Corrections Corporation of America — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are to Q1 2010 unless noted. Amounts below are USD millions except per-share, per-day, and percentage data. The filing identifies the registrant as Corrections Corporation of America (CCA).
Business context
CCA owned 47 correctional and detention facilities, including two leased to other operators, and operated 66 facilities in 20 states and the District of Columbia. Its services include facility management, inmate housing and transportation, health care, and rehabilitation programs. The company was building a 1,124-bed facility in Millen, Georgia, expected to be completed in Q1 2012.
Financial performance and liquidity
- Revenue: $428.1 million, up 5.5%; management and other revenue was $427.5 million and rental revenue was $0.6 million.
- Operating income: $83.5 million, up from $72.5 million. Operating margin was approximately 19.5%, versus 17.9%.
- Net income and EPS: Net income was $40.3 million, versus $34.9 million; diluted EPS was $0.37, versus $0.30. Continuing-operations diluted EPS was also $0.37, versus $0.29.
- Costs and facility economics: Operating expenses were $296.1 million, up 2.2%; general and administrative expense rose to $21.4 million from $18.6 million. Companywide operating margin per compensated man-day increased to $18.36 from $17.15, while compensated occupancy eased to 89.9% from 90.5%.
- Cash flow: Operating cash flow was $111.0 million, versus $72.1 million. Investing cash outflow was $12.5 million, including $12.7 million of capital expenditures; financing cash outflow was $86.2 million. Cash increased $12.3 million to $37.8 million. Management attributed much of the operating cash-flow improvement to working-capital movements, including collection of past-due California receivables.
- Balance sheet and liquidity: Total assets were $2.93 billion and stockholders’ equity was $1.47 billion. Current assets were $342.4 million and current liabilities $196.1 million; reported net working capital was $146.3 million. Cash was $37.8 million, with $286.5 million available under the $450 million revolving facility.
- Debt: Long-term debt was $1.11 billion, down from $1.16 billion at year-end 2010. The revolver had $133.8 million drawn and $29.7 million in letters of credit outstanding. No principal repayments were scheduled before the revolver’s December 2012 maturity. The company reported compliance with its debt covenants.
Material changes and operating drivers
- Average compensated population increased to 80,946 from 76,490, principally reflecting new Florida operations, higher California and Georgia populations, and growth in U.S. Marshals Service populations. This more than offset losses of Arizona populations at facilities idled in 2010.
- Federal customers generated approximately 43% of total revenue, compared with 42% a year earlier. State revenue increased to $216.3 million from $204.7 million.
- Owned-and-managed facility contribution increased to $122.4 million from $110.1 million; managed-only contribution rose to $11.3 million from $8.0 million. Facility contribution is a company-defined measure before interest, taxes, goodwill impairment, depreciation, and amortization.
- Depreciation and amortization increased to $27.1 million from $25.0 million, partly due to completed development and expansion projects. Interest expense, net, increased to $18.4 million from $17.3 million.
- CCA repurchased 1.8 million shares during the quarter for approximately $43.7 million. Through March 31, it had repurchased 9.0 million shares for $189.6 million under a $250 million program scheduled to run through June 30, 2011. It bought a further approximately 797,000 shares for $19.4 million through May 3.
- Q1 2010 included $0.7 million of after-tax discontinued-operations income; there was none in Q1 2011. The Gadsden and Hernando County operations had been discontinued in 2010.
Outlook, risks, and contingencies
- No earnings guidance was provided. Management expected to meet cash requirements for the next year using cash, operating cash flow, and revolver availability.
- For 2011, management estimated $48–$53 million of facility maintenance and technology capital expenditures, plus $52–$62 million for ongoing prison construction and potential land acquisitions. Estimated federal and state income tax payments were $70.2–$73.2 million. The Georgia facility’s estimated total construction cost was approximately $57 million, with $47.4 million remaining at quarter-end.
- Management expected to resume wage increases in Q3 2011; it cautioned that expense increases could pressure margins if per-diem revenue does not keep pace. It viewed long-term demand as attractive but said it wanted better visibility and meaningful utilization of existing capacity before speculative expansion.
- Government budget constraints could reduce inmate populations, constrain per-diem rates, delay payments, or lead to contract terminations. California was a significant exposure: the California Department of Corrections and Rehabilitation generated approximately 14% of Q1 management revenue. Proposed state realignment could reduce demand; negotiations on an additional contract were suspended pending the state budget outcome.
- CCA reported approximately 11,300 unoccupied beds at facilities with at least 100 available beds; this fell to approximately 7,900 after accounting for committed beds and a California intent to award. Filling available capacity was not assured. Five facilities had long-lived assets, excluding equipment, of $106.5 million; the filing noted impairment risk if contracts end or populations decline.
- Other risks include competitive pressure on managed-only per diems, variable interest rates on the revolver, construction costs and timing, and dependence on government funding. Management cited $32.7 million of accrued employee health, workers’ compensation, and auto-insurance claims and $13.6 million of accrued legal liabilities. It stated no pending legal proceeding was expected to have a material effect, while noting litigation uncertainty.
- CCA had a debt-service deficit guarantee associated with Hardeman County bonds; outstanding bond principal was $37.7 million. The filing also reported $29.7 million of letters of credit, primarily supporting workers’ compensation obligations.
- The effective tax rate was 37.9%, versus 38.1%. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated there were no material changes to the risk factors in the 2010 Form 10-K.
Investor facts to verify
- Whether California appropriations, realignment, and the suspended contract negotiations affect CCA’s populations, revenue, or renewal prospects.
- Whether higher compensated populations and improved facility margins persist, particularly as wage increases resume and government budget pressure continues.
- How much of the Q1 operating cash-flow increase reflects recurring operations versus working-capital timing and receivable collections.
- Progress on filling available beds, the Georgia project’s completion and cost, and potential asset impairment at idle facilities.
- Debt repayment and refinancing plans ahead of the December 2012 revolver maturity, and exposure to variable rates and government payment delays.
- Completion and pricing of remaining share repurchases, and the balance between buybacks, debt reduction, and investment in capacity.