Corrections Corporation of America (now CoreCivic): Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing is by Corrections Corporation of America (CCA), the company now known as CoreCivic. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context
CCA owned 47 correctional and detention facilities, including two leased to other operators, and operated 66 facilities across 20 states and the District of Columbia. Its approximately 90,000-bed capacity included owned-and-managed and managed-only facilities. The company was developing a 1,150-bed facility in Millen, Georgia, for expected completion in Q1 2012.
Financial performance and liquidity
- Q2 revenue: $432.8 million, up 5.6% from $409.9 million. Management and other revenue was $432.3 million; rental revenue was $0.6 million.
- Q2 operating income: $86.8 million, versus $78.2 million. Operating margin was approximately 20.0%, compared with 19.1%.
- Q2 net income and diluted EPS: $42.4 million and $0.39, versus $36.6 million and $0.32.
- First-half revenue: $860.9 million, up 5.5% from $815.7 million. Operating income was $170.2 million versus $150.8 million; net income was $82.7 million versus $71.5 million. Diluted EPS was $0.76 versus $0.62.
- Operating performance: Average compensated occupancy was 89.9% in both Q2 2011 and Q2 2010. Overall operating margin per compensated man-day increased to $18.69 from $17.99. Owned-facility margins improved, while managed-only margins rose to 16.8% from 12.2%.
- Cash flow: First-half operating cash flow was $189.3 million, versus $109.8 million. Investing used $38.2 million, primarily for capital expenditures; financing used $122.0 million, including debt repayments and share repurchases. Cash increased to $54.6 million from $25.5 million at year-end 2010.
- Debt and liquidity: Balance-sheet long-term debt was $1.104 billion at June 30, down from $1.157 billion at year-end. The $450 million revolver had $125.0 million drawn and $295.3 million available after letters of credit. Net working capital was $165.4 million. Management said it expected available resources to cover cash requirements for the next year. The revolver matures in December 2012; senior-note maturities include $375 million in 2013 and $150 million in 2014.
Changes versus the prior comparable period
- Revenue and earnings rose year over year, supported by higher compensated populations, new Florida managed-only contracts, expanded Georgia facilities, and the Nevada Southern Detention Center. Federal customers generated about 43% of first-half revenue; state revenue also increased.
- First-half cash from operations increased substantially, in part because of improved operating income and collection of past-due California receivables. Facility development and expansion spending fell to $21.9 million from $74.9 million in the first half of 2010.
- Prior-year 2010 results included discontinued-operation losses from the Gadsden and Hernando facilities, including goodwill impairment, and $4.1 million of staff bonuses. There were no discontinued-operation losses in 2011.
- CCA repurchased approximately 3.0 million shares during the first half for about $72.6 million in cash-flow-statement purchases and retirements. The board raised the total program authorization to $350 million and extended it through December 31, 2012.
Outlook, commentary, and risks
- Management expected 2011 facility maintenance and technology capital spending of $45–$50 million, plus approximately $52–$62 million for ongoing prison construction and potential land acquisitions. Expected 2011 income-tax payments were approximately $77–$78.1 million.
- The Georgia project was estimated to cost approximately $57 million, with $33.9 million remaining to complete at June 30. Its contract provides a 90% population guarantee after a 120-day ramp-up period.
- Wage increases for most employees in Q3 2011 were expected to raise operating costs in the second half and negatively affect margins; management did not expect per-diem increases and other cost controls to fully offset them.
- California’s court-ordered population reduction and the state’s planned realignment of responsibilities to local jurisdictions could reduce demand for CCA’s California-related beds. The existing agreement covering up to 9,588 beds was extended through June 2013, subject to appropriations; CCA reported that CDCR accounted for 13.8% of first-half management revenue.
- Five idle facilities had carrying values of $105.7 million. CCA was seeking customers for available beds but could not assure successful placement. Government budget constraints could also lead to lower populations, per-diem reductions, delayed payments, or nonrenewal of contracts.
- CCA reported $1.104 billion of debt carrying value and a $37.7 million outstanding principal balance on bonds covered by a debt-service-deficit agreement related to a Tennessee facility. Management said it was in compliance with revolver covenants. Legal proceedings and self-insured claims remain contingencies; management did not believe pending matters would materially affect the financial statements, while acknowledging adverse outcomes could occur.
Important facts for investors to verify
- Whether California’s population-reduction mandate and realignment change the demand, timing, or economics of CCA’s out-of-state beds and the proposed additional contract.
- Occupancy, per-diem rates, contract renewals, and customer funding, particularly for federal customers and contracts approaching expiration.
- Whether Q3 wage increases and other operating costs pressure margins more than management anticipated.
- Progress, cost to complete, and ramp-up of the Georgia facility, as well as utilization of idle and currently available beds.
- Liquidity, refinancing terms for the revolver due in 2012, debt maturities, and continued spending on share repurchases versus facility investment.
- Potential exposure from litigation, self-insurance reserves, and the Tennessee bond guarantee.