Corecivic, Inc. quarterly report, Q2 FY2019

CoreCivic, Inc. — Form 10-Q Summary

Reporting period: Quarter ended June 30, 2019; filed August 6, 2019. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties through its Safety, Community, and Properties segments. It is structured as a REIT.

Financial performance

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Revenue	$490.3 million	$449.9 million	$974.4 million	$890.8 million
Operating income	$71.0 million	$61.7 million	$144.2 million	$120.4 million
Net income	$48.6 million	$39.2 million	$97.9 million	$77.0 million
Diluted EPS	$0.41	$0.33	$0.82	$0.65
Operating cash flow	Not separately stated	Not separately stated	$166.6 million	$183.7 million

• Q2 revenue rose 9.0% and net income rose 23.9% year over year. For the first half, revenue rose 9.4% and net income rose 27.2%.
• Q2 facility net operating income was $144.7 million, up from $129.5 million. Segment revenue was $440.4 million for Safety, $30.7 million for Community, and $19.1 million for Properties.
• Q2 operating margin was approximately 14.5%, compared with 13.7% a year earlier, calculated as operating income divided by revenue. Company-wide operating margin per compensated man-day was 28.1%, versus 26.5%; average compensated occupancy increased to 82.8% from 80.2%.
• At June 30, cash and cash equivalents were $56.7 million, with an additional $30.2 million of restricted cash. Total assets were $3.74 billion and stockholders’ equity was $1.38 billion.
• Total debt principal was $1.92 billion. The weighted-average effective interest rate was 4.8%; $522.8 million was available under the $800 million revolving facility after borrowings and letters of credit. The company reported compliance with credit-facility covenants.
• First-half investing cash outflow was $146.1 million, including $109.9 million of capital expenditures and accrued amounts. Dividends paid were $104.7 million; quarterly dividends declared were $0.44 per share.

Material changes and operating developments

• Growth reflected higher compensated populations, per-diem increases and a greater mix of federal populations, alongside acquisitions. Average compensated population increased 3.4% in Q2. Federal revenue rose 16.8%; state revenue fell 5.0%, mainly because California inmates were fully removed from out-of-state facilities by June 30.
• Properties revenue increased 60.0% in Q2, primarily reflecting properties acquired in 2018. Community revenue rose 24.2%, including contribution from the 2018 acquisition of electronic-monitoring and case-management provider RMSC.
• Operating cash flow declined by $17.0 million in the first half despite higher net income. The filing attributes cash-flow movements partly to working-capital changes; it does not identify one single cause for the decline.
• General and administrative expense rose to $33.4 million in Q2 from $27.5 million, primarily due to higher salaries and incentive compensation, professional fees, and headquarters-relocation costs. Interest expense also increased, driven by higher average revolver borrowings, LIBOR, and mortgage debt.
• The company adopted lease accounting standard ASC 842 on January 1, 2019, recording operating-lease right-of-use assets and liabilities and a $29.9 million cumulative charge to accumulated deficit. Adoption also changed classification of South Texas Family Residential Center lease costs.

Outlook, risks and unusual items

• No specific earnings or revenue guidance is provided. Management said it expects available liquidity to meet cash expenditure requirements for the next year. It expects the Lansing, Kansas facility project to be completed in Q1 2020 and the Otay Mesa 512-bed expansion in Q4 2019.
• The BOP chose not to renew its Adams County contract. ICE was authorized to use up to 660 beds, the BOP contract was extended to August 30, 2019, and negotiations for additional ICE use remained ongoing. Management reported no impairment at June 30, 2019, but there is no assurance a further agreement will be reached.
• Previously idle Torrance and Eden facilities secured new contracts and were expected to begin receiving populations in Q3 2019. Conversely, an Oklahoma reentry center was idled and an Arizona center was expected to be idled; the company recorded a $4.3 million impairment for the Arizona property. Total Q2 asset impairments were $4.7 million.
• The $325 million 4.125% senior notes mature in April 2020. Management said revolver capacity was sufficient to repay them and expected such capacity to remain available through maturity.
• Some banks have announced they do not expect to continue providing credit or financial services to private correctional and detention operators. CoreCivic expects existing credit commitments to be honored through April 2023, but warns that further lender exits or reduced capital-market access could adversely affect financing and operations.
• Other risks include government appropriations and payment delays, contract nonrenewal or termination, population and utilization changes, labor-cost pressure, interest rates, REIT qualification, self-insurance and legal claims. Management reported $42.9 million of accrued self-insurance liabilities and $13.4 million of legal reserves.
• A securities class action was certified by the district court in March 2019; CoreCivic petitioned the appeals court to review certification, and that petition was pending. The company said it believes the claims are without merit and intends to defend them.
• Normalized FFO, a non-GAAP measure, was $82.6 million for Q2, versus $67.5 million, and $159.0 million for the first half, versus $130.2 million. The filing cautions that FFO is not a measure of cash generated or liquidity.

Important facts for investors to verify

• Progress and utilization at Adams County, including whether ICE agreements replace the departing BOP population.
• Repayment or refinancing plans for the $325 million notes due April 2020, and continued availability of revolving-credit commitments.
• Occupancy, contract renewals and federal-versus-state population trends, especially following the California transition.
• Completion costs and timing for the Lansing project and Otay Mesa expansion, and the cash-flow effects of elevated investment spending.
• Potential further facility impairments, self-insurance and litigation exposure, and any developments affecting lender access or REIT status.