Business context and reporting period
The GEO Group, Inc. provides government-outsourced correctional, detention, treatment, re-entry, monitoring and transportation services. This unaudited Form 10-Q covers the 13 and 39 weeks ended October 2, 2011; comparisons are with the periods ended October 3, 2010. Unless noted, amounts below are in U.S. dollars.
GEO acquired B.I. Incorporated (BI) on February 10, 2011, adding electronic monitoring and community-supervision services. At quarter-end, GEO managed or owned approximately 79,600 beds at 116 facilities and monitored more than 67,000 people.
Financial performance and position
| Metric | Third quarter 2011 | Third quarter 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Revenue | $406.8 million | $327.9 million | $1,206.4 million | $895.6 million |
| Operating income | $51.2 million | $29.5 million | $142.5 million | $97.1 million |
| Operating margin | 12.6% | 9.0% | 11.8% | 10.8% |
| Net income attributable to GEO | $21.5 million | $5.3 million | $59.9 million | $40.0 million |
| Diluted EPS | $0.34 | $0.09 | $0.93 | $0.75 |
- For the 39 weeks, operating cash flow was $164.1 million, versus $103.6 million. Investing cash flow was negative $583.5 million, including $409.6 million for BI and $177.7 million of capital expenditures; financing cash flow was positive $427.5 million. Cash at period-end was $44.0 million.
- At October 2, current assets were $425.9 million and current liabilities $300.7 million. The resulting current ratio was approximately 1.4; current assets include restricted cash and investments.
- Reported long-term debt was $1,310.8 million; non-recourse debt was $162.0 million, in addition to current portions of debt and lease obligations. Senior Credit Facility borrowings were $772.1 million, with $56.8 million of letters of credit and $156.2 million available on the revolver. GEO reported a 3.2% weighted-average rate on Senior Credit Facility borrowings.
- GEO repurchased 2.5 million shares for approximately $50.0 million during the quarter, primarily using revolver proceeds, under a $100 million authorization.
Material changes versus prior periods
- Revenue increased 24.1% in the quarter and 34.7% year to date. BI and Cornell acquisitions were major contributors; GEO Care revenue rose 80.1% for the quarter and 134.5% for the 39 weeks.
- Operating income increased as revenue growth and lower general and administrative expense more than offset higher operating costs and depreciation. Third-quarter G&A fell to $25.9 million from $33.9 million, largely because the prior-year quarter included $14.3 million of non-recurring acquisition costs.
- Interest expense rose to $19.3 million from $11.9 million for the quarter and to $55.7 million from $28.2 million year to date, primarily reflecting higher debt following BI financing and acquisition-related borrowing.
- Depreciation and amortization increased to $62 million year to date from $32.1 million, reflecting acquired assets and facilities. The 2010 comparison includes Cornell for only part of that year-to-date period.
- GEO’s average company-wide facility occupancy was 94.5% for the 39 weeks. U.S. Detention & Corrections occupancy was 94.6% on the company’s stated basis.
Outlook, commentary, risks and unusual items
- Management estimated fiscal 2011 effective tax rate of 38%–39%. It anticipated $3–$5 million of annual synergies in the year following BI’s acquisition. These are estimates, not earnings guidance.
- Management said cash, operating cash flow and Senior Credit Facility availability should meet disclosed capital needs through 2012. Remaining spending on projects underway was estimated at $109.9 million through fiscal 2011 and 2012; 2011 maintenance capital expenditures were expected to be $30–$35 million. Additional self-financed awards could materially increase capital needs and require further financing.
- California’s realignment plan led to cancellation of contracts at three facilities; $23.8 million of year-to-date revenue related to the affected contracts. GEO was marketing approximately 6,800 vacant beds at eight idle facilities, with carrying values of $276.4 million. Other contract terminations included North Lake; the Frio County contract was scheduled to end December 2, 2011.
- Potential growth opportunities included U.S. state procurements, U.K. prison privatization and a New Zealand correctional facility proposal. GEO cautioned that government budget pressures could result in early releases, reduced rates or services, contract losses, and weaker customer payment capacity.
- A jury verdict in a wrongful-death case resulted in an $8.4 million judgment; GEO intended to appeal and said its accrual was adequate. An Australian property-damage lawsuit seeks up to approximately $17.4 million plus interest; GEO is uninsured for this claim and said an unfavorable outcome could materially affect results or cash flows. A South African tax dispute carried a stated maximum exposure of $2.6 million.
- Other notable items include $4.3 million of BI acquisition transaction costs year to date and Cornell-related operating expense recoveries of $3.9 million year to date. BI purchase accounting remained preliminary; the company recorded acquisition measurement adjustments. The filing states GEO was in compliance with debt covenants at quarter-end.
Important facts for investors to verify
- Whether acquisition-driven revenue and earnings growth can be sustained after contract losses, idle capacity and integration costs.
- Current and future borrowing levels, revolver availability, interest-rate exposure, covenant headroom and funding for committed projects and share repurchases.
- The replacement use and economics of California facilities and other idle beds, and the revenue impact of the Frio County termination.
- Final BI purchase-price allocation, goodwill and intangible-asset valuations, and the resulting amortization or impairment risk.
- Developments in the wrongful-death appeal, Australian litigation and South African tax appeal, including any changes to recorded reserves or exposures.