CoreCivic, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. CoreCivic, formerly Corrections Corporation of America, rebranded in 2016 and operates as a REIT through three offerings: corrections and detention management, government real estate, and community reentry.
Business and operating context
At year-end, the company owned or controlled correctional, detention, and reentry facilities and managed 11 government-owned facilities, with approximately 89,700 beds of design capacity. Revenue is primarily earned under government contracts, often on per-diem rates tied to occupancy. Federal agencies generated 52% of FY2016 revenue; ICE alone accounted for 28%.
Financial and operating metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,849.8 million | $1,793.1 million |
| Operating income | $296.4 million | $280.6 million |
| Net income | $219.9 million | $221.9 million |
| Diluted EPS | $1.87 | $1.88 |
| Cash from operating activities | $375.4 million | $399.8 million |
| Average compensated occupancy | 79% | 83% |
| Facility operating margin per compensated man-day | 28.1% | 27.9% |
Fourth-quarter 2016 revenue was $464.1 million, operating income $80.4 million, net income $60.7 million, and diluted EPS $0.52. In fourth-quarter 2015, these were $447.8 million, $66.5 million, $48.6 million, and $0.41, respectively.
- Annual revenue rose 3.2%, supported by higher average revenue per compensated man-day, facility activation, and acquisitions. Federal revenue rose 4.7%; state revenue fell 2.0%, principally reflecting fewer California inmates housed out of state.
- Operating expenses increased 1.5% to $1,275.6 million. Depreciation and amortization rose to $166.7 million from $151.5 million; net interest expense rose to $67.8 million from $49.7 million.
- Operating cash flow declined about 6% year over year, which management attributed mainly to working-capital timing and lower deferred revenue associated with the South Texas Family Residential Center.
- Year-end cash was $37.7 million; net working capital was $26.6 million. Gross principal debt was $1.455 billion, with $455.9 million available on the revolver. Weighted-average effective interest rate was 4.0%; weighted-average debt maturity was 4.5 years. The company reported 3.4x debt leverage and 6.8x fixed-charge coverage.
- Capital expenditures were $93.4 million, including $41.8 million for development and expansions. Dividends declared totaled $2.04 per share, down from $2.16 in 2015; the quarterly dividend was reduced from $0.54 to $0.42 for the fourth quarter.
Material changes, outlook, and risks
- The DOJ directed the BOP to decline renewal or substantially reduce the scope of private-prison contracts as they expire. CoreCivic renewed McRae for two years, but two other BOP contracts due to expire within 12 months represented $91.4 million of 2016 revenue and had $144.5 million of carrying value.
- Management expected South Texas Family Residential Center revenue to decline approximately 40% in 2017 under amended, lower-payment terms. That facility generated $267.3 million in 2016 revenue; ICE can terminate the agreement for convenience or non-appropriation with 60 days’ notice.
- California’s proposed 2017–2018 budget contemplated removing inmates from one of CoreCivic’s remaining out-of-state facilities; the state anticipated returning any remaining inmates by 2020. California revenue had already fallen to 6% of total revenue in 2016 from 10% in 2015.
- Management announced a corporate restructuring, including elimination of approximately 12% of headquarters positions. The $4.0 million charge was expected to yield approximately $9.0 million in annual expense savings, most of which are general and administrative savings.
- Other material contract exposures included the Houston ICE contract scheduled to expire in April 2017 and four Texas managed-only contracts scheduled to expire in August 2017. The District of Columbia assumed operation of its facility in January 2017.
- Management cited possible growth from filling available beds, new contracts, acquisitions, and reentry services, but said it preferred better utilization and customer visibility before speculative prison capacity investment. No specific company-wide 2017 earnings guidance is provided in the supplied filing text.
- Risks include dependence on government appropriations and a small group of customers, occupancy and contract-renewal uncertainty, policy or legal changes affecting detention and privatization, labor and self-insurance costs, litigation, REIT qualification, and variable-rate debt. The company disclosed a securities class action it considers without merit; it reported $9.3 million in accrued legal liabilities overall.
Important facts for investors to verify
- Renewal, rebid, or replacement outcomes and economics for the BOP, Houston ICE, and Texas contracts nearing expiration.
- Actual 2017 revenue, occupancy, and operating income at South Texas following the amended contract, and the effect of any related policy or court developments.
- California’s inmate-return schedule and CoreCivic’s ability to redeploy or replace that capacity and revenue.
- Delivery of the projected $9.0 million annual cost savings, and whether further restructuring or labor-cost pressures affect results.
- Debt covenant headroom, refinancing needs around the 2020 maturities, dividend coverage by cash flow, and the impact of interest-rate changes.