The GEO Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparatives are for the three months ended April 1, 2012. The company changed to a calendar-year reporting period in 2013, so the comparable quarters differ slightly in dates. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context
GEO is a REIT providing correctional, detention, re-entry, community, monitoring and transportation services. At quarter-end, it managed or owned approximately 72,000 beds at 95 facilities and monitored more than 70,000 people for approximately 900 agencies. The company began operating as a REIT on January 1, 2013 and sold its Residential Treatment Services business at the end of 2012; that business and certain terminated Mississippi contracts are treated as discontinued operations in the prior-year comparison.
Financial performance and liquidity
| Metric | Q1 2013 | Prior comparable quarter |
|---|---|---|
| Revenue | $377.0 million | $360.0 million |
| Operating income | $41.3 million | $40.5 million |
| Income before tax and affiliate earnings | $23.1 million | $21.5 million |
| Income from continuing operations attributable to GEO | $23.4 million; $0.33 per share | $13.7 million; $0.23 per share |
| Net income attributable to GEO | $23.4 million; $0.33 per diluted share | $15.0 million; $0.25 per diluted share |
| Cash from operating activities | $45.4 million | $68.5 million |
| Capital expenditures | $11.4 million | $47.9 million |
- Revenue increased 4.7%. U.S. Corrections & Detention revenue rose 5.9%, GEO Community Services 2.3%, and International Services 2.7%. Segment operating income increased to $73.3 million from $67.1 million.
- Consolidated operating income rose 1.9%, while the operating margin was approximately 10.9%, versus 11.2%. General and administrative expense increased 20.5% to $32.0 million, primarily reflecting approximately $6 million in REIT-conversion professional fees.
- The effective tax rate fell to 3.8% from 39.5%. Management attributed the decrease primarily to the REIT conversion and the retroactive reinstatement of the Work Opportunity Tax Credit for 2012. The filing estimates a 2013 effective tax rate of approximately 8%, excluding nonrecurring items.
- Operating cash flow declined year over year, in part because working-capital changes were less favorable: receivables, prepaid expenses and other assets used $6.6 million of cash in Q1 2013, compared with a $26.4 million source of cash in the prior-year quarter. Prior-year operating cash flow also included discontinued operations.
- Cash and cash equivalents were $83.7 million at March 31, up from $31.8 million at year-end. Total current assets were $398.4 million and current liabilities $270.3 million.
- Total debt, including non-recourse debt and capital leases, was $1.539 billion, compared with $1.488 billion at December 31, 2012. Long-term debt was $1.370 billion; cash was $83.7 million. The company reported $556.4 million outstanding under its senior credit facility, no revolver borrowings and approximately $439 million of remaining revolver capacity at quarter-end, after letters of credit.
Material changes, outlook and risks
- Financing: GEO issued $300 million of 5.125% senior notes due 2023 in March, using part of the proceeds to repay revolver borrowings. On April 3, after quarter-end, it refinanced its credit facility with a $300 million term loan and a $700 million revolver, initially priced at LIBOR plus 2.50%; stated maturities are 2020 and 2018, respectively. GEO said it believed it was in compliance with debt covenants at March 31.
- REIT distributions: GEO paid its first quarterly dividend of $0.50 per share in March and declared another $0.50 dividend for June. REIT rules require annual distributions of at least 90% of REIT taxable income; future distributions remain at the Board’s discretion and depend on cash flow, debt restrictions and other factors.
- Capital plans: Management estimated $12–$17 million of remaining spending on existing capital projects through 2013 and $30–$35 million of 2013 facility-maintenance expenditures. Management believed cash, operating cash flow and the new credit facility would support 2013 capital requirements.
- Idle capacity: Approximately 6,000 beds at seven idle facilities were being marketed, with a combined carrying value of $238.7 million and estimated 2013 carrying costs of $14.4 million. Management’s illustrative scenario—not a forecast—estimated that full activation at assumed average rates and occupancy could add about $125 million of annual revenue and $0.35–$0.40 of annual EPS.
- Business outlook: GEO was pursuing domestic and international contract opportunities, while warning that government budget constraints could reduce rates or services, delay awards, impair customer payments or prompt contract renegotiations and terminations. Average companywide occupancy, excluding idle beds, was 95.3%, compared with 95.5% in the prior-year quarter.
- Other post-quarter events: GEO agreed to acquire the 1,287-bed Joe Corley Detention Center for approximately $65 million, subject to due diligence and expected to close in Q2 2013. It also filed a prospectus supplement permitting up to $100 million of common-stock sales, which could dilute shareholders.
- Contingencies: A wrongful-death case was settled in April 2013; GEO stated its share was within reserves and the remainder was covered by insurance, with no material Q1 impact. A separate Australian property-damage lawsuit seeks up to approximately AUD 18 million ($18.8 million); GEO is defending the claim and says an unfavorable outcome could materially affect future results or cash flows. The company also disclosed other litigation, guarantees and joint-venture support commitments.
- Key risks: Reliance on governmental customers is significant: four customers accounted for 50% of 2012 revenue, and the BOP, ICE and U.S. Marshals Service together accounted for 45.8%. GEO noted that federal sequestration had begun, though it did not then expect contract effects to be material. Other disclosed risks include REIT qualification, leverage and covenant compliance, contract renewals and occupancy, foreign exchange exposure, labor and medical costs, and the ability to finance growth.
Important facts for investors to verify
- How the REIT conversion affects recurring taxes, taxable-subsidiary arrangements, cash available for distributions and continued REIT qualification.
- Whether operating cash flow recovers and whether the new credit facility, debt maturities, covenants and dividend obligations remain manageable.
- Progress in activating idle beds, contract renewals and new awards, and the financial impact of government budget reductions or customer concentration.
- The status and potential exposure of the Australian litigation, guarantees and joint-venture funding commitments.
- Whether the Joe Corley acquisition closes on the disclosed terms and whether any common shares are sold under the $100 million offering program.