The GEO Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Dollar amounts below are in millions unless stated otherwise. GEO operates correctional, detention, reentry, youth, monitoring and related services across the U.S. and internationally; it reported approximately 96,000 beds at 139 facilities and community supervision services for more than 192,000 people.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $583.5 | $577.1 | $1,148.4 | $1,127.7 |
| Operating income | $67.0 | $54.6 | $131.4 | $118.9 |
| Operating margin | 11.5% | 9.5% | 11.4% | 10.5% |
| Net income attributable to GEO | $37.4 | $31.0 | $72.4 | $71.4 |
| Diluted EPS | $0.31 | $0.25 | $0.60 | $0.60 |
| Operating cash flow | Not separately stated | Not separately stated | $180.3 | $50.7 |
Q2 revenue rose 1.1% year over year and operating income increased 22.7%. First-half revenue increased 1.8% and operating income increased 10.5%; first-half diluted EPS was unchanged. First-half operating cash flow improved substantially, while capital expenditures were $107.1 million.
- Q2 segment revenue: U.S. Corrections & Detention $369.0 million (+2.3%); GEO Care $149.9 million (+7.6%); International Services $64.6 million (+50.5%). Facility Construction & Design had no revenue versus $33.9 million in Q2 2017, reflecting completion of Ravenhall construction.
- Management attributed growth to the CEC acquisition, higher U.S. occupancy and populations, growth in monitoring and ISAP services, and Ravenhall’s transition to operations. U.S. Corrections & Detention occupancy excluding idle facilities was 95.3% in Q2 versus 90.1% a year earlier.
- Q2 general and administrative expense fell to $47.4 million from $52.2 million, mainly because prior-year CEC acquisition expenses did not recur. First-half G&A was $89.3 million, down 5.8%.
- First-half NAREIT FFO was $107.8 million versus $103.1 million; Normalized FFO was $110.3 million versus $113.5 million; AFFO was $142.0 million versus $148.7 million. These are company-presented non-GAAP measures.
Financial position and capital allocation
- At June 30, cash and cash equivalents were $65.5 million; restricted cash and investments were also significant. Cash, cash equivalents and restricted cash totaled $127.2 million, down from $133.5 million at year-end 2017. Current assets were $547.1 million and current liabilities $373.8 million.
- Total debt, including non-recourse debt and capital leases, was $2.666 billion, up from $2.582 billion at December 31, 2017. Long-term debt was $2.289 billion. Senior credit facility borrowings were approximately $1.171 billion; approximately $449 million of Revolver capacity remained after letters of credit. The weighted average rate on credit facility borrowings was 4.2%.
- The April 2018 credit amendment refinanced the $792 million term loan at LIBOR plus 2.00%, down from LIBOR plus 2.50%. The term loan matures in 2024 and the $900 million Revolver in 2021. The agreement includes leverage and interest-coverage covenants.
- GEO paid $115.0 million in dividends and repurchased $70.4 million of stock in the first half under a program authorizing up to $200 million. The quarterly dividend remained $0.47 per share; the Board declared another $0.47 dividend in July.
- Planned capital projects were estimated at $247 million, with $76 million remaining to be spent through 2019. Management said cash, operating flows and credit availability should support 2018 capital requirements.
Outlook, risks and unusual items
- The filing provides no consolidated revenue or EPS guidance. Management described growth opportunities but cautioned that government budget constraints, contract changes, terminations and rebids could pressure rates, occupancy, collections and new business.
- Four idle facilities with approximately 4,700 vacant beds were being marketed; carrying value was $122.5 million and estimated 2018 annual carrying costs were $17.7 million. No activation commitments were in place. Management estimated full activation could add approximately $104 million in annualized revenue and $0.15–$0.20 in annualized EPS, using stated occupancy and rate assumptions.
- GEO lost the Parklea Center rebid in Australia and expects to transition the contract in March 2019. Newly announced awards included an Idaho contract expected to generate approximately $17 million annualized revenue and a Scottish transport contract expected to average approximately $39 million annually from 2019.
- Interest-rate exposure is material: management estimated each 1 percentage-point increase in the average rate on credit-facility borrowings would raise annual interest expense by approximately $12 million. Currency sensitivity was estimated at about $5 million to financial position and $1 million to first-half results for a 10% currency-rate change.
- Legal matters include immigration-detainee wage and trafficking-related class actions in Colorado, Washington and California; GEO said losses were not then considered probable or reasonably estimable and recorded no accrual. A Mississippi lawsuit was settled in July 2018 without admission of liability; the payment was not material. A separate state tax assessment was approximately $19.6 million, for which GEO had established a reserve and was contesting the assessment.
- Other notable items: a $2.3 million CEC escrow recovery reduced Q2 operating expense; first-half G&A included $4.5 million of legal-related expense. Revenue-recognition standard adoption had no material impact. Management expected lease-accounting adoption to significantly increase long-term assets and liabilities.
Investor verification priorities
- Check whether operating cash-flow improvement persists, given the filing’s attribution of working-capital changes to billing, collection and payment timing.
- Monitor debt levels, variable-rate exposure, Revolver usage and compliance with credit-agreement covenants, especially alongside dividends and buybacks.
- Track occupancy, contract renewals and rebids, idle-bed activation, Parklea transition costs, and delivery of announced contract awards.
- Follow outcomes and potential financial exposure from the wage-related lawsuits and the disputed state tax assessment.
- Reconcile GAAP earnings with FFO, Normalized FFO and AFFO, including the company’s adjustments for legal costs, escrow recovery and other items.