CoreCivic (formerly Corrections Corporation of America) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context
The company operated 68 correctional and detention facilities, with approximately 92,000 beds across 20 states and the District of Columbia. It began operating as a REIT for federal tax purposes on January 1, 2013, conducting correctional services and certain other activities through taxable REIT subsidiaries.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $434.0 | $442.9 | $859.7 | $878.2 |
| Operating income | $63.6 | $74.9 | $122.9 | $144.4 |
| Net income | $20.4 | $37.3 | $201.5 | $69.0 |
| Diluted EPS | $0.19 | $0.37 | $1.91 | $0.69 |
| Operating cash flow | Not provided for the quarter | $182.9 | $130.0 |
- Q2 facility operating margin per compensated man-day was 28.4%, down from 29.3%; average compensated occupancy fell to 86.5% from 89.0%. Revenue per compensated man-day was $59.44 versus $59.22.
- At June 30, cash was $37.9 million, working capital was $77.0 million, and $399.8 million was available under the $900 million revolving facility. Total debt was $1.15 billion. The company reported covenant compliance and no scheduled debt maturities until December 2017.
- Net cash used in investing activities was $28.7 million for the first half, including $26.9 million of capital expenditures. Net cash used in financing was $179.1 million, principally reflecting $188.6 million of dividends paid.
- Quarterly regular dividend declared was $0.48 per share. A $6.66-per-share special dividend, valued at $675 million, was paid in May; most was distributed in shares, adding 13.9 million shares.
Material changes versus prior period
- Q2 revenue declined 2.0%, primarily as average compensated population decreased by 1,876 to 80,037. Federal revenue was 43% of Q2 revenue and declined year over year; USMS populations were approximately 9,300 versus 11,400 a year earlier.
- Q2 operating income and net income declined. First-half net income rose sharply chiefly because the REIT conversion generated a $137.7 million deferred-tax revaluation benefit; it is not representative of recurring operating performance.
- Q2 results included $36.3 million of debt-refinancing charges and $2.6 million of asset impairments. First-half results also included $9.8 million of REIT-conversion professional fees. The company said these and other non-routine items reduced Q2 and first-half net income by $34.7 million and $42.4 million, respectively, after tax.
- The company refinanced its 7.75% notes with $325 million of 4.125% notes due 2020 and $350 million of 4.625% notes due 2023, alongside an expanded and extended revolving facility. Debt refinancing reduced ongoing interest expense but generated substantial one-time charges.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management cited longer-term potential demand for private capacity but said it wanted better visibility and meaningful utilization before adding speculative capacity.
- Texas declined to renew contracts for the owned Mineral Wells facility and managed Dawson State Jail, with operations expected to cease in August 2013. Kentucky did not award a continued-use contract for the owned Marion Adjustment Center, which the company expected to idle by the end of September. The Wilkinson County management contract ended June 30; the company recorded $2.6 million of impairments and expected to report Wilkinson and Dawson as discontinued operations from Q3.
- California’s inmate-reduction requirements and plans to recall out-of-state inmates pose a significant risk to utilization and results. California generated approximately 11% of Q2 revenue; the filing said the long-term effect of court proceedings and the state’s plans remained uncertain.
- Government budget constraints, sequestration, lower inmate populations, per-diem pressure, contract nonrenewals, and delays or reductions in government payments could affect revenue and cash flow. The company also cited variable-rate debt exposure, facility-idling and impairment risk, and substantial self-insurance and litigation exposure.
- Seven previously idled facilities had a combined carrying value of $129.6 million; the filing also identified the suspended Trousdale County project, with $29.0 million invested. Management reported recoverable values above carrying values based on its analyses, but gave no assurance future impairment charges would be avoided.
- After quarter-end, the company acquired Correctional Alternatives, Inc. for approximately $36 million in cash. It also expected $20.5 million of improvements at Red Rock for Arizona inmates beginning in 2014 and estimated total San Diego facility construction costs of $170–175 million.
- Legal proceedings were described as routine for the business; management did not expect pending matters to be material, while acknowledging adverse outcomes could have a material effect. A separate guarantee covers debt service deficits on Hardeman County facility bonds; outstanding principal was $28.8 million.
Important facts for investors to verify
- Underlying earnings and cash generation excluding the REIT-related tax benefit, refinancing charges, conversion costs, and impairments.
- Actual inmate transfers and occupancy following the Texas, Kentucky, and Wilkinson contract changes, and any effect on owned-facility costs or asset values.
- California’s court-ordered population plan, appeal, and resulting use of the company’s out-of-state beds.
- REIT qualification, required distributions, future dividend capacity, and the tax treatment of taxable REIT subsidiaries.
- Debt-facility covenant headroom, variable-rate exposure, and the cash requirements for planned construction, facility improvements, and the post-quarter acquisition.