The GEO Group, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended January 1, 2012 (52 weeks). The filing is an annual report; selected fourth-quarter results are also shown below.
Business context
GEO provides correctional, detention, mental health, residential treatment, re-entry, youth, electronic monitoring and transportation services to government customers in the U.S. and internationally. At year-end, it managed or owned approximately 79,400 beds at 115 facilities and monitored approximately 70,000 people for about 900 agencies. Average facility occupancy was 94.6%, excluding idle facilities and projects under development.
The year included the February 2011 acquisition of B.I. Incorporated (BI) for $409.6 million in cash consideration, following the 2010 Cornell acquisition. BI added electronic monitoring and community-supervision services.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1,612.9 million | $1,270.0 million | +27.0% |
| Operating income | $192.2 million | $140.5 million | +36.8% |
| Operating margin | 11.9% | 11.1% | +0.8 percentage points |
| Income from continuing operations | $77.5 million | $62.8 million | +23.4% |
| Net income attributable to GEO | $78.6 million | $63.5 million | +23.9% |
| Diluted EPS from continuing operations | $1.23 | $1.13 | +8.8% |
| Cash from continuing operating activities | $188.9 million | $126.2 million | +49.7% |
| Capital expenditures | $224.7 million | $97.1 million | +131.5% |
Revenue growth reflected acquisitions, facility openings and higher populations and rates; GEO Care revenue nearly doubled to $426.8 million. International Services revenue rose 13.1%, including a $19.3 million favorable foreign-exchange contribution. Construction and Design revenue declined to $0.1 million as the Blackwater River project had been completed. Higher interest expense and depreciation partly offset operating growth: interest expense increased to $75.4 million from $40.7 million.
Cash and cash equivalents were $44.8 million, versus $39.7 million. Current assets were $459.3 million and current liabilities $288.8 million. Corporate debt, excluding non-recourse debt and capital leases, was $1,338.4 million, up from $807.8 million. Separately, non-recourse debt was $241.8 million and capital lease obligations were $14.2 million. The $500 million revolver had $302.0 million drawn and $58.6 million in letters of credit at year-end; reported additional borrowing capacity was $139.4 million, subject to covenants and borrowing conditions.
Fourth-quarter FY2011 revenue was $406.5 million, operating income $49.6 million, net income $18.6 million and diluted EPS $0.30. Fourth-quarter FY2010 figures were $374.4 million, $43.4 million, $23.0 million and $0.36, respectively. FY2011 Q4 earnings were affected by higher interest expense and GEOAmey’s start-up loss.
Material changes versus the prior year
- BI contributed $113.2 million of revenue and $10.9 million of earnings from its acquisition date through year-end; FY2011 included a full year of Cornell operations versus a partial year in FY2010.
- Debt rose substantially to finance the BI acquisition and other needs. GEO issued $300 million of 6.625% senior notes due 2021 and borrowed under its senior credit facility.
- Operating cash flow improved, but acquisition spending and capital expenditures drove investing cash outflow to $635.5 million.
- GEO repurchased 3.9 million shares for $75.0 million, primarily funded with revolver borrowings. No common dividends were paid in FY2011.
- Contracts terminated during FY2011 generated $48.8 million of revenue and a $2.8 million net operating loss. California realignment led to several facility contract cancellations.
Outlook, risks and unusual items
- Management provided no specific consolidated revenue or earnings guidance. It expected cash on hand, operating cash flow and available credit to meet disclosed 2012–2013 requirements, while warning that additional self-financed projects could increase funding needs.
- Existing development projects required an estimated $89.7 million of remaining investment for 2012–2013; 2012 facility maintenance capital expenditures were estimated at $30–$35 million. Management estimated $12–$15 million of annual Cornell synergies and $3–$5 million of annual BI synergies following integration.
- Approximately 7,700 beds at nine idle facilities were being marketed. Their carrying value was $297.3 million; estimated 2012 carrying costs were $16.6 million if they remained vacant all year. Impairment charges are possible if expected cash flows do not support carrying values.
- Contract risk is material: 54 facility contracts representing about 21,000 beds and 26.3% of FY2011 revenue were scheduled to expire on or before December 30, 2012, subject to renewal. Government customers can generally terminate contracts on 30–180 days’ notice. Four customers accounted for over half of revenue; three federal agencies accounted for 39.9%.
- Debt covenants, floating-rate exposure and refinancing needs constrain flexibility. A one-percentage-point increase in rates on year-end senior credit facility borrowings would increase annual interest expense by approximately $7.8 million. Management reported covenant compliance at year-end.
- After year-end, GEO received notice that the Golden State facility contract would end July 1, 2012 and that the Guantanamo Bay contract would end March 31, 2012. A proposed quarterly dividend of $0.10 per share, beginning in Q4 2012, was subject to available capital, board approval and debt restrictions.
- Material litigation includes an $8.4 million wrongful-death judgment under appeal, with GEO responsible for the first $3.0 million under its insurance plan, and an Australian property-damage claim seeking up to approximately $18.4 million plus interest for which GEO reported no insurance coverage. GEO stated an unfavorable outcome could materially affect results or cash flow.
- The company reported an unqualified audit opinion and effective internal controls, but the control assessment excluded BI, which represented 15% of consolidated assets and 7% of revenue. Integration and assessment were ongoing.
Important facts for investors to verify
- Whether contract renewals and re-bids preserve occupancy, rates and margins, particularly for contracts expiring in 2012.
- Progress in leasing or contracting the idle beds, and whether their carrying values remain recoverable.
- Debt balances, covenant headroom, revolver availability and the funding plan for committed and potential capital projects.
- Realized Cornell and BI synergies, integration costs and the continuing performance of GEO Care and GEOAmey.
- Developments in the two disclosed lawsuits, the BI working-capital adjustment arbitration, and other significant contingencies.
- Whether the proposed dividend is approved and paid within the constraints of the credit agreement and note indentures.