The GEO Group, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2015. GEO is a REIT that owns, leases and operates correctional, detention and reentry facilities and provides community-based, monitoring and related services in the U.S. and internationally. It reported approximately 87,000 beds at 104 facilities and community supervision services for more than 127,000 people.
Financial performance and position
Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $469.9 | $457.9 | $1,343.2 | $1,263.9 |
| Operating income | $63.0 | $63.3 | $169.0 | $172.8 |
| Net income attributable to GEO | $38.3 | $39.0 | $95.4 | $105.9 |
| Diluted EPS | $0.52 | $0.54 | $1.29 | $1.47 |
| Operating margin | 13.4% | 13.8% | 12.6% | 13.7% |
- Cash flow: Nine-month operating cash flow was $111.2 million, down from $164.6 million. The Ravenhall, Australia contract receivable increased cash-flow use by $74.5 million as construction costs and earnings exceeded billings; GEO said the balance is expected to continue growing until facility completion and commercial acceptance.
- Investing and financing: Investing activities used $442.5 million, including $331.8 million for the LCS and Soberlink acquisitions and $100.8 million of capital expenditures. Financing activities provided $340.7 million, primarily reflecting debt proceeds; cash dividends paid were $138.5 million.
- Liquidity and debt: Cash was $47.1 million at September 30, versus $41.3 million at December 31, 2014. Total debt, including non-recourse debt and capital leases, was $2.085 billion, versus $1.621 billion; long-term debt was $1.881 billion. Revolver borrowings were $490.0 million, term-loan borrowings $293.3 million, and remaining revolver capacity $151.9 million after letters of credit. GEO reported compliance with debt covenants.
- Dividends: GEO declared and paid $0.62 per share for each of the first three 2015 quarters. After quarter-end, the board declared $0.65 per share, payable November 25, 2015.
Material changes versus comparable periods
- Q3 revenue rose 2.6%, but operating income declined slightly and GEO-attributable net income fell about 1.7%; diluted EPS declined from $0.54 to $0.52. For the first nine months, revenue increased 6.3%, while attributable net income declined about 9.9% and diluted EPS about 12.2%.
- U.S. Corrections & Detention drove growth: Q3 segment revenue increased 13.8% to $320.5 million; nine-month revenue rose 10.4% to $910.5 million. New facility activations and LCS contributed, while lower occupancy at acquired, historically underutilized LCS facilities weighed on utilization. U.S. segment occupancy was 92.8% in Q3 versus 97.0%, and 94.4% for nine months versus 96.8%.
- International Services revenue declined 25.2% in Q3 and 24.3% for nine months, reflecting foreign exchange, the winding down of the Harmondsworth contract in the U.K., and lower populations in certain operations. Facility Construction & Design revenue reflected Ravenhall construction activity and varied with project timing.
- Interest expense increased 27.6% in Q3 and 25.5% for nine months, principally from Ravenhall construction borrowing and revolver debt used for the LCS acquisition. General and administrative expense increased 19.3% in Q3 and 15.1% for nine months, including business-development, stock-compensation and acquisition-related costs.
Outlook, commentary and risks
- The filing provides no specific consolidated revenue or earnings forecast. Management estimated an annual effective tax rate of approximately 8%–9%, excluding non-recurring items, and said cash, operating cash flow and credit-facility availability were expected to support capital requirements through 2017.
- Management estimated $159 million in costs for existing capital projects, of which $51 million had been spent through September 30; the remaining $108 million was expected to be spent through 2017. This included an estimated $80.2 million Ravenhall capital contribution expected in January 2017.
- GEO was marketing 3,422 vacant beds at four idle facilities. Their carrying value was $34.5 million and estimated 2015 annual carrying cost was $13.7 million. Management’s estimate that activation of all those beds could add about $76 million in annual revenue and $0.20–$0.25 in annual EPS is conditional, not guidance; GEO had no firm activation commitments.
- Subsequent developments disclosed included a nine-year-and-six-month ICE contract for Northwest Detention Center, a new Arizona State Prison-Kingman management contract expected to start December 1, 2015, and other ICE and community case-management awards. These were announced after quarter-end and should not be treated as Q3 results.
- Key risks include government budget pressure and payment capacity, contract renewals and re-bids, facility activation and occupancy, operating/start-up costs, REIT qualification and distribution requirements, high debt and covenant capacity, acquisition integration and goodwill/intangible impairment, and foreign-exchange and interest-rate exposure. A 1% increase in the average rate on credit-facility borrowings would increase annual interest expense by approximately $7.8 million, per the filing.
- GEO said it did not expect pending litigation to materially affect financial condition, results or cash flows. It also disclosed guarantees and other commitments, including Ravenhall project financing and performance guarantees; management’s stated expectation is not assurance of outcomes.
Most important facts for investors to verify
- Whether LCS facility occupancy and margins improve, and whether activated facilities ramp up as planned.
- Cash conversion and the timing and collection of the Ravenhall contract receivable, alongside remaining project funding needs.
- Debt levels, revolver availability, covenant headroom and sensitivity to interest-rate changes after acquisition-related borrowing.
- Whether international revenue pressure, including foreign-exchange effects and the U.K. contract wind-down, continues.
- Dividend sustainability in light of operating cash flow, capital commitments, debt restrictions and REIT distribution obligations.