Business context and reporting period
Corrections Corporation of America (now CoreCivic) filed this Form 10-K for the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing. The company was a REIT operating correctional and detention facilities, community-reentry services, and prisoner transportation. At year-end, it owned or controlled 52 facilities and managed 12 government-owned facilities, with approximately 84,500 beds across 19 states and the District of Columbia.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $1.647 billion | $1.694 billion |
| Operating income | $240.3 million | $251.2 million |
| Net income | $195.0 million | $300.8 million |
| Diluted EPS | $1.66 | $2.70 |
| Cash from operations | $423.6 million | $369.5 million |
| Facility operating margin per compensated man-day | 29.7% | 29.4% |
- Revenue fell 2.8%; management attributed the decline principally to lower compensated populations and loss or expiration of contracts. Average compensated occupancy declined to 83.8% from 85.2%, and average compensated population fell 8.1%.
- Operating income decreased 4.3%. Net income declined substantially, but the comparison was affected by the $137.7 million REIT-conversion tax benefit recognized in 2013 and 2014 asset impairments of $30.1 million.
- Normalized FFO, a non-GAAP measure, was $310.5 million, up from $294.7 million. The filing cautions that FFO is not a measure of cash generated under GAAP.
- Operating cash flow increased 14.6%, partly reflecting a $70.0 million customer payment for the South Texas Family Residential Center, much of which remained deferred revenue at year-end. Investing cash flow was an outflow of $196.9 million; financing cash flow was an outflow of $230.2 million, including $234.0 million of dividends paid.
- Per compensated man-day, revenue was $63.54 and operating expense $44.66, producing $18.88 of operating income. Salaries and benefits represented approximately 62% of operating expenses.
Debt, liquidity and distributions
Year-end debt was $1.20 billion: $525 million drawn on the revolving credit facility and $675 million of senior notes. Weighted-average effective interest was 3.6%, and weighted-average debt maturity was 5.2 years. The revolver had $358.7 million available; cash was $74.4 million, net working capital $47.0 million, and reported debt leverage 3.1x. No scheduled principal maturities were due before December 2017. The company reported compliance with its credit-facility covenants.
Regular dividends declared in 2014 totaled $2.04 per share ($239.1 million). The board declared a first-quarter 2015 dividend of $0.54 per share. REIT status generally requires distributions of at least 90% of REIT taxable income; future dividends remain at the board’s discretion.
Material changes and outlook
- State management revenue fell 7.8% and federal management revenue fell 1.6%; rental and other revenue rose to $34.2 million, chiefly reflecting the California City lease.
- Contract losses and expirations at three Florida facilities, Idaho Correctional Center, and North Georgia reduced 2014 revenue. The BOP also elected not to renew its Northeast Ohio contract, which was scheduled to expire in May 2015; management expected to continue housing USMS detainees there under a separate contract while marketing available beds.
- South Texas Family Residential Center began service in late 2014, generated $21.0 million of revenue in the year, and was expected to reach its 2,400-bed capacity in the second quarter of 2015. The company also expected completion of the 1,492-bed Otay Mesa project in the third quarter of 2015 and the 2,552-bed Trousdale Turner facility in the fourth quarter of 2015, with Tennessee inmate intake expected in early 2016.
- Management described near-term demand as constrained by government budgets and lower populations, while citing longer-term potential from aging public facilities and limited government construction. It emphasized filling existing beds, controlling costs, and avoiding speculative capacity additions without better customer visibility. No quantified earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Customer and funding concentration is significant: federal authorities generated 44% of 2014 revenue; the three principal federal agencies were BOP, USMS, and ICE. California’s corrections department accounted for 14% of revenue.
- Government contracts may be terminated without cause, are often subject to appropriations, and typically pay by occupied bed. Lower occupancy, non-renewal, rebidding, sentencing or immigration policy changes, and public opposition to privatization could materially affect results.
- A February 2015 preliminary injunction in litigation concerning ICE family detention could affect the South Texas contract. The company said ICE had not yet advised it of the impact; contract changes or termination could harm results. The related lease and project commitments also create exposure if the contract ends.
- The company recorded $27.8 million of fourth-quarter non-cash impairments to write down Queensgate and Mineral Wells, and a $2.2 million impairment for the Houston Educational Facility, which was sold for $4.5 million. Total 2014 asset impairments were $30.1 million.
- Other exposures include self-insured claims, legal and operational claims, regulatory compliance, construction cost and completion risks, variable-rate debt, REIT qualification and distribution requirements, and the potential effect of the Idaho Correctional Center investigation. The company paid Idaho $1.0 million in 2014 to resolve contractual staffing disputes.
- The fourth quarter of 2014 included revenue of $423.5 million, operating income of $41.8 million, and net income of $30.0 million; fourth-quarter earnings were reduced by the $27.8 million non-cash impairments.
Important facts for investors to verify
- Whether the lost or expiring contracts, particularly Northeast Ohio, are replaced and how much capacity is filled at acceptable rates.
- ICE’s response to the family-detention injunction, the South Texas facility’s ramp to full capacity, and the company’s related lease, termination, and funding obligations.
- Actual completion costs, timing, occupancy guarantees, and customer intake for Otay Mesa, Trousdale Turner, and the Stewart expansion.
- Whether operating cash flow and dividends remain sustainable after accounting for construction spending, required REIT distributions, and the deferred South Texas payment.
- Future impairment risk at idle facilities, developments in the Idaho investigation and other litigation, and continued compliance with debt covenants and REIT requirements.