Corrections Corporation of America (now CoreCivic, Inc.) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone Q4 filing; quarterly figures below are unaudited. The company operated 67 correctional and detention facilities, with approximately 92,500 beds across 20 states and the District of Columbia.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $1.760 billion | $1.724 billion |
| Operating income | $304.8 million | $334.0 million |
| Net income | $156.8 million | $162.5 million |
| Diluted EPS | $1.56 | $1.54 |
| Cash from operations | $283.3 million | $351.1 million |
| Capital expenditures | $76.9 million | $171.4 million |
| Cash and cash equivalents, year-end | $62.9 million | $55.8 million |
| Total debt, year-end | $1.112 billion | $1.245 billion |
Revenue increased 2.1%, while operating income fell 8.7% and net income fell 3.5%. Operating margin was approximately 17.3%, down from 19.4%. Facility operating margin per compensated man-day declined to 29.6% from 31.6%; average compensated occupancy eased to 88.2% from 89.9%. Diluted EPS increased modestly, aided by a lower share count following earlier repurchases.
Fourth-quarter 2012 revenue was $436.9 million, operating income $80.5 million, net income $45.4 million, and diluted EPS $0.45. In Q4 2011, the corresponding reported figures were $437.1 million, $82.4 million, $40.5 million, and $0.41.
Year-end net working capital was $184.3 million. The company had $655 million drawn on its $785 million revolving credit facility and $104 million available after letters of credit. Debt carried a 4.8% weighted-average effective interest rate and 4.2-year weighted-average maturity; scheduled principal maturities were in December 2016 and 2017. The company paid $0.60 per share in 2012 dividends.
Material changes versus prior period
- Revenue growth reflected higher compensated population and the activation of Lake Erie and Jenkins facilities, partly offset by lower U.S. Marshals Service populations at several facilities.
- Operating expenses rose 5.1%, outpacing revenue growth. Wage increases, employee benefit costs, facility start-up and ramp-down expenses, and an inmate disturbance at Adams County pressured margins.
- Operating cash flow declined by $67.8 million, chiefly because of weaker operating income and less favorable working-capital movements; 2011 had benefited from collection of past-due California receivables.
- The company refinanced its revolving credit facility, expanding capacity from $450 million to $785 million, and redeemed $525 million of 6.25% and 6.75% senior notes. Debt fell by $133.5 million year over year, while exposure to variable-rate borrowing increased.
- CCA ended its share repurchase program and began quarterly dividends in 2012. It also closed the Otter Creek facility and completed the Delta facility closure, reported in discontinued operations.
Outlook, management commentary, risks and unusual items
- REIT conversion: In February 2013, after year-end, CCA reported a favorable IRS private letter ruling and a reorganization intended to support REIT taxation effective January 1, 2013. Management cited potential tax and financing benefits, but the transition depends on meeting REIT requirements.
- Special distribution and financing: The company estimated a required pre-REIT accumulated earnings-and-profits distribution of $650 million to $700 million by December 31, 2013, expected to be primarily stock, with cash capped at 20%. It planned to refinance $465 million of 7.75% notes due 2017, may amend its revolver, and expected up to $25 million in one-time REIT conversion costs. Terms and execution were not finalized in the filing.
- 2013 expectations: Planned capital expenditures were $85 million to $100 million. Management projected an 8.5%–9.0% consolidated effective tax rate, excluding an anticipated $125 million to $135 million tax benefit from revaluing deferred tax items related to the REIT conversion. The filing did not provide formal revenue or earnings guidance.
- Demand and customer concentration: Federal agencies generated 43% of 2012 revenue; state agencies generated 50%. The U.S. Marshals Service represented 19%, and BOP, ICE, and California each accounted for roughly 12%. Federal budget pressure, sequestration, state budget constraints, per-diem demands, population changes, and contract renewal or termination could affect results.
- California exposure: California’s prison realignment and court-ordered population limits create uncertainty over out-of-state bed utilization. A return of California inmates housed by CCA to state facilities could materially harm results and cash flow.
- Other material risks: Occupancy volatility against a largely fixed cost base; contract renewals and competitive rebids; labor, medical, insurance and inflation costs; litigation and self-insurance exposure; variable-rate debt and covenant restrictions; REIT qualification and distribution requirements; and potential impairment of idle facilities or the suspended Trousdale project.
- Unusual items: 2012 results included a $2.9 million tax benefit from the corporate reorganization and $2.1 million in debt-refinancing charges. Seven idled facilities had $132.1 million of carrying value; management reported no impairment after its recoverability analyses. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the $650 million–$700 million E&P distribution was finalized and completed on time, and its eventual stock/cash mix and dilution impact.
- Whether the planned refinancing and any revolver amendment were completed on acceptable terms, and the resulting leverage, interest expense, and dividend capacity.
- Subsequent California inmate transfers, contract renewals, and any effects on occupancy and revenue; also monitor federal appropriations and sequestration impacts.
- Whether occupancy and facility margins stabilized after the 2012 decline, particularly as wage, benefits, and staffing costs change.
- Utilization or impairment developments for idle facilities and Trousdale, and the cost, schedule, and population-retention assumptions for the San Diego replacement facility.