Corrections Corporation of America (now CoreCivic, Inc.) — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013, compared with the same period in 2012. The filing reports results under the name Corrections Corporation of America (CCA).
Business context
CCA owned or controlled 51 of the 67 correctional and detention facilities it operated, with approximately 92,500 beds across 20 states and the District of Columbia. Effective January 1, 2013, the company began operating as a REIT for federal income-tax purposes, conducting correctional services and certain other activities through taxable REIT subsidiaries (TRSs).
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $425.7 million | $435.3 million |
| Operating income | $59.3 million | $69.5 million |
| Income before taxes, continuing operations | $46.4 million | $51.1 million |
| Net income | $181.1 million | $31.7 million |
| Diluted EPS | $1.78 | $0.32 |
| Cash from operating activities | $96.9 million | $68.3 million |
| Capital expenditures | $10.8 million | $21.5 million |
- Q1 2013 net income included a $137.7 million tax benefit tied to the REIT conversion and remeasurement of deferred taxes; it is not a measure of recurring operating improvement. Excluding that benefit and certain other tax items, the company reported an approximately 8.0% effective tax rate for Q1 2013 versus 37.3% in Q1 2012.
- Operating margin was approximately 13.9% of revenue, compared with 16.0% a year earlier. Facility operating margin per compensated man-day was 28.6%, versus 28.4%; average compensated occupancy fell to 85.9% from 88.7%.
- Normalized FFO, a company-presented non-GAAP measure, was $70.8 million versus $52.0 million. Reported FFO was $200.8 million versus $51.0 million, heavily affected by the REIT-related tax benefit. The company cautions that FFO is not a measure of cash flow or liquidity.
- At March 31, cash was $60.3 million, net working capital was $99.9 million, and $314.3 million was available on the revolving credit facility. Long-term debt was $1.017 billion, down from $1.112 billion at December 31, 2012. The company reported compliance with its credit-facility covenants.
- Q1 financing activity included $95.0 million of net debt principal repayments. Cash declined by $2.6 million during the quarter to $60.3 million.
Material changes and significant events
- Revenue declined 2.2%, primarily reflecting lower average compensated population and approximately $12 million from one fewer operating day than in leap-year 2012. Average compensated population declined to 79,418 from 80,781; U.S. Marshals Service populations were approximately 9,500 versus 11,200.
- Operating expenses fell to $307.5 million from $315.5 million, largely with lower inmate populations. General and administrative expense rose to $31.2 million from $21.8 million, including $8.1 million of REIT-conversion costs; management expected up to a further $5.7 million in conversion-related G&A expense during the rest of 2013.
- Interest expense, net, declined to $12.6 million from $16.9 million, reflecting prior-year repayment of higher-rate notes. The March 2013 amendment increased revolving-facility commitments to $900 million and extended maturity to December 2017.
- After quarter-end, on April 4, CCA issued $325 million of 4.125% notes due 2020 and $350 million of 4.625% notes due 2023, and accepted $315.4 million of its 7.75% notes in a tender offer. It planned to redeem the remaining 7.75% notes on June 1. The filing estimated $36.5 million of Q2 charges for the tender and redemption.
- The board declared a $675 million special dividend on April 8, approximately $6.63 per share, to meet the distribution requirement for pre-REIT accumulated earnings and profits. Shareholders could elect cash or stock, but cash was capped at $135 million; payment was expected May 20. The Q1 quarterly dividend was $0.53 per share, compared with none in Q1 2012.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said it expected to meet cash requirements for the next year using available liquidity and operating resources, and expressed a long-term expectation of demand for additional private correctional capacity. Results are subject to government funding, occupancy, contract awards and renewals, and budget decisions.
- Federal customers generated about 42% of Q1 revenue, down from 43%; federal revenue declined 5.9% to $178.2 million. Management cited sequestration and state budget pressures as risks that could lead to lower populations, rate reductions, inmate transfers, or delayed payments.
- California’s population-reduction litigation and realignment could affect out-of-state inmate placements. CCA housed approximately 8,500 California inmates at quarter-end, and CDCR contributed approximately 12% of Q1 revenue. Management said a return of these inmates to California would materially harm financial results and cash flows; the long-term effect remained uncertain.
- Contracts at six facilities were subject to near-term renewal or procurement uncertainty involving Florida, Mississippi, and Texas. The company reported $0.6 million of aggregate operating income at those facilities in Q1 and said it could not assure contract retention.
- CCA had seven idled facilities with $130.9 million of carrying value and $29.0 million invested in the suspended Trousdale County, Tennessee project. Management reported no impairment but cautioned that utilization and recoverability are uncertain. Planned investment included an estimated $170–$175 million for a replacement San Diego facility and approximately $20 million of Red Rock improvements for Arizona inmates.
- Legal proceedings are typical of the business; management said no pending proceeding was expected to have a material effect, while acknowledging uncertain outcomes. Accrued legal liabilities were $7.9 million and self-insurance liabilities were $33.7 million. CCA also had a debt-service-deficit guarantee related to Hardeman County bonds with $28.8 million outstanding principal.
Most important facts for investors to verify
- How much of reported earnings and EPS reflects the one-time REIT-related tax benefit, and how sustainable are normalized FFO and operating performance?
- Whether government budget actions, federal population declines, California policy and court orders, and contract renewals change occupancy, rates, or facility utilization.
- The final cash-versus-stock composition and share dilution from the $675 million special dividend, alongside ongoing REIT distribution requirements and liquidity needs.
- Completion and economics of the 7.75% note redemption and refinancing, including the expected Q2 charges and resulting debt, interest costs, and maturity profile.
- Whether planned San Diego and Red Rock investments proceed on budget and whether CCA retains the populations and contracts expected to support them.