CoreCivic, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. CoreCivic operates correctional and detention facilities (Safety), residential reentry centers (Community), and government-leased properties (Properties). At quarter-end, it operated 45 Safety facilities, 24 Community centers, and owned 10 Properties-segment properties.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $456.7m | $464.6m | $909.7m | $919.3m |
| Operating expenses | $349.0m | $333.1m | $693.6m | $666.0m |
| Net income (loss) | $10.6m | $15.6m | $29.6m | ($109.9m) |
| Diluted EPS | $0.09 | $0.13 | $0.24 | ($0.92) |
| Operating cash flow | Not provided for the quarter | $94.3m | $82.3m | |
| Cash, cash equivalents and restricted cash | At June 30: $127.4m, including $115.6m unrestricted cash | At June 30, 2021: $171.8m |
Q2 total revenue fell 1.7%; six-month revenue fell 1.0%. Revenue per compensated man-day rose, but lower compensated populations and higher operating costs weighed on results. Average compensated occupancy was 69.5% in Q2 versus 71.6% a year earlier. Operating margin per compensated man-day declined to 22.2% from 26.8% in Q2 and to 22.3% from 26.0% for the six-month period.
Q2 facility net operating income (NOI) was $107.7m, down from $131.6m. For the six months it was $216.2m, down from $253.5m. Safety NOI declined to $92.1m from $112.6m in Q2 and to $185.3m from $216.9m for six months. Community six-month NOI improved to $8.4m from $7.5m; Properties NOI fell to $22.5m from $29.0m.
Six-month net income compared favorably with the prior-year loss mainly because 2021 included a $114.2m tax charge associated principally with revoking REIT status and $54.3m of shareholder-litigation expense. Q2 2022 results included $6.8m of debt repayment/refinancing expense and $1.9m of derivative-litigation expense; the six-month period also included $3.3m of real-estate sale gains.
Balance sheet, debt and liquidity
- Total assets were $3.28bn at June 30, 2022, compared with $3.50bn at December 31, 2021. Stockholders’ equity was $1.37bn.
- Total debt principal was $1.35bn, down from $1.55bn at year-end 2021. Reported current debt was $180.4m and long-term debt, net, was $1.15bn. Weighted-average effective interest rate was 6.9%; weighted-average maturity was 5.3 years.
- In May, CoreCivic replaced its $1.0bn prior bank facility with a $350m facility: a $100m term loan and a $250m revolver, extending bank-facility maturity to May 2026. The revolver had no borrowings; $233.2m was available after letters of credit. The company reported compliance with financial covenants.
- CoreCivic repaid the $124.1m Term Loan B in May using cash and repaid $167.5m on its prior Term Loan A in connection with the refinancing. The $170.1m 4.625% notes mature in May 2023; management said it expects sufficient liquidity to repay them.
- Cash from investing was a $22.7m use in the first half, including $34.1m of cash capital spending and $11.0m of net asset-sale proceeds. Financing used $254.9m, including debt repayments and $40.2m for share repurchases. Cash and restricted cash decreased $183.3m during the period.
Business changes and management outlook
- Average compensated population fell 5.1% in Q2 and 3.2% for the six-month period. Drivers included expired USMS contracts, the Marion County contract termination, and conversion of the Northwest New Mexico facility from management operations to a lease.
- State revenue increased, supported by per-diem increases and Arizona’s new contract at La Palma. The population transfer from ICE to Arizona was underway and expected to finish in Q1 2023; at full utilization, management expects annualized La Palma revenue of approximately $75m–$85m. The transition is expected to disrupt earnings and cash flow until occupancy stabilizes.
- Management cited labor shortages, wage increases, registry nursing costs and inflation as pressures. Salaries and benefits represented approximately 59% of operating expenses in the first half. Per-diem increases, including further inflation-linked increases expected in the second half, may partly offset cost inflation.
- On July 25, CoreCivic agreed to sell McRae Correctional Facility to the Georgia Building Authority for $130m and lease it back through November 30, 2022. The sale was expected to close in Q3, with an estimated gain of $75m–$80m. The BOP contract expires in November and is not expected to be renewed. Two other property sales completed in July were expected to generate $15.6m net proceeds in total.
- The board authorized a $150m share-repurchase program in May and increased it to $225m on August 2, after quarter-end. By June 30, approximately 3.0m shares had been repurchased for $37.5m. The company said it expects to meet cash needs using cash, operating cash flow and revolver availability; no formal earnings guidance is stated in the supplied filing text.
Risks, contingencies and unusual items
- The Private Prison Executive Order directs DOJ not to renew BOP contracts. USMS contracts are also exposed to nonrenewal risk; the company reported USMS and BOP represented 23% and 2% of 2021 revenue, respectively. A local-government contract allowing USMS use of Tallahatchie capacity was renewed in Q3 2022 through June 2024.
- ICE exposure is significant: ICE generated $268.3m of first-half 2022 revenue. Title 42 and the Migrant Protection Protocols remained subject to policy and litigation developments, making detention demand uncertain. Management noted possible future government action affecting private ICE facilities.
- California’s AB32 litigation could affect the Otay Mesa ICE contract, scheduled to expire in December 2024; the Ninth Circuit reheard the matter en banc and a decision was pending.
- Six derivative lawsuits related to prior securities litigation remained pending. The parties expected to seek court approval of a settlement; CoreCivic recorded $1.9m of Q2 expense and expected its reserve to cover the settlement. A separate ICE detainee labor class action had been certified, with the Ninth Circuit affirming class certification in June; the company could not estimate a loss.
- Seven Safety facilities were idle at quarter-end, with aggregate carrying values of approximately $198.6m. Management reported that estimated undiscounted cash flows exceeded carrying values, but assumptions depend on future use or sale. Self-insurance, litigation and contract-performance claims also create exposure.
Important facts for investors to verify
- Progress and occupancy ramp at La Palma, expected completion timing, and whether projected annualized revenue converts into improved NOI.
- Renewal, replacement or termination outcomes for federal contracts, including the BOP McRae expiration, USMS contracts and developments affecting ICE demand.
- Staffing levels, registry-nursing costs, vacancy deductions and whether per-diem increases keep pace with labor and other inflation.
- Completion and proceeds of announced property sales, and the balance of share repurchases relative to debt repayment and liquidity needs.
- Debt repayment capacity ahead of the May 2023 notes maturity, covenant headroom, and exposure to variable interest rates.
- Developments in the detainee labor and derivative litigation, as well as the California AB32 appeal.