The GEO Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. GEO is a REIT operating correctional, detention, reentry, youth, community-supervision, monitoring and transportation businesses in the U.S. and internationally. At quarter-end, it managed or owned approximately 96,000 beds at 141 facilities and provided community supervision to more than 192,000 people.
Financial performance
Unless otherwise indicated, amounts are in U.S. dollars. Financial statement amounts below are in millions.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $564.9 | $550.6 | Up 2.6% |
| Operating income | $64.5 | $64.4 | Essentially flat |
| Operating margin | 11.4% | 11.7% | Down 0.3 percentage points |
| Net income attributable to GEO | $35.0 | $40.4 | Down 13.4% |
| Diluted EPS | $0.29 | $0.35 | Down $0.06 |
| Cash from operating activities | $65.1 | $47.9 | Up $17.2 |
| Capital expenditures | $52.1 | $34.4 | Up $17.7 |
- Net interest expense rose to $26.8 million from $23.0 million, as interest income fell $2.9 million and interest expense increased $0.9 million. The effective tax rate was 12.6%, versus 6.0%; GEO cited a $1.2 million discrete tax expense in 2018 and a $1.1 million discrete tax benefit in 2017.
- Operating cash flow less capital expenditures was approximately $13.0 million. Financing cash outflow was $49.0 million, including $58.2 million of dividends and $40.2 million of share repurchases, partly offset by net debt proceeds.
- At March 31, cash and cash equivalents were $49.2 million; restricted cash and cash equivalents were $56.9 million. Total current assets were $536.2 million and current liabilities $348.6 million.
- Total debt, including non-recourse debt and capital leases, was $2.63 billion, up from $2.58 billion at year-end. Long-term debt was $2.24 billion; non-recourse debt was $359.4 million on the balance sheet. Senior Credit Facility borrowings were approximately $1.12 billion, and management reported about $500 million of additional Revolver borrowing capacity after letters of credit. Its weighted-average borrowing rate was 4.2%.
- GEO declared $0.47 per share in dividends for the quarter and paid $58.2 million. The Board declared another $0.47 quarterly dividend in April.
Material changes and operating trends
- Growth reflected the 2017 acquisition of Community Education Centers (CEC), which contributed to higher U.S. Corrections & Detention and GEO Care revenue. GEO Care revenue rose 35.0% to $140.1 million; International Services revenue rose 58.7% to $66.2 million, chiefly as Ravenhall prison operations began. These gains were partly offset by the end of Ravenhall construction revenue, which had contributed $57.2 million in Q1 2017.
- Segment operating income was $69.2 million for U.S. Corrections & Detention, $31.7 million for GEO Care, and $5.4 million for International Services. Total segment operating income declined to $106.3 million from $107.0 million. GEO said CEC-related operating expenses increased faster than revenue and expected to pursue integration savings and synergies.
- Company-wide facility occupancy was 91.5%, down from 93.7%, with 88,345 active beds in Q1 2018 versus 82,897 a year earlier. U.S. Corrections & Detention occupancy, excluding idle facilities, was 94.0% in both periods.
- GEO repurchased 1.85 million shares for $40.2 million under a $200 million program authorized through October 2020. The company said it believed it could fund repurchases, debt service and capital needs while retaining sufficient liquidity.
- After quarter-end, GEO amended its credit agreement to refinance the term loan at LIBOR plus 2.00%, down from LIBOR plus 2.25%.
Outlook, risks and contingencies
- Management estimated the 2018 annual effective tax rate at approximately 10%–12%, excluding discrete items. It expected G&A as a percentage of revenue to remain consistent or decrease and stated that cash, operating cash flow and available credit were expected to support 2018 capital requirements.
- Management cited growth opportunities but cautioned that government budget constraints, reduced use of private operators, lower rates or service scope, contract losses and non-renewals could weigh on revenue and cash flow. It also highlighted labor, medical, insurance, foreign-exchange, interest-rate, financing, REIT-compliance and litigation risks.
- GEO signed an eight-year Scottish Prison Service transportation contract, effective January 2019, with a four-year renewal option and expected average annual revenue of approximately $39 million. Conversely, GEO lost the competitive rebid for Australia’s Parklea Center and expected to transition the contract in March 2019.
- Five idle facilities had approximately 5,400 beds being marketed, a carrying value of $138.5 million and estimated 2018 carrying costs of $18.8 million. No activation commitment was in place. Management estimated that full activation could generate approximately $118 million in annualized revenue and $0.15–$0.20 in annualized EPS, based on stated occupancy and margin assumptions.
- Existing capital projects were estimated to cost $239.5 million, of which $129.7 million had been spent through Q1; the remaining $109.8 million was expected to be spent through 2019. Management also noted a $19.6 million state non-income tax assessment under protest, for which a reserve had been established.
- GEO had not accrued losses for the Mississippi contract-related lawsuit or lawsuits alleging wage-law and trafficking violations involving detainee work programs, stating losses were not considered probable or reasonably estimable at that stage. It intends to defend the claims; outcomes remain uncertain.
- For interest-rate sensitivity, GEO estimated that a 1 percentage-point increase in rates on Credit Facility borrowings would raise annual interest expense by approximately $11.0 million. It estimated a 10% foreign-currency change would affect financial position by about $4.9 million and Q1 results by about $0.7 million.
Important facts for investors to verify
- Whether CEC integration produces the expected cost savings, and how much reported growth reflects acquisition effects versus underlying performance.
- Cash conversion and capital intensity: Q1 operating cash flow was $65.1 million against $52.1 million of capital expenditures, alongside dividends and buybacks.
- Debt levels, Revolver availability, variable-rate exposure and compliance with credit covenants as borrowing and investment needs evolve.
- Occupancy, the status and carrying costs of idle beds, Parklea’s transition, and the timing and economics of the new Scotland contract.
- Developments in the Mississippi, detainee work-program and state tax-assessment matters, including any change in estimated exposure or reserves.
- The sustainability of the $0.47 quarterly dividend and the pace and funding of the authorized share-repurchase program.