CoreCivic, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties through its Safety, Community, and Properties segments.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $472.6M | $490.3M | $963.7M | $974.4M |
| Operating income | $39.2M | $71.0M | $98.3M | $144.2M |
| Net income attributable to common stockholders | $22.2M | $48.6M | $54.2M | $97.9M |
| Diluted EPS | $0.18 | $0.41 | $0.45 | $0.82 |
| Operating cash flow | Not separately stated for the quarter | $174.3M | $166.6M |
- Q2 revenue declined 3.6%; operating income declined 44.7%. Six-month revenue fell 1.1%, while operating income declined 31.9%.
- Average compensated occupancy across managed correctional, detention, and reentry facilities was 74.9% in Q2, versus 82.8% a year earlier. Operating income per compensated man-day was $19.58 versus $22.06, and operating margin was 23.5% versus 28.1%.
- At June 30, cash and cash equivalents were $363.8M, restricted cash was $19.0M, and total current assets were $668.4M. The company reported $154.2M available under its revolving credit facility.
- Total debt was $2.290B, including $631.0M drawn on the revolving facility. The company reported a 4.0% weighted average effective interest rate and 5.5-year weighted average maturity; it was in compliance with credit covenants.
- Six-month investing cash outflow was $50.8M, versus $146.1M in 2019. Financing cash inflow was $140.2M, reflecting net revolver borrowings, partly offset by $106.0M in dividends and scheduled repayments.
Drivers and material changes
- COVID-19-related reductions in ICE and U.S. Marshals populations, court activity, prosecutions, and referrals contributed to lower occupancy and revenue. The company also cited the prior BOP contract transition at Adams County and California inmate transfers completed in 2019.
- Revenue per compensated man-day increased, supported by per diem increases and a higher mix of federal populations, but did not offset lower populations and higher costs.
- Safety segment Q2 revenue was $424.1M and facility net operating income was $100.4M, down from $440.4M and $123.4M. Community revenue was $26.0M and net operating income $3.8M, down from $30.7M and $7.6M. Properties revenue rose to $22.5M from $19.1M, and net operating income increased to $15.6M from $13.6M, principally reflecting acquisitions and the Lansing lease commencement.
- Operating expenses rose to $352.9M in Q2 from $345.7M. The company recorded $8.2M of COVID-19 costs, including $6.3M in staff “hero bonuses”; higher fixed costs per compensated man-day also weighed on margins.
- Q2 included $11.7M of asset impairments, $0.3M in corporate-structure evaluation costs, and a $2.8M gain on asset sales. Six-month results also included a $3.1M non-recurring deferred tax expense. Impairments included $9.8M for an Oklahoma reentry facility and $2.0M of goodwill related to expected contract terminations.
Outlook, risks, and contingencies
- On June 17, the board suspended the quarterly dividend while considering capital allocation. On August 5, after quarter-end, it approved revoking REIT status effective January 1, 2021, becoming a taxable C corporation, discontinuing quarterly dividends, and prioritizing debt reduction. Management said it expects greater cash-flow flexibility; the filing notes a material tax charge from deferred-tax revaluation is expected in Q1 2021, with the amount not yet estimated.
- Management expected to meet cash needs for the next year using cash on hand and revolver availability, and reported no debt maturities until October 2022. It cautioned that COVID-19, government budgets and population levels, contract renewals, and financing availability could affect results and liquidity.
- Management reported $8.2M of Q2 COVID-19 expenses and expected short-term incremental staffing and health-protection costs. It also described reduced discretionary spending and review of capital projects.
- Subsequent to quarter-end, CoreCivic agreed to idle Oklahoma’s Cimarron facility and Tulsa Transitional Center, and notified customers it intends to terminate contracts at Silverdale and Metro-Davidson County, with transitions expected in Q4 2020. These developments create potential revenue, utilization, and impairment risks.
- Legal matters include certified classes in litigation concerning ICE detainee labor and a securities class action. The company had not accrued losses for the detainee-labor claims because losses were not considered probable or reasonably estimable; it had accrued $15.5M for certain legal matters overall. Unfavorable outcomes could be material.
- Other risks include California AB32’s uncertain impact on private detention and reentry contracts, self-insurance exposure, and possible further impairment of idle facilities or goodwill. Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether lower federal, state, and local populations and COVID-related disruptions persist, and how they affect occupancy, per diem revenue, and staffing costs.
- Execution and financial consequences of the REIT-to-C-corporation transition, including the eventual deferred-tax charge, dividend policy, and pace of debt reduction.
- Contract and utilization outcomes for Cimarron, Tulsa, Silverdale, and Metro-Davidson County, and potential additional impairments.
- Liquidity and refinancing capacity, especially revolver availability, covenant headroom, variable-rate exposure, and large scheduled debt payments in 2022–2024.
- Developments in detainee-labor, securities, and California AB32 proceedings, as well as updates to legal and self-insurance reserves.