CoreCivic, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties. At quarter-end it operated 51 correctional and detention facilities, owned and operated 26 reentry centers, and owned 13 properties leased to third parties. It operates as a REIT, with certain services conducted through taxable REIT subsidiaries.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Revenue | $440.9 million | $445.7 million; down 1.1% |
| Operating income | $58.7 million | $69.0 million; down 15.0% |
| Net income | $37.8 million | $50.0 million; down 24.5% |
| Diluted EPS | $0.32 | $0.42 |
| Operating cash flow | $108.5 million | $91.5 million |
| Cash and cash equivalents | $56.4 million | $52.2 million at Dec. 31, 2017 |
| Total debt | $1,479.8 million | $1,459.0 million at Dec. 31, 2017 |
Operating expenses were $319.2 million, up 1.2%; depreciation and amortization was $38.1 million, up from $36.3 million. Net interest expense rose to $19.0 million from $16.5 million. The company reported average compensated occupancy of 79.7% versus 81.0%, and an operating margin per compensated man-day of 25.3% versus 26.9%. The quarterly dividend declared increased to $0.43 per share from $0.42.
At March 31, current assets were $288.6 million and current liabilities were $285.8 million; management reported net working capital of $2.8 million. The company had $694.4 million available under its $900 million revolving credit facility, after borrowings and letters of credit. Total assets were $3.26 billion and stockholders’ equity was $1.43 billion.
Material changes versus Q1 2017
- Management revenue fell 1.5% to $429.3 million. A 7.5% decline in average daily compensated population reduced revenue by approximately $32.6 million; higher per-diem revenue and RMOMS acquisition revenue partly offset the decline.
- Average compensated population declined to 62,173 from 67,192. Contributing factors included lower ICE detainee populations versus the prior-year surge, fewer California inmates housed out of state, and expired federal, District of Columbia, and Texas contracts.
- CoreCivic Safety revenue declined 3.4% and segment net operating income declined 8.5%. Community revenue rose 45.0%, largely reflecting acquisitions, while Properties revenue rose 17.2%, also reflecting acquisitions.
- Expenses per compensated man-day increased to $56.73 from $52.67. Management cited wage pressure, legal expense, and start-up costs at Lee Adjustment Center; the overall per-man-day operating margin narrowed.
- Operating cash flow increased, but investing outflows rose to $69.9 million from $19.3 million, primarily due to the Capital Commerce Center and RMOMS acquisitions and higher capital expenditures. Financing outflows were $34.4 million, including $51.1 million of dividends paid.
Outlook, management commentary, risks and unusual items
- Management said it expects to meet cash expenditure requirements for the next year using available liquidity and operating cash flow. It expects full utilization of the new Ohio contract in Q2 2018 and estimates approximately 24 months to complete the new Lansing, Kansas facility. The filing provides no formal earnings or revenue guidance.
- On April 17, 2018, after quarter-end, CoreCivic replaced its revolving credit facility and term loan with a new facility of up to $1.0 billion, comprising a $200 million term loan and an $800 million revolver. The maturity was extended to April 2023 and the maximum total leverage covenant increased from 5.0x to 5.5x.
- CoreCivic entered a 20-year lease with Kansas for the 2,432-bed Lansing facility under construction; estimated project cost is $155 million to $165 million. A related $159.5 million private placement of non-recourse notes was priced after quarter-end to help fund construction.
- California’s proposed 2018–2019 budget contemplated ending use of out-of-state contract beds. The state’s removal of inmates from both of CoreCivic’s out-of-state facilities could materially adversely affect results, cash flows, and financial position.
- Eight correctional facilities were idle, with $240.0 million of carrying value; the company also had two idle non-core facilities. Management reported recoverable values above carrying values but cautioned that future impairment charges remain possible. Idle-facility operating costs were approximately $3.5 million in Q1.
- Other risks include government appropriations and payment delays, contract renewals or terminations, public policy and acceptance of private corrections, occupancy, labor and operating-cost inflation, interest-rate changes, construction execution, and maintaining REIT qualification. Government funding and customer demand affect cash flow and dividends.
- A securities class action related to alleged statements about the 2016 DOJ directive remains pending; the court denied the company’s motion to dismiss. CoreCivic denies the allegations and intends to defend the case. Management stated that no pending proceedings were expected to have a material effect, while acknowledging litigation uncertainty and substantial self-insurance exposure.
- Accounting adoption items included a $2.6 million opening accumulated-deficit adjustment for deferred taxes on intercompany transfers. Revenue-standard adoption was not material. A $2.0 million interest-rate-swap loss was recorded in other comprehensive loss; the swap was terminated after quarter-end, generating a $0.2 million receipt.
Important facts for investors to verify
- Whether population declines, especially ICE and California out-of-state placements, continue and how they affect utilization and revenue.
- Progress on Ohio contract utilization, Lee Adjustment Center operations, and Lansing construction, financing, and completion costs.
- Renewal or replacement of material government contracts, including the outlook for idle facilities and potential impairment exposure.
- Debt service, covenant compliance, variable-rate exposure, and the terms and utilization of the post-quarter credit agreement and Lansing financing.
- Whether operating-cost inflation and wage pressures persist, and whether margins recover as new operations ramp up.
- Cash available for dividends after capital spending, acquisitions, and debt obligations; future dividends remain subject to board discretion and REIT requirements.