CoreCivic, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2018; filed August 8, 2018. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties. At quarter-end it operated 51 correctional and detention facilities, 26 reentry centers, and owned 13 properties leased to third parties. The company is structured as a REIT, with taxable REIT subsidiaries conducting certain operating businesses.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $449.9 million | $436.4 million | $890.8 million | $882.1 million |
| Operating income | $61.7 million | $65.3 million | $120.4 million | $134.3 million |
| Net income | $39.2 million | $45.5 million | $77.0 million | $95.5 million |
| Diluted EPS | $0.33 | $0.38 | $0.65 | $0.81 |
| Cash from operations | — | $183.7 million | $182.8 million |
Consolidated operating margin was approximately 13.7% for Q2 and 13.5% for the first half, versus approximately 15.0% and 15.2%, respectively, in 2017. Facility operating margin per compensated man-day was 26.5% in Q2 and 25.9% for the first half, compared with 27.2% and 27.0%. Average compensated occupancy was 80.2% in Q2 and 79.9% for the first half.
At June 30, cash and cash equivalents were $71.4 million, with $5.2 million restricted cash. Current assets of $339.4 million exceeded current liabilities of $284.3 million; reported net working capital was $55.1 million. Total debt was $1.508 billion, including $1.488 billion of long-term debt, net. The company had $682.3 million available under its revolving facility after borrowings and letters of credit. It reported a 4.9% total weighted-average effective interest rate and 5.1-year weighted-average debt maturity. Dividends declared were $0.43 per share per quarter.
Material changes versus prior comparable periods
- Q2 revenue increased 3.1%, while net income fell 13.8%; first-half revenue rose 1.0%, while net income declined 19.4%. Higher per-diem revenue and growth in Community and Properties were offset by lower compensated populations and higher costs.
- Revenue per compensated man-day increased to $76.19 in Q2 from $71.90, but expenses per day rose to $56.00 from $52.37. Management cited wage pressure, medical and legal costs, start-up costs, and operating inefficiencies at certain facilities.
- Safety remained the largest segment, but its first-half revenue declined 1.2% and facility net operating income declined 4.8%. Community revenue rose 43.0% and Properties revenue rose 18.7%, reflecting acquisitions and expansion.
- Interest expense, net, increased to $19.0 million in Q2 from $16.6 million and to $38.1 million for the first half from $33.1 million. The company attributed the increase primarily to higher LIBOR, debt issued in late 2017, and new mortgage borrowings.
- Operating cash flow was broadly stable year over year. Investing cash outflow increased to $96.1 million from $43.2 million, including $50.5 million for acquisitions and $44.1 million for capital expenditures. Financing cash outflow was $63.2 million, including $102.1 million of dividends paid.
Outlook, commentary, risks, and unusual items
Management said it expected to meet cash expenditure requirements for the next year using available liquidity and noted there were no debt maturities until April 2020. It expressed confidence in renewing material contracts expiring within the next 12 months, while cautioning that renewals are not assured. It also expected additional acquisitions in the second half of 2018; no specific earnings or revenue guidance was provided.
The April 2018 credit agreement refinanced the prior facility, extended maturity to April 2023, and increased the maximum total leverage covenant from 5.0x to 5.5x. CoreCivic reported compliance with its covenants at quarter-end. Lansing, Kansas facility construction was underway under a 20-year lease arrangement; estimated project cost was $155–$165 million and completion was expected in approximately 24 months.
California’s 2018–19 budget contemplated ending use of out-of-state prison beds. All California inmates had left Tallahatchie by June 30, and the state anticipated removing inmates from La Palma by January 2019. CoreCivic announced replacement contracts for Tallahatchie and, in July, an ICE agreement for La Palma, but the latter is terminable by either party on 90 days’ notice. Management also cited governmental appropriations and payment timing, contract renewals and terminations, occupancy, labor and medical costs, public policy, financing, construction execution, REIT qualification, and acquisition integration as risks.
Unusual items included a $1.6 million impairment charge on property held for sale and $1.0 million of debt-refinancing costs. Adoption of a tax accounting standard reduced accumulated deficit by approximately $2.6 million; adoption of the revenue standard was reported to have no material financial impact. Eight correctional facilities remained idle, with $238.7 million of carrying value; management reported no impairment based on its analyses, but noted future impairment remains possible. A securities class action related to prior company disclosures remained pending; the court had denied the company’s motion to dismiss, and CoreCivic said it would defend the case. Management reported $13.5 million in accrued legal liabilities and stated that no pending proceeding was expected to have a material effect, while acknowledging litigation uncertainty.
Most important facts for investors to verify
- Whether population trends, facility starts and shutdowns, and contract renewals support revenue and occupancy—particularly at Tallahatchie, La Palma, Northeast Ohio, and Lee Adjustment Center.
- Whether higher per-diem revenue can offset wage, medical, legal, and other operating-cost inflation, and whether segment margins recover.
- Debt levels, variable-rate exposure, covenant headroom, the 2020 note maturity, and funding and completion risks for the Lansing project.
- Dividend sustainability relative to cash generation, REIT distribution requirements, capital spending, acquisitions, and debt service.
- Outcomes of the securities litigation and other contingencies, and whether idle-facility carrying values remain recoverable.