The GEO Group, Inc. — 2017 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company is a REIT providing correctional, detention, reentry, community supervision, monitoring and related services in the U.S. and internationally. Results include Community Education Centers (CEC) from its April 5, 2017 acquisition. Financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $577.1 | $548.4 | $1,127.7 | $1,058.5 |
| Operating income | $54.6 | $66.0 | $118.9 | $125.1 |
| Operating margin | 9.5% | 12.0% | 10.5% | 11.8% |
| Net income attributable to GEO | $31.0 | $23.2 | $71.4 | $55.6 |
| Diluted EPS | $0.25 | $0.21 | $0.60 | $0.50 |
| Operating cash flow | Not separately presented for the quarter | $50.7 | $38.3 |
- Q2 revenue increased 5.2%; first-half revenue increased 6.5%. Q2 operating income declined 17.3% despite higher revenue, while attributable net income and diluted EPS rose.
- CEC contributed $56.7 million of revenue and $2.6 million of earnings in the reported periods after closing. GEO paid $354.5 million net of acquired cash; the preliminary allocation included $172.3 million of goodwill and $76.0 million of intangible assets.
- Q2 segment revenue rose in U.S. Corrections & Detention and GEO Care, partly offset by lower Facility Construction & Design revenue as Ravenhall construction activity declined. CEC and growth in monitoring services contributed to GEO Care gains.
- Consolidated G&A rose to $52.2 million in Q2 from $36.9 million, including $10.3 million in CEC-related merger and acquisition costs. Higher operating costs, depreciation and interest also weighed on operating results. Q2 interest expense was $36.0 million versus $31.1 million.
Cash, liquidity and debt
- Cash and cash equivalents were $65.9 million at June 30, 2017, versus $68.0 million at December 31, 2016. Current assets were $707.1 million and current liabilities $570.6 million.
- First-half operating cash flow was $50.7 million. A $122.0 million increase in contract receivable for the Ravenhall project was a significant cash use; the filing says this balance is expected to grow during construction and is payable under the contract upon completion and commercial acceptance, with the remainder over the contract term.
- Investing cash outflow was $423.2 million, including $354.5 million for CEC and $67.5 million in capital expenditures. Financing cash inflow was $369.0 million, including common-stock proceeds and debt activity; dividends paid were $110.9 million.
- Total debt, including non-recourse debt and capital leases, was $2.653 billion, compared with $2.420 billion at year-end 2016. The senior credit facility had $992.2 million outstanding, a 3.4% weighted-average rate, and $642 million of additional revolving capacity after borrowings and letters of credit. The company also reported approximately $508 million outstanding under the Ravenhall construction facility.
- The company issued 10.35 million shares in a March offering, receiving $275.9 million net proceeds reported in financing cash flow; proceeds were used to repay revolver borrowings and for general corporate purposes. Shares outstanding rose to about 124.0 million at June 30. The 3-for-2 stock split was completed in April; reported historical per-share figures were adjusted.
Outlook, risks and unusual items
- Management gave no specific full-year revenue or EPS guidance in the provided filing text. It estimated a 2017 annual effective tax rate of approximately 7%–9%, excluding discrete items, and said available cash, operating cash flow and credit-facility capacity were expected to support 2017 capital requirements.
- Management expected ICE facility utilization to rise sequentially in the third and fourth quarters from Q2, but remain below previously projected levels. It cited government budget constraints, potential changes to public-private partnerships, contract renewals and rebids, facility occupancy, labor and medical costs, and acquisition integration as risks.
- CEC integration is expected to offer cost savings and synergies, but management cautioned that they may take longer than expected or not be fully realized. The CEC purchase-price allocation remained preliminary. GEO reported approximately 6,600 vacant beds at six idle facilities, with an estimated $11.7 million 2017 carrying cost and no firm activation commitments. Management estimated hypothetical activation could generate about $140 million in annual revenue, but this is not a forecast.
- Ravenhall construction overruns led to a recorded provision of approximately $1.9 million. Completion delays could also expose GEO to penalties or liquidated damages. The company had $149.5 million of remaining estimated capital requirements for existing projects through 2018.
- Legal and tax matters include a Mississippi lawsuit seeking damages and other relief; GEO said no loss accrual was recorded because loss was not considered probable or reasonably estimable at that stage. A Colorado detainee-work-program class action was certified, with GEO’s appeal accepted; no accrual was recorded, and a change to the program could raise operating costs. A separate state tax assessment totaled approximately $19.6 million; GEO protested it and recorded a reserve based on its estimate of the most probable loss. A shareholder class action was dismissed with prejudice in March 2017, with no liability to GEO.
- Interest-rate exposure is material: the filing estimated that a 1-percentage-point increase in the rate on credit-facility borrowings would add about $10.0 million to annual interest expense. Management also disclosed foreign-currency exposure and extensive debt covenants. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether CEC integration delivers the expected savings and earnings contribution, and how final purchase-accounting adjustments affect reported results.
- Progress, completion timing, cost overruns, customer acceptance and cash settlement of the Ravenhall project and its contract receivable.
- ICE utilization trends, contract renewals and rebids, and the outlook for the company’s idle beds and government-funded contracts.
- Debt levels, revolving capacity, covenant compliance, interest-rate sensitivity, and the company’s ability to fund dividends and planned capital commitments.
- Developments in the Mississippi and Colorado litigation and the disputed state tax assessment, including any change in loss estimates or accruals.