CoreCivic, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties as a REIT.
Financial performance
Amounts are in millions of dollars except per-share data and where otherwise stated.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $491.1 | $484.1 | Up 1.4% |
| Operating income | $59.0 | $73.3 | Down 19.4% |
| Net income | $33.2 | $49.3 | Down 32.6% |
| Net income attributable to common stockholders | $32.1 | $49.3 | Down 35.0% |
| Diluted EPS | $0.27 | $0.41 | Down $0.14 |
| Cash from operating activities | $75.4 | $77.8 | Down $2.4 |
| Cash and cash equivalents, March 31 | $335.5 | — | Was $92.1 at Dec. 31, 2019 |
| Total debt, before unamortized costs and discount | $2,297.5 | — | Was $1,986.9 at Dec. 31, 2019 |
Operating margin was 12.0% of revenue, compared with 15.1% a year earlier. Interest expense, net, was $22.5 million versus $21.4 million. The company reported a $3.8 million income tax expense, including $3.1 million related to the completed Lansing facility’s tax treatment.
Investing activities used $42.1 million, including $22.2 million for facility development and expansions, $8.6 million for other capital improvements, and $8.8 million primarily related to the property portfolio acquisition. Financing activities provided $199.9 million, primarily reflecting $266.0 million in net revolving-credit borrowings; cash dividends paid were $54.5 million.
Business and segment changes
- Safety: Revenue rose 0.8% to $437.8 million, while facility net operating income (NOI) fell 9.1% to $107.0 million. Average compensated population declined 4.5% to 61,617 and compensated occupancy fell to 79.0% from 82.7%. Per-compensated-man-day operating margin declined to 24.6% from 27.2%.
- Community: Revenue was essentially flat at $30.6 million; facility NOI declined 13.0% to $6.2 million. Compensated occupancy was 73.5%, versus 78.4%.
- Properties: Revenue increased 18.8% to $22.7 million and facility NOI increased 16.8% to $15.7 million, primarily due to acquisitions and the January commencement of the Lansing lease.
Management attributed lower populations in part to the end of the BOP contract at Adams County and the return of California inmates to the state. Higher per-diem rates and a larger federal revenue mix partly offset the population decline. Federal customers represented approximately 51% of total revenue.
Liquidity, debt, and capital
At March 31, 2020, CoreCivic reported $335.5 million of cash and $155.0 million available under its revolving credit facility, after $631.0 million drawn and $14.0 million of letters of credit. Management stated it expected these resources to meet cash expenditure requirements for the next year. The company drew on its revolver as a precaution amid COVID-19 uncertainty. It reported compliance with credit-facility covenants.
Total debt was $2.30 billion, including variable-rate revolver, Term Loan A, and Term Loan B borrowings. The company reported a 4.7% total weighted-average effective interest rate and 5.7-year weighted-average maturity. Scheduled debt maturities include $294.0 million in 2022 and $1.17 billion in 2023; management stated there were no debt maturities until October 2022. A 100-basis-point change in rates on variable-rate debt would have changed quarterly interest expense by an estimated $2.1 million.
The quarterly dividend declared was $0.44 per share. Management emphasized that future distributions depend on cash flows, REIT requirements, debt covenants, capital needs, and other factors; no assurance was given that the dividend would continue at the same level.
Outlook, risks, and unusual items
- COVID-19: Border-entry restrictions reduced ICE populations, while court and prosecution disruptions affected U.S. Marshals populations and reentry referrals. Management expected near-term staffing costs, including an estimated $6.5–$7.5 million in Q2 “hero bonuses,” and said the pandemic could materially affect results, cash flows, and government budgets. It had observed no meaningful population reductions in most state and local facilities as of the filing.
- Operating outlook: Management was reevaluating spending and capital projects and limiting travel and other expenses. It said the longer-term impact of COVID-19 was difficult to predict. Management believed it would renew materially significant contracts expiring within the following 12 months, but cautioned that renewal was not assured.
- Acquisition and financing: In January, the company acquired 28 GSA-leased properties for $83.2 million, funded with cash, assumed debt, and Operating Partnership Units. It completed the Lansing correctional facility and began its 20-year lease in January.
- Asset and tax items: A $0.5 million impairment was recorded for an idle Community facility sold after quarter-end. The company’s COVID-related qualitative review found no goodwill impairment as of March 31, but warned future impairment remained possible. The $3.1 million Lansing-related deferred tax charge reduced Q1 earnings.
- Legal and regulatory: A nationwide class was certified April 1 in litigation concerning ICE detainee labor; the company recorded no accrual because loss was not considered probable or reasonably estimable. A shareholder securities class action remained in discovery, with a reserve recorded. California’s AB32 restrictions could affect future federal detention and reentry contracts in the state; litigation challenging the law was pending.
- Other risks: The company cited staffing and facility health risks, possible releases or transfers of residents, government appropriations and payment delays, contract termination or nonrenewal, reliance on federal customers, and uncertainty about future access to bank financing. Some lending banks had announced they did not expect to continue providing services to correctional-facility operators, though they remained legally obligated under the current credit agreement.
Investor verification priorities
- Track ICE, U.S. Marshals, state, and local populations, occupancy, and per-diem rates as COVID-19 and court activity evolve.
- Verify the effect of lower occupancy and higher compensation, health, and staffing costs on segment margins and operating cash flow.
- Review revolver availability, debt maturities, covenant headroom, and refinancing access, particularly the 2022–2023 maturities.
- Assess dividend coverage and the board’s future distribution decisions against cash flows, REIT requirements, and debt restrictions.
- Monitor COVID-19-related impairment assumptions, government budgets, contract renewals, California AB32 litigation, and the detainee-labor and shareholder lawsuits.