Corrections Corporation of America (now CoreCivic) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The filing was made under the name Corrections Corporation of America. Financial amounts below are in millions of dollars unless otherwise indicated.
Business context
CCA owned 46 correctional and detention facilities, including two leased to other operators, and operated 65 facilities across 19 states and the District of Columbia. Design capacity was approximately 88,000 beds. The company’s business depends on government contracts, appropriations, inmate populations and facility utilization.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $419.4 | $412.7 | $834.3 | $816.8 |
| Operating income | $76.6 | $74.9 | $150.4 | $149.9 |
| Net income | $36.6 | $32.6 | $71.5 | $67.2 |
| Diluted EPS | $0.32 | $0.28 | $0.62 | $0.57 |
| Operating cash flow | Not separately stated for quarter | $109.8 | $132.1 |
- Q2 revenue rose 1.6%; six-month revenue rose 2.1%. Six-month net income increased 6.4%.
- Overall facility operating margin per compensated man-day was 30.6% in Q2 versus 30.7%; for the first half it was 29.7% versus 30.4%. Average compensated occupancy was 90.0% in Q2, compared with 90.5%.
- Cash and cash equivalents were $22.7 at June 30, down from $45.9 at year-end 2009. Net cash used in investing was $90.2, primarily reflecting $89.9 of capital expenditures. Operating cash flow declined year over year, mainly due to working-capital movements.
- Reported long-term debt was $1,186.6; principal outstanding was approximately $1,198.6, including $208.6 drawn on the revolving facility. Revolver availability was $199.3 after $30.4 of letters of credit. Total weighted-average effective interest rate was 6.5%; the company reported covenant compliance and no debt maturities before December 2012.
- Net working capital was $142.4. The company reported sufficient resources to meet expected cash requirements for the next year, using cash, operating cash flow and revolver availability.
Material changes versus prior periods
- Federal-customer revenue increased 8.5% year over year in the first half, to $349.7, and represented approximately 42% of total revenue. State revenue fell 1.9% to $420.3 as some states reduced populations or used in-state capacity; California population growth partly offset the declines.
- Average compensated population increased 2.0% in Q2 to 78,975, while revenue per compensated man-day edged down. Managed-only facility margins weakened: 12.8% in Q2 versus 14.1%, and 11.8% for the first half versus 13.5%.
- CCA recorded $3.1 of non-cash charges related to the expected termination of the Gadsden and Hernando County contracts, including a $1.7 goodwill impairment. In the prior-year period, results included $3.8 of debt-refinancing costs and $4.1 of consulting fees.
- Debt increased from $1,149.1 at December 31, 2009, while cash declined. First-half capital spending rose to $89.9 from $54.1 a year earlier. CCA repurchased 4.4 million shares for $88.6 through June 30 under a $250.0 million program.
Outlook, risks and contingencies
- Capacity and projects: The 1,072-bed Nevada Southern Detention Center was expected to be completed in Q3 2010 at an estimated cost of $83.5; $3.2 remained to complete at June 30. The filing estimated 2010 maintenance and IT expenditures of $45.8–$50.8 and development and expansion spending of $91.7–$106.7. These are estimates, not earnings guidance.
- Contracts and utilization: Arizona non-renewals led to idling the Huerfano and Diamondback facilities; Prairie was also idled. California City was not selected for continued federal management after its contract expiry, and CCA expected inmate transfers by Q3 2010. The company was pursuing replacement customers but gave no assurance of success. CCA also faced competitive contract renewals for five Texas managed-only facilities in January 2011.
- California exposure: California housed approximately 8,900 inmates at June 30 under an agreement subject to legislative appropriations and expiring June 30, 2011. The filing states that about 11.8% of first-half management revenue came from the California Department of Corrections and Rehabilitation; limits on out-of-state transfers or failure to extend authority could materially harm results and cash flow.
- Near-term contract changes: Florida indicated intent to award CCA management of Moore Haven and Graceville and continued management of Bay, but CCA lost Gadsden. CCA planned to terminate the Hernando County contract. The filing expected these changes not to materially affect managed-only margin percentages, but results remained subject to transition and contract outcomes.
- Other risks: State budget pressure may reduce inmate populations, rates or contract renewals; available beds may remain unfilled; operating costs, especially staffing and insurance, may rise. A 100-basis-point rate change on the revolver would have changed first-half interest expense by approximately $0.9. Lehman Brothers Commercial Bank was a defaulting lender; CCA did not expect a material liquidity effect but warned that further lender failures could reduce facility capacity.
- Contingencies: CCA disclosed $14.4 of accrued legal liabilities and $35.2 of accrued employee-health, workers’ compensation and auto-insurance claims. Management did not expect pending legal proceedings to have a material effect, while acknowledging litigation uncertainty. CCA also guaranteed certain debt-service deficits on Hardeman County facility bonds; principal outstanding was $41.7 plus future interest.
- The filing provided no formal full-year earnings or revenue guidance. It stated that results could vary with contract awards, occupancy, government funding, construction timing and seasonal effects.
Most important facts for investors to verify
- Whether replacement contracts or occupants were secured for idled facilities and whether projected Florida contract transitions occurred as expected.
- Renewal and utilization prospects for California beds, including the 2011 agreement and statutory authority expirations, and the Texas contract rebids.
- Actual occupancy, realized per-diem rates and managed-only margins relative to the filing’s reported declines.
- Actual capital spending, completion and opening of the Nevada facility, and the effect of repurchases and revolver borrowing on cash, debt and interest expense.
- The filing reports approximately 11,100 unoccupied beds, of which 2,300 were under guaranteed contracts, but says 9,900 remained available; those figures do not reconcile arithmetically and should be checked against the original filing or subsequent disclosures.
- Developments in legal and self-insurance reserves, the Hardeman County guarantee, and any further changes in revolver lender commitments.