Business context and reporting period
Corrections Corporation of America (now CoreCivic, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company owned and operated correctional and detention facilities, managed facilities for governmental customers, and provided related services. At quarter-end it operated 67 facilities, including 47 owned facilities, with about 92,000 beds across 20 states and the District of Columbia.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $442.9 | $429.9 | $878.2 | $855.1 |
| Operating income | $74.9 | $87.1 | $144.4 | $170.7 |
| Net income | $37.3 | $42.4 | $69.0 | $82.7 |
| Diluted EPS | $0.37 | $0.39 | $0.69 | $0.76 |
| Operating margin | 16.9% | 20.3% | 16.4% | 20.0% |
| Net margin | 8.4% | 9.9% | 7.9% | 9.7% |
- Revenue increased 3.0% in Q2 and 2.7% for the first half, while operating income fell 14.0% and 15.4%, respectively. Net income declined 12.0% for both periods.
- Occupancy across operating facilities averaged 89.0% in Q2 and 88.8% for the first half, versus 90.0% in both prior-year periods. Revenue per compensated man-day rose modestly, but operating expenses per man-day increased more, reducing operating margin per man-day to $17.35 in Q2 from $18.95 a year earlier.
- First-half cash from operations was $130.0, down from $189.3. Investing used $43.4, including approximately $42.4 of capital expenditures; financing used $79.4. Cash increased by $7.3 to $63.1.
- At June 30, cash was $63.1, working capital was $178.4, and the company reported $111.7 available under its $785.0 revolving facility after borrowings and letters of credit. Long-term debt carrying value was $1,190.8, compared with $1,245.0 at year-end 2011. The revolving facility had $645.0 drawn, at a weighted-average rate of 1.7%; the company was in compliance with its financial covenants.
- Interest expense, net, declined to $14.7 in Q2 and $31.6 for the first half, from $18.4 and $36.8. The company reported $1.8 of first-half debt-refinancing charges. It paid a $0.20-per-share dividend in Q2; no dividend was paid in the comparable 2011 periods.
Material changes and management commentary
- Growth in revenue reflected higher compensated population, notably the Lake Erie facility acquisition, activation of Jenkins Correctional Center, and new Puerto Rico placements at Cimarron. Federal customers represented about 43% of first-half revenue.
- Margins were pressured by 2011 wage increases, higher employee-benefit costs, facility start-up and inmate-transport costs, Otter Creek wind-down costs, and an inmate disturbance at Adams County. Management attributed $6.8 of first-half operating losses to start-up activity at Jenkins and Cimarron combined; $1.9 occurred in Q2.
- Managed-only facility contribution weakened, in part because of lower ICE per-diem rates at Elizabeth and the absence of a favorable prior-year retroactive rate adjustment. The company reported about 12,100 unoccupied beds at facilities with at least 100 available beds.
- Management said it expected to meet cash requirements for the next year using cash, operating cash flow, and revolving-credit availability. It planned approximately $50–55 of 2012 maintenance and IT capital expenditures, $30–35 for prison development and expansions, and $87–89 in 2012 federal and state income-tax payments. No earnings or EPS guidance was provided.
- Management was evaluating conversion to a REIT and had requested an IRS private letter ruling. A January 1, 2013 effective date remained a possibility, but the ruling, feasibility, timing, and decision were uncertain; a conversion would involve material costs.
Outlook, risks, contingencies, and unusual items
- California had begun reducing the population housed by CCA to an average daily level of 9,038 for the state fiscal year ending June 30, 2013; the reduction was expected to finish by October 1, 2012. California’s longer-term plan contemplated recalling out-of-state inmates, potentially ending the agreement by June 2016. CCA said the effect remained unclear; California generated approximately 13% of first-half management revenue.
- In July 2012, CCA announced planned redemption of another $50.0 of 6.75% notes on August 27, funded with revolving-credit borrowings and cash. After that redemption, $40.0 of those notes would remain. The company’s debt exposed it to variable-rate risk: a 100-basis-point rate change was estimated to affect first-half net interest expense by $2.6.
- Management identified government budget constraints, appropriations and payment delays, reduced inmate populations, contract renewals, per-diem pressure, competition, operating costs, financing availability, and regulatory or policy changes as risks. It also cautioned that forecasts for filling unused capacity and the long-term demand outlook were uncertain.
- Seven idled facilities had $134.7 of long-lived assets, excluding transferable equipment; management reported no impairment based on its analyses. Construction at Trousdale County remained suspended, with $29.0 capitalized. Otter Creek was idled after Kentucky removed its inmates. A Houston educational-facility lessee defaulted in June; recovery of future lease payments was uncertain.
- For the Hardeman County facility, CCA had a debt-service deficit guarantee related to bonds with $33.4 outstanding principal at June 30, 2012, plus future interest. The filing also describes litigation and substantial self-insurance exposure; management considered any additional loss beyond recorded reserves not material, while noting that unfavorable outcomes could have a material effect.
- Jenkins opened in March and housed about 1,100 inmates at quarter-end. A new Idaho agreement and an Oklahoma contract expansion at Cimarron were announced after quarter-end. The San Diego replacement facility was estimated to cost $142–150, and retaining the existing federal population was not assured.
Important facts for investors to verify
- Track California inmate reductions, renewals, and any change to the state’s longer-term out-of-state bed plans.
- Monitor occupancy, per-diem revenue, labor and benefit costs, and whether Jenkins, Cimarron, and other new placements improve margins as ramp-up costs subside.
- Review available revolving-credit capacity, variable-rate exposure, covenant compliance, debt repayments, and cash generation relative to dividends and planned capital spending.
- Check the status and costs of the proposed REIT conversion, including the IRS ruling and the intended timing.
- Assess recoverability of idled-facility and Houston lease assets, the Hardeman County guarantee, and developments in litigation and self-insurance claims.
- The cover page appears to mark “No” for having filed all required Exchange Act reports during the preceding 12 months. Verify this apparent filing-status disclosure against the filed original.