CoreCivic (then Corrections Corporation of America) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context
The company owned or controlled 53 correctional and detention facilities and managed 16 government-owned facilities, with approximately 90,000 beds across 20 states and the District of Columbia. Effective January 1, 2013, it elected REIT tax treatment and conducted correctional services and other operating activities through taxable REIT subsidiaries.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $421.5 million | $435.7 million | $1,263.2 million | $1,296.0 million |
| Operating income | $67.3 million | $79.7 million | $195.1 million | $224.3 million |
| Net income | $51.8 million | $42.3 million | $253.4 million | $111.4 million |
| Diluted EPS | $0.44 | $0.42 | $2.32 | $1.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $283.6 million | $223.1 million |
- Q3 operating margin was approximately 16.0%, down from 18.3%; the nine-month margin was approximately 15.4%, down from 17.3%. Facility operating margin was 29.1% for Q3 versus 30.7% a year earlier.
- Nine-month net income included a $137.7 million tax benefit from revaluing deferred tax assets and liabilities in connection with the REIT conversion. Excluding that benefit and other specified items, reported normalized FFO was $74.0 million for Q3 and $222.0 million for the nine-month period, versus $63.3 million and $172.8 million, respectively, in 2012. FFO and normalized FFO are non-GAAP measures.
- Cash and cash equivalents were $70.1 million at September 30, 2013. The company reported $93.0 million of net working capital and $364.8 million available on its $900 million revolver, after borrowings and letters of credit. It said available resources were expected to cover cash requirements for the next year.
- Long-term debt was $1.185 billion, compared with $1.112 billion at year-end 2012. The company had $510 million outstanding on its revolver and $675 million of senior notes due in 2020 and 2023; it reported no scheduled principal repayments before December 2017 and compliance with credit covenants.
- Cash dividends paid totaled $243.8 million over nine months. The company also declared a $675 million special dividend, approximately $6.66 per share, related to the REIT conversion; part was paid in cash and the balance in shares.
Material changes versus the prior comparable period
- Q3 revenue fell 3.3%, and average compensated population declined to 75,389 from 78,276. Average compensated occupancy was 84.1%, versus 88.1%.
- Management attributed lower revenue mainly to reduced inmate populations, including fewer U.S. Marshals Service offenders, and the ramp-down and closure of the Mineral Wells facility. Federal revenue declined $7.6 million in Q3 and $23.1 million over nine months year over year.
- Operating income declined despite lower operating expenses, reflecting weaker occupancy and higher fixed costs per compensated man-day. General and administrative expense rose to $80.2 million for nine months from $67.0 million, including REIT-conversion and acquisition costs.
- Nine-month interest expense declined to $34.9 million from $45.3 million, but the refinancing generated $36.5 million of charges. The company issued $675 million of new notes and retired its 7.75% notes.
- Managed-only facility net operating income improved to $31.0 million for nine months from $26.3 million. Owned-and-managed facility net operating income fell to $337.6 million from $359.5 million.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expected Q4 results to be affected by California inmate transitions and facility preparations, Arizona contract preparations, and costs to reactivate Diamondback, which had no customer contract. Arizona was expected to begin placing approximately 500 inmates at Red Rock in January 2014 and another 500 in early 2015.
- Management cited government budget pressure, sequestration, the 2013 federal shutdown, possible population reductions or rate concessions, contract non-renewals, and the ability to retain or fill facility capacity as key business risks. The shutdown delayed some federal payments, but management did not expect a material liquidity impact.
- California’s court-ordered population reduction and pending proceedings could affect the use of out-of-state beds; management warned that returning California inmates to the state could materially harm results. In October 2013, the company agreed to lease its California City facility to California for a three-year base term at annual rent of $28.5 million, subject to renewal by mutual agreement.
- The company ceased operations at Dawson State Jail and Wilkinson County Correctional Facility after contract losses, and idled the owned Mineral Wells and Marion facilities. It reported approximately $188.7 million of carrying value across listed idled facilities and had incurred $5.2 million of operating expenses while facilities were idle during the first nine months. Management said impairment analyses indicated recoverable values exceeded carrying values, but future impairment remained possible.
- CCA chose not to bid for continued management of Idaho Correctional Center and recorded a $1.0 million goodwill impairment in Q3. Management expected a further $1.1 million goodwill impairment in Q4 related to a Florida facility contract and was assessing a potential contract termination that could result in an approximately $4.6 million non-cash impairment.
- The company acquired community-corrections provider Correctional Alternatives, Inc. for approximately $36.5 million in cash. It also announced plans to build a 2,500-bed Tennessee facility, estimated to cost approximately $140 million, but was still discussing a management agreement.
- CCA guaranteed debt-service deficits on Hardeman County facility revenue bonds, with $23.9 million of principal outstanding plus future interest. It disclosed substantial self-insurance exposure, $34.0 million of accrued employee health, workers’ compensation and automobile claims, and $6.7 million of legal reserves. Management said it knew of no pending legal proceeding expected to have a material effect, while noting litigation outcomes are uncertain.
Most important facts for investors to verify
- How much of the reported nine-month earnings increase reflects the one-time REIT-related tax benefit, and what recurring tax rate and distributions should be expected under REIT treatment.
- Whether occupancy and government populations—especially federal and California placements—stabilize, and the financial effect of contract losses, facility idling and the Florida contract transition.
- Whether new agreements use available capacity, and the costs, timing, customer commitments and returns associated with Red Rock, San Diego, California City, Diamondback and Trousdale projects.
- Debt costs, revolver availability, covenant headroom and the company’s capacity to sustain dividends while funding capital spending and meeting REIT distribution requirements.
- Potential effects of California population litigation, federal and state budget actions, inmate-calling regulation, self-insurance claims, legal proceedings and possible future impairment charges.