Corecivic, Inc. quarterly report, Q2 FY2015

CoreCivic, Inc. (filed as Corrections Corporation of America) — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015. Financial amounts below are in millions unless stated otherwise. The company operated as a REIT and reported one operating segment, with results also presented for owned-and-managed and managed-only facilities.

Financial performance

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Revenue	$459.3	$410.7	$885.3	$814.9
Operating income	$79.8	$65.5	$148.6	$128.6
Net income	$65.3	$55.7	$122.6	$107.5
Diluted EPS	$0.55	$0.48	$1.04	$0.92
Operating margin	17.4%	16.0%	16.8%	15.8%

Q2 revenue rose 11.8% and net income rose 17.2% year over year; first-half revenue rose 8.6% and net income rose 14.1%.
Growth was driven principally by the South Texas Family Residential Center, activated in late 2014, and per-diem increases. Lower average compensated population partly offset revenue growth: Q2 population fell 4.4% to 67,902; first-half population fell by 4,383 year over year.
Q2 interest expense was $11.8 million versus $8.4 million; first-half interest expense was $22.0 million versus $18.7 million. Depreciation and amortization increased to $38.4 million in Q2 from $28.8 million, partly reflecting completed construction at South Texas.
Facility operating margin per compensated man-day was 28.2% in Q2 versus 30.0% a year earlier; first-half margin was 29.0% versus 29.3%. Per-day revenue increased, but per-day operating costs also rose.

Cash flow, liquidity and debt

First-half operating cash flow was $215.2 million, compared with $133.9 million. Management attributed the increase partly to working-capital movements, including higher deferred revenue.
First-half investing cash outflow was $159.4 million, including $112.5 million for facility development and expansions, $25.9 million for other capital improvements, and $24.6 million of capitalized lease payments.
Cash and cash equivalents were $41.1 million at June 30, down from $74.4 million at year-end 2014. Net working capital was $13.8 million. The company reported $322.9 million available under its revolving credit facility, after borrowings and letters of credit.
Total debt was $1.238 billion, up from $1.200 billion at year-end. It comprised $563 million drawn on the revolving facility and $675 million of senior notes. The reported weighted-average effective interest rate was 3.6% and weighted-average maturity was 4.6 years.
In July 2015, after quarter-end, the company extended the revolver’s maturity to July 2020 and reduced the applicable margin; the filing states there were no debt maturities before April 2020 following the amendment. The company was in compliance with financial covenants at June 30.
First-half dividends paid were $124.3 million. Dividends declared were $0.54 per share in each of Q1 and Q2; the board’s future distributions remain discretionary.

Material changes and business developments

Federal management revenue increased 32.6% in Q2 and 24.6% in the first half, principally due to South Texas and per-diem increases. State management revenue declined 3.6% in Q2 and 4.2% for the first half.
The BOP contract at Northeast Ohio Correctional Center expired May 31, 2015; the company expected to continue housing USMS detainees there under a separate contract while marketing available capacity. Vermont did not renew the Lee Adjustment Center contract, which expired June 30; the facility was idled.
The company gave notice that it would cease managing Louisiana’s Winn Correctional Center within 180 days, citing operating losses. It recorded a $1.0 million goodwill impairment in Q1 related to Winn. The facility generated a $2.9 million net operating loss in the first half.
At June 30, six facilities were idle, with $128.1 million of stated carrying value excluding transferable equipment. The company said its impairment analyses showed recoverable values above carrying values, but gave no assurance it would secure new customers.
Construction of the 1,492-bed Otay Mesa facility was expected to finish in Q3 2015, with estimated total cost of $153–157 million; $147.1 million had been invested by June 30. The 2,552-bed Trousdale Turner facility was expected to finish in Q4 2015, at estimated cost of $140–145 million; $114.0 million had been invested. Intake was expected to begin in Q1 2016.
The company expected South Texas to continue benefiting results, but noted increased depreciation and interest costs as construction was completed. It estimated incremental depreciation of about $21 million and lease-related interest of about $6 million for the remainder of 2015.

Outlook, risks and contingencies

No quantified earnings or revenue guidance was provided. Management said it expected to meet cash expenditure requirements for the next year using available resources, and expected a temporary Arizona inmate agreement to benefit second-half 2015 results.
South Texas is subject to ICE termination rights, including termination for convenience with 90 days’ notice and termination for non-appropriation. The filing cited a policy change and litigation concerning family detention that could affect the facility; the impact was uncertain. Certain termination circumstances could leave the company exposed to a lessor penalty of up to approximately $13.7 million.
California’s declining inmate population reduced out-of-state placements. The company said its California contract was due to expire in June 2016 and that loss of the program could materially affect results; approximately 13% of first-half 2015 revenue came from the California Department of Corrections and Rehabilitation.
Other key risks include government appropriations and payment timing, contract renewals and occupancy, wage and operating-cost inflation, construction cost and schedule overruns, variable-rate debt exposure, REIT qualification, and public-policy or regulatory changes.
Management stated pending legal proceedings were not expected to have a material effect, while cautioning that adverse outcomes remain possible. Accrued liabilities included $31.6 million for self-funded insurance and $5.1 million for legal matters. CCA also had a debt-service deficit guarantee related to Hardeman County bonds; outstanding principal was $18.6 million.

Most important facts for investors to verify

Whether South Texas occupancy, contract terms, and ICE policy or court developments sustain the facility’s revenue and allow CCA to manage its lease exposure.
How lost or expiring contracts, including Lee, Winn, Northeast Ohio, and California placements, affect occupancy, idle-facility costs, and impairment risk.
Whether Otay Mesa and Trousdale Turner are completed on schedule and within stated cost estimates, and whether planned populations begin as expected.
Cash generation after development spending, lease payments, and dividends; revolver availability, variable-rate sensitivity, and compliance with debt covenants.
The filing reports South Texas revenue figures that vary slightly between sections (approximately $65.8–$65.9 million for Q2 and $101.8–$101.9 million for the first half); verify the precise amounts and accounting presentation in the underlying statements and notes.