The GEO Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 1, 2012; comparatives are the periods ended July 3, 2011. GEO provides government-outsourced correctional, detention, treatment, re-entry, monitoring and transportation services. At quarter-end, it managed or owned approximately 75,000 beds at 109 facilities and monitored more than 70,000 people. Average facility occupancy for the first half was 95.7%, excluding idle and developing facilities.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $412.3m | $396.8m | $813.6m | $777.1m |
| Operating income | $56.5m | $48.9m | $98.9m | $88.7m |
| Operating margin (calculated) | 13.7% | 12.3% | 12.2% | 11.4% |
| Income from continuing operations | $23.0m | $20.2m | $38.1m | $36.0m |
| Net income attributable to GEO | $22.5m | $21.6m | $37.5m | $38.4m |
| Diluted EPS attributable to GEO | $0.37 | $0.33 | $0.62 | $0.59 |
| Operating cash flow, continuing operations | Not presented | Not presented | $124.8m | $91.3m |
Second-quarter revenue increased 3.9% and operating income increased 15.4%. First-half revenue increased 4.7%, while operating income rose 11.5%. First-half attributable net income declined despite higher continuing-operations income, reflecting discontinued-operations results and other items. First-half depreciation and amortization was $46.9m, up from $39.6m; interest expense was $41.4m, up from $36.4m. The effective tax rate was 39.6% for the first half; management estimated a 39%–40% full-year rate.
By segment, first-half revenue was $481.1m in U.S. Corrections & Detention, $220.0m in GEO Care and $112.5m in International Services. U.S. Corrections & Detention operating income was $107.0m versus $107.6m a year earlier; GEO Care operating income increased to $39.8m from $35.3m, and International Services to $6.6m from $6.3m.
Liquidity, debt and capital
At July 1, cash and cash equivalents were $68.5m, versus $44.8m at January 1. Current assets were $451.9m and current liabilities $283.0m. Restricted cash and investments totaled $100.1m across current and non-current balance-sheet categories and are not all freely available. First-half investing cash outflow was $71.0m, chiefly $71.9m of capital expenditures; financing cash outflow was $31.0m. Total debt, including capital leases and non-recourse debt, was $1.57bn, compared with $1.59bn at year-end.
The $500m revolver had $295.0m drawn, $56.5m in letters of credit and $148.5m of additional availability. Management reported covenant compliance and considered cash, operating cash flow and facility availability adequate for stated 2012–2013 requirements. Variable-rate exposure remains material: management estimated that a 1 percentage-point increase in Senior Credit Facility rates would add approximately $7.7m to annual interest expense.
Changes, outlook and material items
- New or expanded facilities, including Adelanto East, Riverbend and Karnes, supported U.S. segment growth. Management cited higher populations and rates, partly offset by contract losses and lower populations elsewhere.
- GEO discontinued its Mississippi contracts covering East Mississippi, Marshall County and Walnut Grove; related revenue was $22.3m in the first half of 2012. Approximately 7,000 beds at eight idle facilities were being marketed; their carrying value was $266.7m. Management estimated 2012 carrying costs for these beds of $14.8m, including $7.6m depreciation.
- GEO expected to complete the purchase of MCF partnership interests in Q3 2012 for about $27m cash plus release of roughly $10m held in escrow, and to redeem MCF bonds for approximately $67m net of reserves. It expected a one-time debt-extinguishment loss of about $8m.
- Management estimated $52.2m remained to complete existing capital projects in 2012–2013 and forecast 2012 maintenance capital expenditures of $30m–$35m. Winning and self-financing additional projects could materially increase capital needs.
- Management described procurement opportunities in U.S. corrections, U.K. prisons and electronic monitoring, and GEO Care services, while warning that public-budget constraints, contract terminations or non-renewals, occupancy, staffing and medical costs, and execution of new projects could weigh on results. It provided no full-year revenue or EPS forecast in the supplied filing text.
- A $0.20-per-share dividend was declared after quarter-end for payment September 7, 2012. GEO was evaluating a possible REIT conversion and had requested an IRS private letter ruling; timing and whether to proceed remained uncertain. In Q3, it received $6.0m of refunds related to disputed non-income taxes.
- Contingencies include an appealed wrongful-death judgment of $8.4m, with GEO responsible for the first $3.0m under its insurance arrangement, and an uninsured Australian property-damage claim seeking up to approximately $18.4m plus interest. GEO said an unfavorable outcome in the Australian matter could materially affect future results, condition or cash flows.
Investor verification priorities
- Check subsequent filings for completion and actual financing, redemption costs and accounting impact of the MCF transaction.
- Track Mississippi contract wind-down, idle-bed utilization, carrying costs and any impairment or sale of the idle facilities.
- Verify cash generation, capital spending, revolver availability, debt covenant headroom and dividend funding as distributions begin.
- Review developments and reserve adequacy in the Australian claim and the appeal of the wrongful-death judgment.
- Confirm outcomes of key contract bids, renewals and facility activations, and any decision or timetable concerning a REIT conversion.