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The GEO Group Inc. Reports Operating Results (10-Q)

May 14, 2010 | About:
10qk

10qk

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The GEO Group Inc. (GEO) filed Quarterly Report for the period ended 2010-04-04.

The Geo Group Inc. has a market cap of $1.13 billion; its shares were traded at around $21.9 with a P/E ratio of 15.5 and P/S ratio of 1. The Geo Group Inc. had an annual average earning growth of 24.1% over the past 10 years.

Highlight of Business Operations:

If the proposals that are required to be approved by GEOs stockholders and Cornells stockholders in connection with the consummation of the merger with Cornell are approved, we expect to increase our aggregate annual revenues by approximately $400 million to more than $1.5 billion. This increase in revenues will occur in our U.S. corrections and GEO Care segments.

We are exposed to market risks related to changes in interest rates with respect to our Senior Credit Facility. Payments under the Senior Credit Facility are indexed to a variable interest rate. Based on borrowings outstanding under the Senior Credit Facility of $221.1 million and $45.2 million in outstanding letters of credit, as of April 4, 2010, for every one percent increase in the interest rate applicable to the Amended Senior Credit Facility, our total annual interest expense would increase by $2.7 million.

In November 2009, we executed three interest rate swap agreements in the aggregate notional amount of $75.0 million. Effective January 6, 2010, we executed a fourth swap agreement relative to a notional amount of $25.0 million of our 73/4% Senior Notes. These interest rate swaps, which have payment, expiration dates and call provisions that mirror the terms of the 73/4% Senior Notes, effectively convert $100.0 million of the Notes into variable rate obligations. Under these interest rate swaps, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 73/4% per year calculated on the notional $100.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the three-month LIBOR plus a fixed margin of between 4.16% and 4.29% also calculated on the notional $100.0 million amount. For every one percent increase in the interest rate applicable to our aggregate notional $100.0 million of swap agreements relative to the 73/4% Senior Notes, our annual interest expense would increase by $1.0 million.

We are also exposed to market risks related to fluctuations in foreign currency exchange rates between the U.S. dollar, the Australian dollar, the Canadian dollar, the South African Rand and the British Pound currency exchange rates. Based upon our foreign currency exchange rate exposure at April 4, 2010, every 10 percent change in historical currency rates would have approximately a $5.3 million effect on our financial position and approximately a $0.2 million impact on our results of operations over the next fiscal year.

GEOs obligation to complete the merger is not conditioned on receipt of any financing. However, GEO needs approximately $300.0 million to fund the cash component of the merger consideration, the redemption of Cornells 10.75% senior notes, the refinancing of Cornells credit facility and the payment of transaction fees and expenses. GEO intends to fund the foregoing utilizing a combination of existing cash and one or more draws upon GEOs senior credit facility. BNP Paribas has provided a commitment to extend $150.0 million of additional financing under the accordion feature of GEOs existing senior credit facility. GEO may choose to draw upon its existing senior credit facility and the $150.0 million of committed financing or it may choose to pursue alternate financing sources, including debt financing or accessing the capital markets. GEO is currently in compliance with its debt covenants; however, GEO cannot guarantee that it will continue to be in compliance with all necessary conditions in order to draw upon its existing senior credit facility or the $150.0 million of committed financing, or that it will be able to obtain alternative financing on terms as favorable as its current debt financing arrangements, on commercially acceptable terms, or at all. If GEO is unable to access its current sources of debt financing or is unable to use its available cash and obtain any alternative financing in order to fund the payments it is obligated to make in connection with the merger, GEO will be in breach of the merger agreement.

GEO and Cornell entered into the merger agreement because each company believes that the merger will be beneficial to each of GEO, the GEO shareholders, Cornell and the Cornell stockholders including, among other things, as a result of the anticipated synergies resulting from the combined companys operations. GEOs management anticipates annual synergies of $12-$15 million during the year following the completion of the merger. GEO may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of the merger within the timing anticipated or at all. For example, elimination of duplicative costs may not be fully achieved or may take longer than anticipated. For at least the first year after the merger, and possibly longer, the benefits from the merger will be offset by the costs incurred in integrating the businesses and operations, or adverse conditions imposed by regulatory authorities on the combined business in connection with granting approval for the merger. An inability to realize the full extent of, or any of, the anticipated synergies or other benefits of the merger, as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on the business and results of operations of the combined company, and may affect the value of the shares of GEO common stock after the completion of the merger.

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