CoreCivic, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless otherwise noted, financial amounts below are in millions of dollars. CoreCivic operates correctional and detention facilities (Safety), residential reentry services (Community), and government-leased properties (Properties).
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $468.3 | $508.5 | $1,432.0 | $1,482.9 |
| Operating income | $45.2 | $71.1 | $143.4 | $215.3 |
| Net income attributable to common stockholders | $26.7 | $49.0 | $81.0 | $146.9 |
| Diluted earnings per share | $0.22 | $0.41 | $0.68 | $1.23 |
| Cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $281.5 | $304.1 |
- Q3 operating margin was approximately 9.6%, compared with 14.0% a year earlier; nine-month operating margin was approximately 10.0%, versus 14.5%. Facility operating margin per compensated man-day was 23.8% for Q3 and 24.0% year to date, down from 26.2% and 27.2%, respectively.
- At September 30, cash and cash equivalents were $282.5; including restricted cash, cash totaled $293.7. The company also reported $329.2 available under its revolving credit facility. Current assets were $594.0 and current liabilities $317.4.
- Total debt outstanding was $2.106 billion, up from $1.987 billion at December 31, 2019. The balance sheet reported $2.044 billion of long-term debt, net, plus $38.6 million current portion. Weighted-average effective interest rate was 4.2%; weighted-average maturity was 5.4 years. The company reported covenant compliance.
- Cash used in investing activities was $63.4 for the nine months, including $26.6 of development and expansion spending, $33.5 of other capital improvements, and $8.8 for acquisitions, partly offset by asset-sale proceeds. Financing activities used $43.5, including $106.0 of dividends paid and $23.7 of scheduled principal repayments; net borrowing activity also affected this amount.
Material changes versus comparable periods
- Q3 revenue declined 7.9% and nine-month revenue declined 3.4%. Management attributed lower management revenue principally to reduced compensated populations, with COVID-19-related border restrictions and criminal-justice disruptions among the causes. Average compensated population fell 14.9% in Q3 and 9.8% for the nine-month period.
- Higher revenue per compensated man-day, up 6.9% in Q3 and 5.9% year to date, partly offset lower populations. Lower occupancy also reduced operating costs, but expenses per compensated man-day increased, including from higher staffing costs and pandemic-related expenses.
- Safety segment revenue fell 8.3% in Q3 and 3.8% year to date; its facility net operating income fell 15.9% and 14.6%, respectively. Community revenue fell 22.0% and 12.4%, while its facility net operating income fell 55.5% and 39.5%. Properties revenue rose 21.7% and 19.3%, mainly reflecting acquired properties and commencement of leases at Lansing and Southeast Correctional Complex.
- Operating cash flow was $281.5 for nine months, down from $304.1. Cash and cash equivalents increased to $282.5 from $92.1 at year-end, supported in part by financing activity and lower investment spending compared with 2019.
Outlook, management commentary, risks and unusual items
- Capital allocation and tax status: The board suspended and discontinued the quarterly dividend and plans to revoke CoreCivic’s REIT election and become a taxable C corporation effective January 1, 2021. Management intends to prioritize free cash flow toward debt reduction, then consider shareholder returns and growth. The company expects a material deferred-tax charge when it completes the REIT revocation actions, currently anticipated in Q1 2021; the amount had not been estimated. It expects to pay federal and state income taxes as a C corporation and will lose the dividends-paid tax deduction.
- No numerical earnings guidance: The filing does not provide a clear numerical forecast for full-year revenue, earnings, or cash flow. Management said it expects sufficient liquidity for the next year from cash and revolver availability and does not currently anticipate a short-term capital-markets need. It is exploring sales of non-core real estate but gives no assurance that sales will occur.
- COVID-19 and demand: COVID-19-related border restrictions, court and prosecution disruptions, releases or transfers of residents, and government budget pressure reduced populations and referrals. The company reported $2.8 of incremental COVID-related expenses in Q3 and $11.0 for nine months, including $6.3 of staff incentive payments in Q2. Management said the duration and financial effects remain uncertain.
- Contracts and facilities: Cimarron Correctional Facility began a new U.S. Marshals Service contract in September; management expects annual revenue of about $30 at current utilization, but performance depends on occupancy. The company expects to transition operations at Metro-Davidson County in October 2020 and Silverdale in December 2020 following contract terminations. The BOP awarded Oklahoma reentry work in Q4, and CoreCivic expects to reactivate Turley in Q1 2021. The South Texas Family Residential Center agreement was extended to 2026, but ICE retains termination-for-convenience and non-appropriation rights on 60 days’ notice.
- Unusual charges and gains: Q3 and nine-month results included $0.8 and $13.1 of asset impairments, $4.7 and $5.0 of costs associated with the corporate tax-structure change, and $2.8 and $11.0 of COVID-related expenses. Nine-month results also included $3.1 of deferred tax expense related to the Lansing lease structure. The company recorded gains on asset sales of $2.1 in Q3 and $4.9 year to date. 2019 comparisons included a $4.1 after-tax contractual settlement gain in Q3 and start-up costs for previously idled facilities.
- Legal and regulatory risks: A class action concerning detainee labor was certified for specified claims and classes; the company disputes the allegations. A shareholder securities class action is in discovery, with trial scheduled for May 2021. The filing says outcomes cannot be reasonably predicted and no accrual was recorded for these lawsuits. California’s AB32 ruling may restrict future BOP and ICE contracts or renewals, potentially affecting Otay Mesa; appeals were possible.
- Other risk exposures: CoreCivic is substantially self-insured and had $47.1 of accrued employee health, workers’ compensation, and auto claims. It had $8.9 of accrued legal liabilities for other matters. Some lending banks have announced they may not continue financing private correctional and detention operators after their existing commitments expire; the revolving facility matures in April 2023.
Important facts for investors to verify
- Whether population levels and revenue recover, particularly for ICE, U.S. Marshals, state customers, and Community services, and whether pandemic-related restrictions persist.
- Actual progress on the January 2021 REIT-to-C-corporation transition, the deferred-tax charge, debt reduction, and any future shareholder distributions.
- Utilization and economics of the Cimarron contract, Oklahoma reentry award, and other new or renewed contracts; completion of the Metro-Davidson and Silverdale transitions.
- Liquidity, debt maturities and refinancing plans—especially the scheduled 2023 principal maturities—and ongoing compliance with credit covenants.
- Potential impairment exposure among idle facilities, the outcome of material litigation, and the impact of California AB32 and other policy or regulatory changes.