CoreCivic (then Corrections Corporation of America) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 7, 2014. Unless stated otherwise, financial amounts below are in millions of dollars. CCA was a REIT operating correctional facilities and related services. It reported 52 facilities owned or controlled and 12 government-owned facilities managed, with design capacity of approximately 84,500 beds.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $410.7 | $425.0 | $814.9 | $841.7 |
| Operating income | $65.5 | $68.0 | $128.6 | $127.9 |
| Net income | $55.7 | $20.4 | $107.5 | $201.5 |
| Diluted EPS | $0.48 | $0.19 | $0.92 | $1.91 |
| Operating margin | 16.0% | 16.0% | 15.8% | 15.2% |
Q2 revenue fell 3.4% year over year; first-half revenue declined 3.2%. First-half operating income edged up despite lower revenue, while first-half net income and EPS fell sharply against a prior-year period that included a $137.7 million tax benefit from the REIT conversion. Q2 2014 net income also benefited from the absence of substantial prior-year debt-refinancing charges. The 2014 quarter included a $2.2 million impairment charge for the Houston Educational Facility.
- Cash flow: First-half operating cash flow was $133.9, down from $182.9 in 2013. Investing cash outflow was $41.9, including $48.6 of capital expenditures; financing cash outflow was $123.3, principally reflecting $115.5 of dividends. Cash declined by $31.3 to $46.6.
- Liquidity: Net working capital was $90.4. CCA reported $363.7 available on its $900 million revolving credit facility, after $520 million of borrowings and $16.3 million of letters of credit. Management expected available resources to cover cash needs for the next year.
- Debt: Total debt was $1.195 billion, comprising $520 million drawn on the revolver and $675 million of fixed-rate senior notes due 2020 and 2023. Weighted-average effective interest rate was 3.7%; no scheduled principal maturities were due before December 2017. CCA reported compliance with credit-facility covenants.
- Dividends: Regular dividends declared were $0.51 per share in each of the first two quarters of 2014. No special dividend was declared in 2014; the $6.66-per-share 2013 special dividend related to the REIT conversion.
Material changes and operating trends
- Average compensated population declined to 71,014 in Q2 from 76,956 a year earlier; average compensated occupancy fell to 84.9% from 86.2%. Lost populations reflected the Florida contract expirations, idled facilities, and the transition of California inmates from Red Rock ahead of the Arizona contract.
- Federal-customer revenue declined 5.1% in Q2; state-customer revenue declined 7.3%. Federal customers generated approximately 43% of Q2 revenue.
- Facility net operating income declined: owned-and-managed facilities generated $112.3 in Q2 versus $114.0; managed-only facilities generated $6.5 versus $10.5. Managed-only operating margin fell to 10.7% from 13.9%, with higher per-day variable costs, including medical costs, contributing.
- First-half operating expenses decreased to $575.0 from $602.2, partly reflecting facilities whose contracts ended or were idled. Operating income per compensated man-day improved to $18.16 from $17.75 for the first half, although average population and available beds were lower.
- CCA early adopted new discontinued-operations accounting guidance. The 2014 expirations of three Florida contracts and the Idaho contract were not classified as discontinued operations; prior-period qualifying discontinued operations remained separately reported.
Outlook, risks, and unusual items
- Management estimated an annual effective tax rate of approximately 5%–7%. It expected the revolving-credit rate to remain at LIBOR plus 1.75% for the remainder of 2014.
- CCA said it believed it would renew other contracts expiring within the following 12 months, but contract renewals, government appropriations, occupancy, per-diem rates, and public-sector budget decisions remain important uncertainties. Management cited potential population reductions, transfers, rate cuts, and reduced use of private beds.
- Projects included the 1,492-bed Otay Mesa facility, estimated at $156–$160 million total cost, and the 2,552-bed Trousdale County facility, estimated at $140–$145 million with completion expected in Q4 2015. The Tennessee intergovernmental agreement was finalized in July 2014 and provides a minimum monthly payment plus per-diem payments under specified occupancy and ramp-up terms.
- Nine facilities were idle, with aggregate carrying value of $153.2 million excluding transferable equipment. CCA recorded a $2.2 million impairment after negotiating a potential $4.5 million sale of the Houston facility; it expected to sign an agreement in Q3 and close in Q4 2014. The other idle facilities remained subject to utilization and impairment uncertainty.
- CCA reported a $1.0 million settlement with Idaho over staffing-related contractual disputes. It also disclosed an FBI investigation and additional government inquiries concerning Idaho Correctional Center matters. Management said no pending proceedings were expected to have a material effect, while acknowledging adverse outcomes could materially affect results in the period incurred.
- CCA guaranteed debt-service deficits on Hardeman County facility bonds, with $23.9 million principal outstanding plus future interest. Other risks include REIT qualification, variable-rate debt exposure, construction costs and timing, self-insured claims, and dependence on government customers.
Important facts for investors to verify
- Whether occupancy and revenue recover after contract losses, and the timing and economics of new or renewed government contracts.
- Progress, total funding needs, and customer commitments for Otay Mesa and Trousdale County; the filing’s stated cost estimates and completion dates.
- Whether the Houston sale closes as anticipated and whether other idle facilities require further impairment or generate new business.
- Developments in the Idaho investigation, related claims, and the financial exposure under the Hardeman County guarantee.
- Cash generation, dividend sustainability, REIT distribution requirements, and the effect of variable interest rates and contract-related funding delays.