Corecivic, Inc. annual report, FY2015

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CoreCivic, Inc. (then Corrections Corporation of America) — FY 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. Although the request identifies 2015 Q4, this filing is an annual report; it also provides unaudited quarterly results. The company operated as a REIT, with correctional services conducted through taxable REIT subsidiaries.

Business context

CoreCivic owned or controlled 66 correctional and detention facilities and managed 11 government-owned facilities, with approximately 88,500 beds across 20 states and the District of Columbia. Its services include facility operations, detention and residential services, community corrections, re-entry programs, and prisoner transportation. Federal customers supplied 51% of 2015 revenue, up from 44% in 2014.

Financial performance and liquidity

  • Revenue: $1.793 billion, up 8.9% from $1.647 billion in 2014. Federal management revenue rose 25.2% to $912.1 million; state management revenue fell 4.5% to $725.1 million.
  • Profit: Operating income was $280.6 million, up from $240.3 million. Net income was $221.9 million, or $1.88 per diluted share, versus $195.0 million, or $1.66 per diluted share.
  • Margins and occupancy: Average compensated occupancy was 82.5%, compared with 83.8% in 2014. Operating margin per compensated man-day was 27.9%, down from 29.7%; revenue and operating costs per man-day increased to $72.76 and $52.49, respectively.
  • Cash flow and investment: Operating cash flow was $399.8 million, down from $423.6 million. Investing cash outflow was $409.3 million, including $224.3 million of capital expenditures and $158.4 million for acquisitions. Cash dividends paid were $250.7 million.
  • Debt and liquidity: Gross debt was $1.464 billion at year-end, versus $1.200 billion in 2014; the balance-sheet carrying amount was $1.452 billion. Cash was $65.3 million, revolving-credit availability was $446.5 million, and net working capital was $17.5 million. Weighted-average effective interest rate was 3.9%, and weighted-average debt maturity was 5.6 years. Management reported covenant compliance and no debt maturities until April 2020.
  • Distributions: Quarterly dividends rose to $0.54 per share in 2015, or $2.16 for the year, from $2.04 in 2014. The board declared a $0.54 first-quarter 2016 dividend.

Material changes versus 2014

  • Revenue growth was led by the South Texas Family Residential Center, which generated $244.7 million in 2015 revenue, and by per-diem increases. Average compensated population declined 4.9%, partly offsetting higher revenue per man-day.
  • Occupancy and operating margin per man-day weakened, while total operating expenses rose 8.6% and depreciation and amortization increased to $151.5 million from $113.9 million. Higher costs reflected the South Texas facility, new capacity, staffing, and the Avalon acquisition.
  • Federal revenue increased, but state revenue declined; California inmate reductions lowered revenue by $33.9 million. The company idled North Fork and Lee Adjustment Center during 2015 and had seven idled core facilities with $200.7 million of carrying value at year-end. Management reported that impairment testing found recoverable values above carrying values.
  • The company acquired Avalon for $157.5 million and purchased four Pennsylvania community corrections properties for approximately $13.8 million. It completed Otay Mesa construction and Trousdale Turner construction; Trousdale began inmate intake in early 2016.
  • Refinancing actions included a $250 million 5.0% senior-note issue due 2022, a $100 million term loan, and extension and repricing of the $900 million revolver. These actions extended maturities and reduced variable-rate exposure, but management expected higher interest expense.

Outlook, risks and unusual items

  • Management expected the new Arizona contract at Red Rock to begin receiving inmates in late Q3 or early Q4 2016, with estimated annual revenue of $22–$25 million. Avalon’s 11 facilities were expected to generate approximately $35–$40 million in annualized revenue. These are estimates, not company-wide earnings guidance.
  • Management cited available beds and possible government demand as growth opportunities, but said it would prefer stronger utilization and customer visibility before speculative capacity expansion. It expected to meet cash expenditure needs for the next year using available resources.
  • Key risks include contract termination or non-renewal, budget and appropriation constraints, occupancy declines, customer concentration, public or political opposition to privatization, regulatory and operational compliance, litigation, staffing and self-insurance costs, variable interest rates, debt covenants, and maintaining REIT qualification.
  • Revenue concentration is material: ICE accounted for 24% of 2015 revenue, including $244.7 million from South Texas; USMS accounted for 16%, BOP 11%, and California’s CDCR 11%. ICE may terminate the South Texas agreement for convenience or non-appropriation; related court or policy developments could affect the contract.
  • Contracts representing $594.0 million, or 33% of 2015 revenue, were scheduled to expire by year-end 2016, notwithstanding renewal options. The BOP did not renew its Northeast Ohio contract; Vermont did not renew Lee; CoreCivic exited the Winn management contract. The New Mexico Women’s Correctional Facility contract was due to expire in June 2016, with renewal uncertain.
  • Unusual items included $30.1 million of 2014 asset impairments, compared with $1.0 million in 2015; the filing attributes much of the prior-year charge to non-core facilities. 2015 also included $3.6 million of merger and acquisition expenses. Normalized FFO, a non-GAAP measure, was $317.3 million versus $310.5 million.
  • The FCC’s inmate-calling rate caps were scheduled to take effect in March 2016 and could reduce related revenue, although the amount was unclear. Management reported no pending legal proceedings expected to materially affect results, while cautioning that litigation outcomes remain uncertain.

Important facts for investors to verify

  • Whether ICE continues using South Texas at expected levels, and the effect of detention policy, litigation, and appropriations.
  • Renewal, rebidding, and replacement outcomes for contracts expiring in 2016, especially New Mexico and the remaining Northeast Ohio capacity.
  • Utilization and impairment risk for the seven idled core facilities, including North Fork, and the cost of keeping idle assets available.
  • Actual ramp-up, revenue, and costs at Red Rock and Trousdale, and integration and utilization results for Avalon.
  • Debt levels, variable-rate exposure, covenant headroom, capital spending, and whether operating cash flow supports dividends and planned investment.
  • REIT qualification and distribution requirements, alongside the company’s substantial reliance on a small group of government customers.