Corrections Corporation of America (now CoreCivic): Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless stated otherwise, amounts are in millions of dollars. The company owned and operated correctional facilities and provided management, inmate housing, and related services to government agencies.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $444.9 | $432.1 | $1,323.0 | $1,287.3 |
| Operating income | $79.9 | $80.9 | $224.3 | $251.7 |
| Net income | $42.3 | $39.2 | $111.4 | $122.0 |
| Diluted EPS | $0.42 | $0.37 | $1.11 | $1.14 |
| Operating margin | 18.0% | 18.7% | 17.0% | 19.5% |
- Quarterly revenue rose 2.9%; nine-month revenue rose 2.8%. Quarterly net income increased, helped by lower interest expense, while nine-month net income fell 8.7%.
- Operating expenses rose 4.2% in Q3 and 6.5% for the nine-month period, outpacing revenue growth. Higher wages, employee-benefit costs, facility start-up and ramp-down expenses, and inmate medical costs pressured margins.
- Nine-month operating cash flow was $223.1 million, down from $258.0 million. Investing activities used $62.3 million, including facility development and capital improvements; financing activities used $157.3 million. Cash increased to $59.2 million from $55.8 million at year-end 2011.
- At September 30, long-term debt was $1,131.2 million on the balance sheet; stated principal was approximately $1,140 million. The company had $635 million drawn on its $785 million revolver, $26 million of letters of credit, and $124 million of remaining availability. Net working capital was $158.1 million.
- Debt refinancing reduced interest expense and extended the revolver maturity to December 2016, but increased exposure to variable rates. The company reported covenant compliance and no scheduled debt maturity until January 2014.
Changes, outlook, and risks
- Average compensated population increased to 81,384 in Q3 from 79,840 a year earlier, primarily reflecting Lake Erie, Jenkins, and Cimarron activity. Average compensated occupancy nevertheless declined to 88.4% from 89.6%. The company reported about 13,400 unoccupied beds at facilities with at least 100 available beds.
- Federal customers accounted for about 42% of Q3 revenue. Management cited slower federal population growth and per-diem pressure, with potential further effects from federal budget constraints and sequestration. State budget pressure could also lead to lower populations, rate reductions, or transfers to public facilities.
- California population reductions and policy changes pose a significant risk to out-of-state inmate demand. CCA housed about 8,700 California inmates at quarter-end, down from about 9,500 a year earlier; California generated approximately 12% of nine-month management revenue.
- Management expected to meet cash needs for the next year using cash, operating cash flow, and revolver capacity. It forecast 2012 maintenance and IT capital expenditures of $48–$53 million, facility development and expansion spending of $30–$35 million, and income tax payments of about $84–$85 million. Planned projects included $20 million of Red Rock improvements and a San Diego replacement facility estimated at $142–$150 million, with no assurance the existing population would be retained.
- CCA was evaluating a possible REIT conversion and had requested an IRS private letter ruling; no ruling had been received. Management said a January 1, 2013 effective date remained possible but became less likely as time passed. REIT analysis expenses were $1.9 million for the first nine months, with additional costs expected.
- Unusual items included $2.0 million of debt-refinancing charges for the nine months and REIT-related professional fees. An inmate disturbance at Adams County contributed to workers’ compensation costs. Seven idled facilities carried $133.4 million in long-lived assets, and suspended Trousdale development had $29.0 million capitalized; management reported no impairment at the time.
- The company paid $0.20 per share in each of Q2 and Q3 and declared a further $0.20 dividend for December 2012. It had terminated its share-repurchase program in February.
- Management said pending litigation was not expected to have a material effect, while acknowledging litigation uncertainty and substantial self-insurance exposure. Accrued liabilities included $33.5 million for specified insurance claims and $10.1 million for legal proceedings. CCA also guaranteed debt service deficits on Hardeman County bonds, with $28.8 million principal outstanding.
Investor verification priorities
- Track occupancy, available beds, per-diem rates, and the effect of federal and state budget actions—especially California and U.S. Marshals Service populations.
- Verify whether wage and benefit inflation, medical claims, and facility start-up costs continue to outpace rate increases and erode margins.
- Monitor revolver borrowings, variable-rate exposure, covenant headroom, refinancing needs, and cash available after dividends and capital spending.
- Confirm timing, total cost, and customer population commitments for the San Diego, Red Rock, and other development projects; reassess idle-facility impairment assumptions.
- Follow the IRS ruling and remaining operational, tax, and structural requirements for any REIT conversion, as well as potential related costs.