CoreCivic (formerly Corrections Corporation of America) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The filing was made under the name Corrections Corporation of America; management announced a rebrand to CoreCivic in late October 2016, with legal and branding changes expected to continue into 2017. The company operated as a REIT and reported one operating segment.
Business context and financial performance
CCA owned or controlled 49 correctional and detention facilities and 25 residential reentry facilities, and managed 11 additional correctional and detention facilities. Total design capacity was approximately 89,300 beds across 20 states and the District of Columbia.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $474.9m | $460.0m | $1,385.7m | $1,345.3m |
| Operating income | $74.0m | $65.4m | $216.1m | $214.0m |
| Operating margin | 15.6% | 14.2% | 15.6% | 15.9% |
| Net income | $55.3m | $50.7m | $159.2m | $173.3m |
| Diluted EPS | $0.47 | $0.43 | $1.35 | $1.47 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $301.2m | $305.7m |
Amounts are in U.S. dollars. Operating margin is calculated from reported revenue and operating income. Q3 revenue rose 3.2%, operating income 13.0%, and net income 9.2% year over year. For the nine-month period, revenue rose 3.0%, while net income declined 8.1%.
Cash flow, debt and liquidity
- Nine-month investing cash outflow was $96.0m, including $63.6m of capital expenditures and $43.8m for acquisitions, partly offset by asset-sale proceeds. Financing cash outflow was $227.8m, including $192.0m of dividends paid. Cash declined $22.6m to $42.7m.
- At September 30, cash was $42.7m; current assets were $297.9m and current liabilities $339.8m. The company also had $471.7m available under its $900m revolving credit facility.
- Total debt principal was $1.439bn, compared with $1.464bn at year-end 2015. Reported long-term debt, net of issuance costs and current maturities, was $1.420bn. Weighted average effective interest rate was 4.0%, and weighted average maturity was 4.8 years. The company reported compliance with debt covenants.
- Scheduled principal maturities include $803m in 2020. The revolver and term loan carried variable rates; management estimated a 100-basis-point rate increase would raise net interest expense by $1.4m for Q3 and $4.3m for the nine-month period.
- Quarterly dividends declared were $0.54 per share; $1.62 per share was declared in the first nine months. Future dividends remain subject to board discretion, REIT requirements, financial condition and debt restrictions.
Material changes and operating developments
- Owned-and-managed facility net operating income rose 10.5% to $138.6m in Q3 and 5.8% to $399.5m for the nine months. Managed-only facility revenue declined, while managed-only net operating income increased.
- Average compensated occupancy across operating facilities fell to 80.2% in Q3 from 82.6%, and to 78.2% for nine months from 83.9%. Revenue per compensated man-day increased, but the lower nine-month population weighed on results.
- Federal revenue increased 6.6% for nine months, helped by the South Texas Family Residential Center (STFRC); state revenue declined 4.3%, principally reflecting fewer California inmates housed out of state and expired contracts.
- Acquisitions included Correctional Management, Inc. (CMI) for $35.0m and a California reentry facility for approximately $7.7m. Avalon’s utilization earn-out was not achieved, producing a $2.0m gain in Q3.
- The company leased its previously idled North Fork facility to Oklahoma, with average annual base-term rent of $7.3m. Red Rock expansion was estimated to cost $37m–$38m, with $30.5m invested through quarter-end.
Outlook, risks and unusual items
- STFRC contract amendment: An October 2016 amendment extended the contract through September 2021 but provided for a lower fixed monthly payment beginning November 2016. Management anticipated revenue would decline by about 40% and facility net operating income would fall materially. ICE may terminate for convenience or non-appropriation with 60 days’ notice; potential lease termination fees were described.
- Federal policy risk: The DOJ directed the Bureau of Prisons (BOP) not to renew, or to substantially reduce, private-prison contracts as they expire. DHS also commissioned a review of ICE’s use of private immigration detention. Federal customers generated 52% of nine-month revenue; ICE contributed 28%, USMS 15%, and BOP 9%. Ratings agencies downgraded the company in August following the DOJ announcement.
- Contract exposure: Three owned BOP facilities with contracts expiring within 12 months had 5,632 beds, generated $98.6m in nine-month revenue, and had $205.3m of net carrying value. The District of Columbia planned not to renew its contract, and the Houston Processing Center contract was due to expire in April 2017. Four Texas managed-only contracts were scheduled for rebid in 2017.
- Other stated expectations: Corporate restructuring eliminated about 12% of headquarters positions; the $4.0m charge included severance and a noncash share-based compensation item. Management expected approximately $9.0m of annual expense savings in 2017, with substantial savings beginning in Q4 2016. Red Rock’s contract was expected to add $22m–$25m in annual revenue; CMI facilities were expected to generate $12m–$13m of annualized revenue.
- California’s declining out-of-state inmate population reduced revenue by $12.2m in Q3 and $52.6m for nine months year over year. The company identified possible further demand reduction as a material risk.
- Seven idled core facilities had $181.4m of carrying value; management reported recoverable values above carrying amounts but cautioned that future impairment charges were possible. Self-insured claims, litigation, government funding and payment delays, labor-cost inflation, and variable interest rates were also risks.
- A securities class action was filed following the DOJ announcement. Management considered it without merit and intended to defend it. Management stated that no pending legal proceeding was expected to have a material effect, while acknowledging litigation uncertainty.
Important facts for investors to verify
- How the STFRC amendment affects realized revenue, margins, cash flows and termination exposure after November 2016.
- Whether BOP and ICE policy changes lead to contract nonrenewals or reductions, especially for facilities with near-term expirations and concentrated federal exposure.
- Trends in compensated occupancy, California out-of-state populations and facility-level profitability, including the ability to put idled facilities back into service.
- Whether expected restructuring savings and Red Rock and CMI revenue expectations are achieved, and how acquisition integration affects costs and returns.
- Debt refinancing and liquidity plans ahead of the substantial 2020 maturities, covenant headroom, and the sustainability of dividends relative to cash generation and REIT distribution requirements.
- Developments in the securities lawsuit, self-insurance and other contingencies, and the company’s ongoing REIT qualification.