Business context and reporting period
CoreCivic, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2017. The REIT owns and operates correctional, detention and residential reentry facilities, and manages facilities for government customers. At quarter-end, it reported approximately 87,400 beds across 20 states.
Financial performance
Amounts below are in millions of dollars except per-share data, percentages and occupancy.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $436.4 | $463.3 | $882.1 | $910.7 |
| Operating income | $65.3 | $77.2 | $134.3 | $142.1 |
| Net income | $45.5 | $57.6 | $95.5 | $103.9 |
| Diluted EPS | $0.38 | $0.49 | $0.81 | $0.88 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $182.8 | $213.3 |
| FFO | $69.4 | $81.0 | $143.2 | $150.6 |
| Normalized FFO | $69.7 | $81.3 | $143.9 | $152.1 |
- Q2 revenue fell 5.8%; first-half revenue fell 3.1%. Operating income and net income also declined in both comparisons.
- Q2 operating margin was approximately 15.0%, versus 16.7% a year earlier. For the first half, it was approximately 15.2%, versus 15.6%.
- Average compensated occupancy was 79.0% in Q2 and 80.0% for the first half, compared with 79.3% and 77.2%, respectively, in 2016. Overall operating margin per compensated man-day was 28.1% for Q2 and 27.9% for the first half.
- Cash and equivalents were $46.6 million at June 30, up from $37.7 million at year-end 2016. Net working capital was $24.2 million.
- Total debt principal was $1.426 billion, down from $1.455 billion at year-end. Weighted-average effective interest rate was 4.1%; $411 million of revolving-credit borrowings carried a weighted-average rate of 2.6%. The company reported $481.5 million available under its $900 million revolver and compliance with its financial covenants.
- Dividends declared were $0.42 per share for Q2 2017, compared with $0.54 in Q2 2016. First-half declared dividends were $0.84 versus $1.08.
Material changes versus prior period
- Management revenue decreased 6.1% in Q2 and 3.4% in the first half. Federal revenue declined 15.3% and 11.7%, respectively, partly due to lower South Texas Family Residential Center payments and contract expirations; state revenue increased 4.4% and 5.3%.
- The amended South Texas ICE agreement, effective November 2016, reduced fixed monthly payments and the related lease cost structure, and extended the agreement through September 2021. Revenue associated with the facility was $42.6 million in Q2 2017 versus $70.9 million in Q2 2016, and $85.2 million versus $141.7 million for the first half.
- Lower depreciation and amortization, partly reflecting the South Texas lease amendment, reduced expense to $36.8 million in Q2 and $73.1 million in the first half. General and administrative expense also declined, attributed in part to a corporate cost-reduction plan.
- First-half operating cash flow decreased by $30.5 million year over year, primarily due to lower net income and working-capital changes. Investing cash outflow was $43.2 million; financing cash outflow was $130.7 million, including $101.1 million of dividends.
Outlook, risks and unusual items
- Management said it expected available liquidity to meet cash expenditure needs for the next year. It provided no specific full-year earnings or revenue guidance. It expects to begin receiving Ohio inmates in Q3 2017, with full utilization of the contracted beds expected by the end of Q1 2018.
- The BOP contract at the 1,422-bed Eden Detention Center expired April 30, 2017 and was not renewed. The facility was idled and is being marketed; its $40.5 million carrying value was assessed as recoverable, but replacement business is not assured. Eight idled correctional facilities had aggregate carrying values of $217.7 million and continued to incur costs.
- After quarter-end, Texas selected other operators for the three remaining managed-only facilities in the rebid, following Bartlett’s closure. CoreCivic expected to transfer the other facilities in Q3 and record approximately $1.0 million in related asset write-offs. The four Texas facilities together generated $23.8 million of first-half 2017 revenue and $0.3 million of net operating income.
- CoreCivic expected to seek consent to consolidate populations from Torrance into Cibola because of lower federal populations, and was marketing Torrance, with a $37.3 million carrying value. California’s budget contemplated further reductions in out-of-state inmate placements; the company warned that losing this business could significantly adversely affect results and cash flows.
- Federal customers represented approximately 47% of Q2 revenue and 48% of first-half revenue. Other material exposures include government appropriations and payment timing, contract renewals, policy or regulatory changes, occupancy, wage and operating-cost inflation, and variable-rate debt. A 100-basis-point change in variable rates would have changed first-half interest expense by approximately $2.7 million.
- CoreCivic reported a securities class action related to statements preceding the 2016 DOJ private-prison memorandum; the company said it believed the suit was without merit and intended to defend it. It reported $6.4 million in accrued legal liabilities and $31.4 million in self-funded insurance reserves. Management stated that no pending legal proceeding was expected to have a material effect, while cautioning that litigation outcomes remain uncertain.
- Adoption of share-based payment accounting guidance produced a $1.0 million income tax benefit in the first half of 2017. A $0.3 million goodwill impairment related to Bartlett was recorded in Q1.
Important facts for investors to verify
- Whether Ohio bed utilization ramps as expected and whether the Texas managed-only contract transfers affect revenue and earnings as anticipated.
- Renewal or replacement prospects for federal contracts, including Eden, and the impact of possible California out-of-state population reductions.
- Utilization plans and impairment assumptions for idle facilities, including the anticipated Torrance-Cibola consolidation.
- Continuity and economics of the South Texas ICE agreement, including termination provisions and associated lease obligations.
- Debt maturities, variable-rate exposure, revolver availability, and the board’s future dividend decisions.