CoreCivic, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial amounts below are in millions unless stated otherwise. CoreCivic is a REIT operating correctional, detention, residential reentry, and government-leased properties businesses. At quarter-end it owned and managed 67 facilities, managed seven more, and owned 12 properties leased to third parties.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $442.8 | $474.9 | $1,324.9 | $1,385.7 |
| Operating income | $60.8 | $74.0 | $195.1 | $216.1 |
| Net income | $41.2 | $55.3 | $136.7 | $159.2 |
| Diluted EPS | $0.35 | $0.47 | $1.15 | $1.35 |
| Operating margin | 13.7% | 15.6% | 14.7% | 15.6% |
| Operating cash flow | — | — | $264.1 | $301.2 |
- Q3 revenue fell 6.8%; operating income declined 17.8% and net income 25.6%. For the nine months, revenue fell 4.4%, operating income 9.7%, and net income 14.1%.
- Cash and equivalents were $42.7; current assets $304.1 and current liabilities $277.6, for working capital of $26.5. Cash provided by operations declined from $301.2 to $264.1 for the nine-month period. Investing used $81.8 and financing used $177.4.
- Gross debt was $1,429.5 ($1,411.2 long-term debt, net, on the balance sheet); total weighted-average effective interest rate was 4.2% and weighted-average maturity 3.8 years. Revolver availability was $476.1, after $417.0 drawn and $6.9 in letters of credit. The company reported compliance with debt covenants.
- Dividends declared were $0.42 per share in each of the first three quarters of 2017, versus $0.54 per share in comparable 2016 quarters. Nine-month dividends paid were $150.7.
- Nine-month Funds From Operations were $208.5 versus $229.6; Normalized FFO was $210.3 versus $233.0. These are supplemental non-GAAP measures, not substitutes for cash flow or net income.
Material changes and management commentary
- Management revenue declined 7.3% in Q3 and 4.8% year to date. Federal revenue fell 14.9% and 12.8%, respectively, principally reflecting lower revenue under the amended South Texas Family Residential Center agreement and contract/population changes at federal facilities. State revenue increased, partly offsetting the federal decline.
- Average compensated population fell 4.8% in Q3 to 63,656; average compensated occupancy was 79.2%, compared with 80.2% a year earlier. Revenue per compensated man-day also decreased, primarily due to the South Texas contract amendment.
- Facility net operating income declined at both owned-and-managed facilities ($115.7 versus $138.6 in Q3) and managed-only facilities ($3.7 versus $5.2). Management cited the South Texas agreement’s lower revenue and margin structure; managed-only per-day expenses rose faster than revenue.
- The BOP contract at Eden expired in April 2017, Bartlett State Jail closed in June, and CoreCivic lost the other three Texas managed-only contracts when they expired in August. The company reported eight idled correctional facilities with $216.3 of carrying value, excluding transferable equipment; it also idled Torrance in Q4 after consolidating its population into Cibola. Impairment reviews found recoverable values above carrying amounts at the facilities tested, but management gave no assurance of replacement contracts.
- Management described reentry and government-leased property acquisitions as part of its diversification strategy. 2017 acquisitions cost $27.5 in cash, excluding transaction costs and contingent consideration. It stated that it expected to meet cash requirements for the next year using available resources and did not intend to add prison capacity speculatively without better customer visibility. No specific earnings or revenue guidance was provided.
Outlook, risks, contingencies, and unusual items
- Risks include government appropriations and payment timing, contract renewals and population levels, policy changes affecting private corrections, and the ability to secure replacement customers for idle facilities. Federal customers represented about 47% of Q3 revenue and 48% year to date.
- California’s 2017–2018 budget anticipated reducing or eliminating out-of-state inmate placements; management warned that losing those populations could significantly affect results and cash flows. ICE may terminate the South Texas agreement for convenience or non-appropriation with 60 days’ notice; a lease termination fee could apply.
- Interest-rate exposure is material on variable-rate borrowings: a 100-basis-point rate change would have affected interest expense by $1.4 for Q3 and $4.1 for the nine-month period. The filing lists $802.0 of scheduled debt principal payments in 2020, largely reflecting the revolver and term loan maturity.
- After quarter-end, CoreCivic issued $250.0 of 4.75% senior notes due 2027 and used net proceeds to repay part of its revolving credit facility. It also acquired Time to Change, Inc. on November 1 for $13.2, with potential contingent consideration currently estimated at $9.0.
- Legal matters include a securities class action related to public statements and the 2016 DOJ policy announcement; the company said it believes the suit is without merit and is defending it. It reported $5.7 in accrued legal liabilities and stated no pending proceedings were expected by management to have a material effect, while noting litigation uncertainty. Self-insurance claims are another exposure; accrued employee health, workers’ compensation, and auto claims were $31.3.
- The company recorded $0.6 of asset impairments in the nine months, including a $0.3 goodwill write-off related to Bartlett. Adoption of share-based payment accounting guidance resulted in a $1.0 income tax benefit in the first nine months.
Important facts for investors to verify
- Whether federal and California population declines, and the South Texas agreement’s revised economics, continue to weigh on revenue and margins.
- Occupancy and replacement-contract prospects for Eden, Torrance, and the other idle facilities, including the recoverability assumptions supporting their carrying values.
- Cash generation relative to dividends, capital expenditures, acquisitions, and debt obligations, including the 2020 maturity concentration and post-quarter note refinancing.
- Exposure to government policy, contract termination or non-renewal, the South Texas ICE agreement, litigation, and self-insurance claims.
- Whether reentry and leased-property acquisitions deliver expected returns and diversification without adding integration or contingent-payment burdens.