The GEO Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; financial statements are unaudited. Amounts below are in U.S. dollars unless noted. GEO operates correctional, detention, re-entry, community-services and monitoring businesses in the U.S. and internationally, and is a REIT.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $412.8 million | $381.7 million | $806.0 million | $758.7 million |
| Operating income | $60.9 million | $51.4 million | $109.5 million | $92.6 million |
| Operating margin | 14.7% | 13.5% | 13.6% | 12.2% |
| Net income attributable to GEO | $38.9 million | $34.2 million | $66.9 million | $57.6 million |
| Diluted EPS | $0.54 | $0.48 | $0.93 | $0.81 |
| Operating cash flow | Not separately stated | Not separately stated | $132.1 million | $101.3 million |
| Capital expenditures | Not separately stated | Not separately stated | $41.1 million | $89.9 million |
- Q2 revenue rose 8.2%; operating income grew faster, up 18.5%. First-half revenue increased 6.2% and operating income increased 18.1%.
- Q2 revenue growth came mainly from U.S. Corrections & Detention (+8.7%) and GEO Community Services (+9.8%); International Services rose 3.2%. For the first half, International Services revenue declined 2.7%, chiefly due to currency effects.
- First-half net cash from operations exceeded reported dividends of $82.7 million. Investing used $62.5 million, including $13.0 million for the Protocol acquisition; financing used $85.2 million. Cash decreased $14.8 million to $37.4 million from year-end 2013.
- At June 30, current assets were $383.7 million and current liabilities $247.0 million, for working capital of $136.8 million. Restricted cash and investments totaled $39.2 million across current and non-current balances.
- Total debt, including capital leases and non-recourse debt, was $1.576 billion, down from $1.585 billion at year-end. Long-term debt on the balance sheet was $1.479 billion. Senior credit facility borrowings were $632.0 million; after approximately $61.0 million of letters of credit, revolver capacity available was about $304.0 million. Weighted-average credit facility borrowing rate was 2.9%.
- Q2 operating expenses were 72.7% of revenue versus 73.2% a year earlier. First-half operating expenses were 73.4% of revenue versus 73.8%. First-half G&A fell 4.6%, partly because prior-year REIT-conversion professional fees did not recur.
Material changes and notable items
- Growth reflected facility activations and contract additions, including GEO’s assumption of management at three Florida facilities in February 2014, increased Rio Grande capacity, and growth at Central Valley and Desert View. U.S. Corrections & Detention occupancy, excluding idle facilities, was 97.3% in Q2 and 96.7% for the first half.
- Protocol was acquired in February for $13 million cash. GEO recorded $7.1 million of acquired intangible assets and $3.9 million of goodwill in the final purchase-price allocation.
- GEO completed its REIT-related merger and name continuity reorganization on June 27, 2014; treasury shares were retired and authorized common shares increased from 90 million to 125 million. GEO reported 72.6 million shares outstanding at August 6.
- The 2014 periods had no debt-extinguishment loss. The comparable 2013 periods included a $5.5 million loss. 2013 also included one-time tax benefits, so the reported tax provision moved from a benefit to an expense: first-half 2014 provision was $5.5 million versus a $6.4 million benefit in 2013. Management estimated an approximately 8% annual effective tax rate, excluding nonrecurring items.
- Non-GAAP measures increased: first-half Normalized FFO was $93.3 million versus $83.6 million, and AFFO was $112.3 million versus $102.0 million. These company-defined supplemental measures are not substitutes for GAAP results.
Outlook, risks and contingencies
- Management said cash on hand, operating cash flow and revolver availability were expected to support 2014 capital requirements. Existing company-financed projects were estimated to cost $119.1 million in total; $41.1 million had been spent by quarter-end, with $78.0 million expected through 2015. This is not earnings guidance.
- GEO was marketing approximately 5,800 vacant beds at five idle facilities, with a $183 million carrying value and estimated 2014 carrying costs of $21.2 million. There were no firm commitments to activate them. Management’s illustrative estimate of about $125 million incremental annualized revenue and $0.35–$0.40 EPS assumes all idle beds are activated at specified average rates and occupancy; it is not a forecast.
- Announced opportunities included the Adelanto 640-bed expansion, expected by July 2015, and reactivation of the 260-bed McFarland facility. Subsequent to quarter-end, a GEO-led consortium was selected as preferred tenderer for a proposed 1,000-bed Victorian prison; final award remained pending. The project was expected to require GEO equity of approximately 20% following activation.
- Risks highlighted include government budget constraints and customer payment capacity; contract termination, renewal and rebid outcomes; labor, medical and startup costs; REIT qualification and distribution requirements; high debt and covenant limits; interest-rate and foreign-exchange exposure; and execution, acquisition and litigation risks. A 1% increase in the applicable credit-facility rate was estimated to increase annual interest expense by $6.3 million.
- GEO said pending legal claims were not expected to materially adversely affect financial condition, results or cash flows. It also disclosed guarantees and support arrangements, including its share of GEOAmey’s £12 million working-capital line, of which £12 million was outstanding in total, plus international performance guarantees. The company had a $2.0 million recorded liability related to a Canadian tax guarantee.
- The board declared a $0.57-per-share quarterly dividend payable August 29, 2014. Future distributions remain at the board’s discretion and are subject to cash flows, debt restrictions and REIT requirements. GEO reported compliance with debt covenants at June 30.
Key facts for investors to verify
- Whether new contracts and facility expansions translate into sustained occupancy, margins and cash generation, and whether contract losses or census declines offset growth.
- Whether the approximately 5,800 idle beds can be activated; confirm the carrying costs and treat management’s revenue and EPS scenario as conditional, not guidance.
- Debt maturities, revolver availability, interest-rate exposure, covenant headroom and the funding required for committed projects, dividends and any further acquisitions.
- The final award, financing terms, equity commitment and delivery schedule for the proposed Ravenhall prison, and progress on Adelanto and McFarland.
- REIT qualification and ability to sustain distributions alongside capital needs; also monitor the stated 8% estimated tax rate and the impact of any nonrecurring tax items.
- Currency effects on International Services and whether community-services revenue growth can overcome fixed-cost pressure at facilities with lower census.