The GEO Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. GEO is a REIT providing correctional, detention, reentry, youth, electronic-monitoring, transportation, and facility-development services in the U.S. and internationally. It reported approximately 87,000 beds across 104 facilities and community supervision services for more than 174,000 people.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $2.179 billion | $1.843 billion |
| Operating income | $265.6 million | $235.7 million |
| Operating margin | 12.2% | 12.8% |
| Net income | $148.5 million | $139.3 million |
| Diluted EPS | $2.00 | $1.88 |
| Operating cash flow | $(28.0) million | $142.2 million |
| Capital expenditures | $81.6 million | $117.6 million |
| Adjusted FFO (non-GAAP) | $279.2 million | $248.4 million |
| Cash and cash equivalents, year-end | $68.0 million | $59.6 million |
| Current assets / current liabilities | $697.7 million / $504.1 million | $438.3 million / $278.6 million |
- Operating margin is calculated from reported revenue and operating income. Net income margin was approximately 6.8%, compared with 7.6% in 2015.
- Operating cash flow turned negative chiefly because Ravenhall construction costs and estimated earnings exceeded billings, increasing contract receivables by $280.6 million. The year-end contract receivable was $443.8 million; GEO said it is expected to be settled as the project is completed and accepted.
- Debt at year-end included approximately $1.96 billion of long-term debt, excluding non-recourse debt and capital leases; non-recourse debt was $472.2 million and capital lease obligations were $8.7 million. Total debt including these items and other debt was reported at $2.42 billion.
- The company had $515.0 million drawn on its $900 million revolver and reported $331.4 million of additional borrowing capacity after letters of credit and covenant limitations. A 1 percentage-point rate increase on senior credit facility borrowings was estimated to add about $8 million in annual interest expense.
- GEO paid $2.60 per share in regular dividends in 2016, up from $2.51 in 2015; cash dividends totaled $194.7 million. Management stated an intention to pay at least 75% of AFFO, subject to board discretion, REIT requirements, and debt restrictions.
Changes versus the prior year
- Revenue rose 18.2%. U.S. Corrections & Detention increased 10.9% to $1.375 billion, GEO Care rose 15.7% to $394.4 million, International Services increased 1.6% to $157.4 million, and Facility Construction & Design rose 135.8% to $252.4 million, largely reflecting Ravenhall construction activity.
- Revenue growth reflected facility activations and ramp-ups, the 2015 LCS facility acquisition, higher populations and rates, and growth in electronic monitoring and immigration supervision. Construction revenue grew substantially, but construction segment operating income was only $0.6 million on $252.4 million of revenue.
- Operating income increased 12.7%, slower than revenue growth; operating expenses rose 21.0%, and interest expense increased to $128.7 million from $106.1 million. The 2016 results also included a $15.9 million loss on extinguishment of debt after GEO refinanced and redeemed its 6.625% notes with a $350 million 6.00% note offering.
- Average company-wide facility occupancy was 92.9%, versus 91.5% in 2015, excluding idle facilities. U.S. Corrections & Detention occupancy was 93.4%, compared with 91.5%.
Outlook, developments, and risks
- Management expressed interest in bidding for projects that meet its profitability and risk criteria, but gave no specific consolidated revenue or earnings guidance. It highlighted government budget pressures, possible rate reductions, contract changes, terminations, non-renewals, and competitive rebids as constraints on growth.
- GEO was marketing approximately 3,300 vacant beds at four idle facilities. The filing estimated 2017 carrying costs at $12.0 million in the year-end business discussion; a later outlook passage gives $12.7 million. The filing does not provide a clear, consistent value. Management estimated activation could add about $70 million of annual revenue and $0.15–$0.20 per share, but had no firm activation commitments.
- Thirty-six facility-management contracts representing about 30,000 beds and 20.2% of 2016 revenue were scheduled to expire on or before year-end 2017. Eighteen contracts, representing $332 million or 15.2% of 2016 revenue, could be competitively rebid in 2017.
- The DOJ’s August 2016 directive called for the Bureau of Prisons to reduce or decline renewals of private-prison contracts. On February 21, 2017, the Attorney General rescinded it and reinstated the BOP’s use of private facilities. This post-year-end policy change reduces, but does not eliminate, federal-contract policy risk. GEO reported that federal agencies accounted for 48% of consolidated revenue in 2016; BOP, ICE, and U.S. Marshals Service together accounted for 47.2%.
- Ravenhall, Australia, was under construction with expected completion in late 2017. GEO had spent $15.2 million of estimated $112.6 million project commitments through year-end and made an AUD 115 million (about $82.9 million) capital contribution in January 2017. The State’s expected AUD 310 million payment depends on completion and commercial acceptance.
- After year-end, GEO agreed to acquire Community Education Centers for $360 million cash, excluding transaction expenses and without assuming its debt. Closing was expected in the second quarter of 2017, subject to customary conditions; financing was to include a term-loan commitment and revolver borrowings.
- Material legal and contingent matters include a securities class action, a Mississippi state lawsuit alleging misconduct related to public contracts, and a state non-income-tax assessment of approximately $19.6 million. GEO disputed the assessment and recorded a reserve based on its estimate of the most probable loss. It stated that losses in the lawsuits were not then considered probable or reasonably estimable.
- Other notable risks include substantial leverage and covenant restrictions, REIT qualification and distribution requirements, customer concentration, occupancy and contract-renewal exposure, labor and insurance claims, construction cost and schedule risk, and potential impairment of goodwill and idle facilities. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track whether operating cash flow recovers as Ravenhall receivables are collected, and compare cash generation with dividends, maintenance needs, and expansion spending.
- Confirm Ravenhall completion, commercial acceptance, the timing and amount of the State payment, and the related non-recourse debt and guarantee exposure.
- Monitor 2017 contract renewals and rebids, especially federal agency decisions and outcomes for contracts representing 15.2% of 2016 revenue.
- Assess the CEC acquisition’s closing, financing, integration costs, and contribution to earnings and leverage.
- Review the resolution and potential financial impact of the Mississippi litigation, securities action, and $19.6 million tax assessment.
- Reconcile debt balances, revolver availability, covenant headroom, interest-rate sensitivity, and dividend capacity against the full audited financial statements and debt notes.