Corrections Corporation of America (CoreCivic in request): Q1 2012 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company owned and operated correctional facilities and provided facility management and related services to government agencies. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $435.3 | $425.2 | +2.4% |
| Operating income | $69.5 | $83.6 | -16.9% |
| Income from continuing operations | $32.0 | $40.4 | -20.8% |
| Net income | $31.7 | $40.3 | -21.4% |
| Diluted EPS | $0.32 | $0.37 | -13.5% |
| Cash provided by operating activities | $68.3 | $111.0 | -38.4% |
- Operating margin was approximately 16.0%, down from 19.7%. Facility operating margin per compensated man-day declined to $16.80 from $18.61; average compensated occupancy fell to 88.7% from 89.9%.
- Operating expenses rose to $315.5 million from $293.2 million. The filing attributes pressure to wage and employee-benefit increases, lower occupancy, and start-up costs at new or ramping facilities.
- At March 31, cash was $31.4 million; working capital was $97.1 million. The $785 million revolving facility had $535 million drawn and $221.7 million available after outstanding letters of credit.
- Total debt carrying value was $1.180 billion, versus $1.245 billion at year-end 2011. The company redeemed the remaining $40 million of 6.25% notes in April 2012, leaving no debt maturities until January 2014, according to management.
- Investing cash outflow was $22.9 million and financing cash outflow was $69.9 million. Cash declined by $24.5 million during the quarter.
Material changes and unusual items
- Revenue growth reflected the Lake Erie facility, higher compensated population, a leap-year operating day, and a small increase in revenue per compensated man-day. Federal revenue increased 3.8%; state revenue increased 1.0%.
- Operating performance was weighed down by approximately $4.9 million of combined start-up operating losses at Jenkins and Cimarron, and a $1.5 million debt-refinancing charge. The refinancing charge reduced diluted EPS by about $0.01 after tax.
- Cash from operations was lower mainly because operating income declined and working-capital movements were less favorable, including the prior-year collection of past-due California receivables.
- The company completed construction of the Jenkins facility at an estimated total cost of $51 million; inmate transfers began in March. Lake Erie was purchased for approximately $73 million and began operating under a new Ohio management contract in January.
- The Mississippi Delta facility closed in January 2012; its results are reported as discontinued operations. The quarter included a $0.4 million after-tax loss from discontinued operations.
Outlook, risks and contingencies
- Management expected available liquidity and operating cash flow to meet cash needs for the next year. It forecast 2012 facility-maintenance and information-technology capital expenditures of $50–55 million, development and expansion spending of $30–35 million, and income-tax payments of $94–97 million.
- The company announced a quarterly dividend of $0.20 per common share beginning in Q2 2012 and terminated its share-repurchase program.
- Management viewed long-term demand opportunities positively but noted budget pressures among government customers and approximately 12,150 unoccupied beds at facilities with at least 100 available beds, excluding recently activated Georgia capacity. It gave no assurance that those beds would be filled.
- California’s population-realignment and capacity plans could reduce use of out-of-state beds. About 9,500 California inmates were housed by the company at quarter-end, generating approximately 13% of management revenue. Management said the state’s April 2012 plan envisioned recalling inmates over several years; the impact remained uncertain and could be materially adverse.
- Kentucky was expected to remove inmates from the company-owned, 656-bed Otter Creek facility by the end of August 2012; the company planned to idle it if it found no replacement customer. The facility represented less than 1% of revenue in each comparison quarter.
- Variable-rate revolving debt increased interest-rate exposure. Management estimated that a 100-basis-point rate change would alter quarterly interest expense, net of capitalized interest, by approximately $1.1 million.
- Other risks include government appropriations and payment delays, contract non-renewals, occupancy and per-diem declines, operating-cost inflation, construction costs, and litigation. The company reported $11.0 million of accrued legal liabilities and $33.2 million of accrued employee-health, workers’ compensation, and automobile-insurance claims. Management said it did not expect pending legal proceedings to have a material effect, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether operating margins recover as Jenkins and other facilities ramp up, and whether wage and benefit cost growth moderates.
- Actual occupancy and revenue trends, especially progress filling the disclosed available beds and changes in federal and state customer demand.
- Developments in California’s plans and the resulting effect on out-of-state inmate populations and company revenue.
- Otter Creek’s customer outlook and any associated idling, impairment, or cash-flow effects.
- Revolver borrowings, interest-rate exposure, covenant compliance, and funding needs for planned capital expenditures and dividends.
- Actual cash conversion and working-capital trends, given the decline in operating cash flow versus the prior-year quarter.