CoreCivic, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties through its Safety, Community, and Properties segments. It reported 51 Safety facilities, 27 Community centers, and 27 Properties at quarter-end.
Financial performance
- Revenue: $484.1 million, up 9.8% from $440.9 million. Operating income was $73.3 million, up from $58.7 million; net income was $49.3 million versus $37.8 million. Diluted EPS was $0.41 versus $0.32.
- Segment revenue / facility net operating income: Safety $434.3 million / $117.7 million; Community $30.6 million / $7.1 million; Properties $19.1 million / $13.5 million. Growth in Properties largely reflected 2018 acquisitions.
- Operating indicators: Average compensated population rose 3.8% to 64,551 and compensated occupancy increased to 82.7% from 79.7%. Revenue per compensated man-day rose to $78.37 from $75.98; operating margin per compensated man-day increased to 27.2% from 25.3%.
- Cash flow: Operating cash flow was $77.8 million, down from $108.5 million. Investing used $78.0 million, including $36.0 million for facility development and expansions and approximately $30.0 million for the Montana Crossroads facility transaction. Financing used $20.6 million, including $52.4 million in dividends. Cash, cash equivalents, and restricted cash ended at $53.4 million; unrestricted cash was $20.5 million.
- Debt and liquidity: Total debt principal was $1.856 billion, compared with $1.815 billion at year-end 2018. Long-term debt, net, was $1.828 billion. The company had $562.3 million available under its revolving credit facility and reported compliance with financial covenants. Scheduled debt principal includes $343.8 million in 2020, including $325.0 million of senior notes due April 2020.
- Other measures: FFO was $75.9 million and normalized FFO was $76.4 million, compared with $62.2 million and $62.7 million, respectively, in Q1 2018. The quarterly dividend declared was $0.44 per share, versus $0.43 a year earlier.
Material changes and notable items
- Federal management revenue increased 14.6% to $242.1 million, reflecting higher populations and per-diem rates; federal customers accounted for approximately 50% of revenue. State revenue declined 3.3%, primarily due to fewer California inmates in out-of-state facilities.
- Management attributed population growth to new and expanded federal and state placements, including at Lee Adjustment Center, Tallahatchie County, and La Palma. California out-of-state populations continued to decline; the company cared for about 1,100 California inmates at La Palma at quarter-end.
- Operating cash flow decreased, in part because Q1 2018 benefited from a $41.2 million favorable working-capital movement. Operating expenses rose with facility activity, acquisitions, wage pressures, and lease-accounting changes.
- Adoption of lease accounting standard ASC 842 on January 1, 2019 added $82.9 million of right-of-use assets and lease liabilities at adoption and reduced accumulated deficit by approximately $29.9 million. It also changed classification of South Texas Family Residential Center lease costs, affecting year-over-year expense comparisons.
- The company continued construction of the 2,432-bed Lansing, Kansas facility, expected to be completed in Q1 2020, and the 512-bed Otay Mesa expansion, expected in Q4 2019. The Lansing project had $74.4 million capitalized at quarter-end; Otay Mesa expansion costs incurred were $24.9 million.
Outlook, risks, and contingencies
- Management said it expected to meet cash expenditure requirements for the next year using available resources and operating cash flow. It provided no quantified earnings or revenue guidance in the supplied filing text.
- On May 1, 2019, after quarter-end, the Bureau of Prisons announced it would not renew the Adams County Correctional Center contract, expiring July 31, 2019. The facility generated $60.9 million of revenue in 2018. CoreCivic was marketing the facility but could not assure replacement business.
- ICE may terminate the South Texas Family Residential Center agreement for convenience or non-appropriation with 60 days’ notice. If the associated lease is then terminated and continued facility use is not arranged, a termination fee was approximately $7.0 million at quarter-end. The facility generated $42.8 million in Q1 2019 revenue.
- Key risks include government appropriations and contract renewals, occupancy and customer demand, policy changes affecting private corrections and immigration detention, labor and operating cost inflation, construction costs and timing, interest-rate exposure, REIT qualification, and the potential impairment of idle facilities. Eight idled facilities had $232.9 million in carrying value; management reported their estimated recoverable values exceeded carrying values, but provided no assurance of future utilization.
- A securities class action was certified by the District Court in March 2019; CoreCivic petitioned the Sixth Circuit for permission to appeal in April. The company said it considers the claims without merit and intends to defend them. Management reported no other pending proceedings expected to have a material effect, while noting litigation outcomes remain uncertain.
Investor verification checklist
- Verify the timing and financial impact of the Adams County contract exit, potential replacement customers, and any related impairment or transition costs.
- Track California population transfers, federal placements, and utilization of La Palma and Tallahatchie, as well as the South Texas facility’s ICE contract and lease exposure.
- Assess the 2020 debt maturity and refinancing or repayment plans, covenant headroom, variable-rate exposure, and the sustainability of dividends relative to cash generation and investment needs.
- Monitor Lansing and Otay Mesa construction costs, schedules, and committed customer demand, and review the effects of ASC 842 on comparable operating results.
- Follow developments in the securities litigation and the company’s self-insurance and legal reserves.