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

August 13, 2010 | About:

The GEO Group Inc. (NYSE:GEO) filed Quarterly Report for the period ended 2010-07-04.

The Geo Group Inc. has a market cap of $1.12 billion; its shares were traded at around $22.7 with a P/E ratio of 16 and P/S ratio of 1.1. The Geo Group Inc. had an annual average earning growth of 24.1% over the past 10 years.

Highlight of Business Operations:

fail to make an election; or (ii) the right to receive cash consideration equal to the greater of (x) the fair market value of one share of our shares of common stock plus $6.00 or (y) the fair market value of 1.3 shares of our common stock, in the case of Cornell stockholders electing to receive cash. As defined in the merger agreement, with respect to the cash consideration, the fair market value of the shares of GEO stock is based on the average closing price of GEOs common stock for the ten consecutive trading days ending on the last trading day immediately preceding the tenth business day preceding the closing date. In order to preserve the tax-deferred treatment of the transaction, no more than 20% of the outstanding shares of Cornell common stock may be exchanged for the cash consideration. If cash elections had been made with respect to more than 20% of Cornells shares, the excess over 20% was treated as if a stock election had been made with respect to them and were exchanged for shares of our common stock. Additionally, if cash elections had been made such that the aggregate cash consideration was in excess of $100.0 million, then we had the option to elect to pay such excess amount in shares of our common stock or in cash.

On August 12, 2010, we acquired 100% of Cornells common stock for aggregate consideration of approximately $443 million excluding the effects of cash acquired and including GEO common stock consideration of approximately $358 million, based on the closing price of our stock on August 12, 2010 of $22.70, and cash consideration of $85.0 million pursuant to the definitive merger agreement discussed above. GEO shareholders of record as of July 2, 2010 were entitled to vote at the special meeting on August 12, 2010. Cornell stockholders of record as of July 2, 2010 were eligible to vote and Cornell stockholders as of the election record date of July 20, 2010 were required to submit an election form indicating their election of cash or stock consideration for their outstanding shares by August 11, 2010, the day before the Cornell special meeting held on August 12, 2010. Refer to Note 2 of Part I Financial Information, Notes to Unaudited Consolidated Financial Statements. Also, in connection with the merger, on August 12, 2010, we paid $181.9 million of Cornells existing long-term debt, including accrued interest and assumed $108.3 million of Cornells existing non-recourse debt. If the merger with Cornell had occurred before July 4, 2010, the number of common shares outstanding would have increased by 15.8 million shares from 48.9 million shares to 64.7 million shares. The number of shares issued in connection with the merger and the purchase price is based on the assumption that the exchange agent receives the required stock certificates by the deadline for Cornell stockholders who made their elections pursuant to the notice of guaranteed delivery procedure.

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, we refer to this as the Credit Agreement). The Credit Agreement is comprised of (i) a $150.0 million Term Loan A, under which borrowings are available only upon closing of the merger with Cornell, 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 excess liability policy for all U.S. corrections operations with limits of $62.0 million per occurrence and in the aggregate. A separate $35.0 million limit applies to medical professional liability claims arising out of correctional healthcare services. Our wholly owned subsidiary, GEO Care, is 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. 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. We also maintain insurance to cover property and other casualty risks including, workers compensation, environmental liability and 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 $27.9 million and $27.2 million as of July 4, 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

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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About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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