The GEO Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Thirteen weeks ended April 3, 2011; unaudited. Comparisons are with the thirteen weeks ended April 4, 2010. Amounts are in U.S. dollars unless noted.
Business context
GEO provides government-outsourced correctional, detention, treatment, re-entry, monitoring and transportation services. During the quarter it completed its February 10 acquisition of BI for approximately $409.6 million net of acquired cash. Together with the 2010 Cornell acquisition, this expanded GEO Care and substantially changed the scale and mix of the business. At quarter-end, GEO reported approximately 80,000 beds at 116 facilities and monitored more than 60,000 people for about 900 agencies. Average company-wide facility occupancy was 93.4%.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $391.8 million | $287.5 million |
| Operating income | $40.9 million | $34.5 million |
| Operating margin | 10.4% | 12.0% |
| Income before tax and affiliate earnings | $25.5 million | $27.9 million |
| Net income attributable to GEO | $16.8 million | $17.7 million |
| Basic and diluted EPS | $0.26 | $0.35 basic; $0.34 diluted |
| Cash from operating activities | $69.1 million | $64.7 million |
| Capital expenditures | $38.7 million | $15.7 million |
Revenue rose 36.2%, principally reflecting acquisitions; operating income increased about 18%, but operating margin narrowed. Interest expense more than doubled to $17.0 million, mainly because of higher debt following the acquisitions. The effective tax rate was 38.4%; management estimated a fiscal 2011 rate of 39%–40%.
At April 3, cash and cash equivalents were $85.9 million, restricted cash and investments totaled $87.6 million, and current assets were $482.0 million versus current liabilities of $296.5 million. Long-term debt was $1.236 billion, current debt and lease obligations were $50.0 million, non-recourse debt was $184.9 million, and non-current capital leases were $13.9 million. The Senior Credit Facility had $703.5 million outstanding, with $219.6 million of stated additional revolver capacity after letters of credit. Cash increased $46.2 million during the quarter, supported by financing proceeds; investing activities used $444.9 million, including the BI acquisition.
Material changes and unusual items
- Reported revenue growth includes Cornell and BI; BI contributed approximately $17.8 million revenue and $0.5 million earnings after its acquisition date. Pro forma results, assuming both acquisitions and their financing from the start of each comparison period, were revenue of $405.4 million and GEO-attributable net income of $20.1 million for Q1 2011, versus $413.0 million and $20.1 million in Q1 2010.
- GEO issued $300 million of 6.625% senior notes due 2021 and borrowed additional amounts under its credit facility to fund BI. Debt issuance costs were $9.3 million. Q1 G&A included $3.9 million of BI transaction costs; management separately described $5.7 million of acquisition-related costs for the quarter, including Cornell and BI.
- Goodwill increased to $527.1 million, including $283.1 million provisionally recorded for BI; acquired intangible assets were $126.9 million gross. The purchase-price allocation remained subject to finalization.
- Construction and design revenue fell to $0.1 million from $14.5 million as Blackwater River construction concluded. GEO Care revenue rose substantially with the acquisitions.
Outlook, risks and contingencies
Management said cash on hand, operating cash flow and available credit were expected to cover disclosed capital requirements through 2012. Existing development projects were estimated to require $193.4 million more in 2011–2012, in addition to expected 2011 maintenance spending of $20–$25 million. Self-financing additional awarded projects could materially increase requirements and may require new financing. Management anticipated annual synergies of approximately $12–$15 million in the year following Cornell and $3–$5 million following BI. No specific revenue or EPS forecast was provided.
Management cited state and federal budget pressure, delayed cash receipts from California, potential reductions in inmate populations or contract rates, contract losses/nonrenewals, integration and execution risks, high indebtedness and covenant restrictions, and foreign-exchange exposure. It reported compliance with debt covenants at quarter-end. A May 2 amendment reduced Term Loan B pricing and its LIBOR floor. Three contracts had terminated or were scheduled to terminate in 2011; management did not expect a material adverse impact from those terminations. New awards included UK prisoner escort and custody contracts and the Dungavel facility contract.
Notable contingencies include an Australian property-damage lawsuit seeking up to approximately $18.7 million plus interest; GEO is uninsured for the claim and has recorded a reserve, but the reserve amount is not stated here. A South African tax dispute carried maximum stated exposure of $2.6 million. GEO also reported insurance reserves of $40.6 million and various guarantees and letters of credit. The CEO had become eligible for a deferred retirement payment; the potential payment including tax gross-up was $5.8 million.
Important facts for investors to verify
- How much reported growth and future earnings derive from acquisitions versus comparable organic operations, especially given the pro forma revenue and earnings comparison.
- Final BI purchase-price allocation, acquired-asset valuations, integration performance and realization of projected synergies.
- Debt levels, covenant headroom, interest-rate sensitivity, revolver availability and the effect of the May 2 pricing amendment.
- Funding and returns for committed construction projects, and whether additional self-financed awards will increase capital needs.
- Government customer budgets, payment timing, occupancy, contract renewals and the outcome or reserve adequacy of material claims and tax contingencies.