The GEO Group Inc. Reports Operating Results (10-Q)
The Geo Group Inc. has a market cap of $1.66 billion; its shares were traded at around $25.58 with a P/E ratio of 17.5 and P/S ratio of 1.5. The Geo Group Inc. had an annual average earning growth of 24.1% over the past 10 years.GEO is in the portfolios of David Dreman of Dreman Value Management.
Highlight of Business Operations:On August 12, 2010, we completed the acquisition of Cornell, a Houston-based provider of correctional, detention, educational, rehabilitation and treatment services outsourced by federal, state, county and local government agencies for adults and juveniles. The strategic benefits of the Merger include the combined Companys increased scale and the diversification of service offerings. The acquisition was completed pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, between us, GEO Acquisition III, Inc., and Cornell. Under the terms of the merger agreement, we acquired 100% of the outstanding common stock of Cornell for aggregate consideration of $618.3 million, excluding cash acquired of $12.9 million and including: (i) cash payments for Cornells outstanding common stock of $84.9 million, (ii) payments made on behalf of Cornell related to Cornells transaction costs accrued prior to the Merger of $6.4 million, (iii) cash payments for the settlement of certain of Cornells debt plus accrued interest of $181.9 million using proceeds from the Companys Credit Agreement, (iv) common stock consideration of $357.8 million, and (v) the fair value of stock option replacement awards of $0.2 million. The value of the equity consideration was based on the closing price of our stock on August 12, 2010 of $22.70.
On August 4, 2010, we entered into a Credit Agreement between us, as Borrower, certain of our subsidiaries, as Guarantors, and BNP Paribas, as Lender and as Administrative Agent (together with the Term Loan A, Term Loan B and the Revolving Credit Facility (which we refer to as the Revolver), we refer to this as the Credit Agreement. The Credit Agreement is comprised of (i) a $150.0 million Term Loan A, initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015, (ii) a $200.0 million Term Loan B initially bearing interest at LIBOR plus 3.25% with a LIBOR floor of 1.50% and maturing August 4, 2016 and (iii) a Revolving Credit Facility of $400.0 million initially bearing interest at LIBOR plus 2.5% and maturing August 4, 2015.
We currently maintain a general liability policy and various excess liability policies for all U.S. Corrections operations with limits of $62.0 million per occurrence and in the aggregate. The Community Based Services Division and the Youth Services Division of GEO Care, Inc. are also covered under these policies. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. Residential Treatment Service Facilities operated by GEO Care, Inc, are insured under their own program for general liability and medical professional liability with a specific loss limit of $35.0 million per occurrence and in the aggregate. We are uninsured for any claims in excess of these limits. We also maintain insurance to cover property and other casualty risks including, workers compensation, environmental liability and automobile liability.
For most casualty insurance policies, we carry substantial deductibles or self-insured retentions $3.0 million per occurrence for general liability and hospital professional liability, $2.0 million per occurrence for workers compensation and $1.0 million per occurrence for automobile liability.
Of the reserves discussed above, our most significant insurance reserves relate to workers compensation and general liability claims. These reserves are undiscounted and were $39.7 million and $27.2 million as of October 3, 2010 and January 3, 2010, respectively. We use statistical and actuarial methods to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as historical frequency and severity of claims at each of our facilities, claim development, payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services and unpredictability of the size of jury awards. We also may experience variability between our estimates and the actual settlement due to limitations inherent in the estimation process, including our ability to estimate costs of processing and settling claims in a timely manner as well as our ability to accurately estimate our exposure at the onset of a claim. Because we have high deductible insurance policies, the amount of our insurance expense is dependent on our ability to control our claims experience. If actual losses related to insurance claims significantly differ from our estimates, our financial condition, results of operations and cash flows could be materially impacted.
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of our deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which we operate, estimates of future taxable income and the character of such taxable income. Additionally, we must use significant judgment in addressing uncertainties in the application of complex tax laws and regulations. If actual circumstances differ from our assumptions, adjustments to the carrying value of deferred tax assets or liabilities may be required, which may result in an adverse impact on the results of our operations and our effective tax rate. Valuation allowances are recorded related to deferred tax assets based on the more likely than not criteria. Management has not made any significant changes to the way we account for our deferred tax assets and liabilities in any year presented in the consolidated financial statements. Based on our estimate of future earnings and our favorable earnings history, management currently expects full realization of the deferred tax assets net of any recorded valuation allowances. Furthermore, in determining the adequacy of our provision (benefit) for income taxes, potential settlement outcomes resulting from income tax examinations are regularly assessed. As such, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty. To the extent that the provision for income taxes increases/decreases by 1% of income before income taxes, equity in earnings of affiliate, discontinued operations, and consolidated income from continuing operations would have decreased/increased by $1.0 million, $0.9 million and $0.6 million, respectively, for the years ended January 3, 2010, December 28, 2008 and December 30, 2007.
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