Corrections Corporation of America (CCA) — Q1 2014 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. CCA owned or controlled correctional and detention facilities and managed additional government-owned facilities, with approximately 86,500 beds across 20 states and the District of Columbia. It began operating as a REIT for federal income tax purposes on January 1, 2013, and provides correctional, detention, community re-entry and related services through the company and taxable REIT subsidiaries.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 or comparison |
|---|---|---|
| Revenue | $404.2 million | $416.7 million; down 3.0% |
| Operating income | $63.1 million | $59.9 million; up 5.3% |
| Income before income taxes | $53.1 million | $47.0 million |
| Income tax expense (benefit) | $1.4 million expense | $134.4 million benefit |
| Net income | $51.7 million | $181.1 million |
| Diluted EPS | $0.44 | $1.78 |
| Cash from operating activities | $66.6 million | $96.9 million |
| Cash used in investing activities | $26.7 million | $11.7 million |
| Cash used in financing activities | $65.1 million | $87.8 million |
| Cash and cash equivalents, March 31 | $52.7 million | $77.9 million at December 31, 2013 |
| Long-term debt, March 31 | $1.195 billion | $1.205 billion at December 31, 2013 |
- Operating expenses were $287.4 million, versus $298.2 million; general and administrative expense declined to $25.4 million from $31.2 million. Depreciation and amortization increased to $28.4 million from $27.4 million. Net interest expense declined to $10.3 million from $12.6 million.
- Revenue per compensated man-day rose to $61.82 from $60.54, but average compensated population fell to 71,698 from 76,310 and average compensated occupancy to 84.3% from 85.5%. Reported operating margin per compensated man-day was 28.7%, versus 29.3%.
- Facility net operating income was $112.8 million, down from $121.8 million. Owned-and-managed facilities generated $107.3 million, down from $112.2 million; managed-only facilities generated $5.6 million, down from $9.6 million.
- Capital expenditures were $27.3 million, compared with $10.8 million. The company declared a $0.51-per-share quarterly dividend; $56.3 million of dividends were paid during the quarter.
- At March 31, working capital was $89.2 million. The $900 million revolving facility had $520 million drawn, $24.9 million of letters of credit outstanding and $355.1 million available. The company reported compliance with its debt covenants and no scheduled debt principal payments or maturities before December 2017.
- Funds from operations (FFO), a supplemental non-GAAP measure, was $72.8 million; normalized FFO was also $72.8 million, compared with $70.8 million in Q1 2013. FFO is not a substitute for GAAP income or operating cash flow.
Material changes versus Q1 2013
- Lower population drove a $16.9 million decline in correctional and detention management revenue. The average compensated population fell by 4,612, principally following Florida contract expirations, the idling of Mineral Wells, and the transition of California inmates out of Red Rock ahead of its Arizona contract.
- Federal customer revenue declined 4.3% to $170.5 million, or approximately 42% of total revenue; state revenue declined 6.6% to $193.9 million. The filing cites California City’s transition from housing federal inmates to a lease with California, a federal contract adjustment and the Florida and Mineral Wells changes.
- Despite lower revenue and facility net operating income, consolidated operating income increased, supported in part by lower operating and general and administrative expenses and lower interest expense. Managed-only operating costs per compensated man-day rose, and that segment’s operating margin fell to 8.7% from 12.9%.
- Q1 2013 net income and EPS were unusually boosted by a $137.7 million tax benefit from revaluing deferred taxes upon REIT conversion. The 2013 quarter also included $8.1 million of REIT-conversion costs and refinancing-related charges; the company says these items materially affect the year-over-year net income comparison. Q1 2014 diluted EPS was also affected by the 13.9 million shares issued for the 2013 special dividend.
- Operating cash flow decreased $30.3 million, primarily due to unfavorable working-capital movements. Capital investment rose, particularly for facility development and expansion.
Outlook, commentary, risks and unusual items
- Management expected to meet cash expenditure requirements for the next year using cash on hand and revolving-credit availability. It expected the annual effective tax rate to be approximately 7%–9%; Q1 2014’s effective rate was 2.6%.
- Management believed it would renew other contracts expiring or expired within the following 12 months, but Idaho was a stated exception: CCA did not bid for continued management of Idaho Correctional Center, and the state planned to assume operations July 1, 2014. The company reported an operating loss of $1.4 million at the facility in Q1 2014.
- CCA identified government budgets, appropriations, occupancy and per-diem rates as key uncertainties. Government partners may reduce inmate populations, transfer inmates to public facilities, seek rate reductions or terminate contracts. CCA also cited competition, operating-cost inflation, interest-rate changes, construction delays and costs, regulatory or policy changes, REIT qualification and access to financing as risks.
- Nine facilities were idle, with reported long-lived carrying values of approximately $157.0 million, excluding transferable equipment. CCA reported no impairment after testing them, but said future utilization is uncertain. Diamondback was re-idled after Oklahoma’s bed-capacity procurement did not appear likely to yield a near-term contract.
- CCA had invested $71.3 million in the Otay Mesa Detention Center as of March 31 and estimated total project cost at $156 million–$160 million. It expected to complete the 2,552-bed Trousdale facility in Q4 2015 at an estimated total cost of approximately $140 million; the related state-county agreement was expected to be completed in Q2 2014. CCA had also invested $20.1 million in Red Rock improvements and expected a further $0.8 million in Q2 2014.
- CCA reported a $1.0 million settlement with Idaho over staffing-related contractual disputes and said it had received FBI and other government-partner inquiries concerning Idaho Correctional Center. It reported $6.6 million of accrued legal liabilities and $33.7 million of accrued self-insurance liabilities. Management did not expect pending proceedings to have a material effect, while cautioning that adverse outcomes could materially affect results in a period.
- CCA early-adopted ASU 2014-08 on discontinued operations. The Florida facilities whose contracts expired in January 2014 were not classified as discontinued operations under the new criteria; earlier qualifying discontinued operations remained presented as such.
Important facts for investors to verify
- Whether inmate populations, occupancy and contract renewals stabilize after Florida, Mineral Wells and Idaho transitions, and how the Arizona Red Rock contract ramps up.
- Whether California continues using out-of-state private capacity: CCA reported that California generated approximately 14% of Q1 2014 revenue and warned that reduced or eliminated use could have a significant adverse effect.
- Progress, funding and final contractual terms for Otay Mesa and Trousdale, including project costs, construction schedules and committed inmate populations.
- Liquidity and dividend sustainability against operating cash flow, REIT distribution requirements, capital spending and revolving-credit borrowing; also monitor variable-rate debt exposure.
- Developments in the Idaho investigation and related inquiries, litigation and self-insurance reserves, as well as the recoverability of assets at idle facilities.
- The effect of the prior-year REIT tax benefit and share issuance when assessing comparable earnings; Q1 2013 net income is not a clean operating comparison with Q1 2014.