CoreCivic, Inc. (then Corrections Corporation of America) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The company operates correctional, detention and residential reentry facilities and reports as a REIT.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $447.4 million | $426.0 million | +5.0% |
| Operating income | $64.9 million | $68.8 million | -5.7% |
| Operating margin | 14.5% | 16.2% | -1.7 percentage points |
| Net income | $46.3 million | $57.3 million | -19.2% |
| Diluted EPS | $0.39 | $0.49 | -20.4% |
| Operating cash flow | $120.3 million | $117.2 million | +$3.1 million |
| FFO / Normalized FFO | $69.6 / $70.8 million | $78.5 / $79.5 million | Both lower |
Revenue growth reflected higher federal revenue, led by the South Texas Family Residential Center (STFRC), and per-diem increases. Federal revenue rose 16.0% to $235.7 million; state revenue fell 7.3% to $171.2 million. Average compensated population declined 3.1% to 63,985, while average compensated occupancy fell to 75.1% from 84.1%. Facility operating expenses rose 5.5%; revenue per compensated man-day increased, but expenses per day rose faster, reducing operating margin to 26.6% from 29.9%.
Net income was pressured by net interest expense of $17.5 million, up from $10.2 million, and depreciation and amortization of $42.1 million, up from $28.7 million. The increases largely reflected the completed STFRC construction and Trousdale Turner facility. The company reported no asset impairment in Q1 2016, compared with $1.0 million in Q1 2015.
Cash, liquidity and debt
- Cash and cash equivalents were $54.8 million at March 31, down from $65.3 million at year-end. Operating cash flow was $120.3 million; investing used $14.2 million and financing used $116.6 million. Financing outflows included $65.1 million of dividends and $46.3 million of net debt repayments.
- Total debt principal was $1.418 billion, down from $1.464 billion at December 31, 2015. The weighted-average effective interest rate was 4.0% and weighted-average maturity 5.3 years. Variable-rate borrowings were exposed to interest-rate changes; a 100-basis-point move was estimated to change quarterly interest expense by $1.4 million.
- The $900 million revolving facility had $394.0 million drawn and $484.5 million available after letters of credit. The company said it complied with its financial covenants. It reported no debt maturities until April 2020; scheduled principal payments in 2020 total $779 million.
- Current assets were $291.8 million against current liabilities of $317.2 million. The board declared a $0.54-per-share dividend for Q1, or approximately $64.0 million; future dividends remain subject to board discretion, REIT requirements, financial condition and debt restrictions.
Material changes, outlook and risks
- Federal revenue benefited from the STFRC reaching full activation; the company recognized about $70.8 million of STFRC revenue in Q1 2016 versus $36.0 million a year earlier. The agreement can be terminated by ICE for convenience with 90 days’ notice or for non-appropriation. A failure to give the lessor timely notice after a non-appropriation termination could expose the company to a penalty of up to approximately $13.5 million.
- California inmate placements declined: the company housed an average of about 5,100 California inmates versus 8,800 a year earlier, reducing revenue by $21.9 million. California remained within the court-ordered population limit; a further reduction or elimination of out-of-state placements could materially affect results. Its California contract was renewed through June 2019.
- The BOP contract at Northeast Ohio expired in May 2015; Vermont placements at Lee Adjustment Center ended in June 2015; and the Louisiana Winn management contract ended in September 2015. The company reported lower population and revenue associated with these changes. The District of Columbia had notified the company it did not plan to renew the D.C. facility contract, scheduled to expire in Q1 2017.
- Trousdale Turner began receiving Tennessee inmates in January 2016 and housed approximately 1,200 at quarter-end. The Red Rock, Arizona expansion was estimated at $35–38 million, with $8.8 million invested by March 31; completion was expected late Q4 2016, with new placements expected from Q3. Management estimated $22–25 million in incremental annual revenue from the Red Rock contract.
- After quarter-end, CCA completed the $35 million acquisition of Correctional Management, Inc. (CMI), with expected annualized revenue of $12–13 million. The 2015 Avalon acquisition added 11 community corrections facilities; its preliminary purchase price was $157.5 million, with earn-outs still relevant.
- Seven core facilities were idle, with carrying values totaling $199.2 million; management concluded they remained recoverable, but stated that future utilization is uncertain and impairment charges could arise. Idle facilities incurred about $2.5 million of operating costs in Q1.
- Other risks include government appropriations and payment delays, contract renewals and occupancy, wage and operating-cost inflation, interest rates, construction costs and timing, acquisition integration, REIT qualification, and legal claims. Management said it did not believe pending legal proceedings would have a material effect, while noting litigation uncertainty and substantial self-insurance exposure. A debt-service deficit guarantee relates to Hardeman County bonds; outstanding principal was $12.8 million.
- No specific full-year earnings or cash-flow guidance was provided. Management said available cash and revolver capacity were expected to meet cash expenditure requirements for the next year. It cited long-term demand potential but said it preferred meaningful utilization and better customer visibility before speculative capacity expansion.
Key investor verification points
- Confirm occupancy and population trends, especially California placements, federal demand, and the pace of Trousdale Turner and Red Rock ramp-up.
- Track STFRC contract and lease terms, ICE policy or legal developments, appropriations, and potential termination exposure.
- Assess whether revenue growth can offset higher facility costs, depreciation and interest expense; reconcile GAAP earnings with FFO and Normalized FFO.
- Review the $779 million of scheduled 2020 principal payments, variable-rate exposure, covenant headroom, and the sustainability of dividends relative to cash generation.
- Monitor idle-facility recovery assumptions, contract renewals and the integration, performance and final purchase accounting for Avalon and CMI.