Corecivic, Inc. quarterly report, Q3 FY2014

CoreCivic, Inc. (then Corrections Corporation of America) — Q3 2014 Form 10-Q

Business context and reporting period. The filing covers the three and nine months ended September 30, 2014. At quarter-end, the company reported owning or controlling 52 correctional and detention facilities and managing 12 government-owned facilities, with approximately 84,500 beds of design capacity across 19 states and the District of Columbia. It operated as a REIT beginning January 1, 2013, with correctional services conducted through taxable REIT subsidiaries.

Financial results and liquidity

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Revenue	$408.5 million	$421.5 million	$1,223.4 million	$1,263.2 million
Operating income	$69.9 million	$67.3 million	$198.5 million	$195.1 million
Net income	$57.5 million	$51.8 million	$165.0 million	$253.4 million
Diluted EPS	$0.49	$0.44	$1.41	$2.32
Operating margin	17.1%	16.0%	16.2%	15.4%

• Q3 revenue declined about 3.1%, while operating income and net income increased. Revenue from facility operations and management fell, principally with lower compensated populations; higher revenue per compensated man-day and lower operating expenses partly offset the decline.
• Nine-month net income fell substantially, mainly because 2013 included a $137.7 million tax benefit tied to the REIT conversion and other favorable tax items. 2013 also included $36.5 million of debt-refinancing costs. In 2014, the company recorded a $2.2 million impairment related to the Houston Educational Facility.
• Average compensated population was 68,544 in Q3, down from 75,389; average compensated occupancy was 83.9%, versus 84.1%. Revenue per compensated man-day increased to $63.28 from $60.60, while operating expense per man-day increased to $43.63 from $42.96.
• Operating cash flow for the first nine months was $248.7 million, down from $283.6 million. Investing cash outflow was $141.5 million, including a $70.0 million South Texas facility construction-related payment and $78.7 million of capital expenditures. Financing cash outflow was $136.3 million, including $174.7 million of dividends paid.
• At September 30, cash was $48.8 million; working capital was $135.1 million. The company had $318.7 million available under its $900 million revolving facility, after borrowings and letters of credit.
• Debt totaled $1.24 billion, up from $1.205 billion at year-end 2013: $565 million drawn on the revolver, $350 million of 4.625% notes due 2023, and $325 million of 4.125% notes due 2020. The revolver matures in December 2017; no scheduled principal repayments were then required. The company reported covenant compliance. Its weighted-average effective interest rate was 3.7%.
• Quarterly dividends declared were $0.51 per share, compared with $0.48 in Q3 2013. The company reported nine-month regular dividends declared of $1.53 per share.

Material changes and operating developments

• Total revenue declined year over year, with facility operations and management revenue down $21.3 million in Q3 and $61.7 million year to date. The loss of the Idaho contract (effective July 2014) and three Florida contracts (effective January 2014), along with idling of facilities, reduced populations and state revenue. Federal revenue was about 44% of Q3 revenue.
• Owned-and-managed facility net operating income increased to $117.3 million in Q3 from $111.4 million, while managed-only facility net operating income fell to $6.6 million from $11.0 million. For the first nine months, those measures were $336.9 million and $18.7 million, respectively, versus $337.6 million and $31.0 million.
• The South Texas Family Residential Center agreement with ICE provides for up to 2,400 residents and began services in Q4 2014. The company expected initial residents in early December 2014 and full capacity in Q2 2015. The agreement has a term of up to four years, with fixed monthly payments and termination rights for ICE.
• Construction continued on the 1,492-bed Otay Mesa facility, estimated at $156–$160 million total cost, and the 2,552-bed Trousdale Turner facility, estimated at $140–$145 million. Completion was expected in Q4 2015, with inmate intake expected in Q1 2016 at Trousdale. These are forward-looking estimates, not completed results.

Outlook, risks, contingencies and unusual items

• No overall earnings or revenue guidance is stated. Management estimated an annual effective tax rate of approximately 5%–7% and expected to meet cash requirements for the next year using available cash and revolver capacity.
• Management cited potential long-term demand for private correctional capacity, but noted short-term government budget constraints and limited visibility before adding speculative capacity. It said it believed contracts expiring within the following 12 months would be renewed.
• Key risks include government appropriations and payment delays, contract non-renewals or rate reductions, occupancy declines, policy and legislative changes, construction cost or schedule overruns, variable interest rates, and maintaining REIT qualification. The company identified California’s use of out-of-state beds as particularly material: approximately 15% of nine-month 2014 revenue came from the California Department of Corrections and Rehabilitation.
• The South Texas arrangement carries material obligations: the filing reports $306.2 million of remaining lease obligations and $66.1 million of other service commitments. The contractual-obligations schedule separately lists $372.3 million of South Texas payments. If ICE terminates, certain commitments can be ended; delayed notice following non-appropriation could expose the company to a penalty currently estimated at up to $13.4 million. ICE had agreed to pay $70 million in two installments in Q4 2014, recorded at quarter-end as a receivable and deferred revenue.
• Idled facilities had $147.6 million of net carrying value, excluding transferable equipment, and incurred $6.2 million of operating expenses in the first nine months. The company concluded that the idled facilities, other than Houston, were recoverable; it had written Houston down by $2.2 million and expected its $4.5 million sale to close in Q4 2014.
• Legal matters include an FBI investigation and other government inquiries related to Idaho Correctional Center staffing, following a $1.0 million settlement with Idaho. The company reported $6.8 million of legal accruals and $31.4 million of accrued employee health, workers’ compensation and auto claims. Management did not expect pending proceedings to have a material effect, but cautioned that outcomes are uncertain.
• The new family residential-services contract entails higher staffing ratios and child-care and education requirements, as well as limits on customary security protocols; the company warned these factors could increase costs and litigation risk.

Important facts for investors to verify

• Whether the South Texas facility reached planned occupancy and generated expected revenue, and how ICE termination rights and related lease and service commitments evolved.
• Contract renewals, occupancy, and revenue trends following the Idaho and Florida contract losses, including the status of California out-of-state capacity.
• Actual construction costs, timing, financing and customer utilization for Otay Mesa and Trousdale Turner.
• Cash conversion, dividend coverage, debt and revolver availability, and exposure to higher variable interest rates.
• Developments in the Idaho investigation and other litigation, insurance claims, and impairment or sale outcomes for idle properties.
• Whether REIT qualification and the stated tax-rate outlook were maintained; the 2013 comparative earnings include unusually large REIT-conversion tax benefits.