The GEO Group, Inc. — 2010 Form 10-K
Business context and reporting period. GEO provides outsourced correctional, detention, mental-health, residential-treatment, youth, re-entry and related services to government customers in the U.S. and internationally. This annual report covers the 52-week fiscal year ended January 2, 2011; the comparable 2009 fiscal year contained 53 weeks. GEO reported four segments: U.S. Detention & Corrections, International Services, GEO Care, and Facility Construction & Design. Cornell was acquired on August 12, 2010. BI was acquired on February 10, 2011, after year-end, and is therefore a subsequent event rather than part of 2010 results.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $1,270.0 million | $1,141.1 million |
| Operating income | $140.5 million; 11.1% margin | $135.4 million; 11.9% margin |
| Income from continuing operations | $62.8 million | $66.5 million |
| Net income attributable to GEO | $63.5 million | $66.0 million |
| Diluted continuing-operations EPS | $1.13 | $1.28 |
| Operating cash flow | $126.2 million | $125.3 million |
| Capital expenditures | $97.1 million | $149.8 million |
| Cash and cash equivalents at year-end | $39.7 million | $33.9 million |
| Current assets / current liabilities | $425.1 million / $270.5 million | $279.6 million / $177.4 million |
The current ratio at year-end was approximately 1.57, based on reported current assets and liabilities. Interest expense rose to $40.7 million from $28.5 million; the income-tax provision was $39.5 million, with a 40.3% effective rate. Total assets were $2.424 billion and shareholders’ equity was $1.039 billion at year-end.
Year-end consolidated indebtedness was $807.8 million excluding non-recourse debt and capital leases; total debt including those items was $1.045 billion. The $400 million revolving facility had $212.0 million drawn, $57.0 million in letters of credit and $131.0 million available at year-end. After the February 2011 BI acquisition and facility amendment, reported debt excluding non-recourse debt and capital leases was $1.251 billion; revolver availability was approximately $233.8 million.
Fourth-quarter results and changes versus prior period
Fourth-quarter 2010 revenue was $374.4 million, operating income was $43.4 million, and income from continuing operations was $23.0 million. Basic and diluted continuing-operations EPS were $0.37 and $0.36, respectively. Fourth-quarter 2009 revenue was $310.8 million, operating income $39.6 million, and continuing-operations income $15.5 million; that quarter contained 14 weeks versus 13 weeks in fourth-quarter 2010.
- Full-year revenue grew 11.3%. Cornell contributed $151.1 million of revenue from its acquisition date through year-end; the filing attributes much of segment growth to the acquisition, new or expanded contracts, and foreign-currency effects.
- GEO Care revenue increased 60.3% to $213.8 million, while its reported average occupancy fell to 92.4% from 99.5%, reflecting the addition of occupancy-sensitive community and youth facilities.
- International Services revenue increased 38.9% to $190.5 million, including a $21.3 million favorable foreign-currency contribution and revenue from Parklea and the Harmondsworth expansion.
- Facility Construction & Design revenue fell 76.3% to $23.3 million as construction at Blackwater River was completed. Its construction revenue is project-dependent and may vary substantially between periods.
- Operating income increased modestly, but operating margin declined to 11.1% from 11.9%. G&A rose to $106.4 million from $69.2 million, including Cornell expenses and approximately $25 million of acquisition-related costs. The company also recorded a separate $7.9 million loss on extinguishment of debt.
- Operating cash flow was nearly flat despite higher earnings before certain costs; capital expenditures declined. Investing cash use increased to $368.3 million, primarily reflecting Cornell acquisition cash consideration and capital spending. Financing activities provided $243.7 million, including new borrowings and share repurchases.
Outlook, risks and unusual items
- Management cited a development pipeline and intends to pursue contract awards, renewals, international opportunities and selective acquisitions. It expected annual Cornell synergies of $12–$15 million and BI synergies of $3–$5 million; these are targets, not guaranteed results.
- Committed projects were estimated to require $227.5 million of remaining capital through 2011–2012, with 2011 maintenance capital expenditures estimated at $20–$25 million. Management said cash, operating cash flow and credit availability were expected to support disclosed 2011 needs, while warning that additional self-financed projects could increase funding requirements.
- GEO completed the $618.3 million Cornell acquisition in 2010. The subsequent $415 million BI acquisition was funded with $300 million of 6.625% senior notes and $150 million of incremental term loans, along with other available proceeds. BI’s purchase-price allocation was incomplete at filing, and pro forma combined results were not provided.
- Significant risks include leverage and floating-rate exposure, covenant limits, capital-intensive development, contract termination/non-renewal/re-bids, occupancy sensitivity, government appropriations and payment delays, state budget pressure, customer concentration, labor and insurance costs, and acquisition integration. A 1% increase in applicable credit-facility rates was estimated to increase annual interest expense by $5.6 million at year-end.
- Thirty-two management contracts covering 19,450 beds—21.5% of 2010 consolidated revenue—were scheduled to expire by January 1, 2012 unless renewed. Fifteen contracts representing $96.3 million, or 7.6% of 2010 revenue, were subject to competitive re-bid in 2011.
- Material disclosed contingencies include an Australian property-damage lawsuit seeking up to approximately $18.4 million plus interest, and an IRS dispute with potential exposure of up to $15.4 million if the challenged deduction is disallowed in full. GEO had recorded reserves and stated it intended to defend its positions. The filing also described a BI-related False Claims Act complaint alleging $2.4 million in claims; GEO said it did not believe the claim had merit or would have a material effect.
- GEO repurchased $80 million of shares under its 2010 program and separately repurchased $7.1 million of shares from certain directors and executives. No cash dividends were paid. A depreciation-life estimate change reduced 2010 depreciation by $3.7 million and increased diluted EPS by $0.04.
Most important facts for investors to verify
- Whether Cornell and BI integration delivers the projected synergies, and whether BI’s final purchase accounting, goodwill and acquired intangible valuations change reported results.
- Post-acquisition leverage, covenant headroom, refinancing needs, variable-rate exposure and capacity to fund committed and prospective projects.
- Renewal and re-bid outcomes for contracts representing material revenue, occupancy levels, and the effect of government budget constraints or delayed payments.
- Resolution and reserve adequacy for the Australian litigation, IRS matter, insurance claims and other contingencies.
- Whether reported earnings and margins are sustainable after acquisition costs, construction revenue fluctuations, amortization, and the depreciation-life estimate change.