The GEO Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are to the three and six months ended July 1, 2012. Amounts below are in U.S. dollars unless noted. GEO operates correctional, detention and re-entry facilities, community and youth services, electronic monitoring, and secure transportation. It reported approximately 72,000 beds at 95 facilities and monitored more than 70,000 people as of June 30, 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $381.7m | $371.2m | $758.7m | $731.2m |
| Operating income | $51.4m | $52.9m | $92.6m | $93.4m |
| Operating margin | 13.5% | 14.3% | 12.2% | 12.8% |
| Income attributable to GEO | $34.2m | $22.5m | $57.6m | $37.5m |
| Diluted EPS | $0.48 | $0.37 | $0.81 | $0.62 |
| Cash from operating activities | Not provided separately | Not provided separately | $101.3m | $127.0m |
- Revenue rose 2.8% in Q2 and 3.8% in the first half. First-half revenue growth was led by U.S. Corrections & Detention, up 4.6%; GEO Community Services rose 2.7%, and International Services rose 1.3%.
- Operating income declined in both comparisons despite revenue growth. First-half operating expenses increased 3.7%; general and administrative expense rose 12.7%, primarily from REIT-conversion professional fees.
- Net income increased substantially, principally reflecting the 2013 tax benefit: income tax benefits were $7.3m for Q2 and $6.4m for the first half, versus tax provisions of $13.7m and $22.2m in 2012. The benefit included REIT-related items and a $6.4m release of tax reserves, primarily following settlement of IRS audit years 2010 and 2011. Thus, earnings growth should not be read as equivalent operating growth.
- First-half operating cash flow fell to $101.3m from $127.0m; the prior-period amount included $10.0m from discontinued operations. Continuing-operations cash flow was $101.3m versus $116.9m. Capital expenditures were $89.9m, up from $69.5m.
Financial position, debt and liquidity
- At June 30, 2013, cash and cash equivalents were $38.5m; current assets were $336.6m and current liabilities $213.2m. Total assets were $2.888bn and shareholders’ equity $1.036bn.
- Total debt, including capital leases and non-recourse debt, was $1.572bn, compared with $1.488bn at December 31, 2012. Long-term debt was $1.444bn and non-recourse debt $93.4m at quarter-end.
- A new credit agreement entered into April 3 provides a $300m term loan due 2020 and a $700m revolver due 2018. At quarter-end, $300m was outstanding on the term loan and $295m on the revolver; $58.2m of letters of credit left $346.8m of revolver availability. The weighted-average rate on credit-agreement borrowings was 3.0%.
- GEO issued $300m of 5.125% senior notes due 2023. The refinancing generated a $5.5m debt-extinguishment loss in the first half. The new facility has leverage and interest-coverage covenants; management stated GEO was in compliance at June 30.
- Financing activities generated $4.3m of net cash in the first half, including $785m of debt proceeds and $697.7m of debt payments. GEO paid $71.5m in dividends. Operating cash flow less capital expenditures was approximately $11.4m before other investing items and financing.
Material changes and business developments
- GEO began operating as a REIT for federal income tax purposes on January 1, 2013, moving non-real-estate operations into taxable REIT subsidiaries. It changed to a calendar fiscal year in connection with the conversion.
- REIT rules led GEO to divest Residential Treatment Services (RTS) on December 31, 2012. The 2012 comparative results were recast as discontinued operations; RTS contributed $41.2m of Q2 2012 revenue and $82.4m in the first half of 2012. GEO received a final net sale price of $32.3m, with up to $5m of contingent earn-out payments possible subject to future contract awards.
- GEO acquired the land and facilities of the 1,287-bed Joe Corley Detention Center for approximately $65m; the transaction closed June 7, 2013.
- Average company-wide occupancy was 95.2% in the first half of 2013, compared with 95.7% in the prior comparable period, excluding idle beds from the stated occupancy measure. Approximately 6,000 vacant beds at seven idle facilities were being marketed; their reported net book value was $237.3m.
- GEO paid quarterly dividends of $0.50 per share in March and June. A further $0.50 dividend was declared July 30 for payment August 29, 2013. The Board retains discretion over future dividends, subject to REIT requirements and debt restrictions.
Outlook, risks and unusual items
- No formal full-year revenue or EPS forecast is stated. Management said cash on hand, operating cash flows and revolver availability were expected to support 2013 capital requirements, but warned future acquisitions or projects could require additional financing and that availability or terms cannot be assured.
- Management identified active bids for correctional and detention opportunities, including state procurements and a federal procurement. It cautioned that government budget constraints, potential rate or service reductions, contract losses, non-renewals and re-bids could impair growth, collections or margins.
- Management estimated annual 2013 carrying costs for idle facilities of $14.4m, including $7.3m of depreciation, and said there were no firm commitments to activate them. If all idle facilities were activated at specified assumed rates and occupancy, management estimated annualized incremental revenue of about $125m and EPS of $0.35–$0.40; this is a conditional illustration, not guidance.
- Management expected 2013 facility-maintenance capital expenditures of $30m–$35m. The filing gives inconsistent figures for existing company-financed projects: one disclosure estimates total costs of $31m–$35m with $24m spent, while another estimates $21m–$26m with $15m spent. The precise project commitment and remaining spend are therefore unclear from the filing text.
- Variable-rate exposure was material: based on credit-facility borrowings and letters of credit, a 1 percentage-point rate increase was estimated to raise annual interest expense by $6.0m. Foreign-exchange sensitivity was estimated at a $4.9m effect on financial position and a $0.5m effect on first-half results for a 10% currency move.
- GEO cited risks involving REIT qualification, debt service and covenants, government budgets and appropriations, occupancy, labor and medical costs, facility activation, litigation, foreign exchange, and access to financing. An Australian property-damage lawsuit was settled in May 2013 within recorded reserves, with no material financial-statement impact reported.
Key facts investors should verify
- How much of first-half earnings growth reflects recurring operations versus REIT conversion benefits and the tax-reserve release.
- The inconsistent capital-project commitment and spending estimates, and actual 2013 maintenance and development capital expenditures.
- Debt-covenant headroom, revolver availability after subsequent activity, interest-rate exposure, and capacity to fund dividends and potential acquisitions.
- Occupancy, contract awards and renewals, and whether any of the approximately 6,000 idle beds can be activated; the stated revenue and EPS potential is conditional.
- The sustainability of the $0.50 quarterly dividend given operating cash generation, REIT distribution requirements, debt restrictions and the Board’s discretion.