CoreCivic, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. CoreCivic is a REIT operating correctional, detention, residential reentry, and government real estate businesses. At year-end it owned and managed 70 facilities, managed seven government-owned facilities, and owned 12 properties leased to third parties, with approximately 78,000 beds across 19 states.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1.765 billion | $1.850 billion | Down 4.6% |
| Operating income | $260.4 million | $296.4 million | Down 12.2% |
| Net income | $178.0 million | $219.9 million | Down 19.0% |
| Diluted EPS | $1.50 | $1.87 | Down 19.8% |
| Cash from operations | $341.3 million | $375.4 million | Down 9.1% |
| FFO / Normalized FFO | $274.3 million / $281.6 million | $314.3 million / $317.6 million | Both lower |
- Operating expenses were $1.250 billion, down 2.0%; general and administrative expense was $107.8 million, nearly flat. Depreciation and amortization fell to $147.1 million from $166.7 million.
- For operated facilities, revenue per compensated man-day was $73.14 versus $74.77; operating expense per man-day was $52.91 versus $53.74. Operating margin declined to 27.7% from 28.1%. Average compensated occupancy rose to 79.6% from 78.8%; excluding idled facilities, owned-and-managed occupancy was 89%.
- Owned-and-managed facility net operating income fell 10.0% to $481.8 million; managed-only facility net operating income fell to $17.0 million from $21.8 million.
- Year-end cash was $52.2 million, revolver availability was $694.1 million, and net working capital was $36.7 million. Management said it expected available resources to meet cash needs for the next year.
- Principal debt was $1.459 billion; balance-sheet debt net of issuance costs was $1.447 billion. Weighted-average effective interest rate was 4.7%, average maturity 4.8 years, fixed-charge coverage 5.6x, and debt leverage 3.6x. The company reported compliance with debt covenants.
- October 2017 issuance of $250 million of 4.75% notes due 2027 was used principally to reduce variable-rate revolver borrowings. The revolver and term loan mature in July 2020; scheduled debt payments include $584 million in 2020.
- Dividends declared were $1.68 per share for 2017, down from $2.04 in 2016; the board declared a first-quarter 2018 dividend of $0.43 per share. The REIT must generally distribute at least 90% of REIT taxable income.
Material changes versus prior year
- Revenue declined primarily because the amended South Texas Family Residential Center agreement reduced 2017 revenue at the facility by $96.7 million versus 2016. Total facility revenue there was $170.6 million, compared with $267.3 million.
- Federal management revenue fell 12.0% to $839.9 million, while state revenue increased 2.4% to $727.8 million and local revenue rose 14.1% to $89.1 million. Federal customers represented 48% of total revenue versus 52% in 2016.
- Average compensated population decreased 2.5% to 64,439. Contract expirations and lower federal and California populations offset new Ohio business, facility expansions, and acquisitions.
- 2017 results included a $4.5 million tax charge related to the Tax Cuts and Jobs Act. The 2016 comparison included $4.0 million of restructuring charges.
- Cash from operations declined, while cash used in investing was $124.6 million, including $73.7 million of capital expenditures and $48.9 million for acquisitions.
Outlook, commentary, and principal risks
- No formal earnings or revenue guidance is provided in the supplied filing text. Management describes long-term opportunities in filling available capacity, community reentry services, government-leased real estate, and selective development and acquisitions. Approximately 9,800 beds at eight prison facilities were vacant and immediately available at year-end.
- A Kentucky contract for the previously idled 816-bed Lee Adjustment Center began in November 2017; the company expected populations to arrive toward the end of the first quarter of 2018. The 20-year Kansas facility lease announced in January 2018 involves construction of a 2,432-bed facility, with estimated project cost of $155 million to $165 million and expected completion in about 24 months.
- California proposed eliminating out-of-state contract beds, potentially removing inmates from one facility by the end of fiscal 2017–2018 and the other by fall 2019. Complete removal could materially affect results. The company also faces uncertainty around ICE family detention policy and the South Texas contract.
- Customer and policy exposure is substantial: ICE generated 25% of 2017 revenue, USMS 16%, and BOP 7%. Government contracts are often subject to appropriations and may be terminated without cause. Of 43 contracts scheduled to expire on or before December 31, 2018, associated 2017 revenue was $640.4 million; management believed material contracts expiring in the following 12 months would be renewed, but gave no assurance.
- Other key risks include occupancy and population declines, privatization opposition and regulation, wage and healthcare inflation, self-insurance claims, facility idling and impairment, variable interest rates, refinancing and covenant risks, REIT qualification and distribution requirements, and acquisition integration.
- A securities class action related to prior company disclosures about private-prison operations remained pending; the court denied the company’s motion to dismiss in December 2017. The company said it considered the suit meritless and intended to defend it. Accrued litigation liabilities were $7.8 million at year-end.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether federal and state populations, utilization, and contract renewals support recovery in revenue and facility margins, particularly following the South Texas contract reduction.
- Timing and scale of California’s planned withdrawal of out-of-state inmates, and any changes to ICE detention policy or the South Texas agreement.
- Execution and returns from the Kansas development, Ohio contract ramp-up, reentry acquisitions, and efforts to fill available and idled capacity.
- Ability to service and refinance debt, especially the 2020 maturities, while funding dividends and growth; monitor variable-rate exposure and covenant headroom.
- Whether reported cash generation and normalized FFO support the dividend, and how REIT distribution needs interact with capital investment and debt reduction.
- Developments in the securities class action, other litigation, self-insurance reserves, and any impairment indicators for the eight idled facilities carrying $242.1 million in net assets.