The GEO Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the same 2015 periods. GEO is a REIT providing correctional, detention, reentry, community supervision, monitoring and related services in the U.S. and internationally. It reported approximately 87,000 beds across 104 facilities, including idle and developing facilities.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $548.4 | $445.9 | $1,058.5 | $873.3 |
| Operating income | $66.0 | $53.3 | $125.1 | $106.0 |
| Operating margin | 12.0% | 11.9% | 11.8% | 12.1% |
| Net income attributable to GEO | $23.2 | $28.3 | $55.6 | $57.1 |
| EPS, diluted | $0.31 | $0.38 | $0.75 | $0.77 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $38.3 | $79.8 |
- Q2 revenue increased 23.0%; operating income rose 23.8%, while net income attributable to GEO declined 18.0%. Six-month revenue increased 21.2%, operating income rose 18.1%, and attributable net income declined 2.6%.
- Q2 net margin attributable to GEO was approximately 4.2%, compared with 6.3% a year earlier; six-month margin was approximately 5.2%, compared with 6.5%.
- Revenue growth reflected new and expanded U.S. facilities and contracts, GEO Care growth, and increased Ravenhall prison construction activity. Facility Construction & Design revenue rose 251.5% in Q2 and 167.0% for the first half, primarily reflecting Ravenhall project progress.
- Six-month operating cash flow fell by $41.5 million. A $124.3 million increase in the Ravenhall contract receivable was a major use of operating cash; the contract is not billed until facility completion and commercial acceptance.
Financial position, debt and liquidity
- At June 30, 2016, cash and cash equivalents were $38.9 million, versus $59.6 million at year-end 2015. Current assets were $437.6 million and current liabilities $288.9 million; current assets included $72.5 million of restricted cash and investments.
- Total debt, including non-recourse debt and capital leases, was $2.269 billion, versus $2.095 billion at December 31, 2015. Long-term debt was $1.869 billion and non-recourse debt was $374.4 million on the balance sheet.
- The amended credit facility provides a $900 million revolving commitment. At quarter-end, GEO had $450 million drawn, $54.2 million in letters of credit and $395.8 million of additional borrowing capacity. The weighted-average rate on credit-facility borrowings was 2.9%.
- In April, GEO issued $350 million of 6.00% senior notes due 2026 and used part of the proceeds to tender for and redeem all $300 million of 6.625% notes due 2021. The refinancing generated a $15.9 million debt-extinguishment loss, reducing reported earnings.
- Six-month investing cash outflow was $111.3 million, including $46.0 million of capital expenditures and a $65.9 million increase in restricted cash. Financing cash inflow was $52.0 million; dividends paid were $97.2 million.
Material changes and operating trends
- U.S. Corrections & Detention revenue increased 12.2% in Q2 and 15.3% for the first half, supported by facility activations, the LCS acquisition, the Kingman contract and higher populations, transportation activity or rates at certain facilities. U.S. segment occupancy was 92.6% for the first half, down from 93.3%.
- GEO Care revenue increased 16.8% in Q2 and 17.2% for the first half, primarily due to higher electronic-monitoring and ISAP participant counts and growth in community and reentry programs.
- International Services revenue was essentially flat in Q2 and declined 4.0% for the first half. Management cited temporary labor-related matters in South Africa, partly offset by favorable foreign-exchange effects.
- Company-wide average facility occupancy was 92.4% for the first half, versus 93.1% in 2015.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and credit-facility availability should support capital requirements through 2016–2017. This is management’s assessment, not a quantified earnings or revenue forecast.
- Management expects 2016 G&A as a percentage of revenue to remain consistent or decline, and estimated an annual effective tax rate of approximately 10%–12%, excluding non-recurring items.
- GEO was marketing approximately 3,300 idle beds at four facilities, with no firm activation commitments. Carrying costs were estimated at $12.7 million for 2016. If activated under stated assumptions, management estimated potential annualized revenue of about $70 million and EPS improvement of $0.20–$0.25; this is hypothetical, not guidance.
- Remaining capital-project requirements were estimated at $103 million through 2017, including an approximately $84 million Ravenhall capital contribution expected in January 2017. The Ravenhall contract receivable and construction financing create significant cash-flow and execution exposure.
- Risks include government budget pressures, contract terminations or non-renewals, occupancy and population changes, labor and medical costs, debt service and covenant compliance, REIT qualification and distributions, foreign-exchange movements, project completion and financing, and litigation. Management did not expect pending legal claims to materially affect financial condition, results or cash flows.
- The Board declared a $0.65 per-share quarterly dividend in July 2016. Future dividends remain subject to Board discretion, cash flows, REIT requirements and debt restrictions.
Key facts for investors to verify
- Whether the Ravenhall project reaches completion and commercial acceptance on schedule, and when the State’s approximately $231 million payment is received.
- How contract-receivable growth, restricted cash and working-capital demands affect cash conversion and the ability to fund dividends and capital commitments.
- Debt levels, available revolver capacity, interest-rate exposure and compliance with leverage and interest-coverage covenants.
- Whether idle beds are activated and whether U.S. occupancy, government contract renewals and customer budgets sustain revenue.
- Whether South African operating performance improves and whether foreign-exchange movements materially affect results.
- The effect of the $15.9 million refinancing charge and other start-up or non-recurring items when assessing recurring earnings and non-GAAP FFO measures.