approximately 85,500 beds at 106 facilities and community-supervision services for more than 115,000 people.
Key financial metrics
Amounts are in millions except per-share data; comparisons are year over year.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $445.9 | $412.8 | $873.3 | $806.0 |
| Operating income | $53.3 | $60.9 | $106.0 | $109.5 |
| Operating margin | 12.0% | 14.7% | 12.1% | 13.6% |
| Net income attributable to GEO | $28.3 | $38.9 | $57.1 | $66.9 |
| Diluted EPS | $0.38 | $0.54 | $0.77 | $0.93 |
| Operating cash flow | — | — | $79.8 | $132.1 |
| Adjusted FFO | $57.5 | $60.9 | $110.4 | $112.3 |
Revenue increased 8.0% in Q2 and 8.4% in the first half. Operating income fell 12.5% in Q2 and 3.2% in the first half; net income attributable to GEO declined 27.3% and 14.7%, respectively. Higher operating expenses, depreciation and amortization, and interest expense weighed on earnings. First-half operating cash flow declined about 40%, while capital expenditures rose to $71.7 million from $41.1 million.
At June 30, cash was $47.0 million and current assets and liabilities were $383.7 million and $256.3 million, respectively. Total debt, including non-recourse debt and capital leases, was $2.044 billion, versus $1.621 billion at year-end 2014. Senior credit facility borrowings were $747 million; after $58.9 million of letters of credit, $188.1 million of revolver capacity remained. The company reported compliance with debt covenants. Dividends declared were $0.62 per share for Q2; the board declared another $0.62 quarterly dividend payable in August.
Material changes versus the prior comparable period
- U.S. Corrections & Detention revenue grew 10.2% in Q2 and 8.7% in the first half, driven by facility activations and the February acquisition of eight LCS facilities with more than 6,500 beds. GEO Care revenue was broadly stable.
- International Services revenue fell 28.9% in Q2 and 23.8% in the first half, reflecting currency translation and the wind-down of the Harmondsworth contract, with additional population-related declines.
- Ravenhall prison construction activity generated $20.4 million of Q2 revenue and $42.2 million in the first half. The related contract receivable reached $110.2 million, up from $66.2 million at year-end.
- Average company-wide occupancy was 93.1% in the first half, compared with 96.1% in 2014. U.S. Corrections & Detention occupancy, excluding idle facilities, was 93.3% versus 96.7%; management attributed much of the decline to the underutilized LCS facilities.
- Debt increased primarily to fund the LCS and Soberlink acquisitions and Ravenhall construction. First-half interest expense rose to $51.3 million from $41.3 million.
Outlook, commentary, risks, and unusual items
- Management said available cash, operating cash flow, and credit-facility capacity should support capital requirements through 2017. It estimated $133 million of remaining spending on existing capital projects through 2017, including an AUD 115 million (about $88.1 million) Ravenhall contribution expected in January 2017.
- Management cited new and reactivated facilities and further opportunities, including planned completion of a 626-bed Karnes County expansion by year-end 2015. However, contract openings, occupancy, costs, and government demand remain uncertain. At filing, about 3,740 vacant beds at five idle facilities were being marketed; annual 2015 carrying costs were estimated at $14.5 million.
- Management estimated a 9%–10% annual effective tax rate, excluding non-recurring items. It expected G&A as a share of revenue to remain stable or decline, while business-development costs could remain stable or rise slightly.
- Key risks include government budget constraints and payment capacity, contract renewals and rebids, facility activation and occupancy, high debt and refinancing needs, REIT qualification and dividend restrictions, foreign exchange and interest-rate changes, and litigation and operating costs. A 1% increase in the average rate on the credit facility would increase annual interest expense by about $7.5 million. Management said pending legal claims were not expected to materially affect financial condition, results, or cash flows.
- The LCS acquisition was preliminarily allocated and included $107.3 million of goodwill; its contingent earnout was assigned zero fair value because management considered payment remote, although total consideration could reach $350 million if targets are met. Soberlink was acquired for $24.4 million, with preliminary goodwill of $14.9 million. Acquisition-related allocations remained subject to finalization.
- Management noted that first-half cash flow was reduced by a $46.6 million increase in Ravenhall contract receivables; billing is expected upon completion and commercial acceptance. The State is also scheduled to make an AUD 310 million payment toward project debt upon acceptance.
Important facts for investors to verify
- Whether new and acquired facilities, especially LCS and North Lake, achieve expected occupancy and margins without persistent start-up or carrying costs.
- Ravenhall construction progress, contract-receivable growth and collection timing, project funding, and the State’s acceptance-related payment.
- Debt growth, revolver availability, floating-rate exposure, covenant headroom, and the ability to fund dividends and committed capital spending.
- Whether international revenue stabilizes after contract wind-downs and currency effects, and whether government budgets affect contract awards, renewals, or payments.
- Final purchase-price allocations and any LCS earnout obligation; also the sustainability of cash flow and adjusted FFO relative to dividends and capital requirements.