CoreCivic (then Corrections Corporation of America) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. CCA operated as a REIT and reported one operating segment, with results also presented for owned-and-managed and managed-only facilities. At quarter-end it owned or controlled 54 facilities and managed 11 government-owned facilities, with approximately 83,000 beds of design capacity.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $460.0 million | $408.5 million | $1,345.3 million | $1,223.4 million |
| Operating income | $65.4 million | $69.9 million | $214.0 million | $198.5 million |
| Net income | $50.7 million | $57.5 million | $173.3 million | $165.0 million |
| Diluted EPS | $0.43 | $0.49 | $1.47 | $1.41 |
| Operating margin | 14.2% | 17.1% | 15.9% | 16.2% |
Revenue rose 12.6% in Q3 and 10.0% year to date, led by federal business and the South Texas Family Residential Center. Q3 net income declined despite revenue growth; for the nine months, net income increased. Average compensated occupancy was 82.6% in Q3 versus 83.9% a year earlier, and 83.9% year to date versus 84.4%. Q3 operating expenses increased 15.5%, outpacing revenue growth.
For the nine months, cash from operations was $305.7 million, compared with $248.7 million in 2014. Investing activities used $225.7 million, including $143.8 million for facility development and expansions, $39.1 million for other capital improvements, $34.5 million of South Texas lease payments, and the $13.8 million facility acquisition. Financing activities used $76.1 million, including $187.5 million of dividends paid. Cash increased $4.0 million to $78.4 million.
At September 30, total assets were $3.25 billion, total liabilities $1.78 billion, and stockholders’ equity $1.47 billion. Current assets of $374.6 million exceeded current liabilities of $323.8 million; management reported net working capital of $50.8 million. Long-term debt was $1.32 billion, up from $1.20 billion at year-end 2014. The revolving facility had $490.9 million available after borrowings and letters of credit; the company reported compliance with its financial covenants.
Material changes and business developments
- Federal revenue increased 32.9% in Q3 and 27.4% year to date, principally reflecting South Texas Family Residential Center activity and per-diem increases. The facility contributed substantially to revenue, but its construction completion also increased depreciation and interest expense.
- Population declines and contract changes weighed on results, including the end of the BOP contract at Northeast Ohio in May, Vermont’s nonrenewal at Lee Adjustment Center effective June, and the end of management at Louisiana’s Winn Correctional Center in September. Lower California inmate populations also reduced occupancy.
- CCA completed a $250 million issuance of 5.0% senior notes due 2022 and amended and extended its $900 million revolving credit facility to July 2020. It obtained a further $100 million incremental term loan in October 2015, after quarter-end.
- In August, CCA acquired four Pennsylvania community corrections facilities for approximately $13.8 million. On October 28, it acquired Avalon Correctional Services for $157.5 million, with additional potential earn-outs; management estimated annualized revenue from Avalon’s 11 facilities at $35–$40 million.
- Construction of the 1,482-bed Otay Mesa facility was completed for approximately $157 million, with operations transitioning in October. Trousdale Turner, a 2,552-bed Tennessee facility, was expected to be completed in Q4 2015, with inmate intake expected in Q1 2016.
Outlook, risks and unusual items
- Management said available liquidity and expected cash generation should meet cash expenditure needs for the next year and noted no debt maturities until April 2020. It expressed long-term optimism about demand for private capacity, but said it wanted better visibility and meaningful utilization before adding speculative capacity. No specific earnings guidance was provided.
- The South Texas ICE agreement can be terminated for convenience on 90 days’ notice or for non-appropriation. A court order concerning detention of migrant families could shorten detention periods and affect the facility; the government appealed and stated it would comply while the appeal proceeded. The filing warns that related government action or court decisions could materially affect results.
- Government appropriations, payment timing, occupancy, contract renewals, policy or sentencing changes, labor and operating costs, construction execution, interest rates, and REIT qualification are key risks. California’s use of out-of-state beds and declining federal populations were specific concerns.
- Six idle facilities had aggregate carrying values of $127.1 million and incurred $5.4 million of operating expenses during the first nine months. Management reported no impairment for those facilities, but said future impairment remained possible if utilization prospects weaken. Winn-related goodwill impairment was $1.0 million.
- Q3 included $0.7 million of debt-refinancing expense and $1.7 million of acquisition-related expense. The IRS had begun an audit of a TRS’s 2013 federal return; the outcome was not yet predictable. Legal reserves were $4.8 million, and management said it did not expect pending proceedings to have a material effect, while acknowledging litigation uncertainty.
Investor verification priorities
- Track South Texas facility revenue, costs, contract terms, and the effects of immigration policy and litigation; the filing gives slightly different revenue figures for the facility in separate disclosures.
- Monitor occupancy and population trends, especially federal and California placements, and the financial impact of terminated or nonrenewed contracts and idle facilities.
- Verify delivery, ramp-up, utilization, and contracted payments at Otay Mesa and Trousdale Turner, and the integration, purchase accounting, and expected returns for Avalon.
- Assess debt and dividend sustainability against operating cash flow, capital spending, acquisition funding, variable-rate exposure, and REIT distribution requirements.
- Follow the IRS audit, litigation and self-insurance exposures, and any changes to REIT status or acquired tax liabilities.