CoreCivic, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are U.S. dollars. CoreCivic operates correctional and detention facilities, residential reentry centers, and government-leased properties as a REIT.
At period-end, it operated 51 correctional and detention facilities, owned and operated 27 residential reentry centers, and owned 27 properties leased to third parties.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $508.5 million | $462.7 million | $1,482.9 million | $1,353.6 million |
| Operating income | $71.1 million | $64.4 million | $215.3 million | $184.8 million |
| Net income | $49.0 million | $41.0 million | $146.9 million | $118.0 million |
| Diluted EPS | $0.41 | $0.34 | $1.23 | $0.99 |
| Operating margin | 14.0% | 13.9% | 14.5% | 13.7% |
Margins are calculated from reported operating income and revenue. Facility net operating income (NOI) was $140.0 million in Q3 and $422.9 million for the nine months, up from $129.1 million and $380.6 million, respectively. Segment NOI for the nine months was Safety $360.8 million, Community $21.4 million, and Properties $40.7 million.
- Cash flow: Nine-month operating cash flow was $304.1 million, versus $284.6 million. Investing used $198.1 million and financing used $107.1 million. Cash, cash equivalents and restricted cash ended at $73.1 million.
- Investment: Nine-month facility development and expansion spending was $122.1 million; other capital improvements were $35.6 million. Total capital expenditures, including accrued amounts, were $154.8 million.
- Debt and liquidity: Debt principal was $1.875 billion. Cash on hand was $47.5 million, with $585.7 million available under the revolving credit facility; $25.3 million of letters of credit were outstanding. The company reported compliance with credit-facility covenants.
- Maturities: $325 million of 4.125% senior notes mature in April 2020. The company said it had capacity under its revolver to repay them and expected that capacity to remain available through maturity. Total debt maturities shown for 2020 were $343.8 million.
- Distribution: Quarterly dividends were $0.44 per share; $157.1 million was paid during the first nine months.
Changes versus prior period
- Nine-month revenue rose 9.6%; net income rose 24.5%. Management attributed higher management revenue primarily to increased compensated population, higher per-diem rates, a higher federal population mix, the 2018 acquisition of electronic-monitoring provider RMSC, and a contractual-dispute settlement gain.
- Average compensated occupancy across the facilities covered by the company’s measure increased to 82.8% from 80.2% for the nine-month period. Revenue per compensated man-day increased to $79.08 from $76.20; operating expenses per man-day also rose, to $57.58 from $56.62.
- Federal revenue increased 16.3% for the nine months, while state revenue decreased 4.5%, mainly reflecting the completed return of California inmates from out-of-state facilities and lower Oklahoma reentry utilization.
- Properties revenue increased 49.4% for the nine months, primarily from acquired properties. Community revenue increased 23.4%, including the contribution from RMSC.
- General and administrative expense increased to $94.8 million from $77.6 million, reflecting higher compensation and professional fees, including costs related to headquarters relocation. Interest expense, net, increased to $63.1 million from $58.6 million.
Outlook, material developments and risks
- No formal earnings guidance was provided. Management said it expected to meet cash expenditure needs for the next year using operating cash flow and available liquidity, and believed it would renew contracts expiring or scheduled to expire within the next 12 months that could materially affect results. This was not an assurance of renewal.
- Management described potential long-term demand from government capacity constraints, but said it would prefer greater visibility and meaningful utilization before speculative development. The Lansing, Kansas facility was expected to be completed in Q1 2020; the project had $127.4 million capitalized as of September 30.
- Previously idle facilities were reactivated under new ICE or U.S. Marshals Service agreements at Adams County, Torrance, and Eden. Start-up operating losses at Torrance and Eden were approximately $6.8 million in Q3 and $9.5 million year to date.
- Q3 and nine-month results included a $4.1 million after-tax gain from settlement of a contractual dispute relating to prior-period revenue. Nine-month results also included $4.7 million of asset impairments, primarily related to an Arizona reentry facility. The company reported a $4.3 million impairment for that facility in Q2.
- California’s AB32 may restrict certain private detention and reentry contracts. The company said the law’s effect was unclear and expected legal challenges; non-renewal of the Otay Mesa contract, scheduled to expire in June 2020, could significantly affect results and cash flow.
- Some banks had announced they did not expect to continue providing services to private correctional and detention operators. CoreCivic expected existing credit commitments to continue through April 2023, but cautioned that future access to financing and capital markets was uncertain.
- Other risks include government appropriations, contract termination or non-renewal, occupancy and per-diem changes, labor and operating-cost inflation, facility activation and construction costs, interest-rate exposure, REIT qualification, and litigation. The company disclosed a securities class action in discovery and said it intended to defend the case; management did not expect pending proceedings to have a material effect, while acknowledging litigation uncertainty.
- The company received notice in October 2019 that the IRS intended to audit its 2017 REIT federal tax return; audit outcomes and any settlement were uncertain.
Investor facts to verify
- Progress in refinancing or repaying the $325 million senior notes due April 2020, and continued access to revolver capacity.
- Actual utilization and economics under the Adams County, Torrance, and Eden agreements, including start-up costs and contract termination provisions.
- Renewal and legal status of California contracts potentially affected by AB32, especially Otay Mesa.
- Whether wage, staffing, and other operating-cost increases outpace per-diem adjustments, and whether occupancy and margins remain sustainable.
- Completion, total cost, and lease commencement for the Lansing project, as well as the status of the IRS audit and securities litigation.