Business Combinations

9 Months Ended

Oct. 02, 2011

Business Combinations [Abstract]

BUSINESS COMBINATIONS

2. BUSINESS COMBINATIONS

Acquisition of BII Holding

On February 10, 2011, the Company completed its acquisition of B.I. Incorporated (“BI”), a Colorado corporation, pursuant to an Agreement and Plan of Merger, dated as of December 21, 2010 (the “Merger Agreement”), among GEO, BII Holding, a Delaware corporation, which owns BI, GEO Acquisition IV, Inc., a Delaware corporation and wholly-owned subsidiary of GEO (“Merger Sub”), BII Investors IF LP, in its capacity as the stockholders’ representative, and AEA Investors 2006 Fund L.P (the “BI Acquisition”). Under the terms of the Merger Agreement, Merger Sub merged with and into BII Holding, with BII Holding emerging as the surviving corporation of the merger. As a result of the BI Acquisition, the Company paid merger consideration of $409.6 million in cash, net of cash acquired of $9.7 million, excluding transaction related expenses and any potential adjustments, for 100% of BI’s outstanding common stock. Under the Merger Agreement, $12.5 million of the merger consideration was placed in an escrow account for a one-year period to satisfy any applicable indemnification claims pursuant to the terms of the Merger Agreement by GEO, the Merger Sub or its affiliates. At the time of the BI Acquisition, approximately $78.4 million, including accrued interest, was outstanding under BI’s senior term loan and $107.5 million, including accrued interest, was outstanding under its senior subordinated note purchase agreement, excluding the unamortized debt discount. All indebtedness of BI under its senior term loan and senior subordinated note purchase agreement were repaid by BI with a portion of the $409.6 million of merger consideration. In connection with the BI Acquisition and included in general and administrative expenses, the Company incurred $4.3 million in non-recurring transaction costs for the thirty-nine weeks ended October 2, 2011.

The Company is identified as the acquiring company for US GAAP accounting purposes and believes its acquisition of BI provides it with the ability to offer turn-key solutions to its customers in managing the full lifecycle of an offender from arraignment to reintegration into the community, which the Company refers to as the corrections lifecycle. Under the acquisition method of accounting, the purchase price for BI was allocated to BI’s net tangible and intangible assets based on their estimated fair values as of February 10, 2011, the date of closing and the date that the Company obtained control over BI. In order to determine the fair values of certain tangible and intangible assets acquired, the Company has engaged a third party independent valuation specialist. For all other assets acquired and liabilities assumed, the recorded fair value was determined by the Company’s management and represents an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The allocation of the purchase price had not been finalized as of October 2, 2011. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to: (i) final agreement of the adjustment to the purchase price based upon the level of net working capital, and the fair value of certain components thereof, transferred at closing; and (ii) deferred tax assets and liabilities. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition. The Company does not believe that any of the goodwill recorded as a result of the BI Acquisition will be deductible for federal income tax purposes. At this time, the Company has not identified any differences in accounting policies that would have a material impact on the consolidated financial statements as of October 2, 2011. The preliminary purchase price consideration of $409.6 million, net of cash acquired of $9.7 million, excluding transaction related expenses and any potential adjustments, was allocated to the assets acquired and liabilities assumed, based on management’s estimates at the time of this Quarterly Report.

The Company has retrospectively adjusted provisional amounts with respect to the BI Acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. These adjustments relate to the Company’s valuation of accounts receivable, property and equipment, intangible assets and other non-current assets and resulted in a net decrease to goodwill of $7.0 million. The increase in amortization expense for the adjustment to intangible assets was not significant for any quarterly or fiscal year to date period within the thirty-nine weeks ended October 2, 2011. The preliminary purchase price allocation as of April 3, 2011 and as of October 2, 2011 is as follows (in thousands):

	Acquisition Date Estimated  Fair Value as of April 3, 2011			Measurement  Period Adjustments			Adjusted Acquisition Date Estimated Fair Value as of October 2, 2011
Accounts receivable	$	18,321		$	1,298		$	19,619
Prepaid expenses and other current assets		3,896			—			3,896
Deferred income tax assets		15,857			—			15,857
Property and equipment		22,359			901			23,260
Intangible assets		126,900			4,900			131,800
Other non-current assets		8,884			(119	)		8,765
Total assets acquired	$	196,217		$	6,980		$	203,197
Accounts payable		(3,977	)		—			(3,977	)
Accrued expenses		(8,461	)		—			(8,461	)
Deferred income tax liabilities		(43,824	)		—			(43,824	)
Other non-current liabilities		(11,431	)		—			(11,431	)
Long-term debt		(2,014	)		—			(2,014	)
Total liabilities assumed		(69,707	)		—			(69,707	)
Total identifiable net assets		126,510			6,980			133,490
Goodwill		283,097			(6,980	)		276,117
Total cash consideration	$	409,607		$	—		$	409,607

For the thirteen weeks ended October 2, 2011, the Company has included revenue and earnings, excluding intercompany transactions, of $31.1 million and $4.6 million, respectively, in its consolidated statement of income. For the thirty-nine weeks ended October 2, 2011, the Company has included revenue and earnings, excluding intercompany transactions, of approximately $79.8 million and $9.4 million, respectively, in its consolidated statement of income which represents revenue and earnings since February 10, 2011, the date BI was acquired.

Acquisition of Cornell Companies, Inc.

On August 12, 2010, the Company completed its acquisition of Cornell pursuant to a definitive merger agreement entered into on April 18, 2010, and amended on July 22, 2010, among the Company, GEO Acquisition III, Inc., and Cornell. Under the terms of the merger agreement, the Company acquired 100% of the outstanding common stock of Cornell for aggregate consideration of $618.3 million. The measurement period for certain tax assets and liabilities, which was the only area of the purchase price not yet finalized, ended on August 12, 2011.

During the measurement period, the Company retrospectively adjusted provisional amounts with respect to the Cornell acquisition that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Those changes are reflected in the table below. The Company made a measurement period adjustment for income taxes in the thirteen weeks ended October 2, 2011 which reduced goodwill by $7.4 million. The purchase price allocation as of January 2, 2011 and as of October 2, 2011 and adjustments made to the estimated acquisition date fair values during the thirty-nine weeks ended October 2, 2011 are as follows (in thousands):

	Acquisition Date Estimated  Fair Value as of January 2, 2011			Measurement  Period Adjustments			Final Acquisition Date Fair Value as of October 2, 2011
Accounts receivable	$	55,142		$	294		$	55,436
Prepaid and other current assets		13,314			(333	)		12,981
Deferred income tax assets		21,273			(3,011	)		18,262
Restricted assets		44,096			—			44,096
Property and equipment		462,771			—			462,771
Intangible assets		75,800			—			75,800
Out of market lease assets		472			—			472
Other long-term assets		7,510			—			7,510
Total assets acquired		680,378			(3,050	)		677,328
Accounts payable and accrued expenses		(56,918	)		3,175			(53,743	)
Fair value of non-recourse debt		(120,943	)		—			(120,943	)
Out of market lease liabilities		(24,071	)		—			(24,071	)
Deferred income tax liabilities		(42,771	)		8,228			(34,543	)
Other long-term liabilities		(1,368	)		—			(1,368	)
Total liabilities assumed		(246,071	)		11,403			(234,668	)
Total identifiable net assets		434,307			8,353			442,660
Goodwill		204,724			(8,353	)		196,371
Fair value of Cornell’s net assets		639,031			—			639,031
Noncontrolling interest		(20,700	)		—			(20,700	)
Total consideration for Cornell, net of cash acquired	$	618,331		$	—		$	618,331

The Company recognized a reduction of operating expenses of $1.4 million and $3.9 million, respectively, in the thirteen and thirty-nine weeks ended October 2, 2011 for items related to Cornell that occurred after the measurement period or purchase price allocation period had ended. These adjustments to operating expenses were the result of a recovery of accounts receivable and an insurance settlement for property damage at one of Cornell’s facilities.

Pro forma financial information

The pro forma financial statement information set forth in the table below is provided for informational purposes only and presents comparative revenue and earnings for the Company as if the acquisitions of BI and Cornell and the financing of these transactions had occurred on January 4, 2010, which is the beginning of the first period presented. The pro forma information provided below is compiled from the financial statements of the combined companies and includes pro forma adjustments for: (i) estimated changes in depreciation expense, interest expense and amortization expense, (ii) adjustments to eliminate intercompany transactions, (iii) adjustments to remove $0.1 million and $6.8 million, respectively, for the thirteen and thirty-nine weeks ended October 2, 2011 in non-recurring charges directly related to these acquisitions that are included in the combined Companies’ financial results, and (iv) the income tax impact of the adjustments. For the purposes of the table and disclosure below, earnings is the same as net income attributable to The GEO Group, Inc. shareholders (in thousands):

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	October 2, 2011		October 3, 2010		October 2, 2011		October 3, 2010
Pro forma revenues	$	406,847	$	401,042	$	1,220,021	$	1,225,780
Pro forma net income attributable to The GEO Group, Inc. shareholders	$	21,567	$	21,091	$	63,172	$	63,676