CoreCivic, Inc. (then Corrections Corporation of America) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are to Q1 2014 unless otherwise stated. Amounts are in U.S. dollars; financial statement figures below are rounded to millions. The company operated as a REIT, with correctional services conducted through taxable REIT subsidiaries.
Business context and financial results
CCA owned or controlled 50 correctional and detention facilities and managed 12 additional government-owned facilities, with approximately 81,500 beds of design capacity. Results reflected the ramp-up of the South Texas Family Residential Center, partly offset by lower populations and the loss of several state contracts.
- Revenue: $426.0 million, up 5.4% from $404.2 million. Management revenue was $416.9 million, up 4.5%; federal revenue rose 16.4% to $203.2 million, while state revenue fell 4.8% to $184.6 million. Rental and other revenue was $9.1 million.
- Profitability: Operating income was $68.8 million, up from $63.1 million; operating margin was approximately 16.2%, compared with 15.6%. Net income was $57.3 million versus $51.7 million. Diluted EPS was $0.49 versus $0.44. The reported income tax expense was $1.4 million, with an effective tax rate of 2.4%.
- Facility economics: Facility net operating income increased to $124.6 million from $112.8 million. Across facilities in service, average compensated occupancy was 84.1% versus 84.3%; average compensated population declined 7.9% to 66,029. Revenue per compensated man-day rose to $70.16 from $61.82, while operating expenses per man-day increased to $49.19 from $44.10.
- Cash flow and investment: Operating cash flow was $117.2 million versus $66.6 million. Investing cash outflow was $91.6 million, including $63.4 million for facility development and expansion, $14.6 million for other capital improvements, and $16.3 million of capitalized lease payments. Financing cash outflow was $26.0 million, including $61.1 million of dividends paid. Cash ended the quarter at $74.0 million, down $0.4 million from year-end.
- Margins and supplemental measure: Normalized FFO was $79.5 million, compared with $72.8 million. This non-GAAP measure is not a substitute for GAAP earnings or operating cash flow.
- Debt and liquidity: Long-term debt was $1.24 billion, up $40 million from December 31, 2014. It included $565 million drawn on a $900 million revolving facility and $675 million of senior notes. The company reported $318.7 million of remaining revolver availability, $74.0 million of cash, and $26.4 million of net working capital. It was in compliance with facility covenants and reported no scheduled principal repayments before the revolver maturity in December 2017.
- Dividends: The quarterly dividend declared increased to $0.54 per share from $0.51; the filing reports $63.6 million of dividends declared for Q1.
Material changes versus Q1 2014
- South Texas contributed $36.0 million of recognized Q1 revenue under the ICE agreement and was the main driver of higher average revenue per compensated man-day and owned-facility results.
- Average compensated population fell by 5,669, primarily following the Idaho contract transition and the loss of three Florida facility contracts, with additional declines in some federal populations. The company said these changes reduced revenue by approximately $31.5 million, partly offset by higher revenue per compensated man-day.
- Operating expenses increased 4.6% to $300.7 million. The filing cites South Texas start-up and operating costs, higher wages and medical and litigation costs, and a $3.0 million bad-debt charge related to a facility no longer managed.
- Capital spending increased substantially from the prior-year quarter, primarily reflecting active construction and expansion projects. Debt increased as the company drew additional amounts under its revolver.
Outlook, risks, contingencies, and unusual items
- Projects and outlook: Management expected to complete the 1,492-bed Otay Mesa Detention Center in Q3 2015, at an estimated total cost of $153–$157 million, and the 2,552-bed Trousdale Turner facility in Q4 2015, at an estimated cost of $140–$145 million; inmate intake at Trousdale was expected to begin in Q1 2016. The company also expected South Texas to reach full capacity in Q2 2015. It estimated approximately $30 million of incremental South Texas depreciation for the remainder of 2015 and approximately $8 million of related interest expense for that period.
- Liquidity outlook: Management said available cash and revolver capacity were expected to meet cash expenditure requirements for the next year. It expected revolver borrowings to increase during 2015 to fund construction. No full-year earnings or revenue guidance was provided in the supplied filing text.
- Contract risks: The BOP elected not to renew its contract at the 2,016-bed Northeast Ohio facility, scheduled to expire May 31, 2015; CCA expected to continue housing U.S. Marshals detainees under a separate contract while marketing available space. In early April, CCA gave Louisiana notice that it would cease managing Winn Correctional Center within 180 days. Winn generated a Q1 operating loss, and CCA recorded a $1.0 million goodwill impairment related to the planned exit.
- South Texas litigation and termination exposure: A federal court certified a class and issued a preliminary injunction concerning DHS/ICE family detention practices. DHS sought reconsideration; the filing warned an adverse outcome concerning the contract could materially affect CCA. ICE may terminate the agreement for convenience with at least 90 days’ notice or for non-appropriation of funds.
- Other legal and contingent exposures: The filing describes an FBI investigation and other government inquiries related to Idaho Correctional Center matters. Management said no pending legal proceedings were expected to have a material effect, while acknowledging litigation uncertainty; accrued legal liabilities were $4.6 million. CCA also had a Hardeman County bond debt-service deficit guarantee tied to bonds with $18.6 million of principal outstanding, plus future interest.
- Operating and financial risks: Results depend on government appropriations, occupancy, contract renewals, public policy, and the availability and cost of financing. The filing notes potential wage and other cost inflation, self-insurance exposure, construction cost and schedule risks, and sensitivity to variable interest rates. A 100-basis-point rate change would have affected Q1 net interest expense by approximately $1.4 million.
- Facility utilization and California: Five idled facilities had combined carrying values of $118.2 million and incurred $1.8 million in Q1 operating expenses. Management found no impairment for those facilities but said future impairment remained possible. California accounted for approximately 14% of total revenue in both periods; further reductions in its out-of-state inmate program could materially affect results.
- Unusual revenue recognition: South Texas is accounted for as a multiple-element arrangement, requiring management estimates to allocate contract revenue among deliverables. Changes may affect the timing, but not the total amount, of revenue recognized over the contract term.
Most important facts for investors to verify
- Whether South Texas reaches full occupancy as expected, how ICE contract terms or litigation affect its revenue, and whether the related lease and operating commitments remain supportable.
- Actual progress, final costs, and opening schedules for Otay Mesa, Trousdale Turner, and other expansion projects, alongside expected incremental depreciation, interest, and funding needs.
- Occupancy, per-diem rates, and contract renewals—particularly the Northeast Ohio transition, the planned Winn exit, California’s inmate program, and trends in federal populations.
- Growth in variable-rate debt, compliance with credit covenants, available revolver capacity, and the company’s ability to sustain dividends while funding construction.
- Developments in Idaho-related inquiries and other litigation, self-insurance claims, and the Hardeman County guarantee.