GEO GROUP INC annual report, FY2014

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The GEO Group, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. GEO is a REIT operating correctional, detention, re-entry, youth-services, electronic-monitoring, and facility-construction businesses in the U.S. and internationally. At year-end, it reported approximately 79,000 beds at 98 facilities and monitoring services for more than 70,000 people.

Financial performance and condition

  • Revenue: $1.692 billion, up 11.1% from $1.522 billion in 2013. U.S. Corrections & Detention revenue rose 9.5% to $1.108 billion; GEO Care rose 9.0% to $329.3 million; International Services fell 4.9% to $198.0 million, largely due to currency movements and a U.K. contract ending. Facility Construction & Design contributed $56.0 million, primarily from the Ravenhall project.
  • Profit: Operating income was $234.7 million, up from $185.5 million; operating margin was approximately 13.9%, versus 12.2%. Continuing-operations income was $143.8 million, compared with $117.5 million; diluted continuing-operations EPS was $1.98 versus $1.64. The 2013 comparison included a $20.7 million debt-extinguishment loss and a significant tax benefit, so reported net income comparisons are affected by unusual items.
  • Q4 results: Revenue was $427.7 million versus $383.5 million in Q4 2013. Operating income was $62.0 million versus $48.0 million; continuing-operations income was $38.0 million versus $27.6 million. Diluted EPS from continuing operations was $0.52 versus $0.38.
  • Cash flow and investment: Cash from continuing operating activities was $202.5 million, up from $192.2 million. Capital expenditures were $114.2 million; investing activities used $121.2 million. Cash and cash equivalents ended the year at $41.3 million, down from $52.1 million. Ravenhall construction receivable growth of $73.3 million reduced operating cash flow; the $66.2 million year-end receivable was expected to be settled under the project terms.
  • Margins and segment mix: Operating expenses were 73.6% of revenue, compared with 73.9% in 2013. U.S. Corrections & Detention occupancy averaged 96.3%, versus 95.4%; company-wide occupancy averaged 95.7%. International Services operating income declined to $6.1 million from $13.3 million.
  • Debt and liquidity: Long-term debt, including current maturities but excluding non-recourse debt and capital leases, was approximately $1.466 billion. Total debt including non-recourse debt and capital leases was approximately $1.621 billion. The company reported $70.0 million drawn on its $700 million revolving facility, $295.5 million on its term loan, and $568.0 million of remaining revolver availability after letters of credit. Cash plus current assets were $377.4 million against current liabilities of $254.1 million. GEO reported compliance with credit-agreement covenants at year-end.
  • Distributions and non-GAAP measures: GEO paid $2.33 per share in regular dividends during 2014, totaling $170.2 million. Management stated an intention to pay at least 75% of adjusted funds from operations (AFFO), subject to board discretion and debt restrictions. AFFO was $232.9 million, up from $205.3 million; FFO was $196.9 million versus $169.1 million. These are company-presented non-GAAP measures.

Material changes versus 2013

  • Revenue growth reflected facility activations and expansions, including Florida facilities assumed in early 2014, increased Rio Grande capacity, and growth in electronic monitoring and ISAP services. Compensated U.S. Corrections & Detention mandays increased to 18.7 million from 17.1 million.
  • Operating income improved as revenue growth exceeded expense growth; lower G&A also helped, partly because 2013 included nonrecurring REIT-conversion costs. Interest expense increased to $87.4 million from $83.0 million, partly due to the new 5.875% notes.
  • Income-tax expense was $14.1 million in 2014, compared with a $26.1 million benefit in 2013. The prior-year benefit included nonrecurring REIT-conversion and tax-settlement items.
  • GEO issued $250 million of 5.875% senior notes due 2024 and amended its credit facility. It also raised $54.7 million net from an at-the-market common-stock offering, issuing approximately 1.5 million shares.
  • International revenue declined, including foreign-exchange effects and the end of the Harmondsworth contract. GEO began Ravenhall prison design and construction activity, adding construction revenue and a contract receivable.

Outlook, risks, and notable items

  • Outlook: The filing provides no formal consolidated revenue or EPS guidance. Management described further contract, expansion, acquisition, and international bidding opportunities, while warning that public budgets, contract outcomes, and operating costs could constrain growth. Management expected 2015 G&A as a percentage of revenue to remain consistent or decline.
  • Projects and costs: GEO estimated $173.6 million of remaining committed project capital requirements for 2015–2017, including an AUD 115 million (about $93.8 million at year-end exchange rates) Ravenhall capital contribution expected in January 2017. Estimated 2015 maintenance capital expenditures were $24.5 million. Ravenhall was expected to be completed toward the end of 2017 and operate under a 25-year management contract after commercial acceptance.
  • Idle beds: GEO estimated 2015 carrying costs of $16.0 million for approximately 3,300 vacant beds at idle facilities, with no firm activation agreements for those facilities at year-end. Management estimated activation of all such beds could add about $80 million of revenue and $0.20–$0.25 of EPS, but this is a scenario, not guidance.
  • Contract and customer exposure: Forty-nine facility-management contracts representing approximately 33,000 beds and 41.5% of 2014 consolidated revenue were scheduled to expire by year-end 2015, subject to renewal or other extensions. Nine contracts representing $85.1 million, or 5.0% of 2014 revenue, were identified for competitive re-bid in 2015. Four government customers accounted for 42.5% of revenue; the BOP, ICE, and U.S. Marshals Service together accounted for 41.9%.
  • Leverage and interest risk: Senior-credit-facility borrowings carried variable rates; GEO estimated that a one-percentage-point increase would raise annual interest expense by approximately $4.0 million. Debt covenants restrict borrowing, distributions, and other actions. Project spending, acquisitions, and dividends compete for liquidity.
  • Other risks and contingencies: Risks include REIT qualification and distribution requirements, government appropriations and payment timing, contract termination/non-renewal, occupancy, public resistance to privatization, litigation and insurance claims, labor costs, foreign exchange, construction completion and cost overruns, and joint-venture exposure. Insurance reserves were $49.5 million at year-end. Management said pending legal matters were not expected to have a material adverse effect. The auditors gave unqualified opinions on the financial statements and internal controls.
  • Subsequent events: In February 2015, GEO completed its acquisition of eight LCS facilities with more than 6,500 beds for approximately $310 million cash, funded with revolver borrowings; a contingent earnout could bring total consideration to $350 million. GEO also signed to reactivate the 400-bed Mesa Verde facility, with intake expected in Q2 2015, and the board declared a $0.62-per-share quarterly dividend.

Key facts for investors to verify

  • Renewal, re-bid, and expiration outcomes for the substantial 2015 contract portfolio, including the assumptions behind reported renewal rates.
  • Ravenhall construction progress, total funding needs, contract-receivable collection, hedge exposure, and the timing and conditions for State acceptance and payment.
  • Post-acquisition occupancy, operating performance, integration costs, and any earnout for the LCS facilities, along with the resulting revolver balance and covenant headroom.
  • Cash generation after capital expenditures and dividends, including the impact of project receivables, idle-facility costs, and REIT distribution requirements.
  • Customer concentration and government budget or policy changes that could affect appropriations, per-diem rates, bed demand, or contract continuity.
  • Potential changes in insurance reserves, material claims, or other contingencies, and the company’s ability to maintain REIT qualification.