The GEO Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. GEO is a REIT operating correctional, detention, reentry, community-supervision and monitoring services in the U.S. and internationally. It reported approximately 87,000 beds at 104 facilities and supervision services for more than 127,000 individuals. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $510.2 million | $427.4 million | +19.4% |
| Operating income | $59.2 million | $52.7 million | +12.3% |
| Operating margin | 11.6% | 12.3% | Down 0.7 percentage points |
| Net income attributable to GEO | $32.4 million | $28.8 million | +12.4% |
| Diluted EPS | $0.44 | $0.39 | +$0.05 |
| Interest expense | $29.4 million | $24.6 million | +19.2% |
| Net cash from operating activities | $(17.5) million | $60.7 million | Down $78.3 million |
| Capital expenditures | $28.4 million | $34.2 million | Down $5.8 million |
| Dividends declared per share | $0.65 | $0.62 | +$0.03 |
Net margin was approximately 6.3%, compared with 6.7% in Q1 2015. Operating expenses rose 22.2% to $388.5 million, faster than revenue, and were 76.2% of revenue versus 74.4%. Management attributed higher costs principally to facility activations and start-up operations, increased populations and services, and expansion of rehabilitation programs. GEO reported NAREIT FFO of $47.5 million versus $42.7 million, Normalized FFO of $48.7 million versus $44.2 million, and AFFO of $62.4 million versus $52.9 million.
Business changes and drivers
- U.S. Corrections & Detention revenue increased 18.5% to $338.4 million, driven by facility activations, the LCS acquisition, the Kingman contract, and higher populations and services at certain facilities. Average occupancy was 93.5%, versus 93.4%.
- GEO Care revenue increased 17.7% to $93.4 million, primarily from growth in electronic monitoring, ISAP, community-based and reentry services.
- International Services revenue declined 7.6% to $37.6 million, mainly reflecting lower populations in South Africa and Australia, partly offset by favorable foreign-exchange movements.
- Facility Construction & Design revenue rose 87.8% to $40.8 million as work progressed on the Ravenhall prison project in Australia. This segment generated only $0.6 million of operating income.
Cash, liquidity and debt
- Cash and cash equivalents were $23.2 million at March 31, down from $59.6 million at year-end 2015. Restricted cash and investments totaled $69.8 million and are not equivalent to freely available cash.
- Current assets were $445.5 million and current liabilities $274.6 million, a current ratio of approximately 1.62.
- Total debt was $2.203 billion, compared with $2.095 billion at December 31, 2015. Long-term debt on the balance sheet was $1.885 billion; non-recourse debt was $292.9 million, with $17.6 million of current debt and lease obligations.
- At quarter-end, borrowings under the senior credit facility were approximately $805.3 million, with $54.2 million in letters of credit and $131.8 million of additional revolver capacity. The weighted-average borrowing rate was 2.9%. GEO stated it was in compliance with credit-agreement covenants.
- Operating cash use reflected, among other items, a $47.0 million increase in Ravenhall contract receivables and adverse working-capital movements. The contract receivable was $230.9 million at quarter-end; construction costs and earned amounts are expected to accumulate before settlement at facility acceptance and over the contract term.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and credit-facility availability were expected to support capital requirements through 2016–2017. This is not a detailed earnings forecast; the filing states quarterly results are not necessarily indicative of full-year results.
- Existing capital-project commitments were estimated at $98.5 million, with $92.6 million remaining through 2017. An $84.0 million GEO capital contribution for Ravenhall was expected in January 2017. The State of Victoria is expected to make a $237.7 million equivalent payment toward project debt upon completion and commercial acceptance.
- Approximately 3,300 beds at four idle facilities were being marketed; carrying value was $34.9 million and estimated 2016 carrying cost was $12.7 million. Management’s illustrative activation scenario—not a committed outlook—estimated annualized revenue of about $70 million and EPS increase of $0.20–$0.25 if all were activated under specified assumptions.
- After quarter-end, GEO issued $350 million of 6.00% senior notes due 2026. It used part of the proceeds to purchase approximately $231 million of 6.625% notes due 2021 and expected to redeem the remainder. The tender and anticipated redemption resulted in an approximately $16 million loss on extinguishment in Q2 2016.
- The Board declared a $0.65-per-share quarterly dividend on April 20, 2016. Future distributions remain subject to Board discretion, REIT requirements, operating cash flow and debt restrictions.
- Key risks include government budget constraints and contract renewals or terminations, occupancy and labor costs, facility start-up and project execution, debt service and covenant capacity, foreign exchange and interest rates, litigation, and maintaining REIT status. Management said pending legal matters were not expected to have a material adverse effect. It also identified $8.1 million of annual interest-expense sensitivity to a 1-percentage-point increase in rates on credit-facility borrowings.
Important facts for investors to verify
- Whether Ravenhall construction milestones, commercial acceptance, contract-receivable collection and the State’s debt payment proceed on schedule.
- How operating cash flow and working capital develop as Ravenhall receivables and restricted cash change.
- Debt levels, revolver availability, covenant headroom and the impact of the 2026 note issuance and 2021 note retirement.
- Whether facility occupancy, new contracts and the marketing of idle beds translate into durable earnings without excessive start-up costs.
- Whether the $0.65 quarterly dividend remains supportable given cash generation, capital commitments and REIT and debt restrictions.