Business context and reporting period
CoreCivic, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2018. It operates three segments: correctional and detention services (Safety), residential reentry and related services (Community), and government-leased real estate (Properties). At quarter-end, it operated 51 correctional and detention facilities, owned and operated 26 residential reentry centers, and owned 27 properties leased to third parties. CoreCivic is structured as a REIT and conducts certain operating activities through taxable REIT subsidiaries.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $462.7 | $442.8 | $1,353.6 | $1,324.9 |
| Operating income | $64.4 | $60.8 | $184.8 | $195.1 |
| Net income | $41.0 | $41.2 | $118.0 | $136.7 |
| Diluted EPS | $0.34 | $0.35 | $0.99 | $1.15 |
- Margins: Operating margin was approximately 13.9% in Q3 versus 13.7% a year earlier; for the first nine months it was 13.7% versus 14.7%. Net margin was approximately 8.9% and 8.7%, respectively, compared with 9.3% and 10.3% in the prior-year periods.
- Cash flow: Nine-month operating cash flow was $284.6, up from $264.1. Investing used $230.6, primarily reflecting acquisitions and capital spending; financing used $1.4, compared with $177.4 used in 2017. Cash, cash equivalents, and restricted cash totaled $104.7 at period-end, including $93.6 of unrestricted cash.
- Debt and liquidity: Total debt principal was $1,778.7, compared with $1,459.0 at year-end 2017; long-term debt net of issuance costs and current portion was $1,752.2. Working capital was $45.0. CoreCivic reported $587.3 available under its revolving credit facility, after borrowings and letters of credit. It was in compliance with credit agreement covenants.
- The amended credit agreement provides a $200.0 term loan and an $800.0 revolving facility, matures in April 2023, and raised the maximum total leverage covenant from 5.0x to 5.5x. Variable-rate borrowings had a 3.7% rate at quarter-end; total weighted-average effective interest rate was 4.8%.
- Quarterly dividends declared were $0.43 per share; cash dividends paid during the first nine months totaled $153.0. Management says future dividends depend on earnings, REIT distribution requirements, capital needs, debt restrictions, and other factors.
Material changes versus the prior comparable period
- Q3 revenue rose 4.5%, while net income was nearly unchanged and diluted EPS declined to $0.34 from $0.35. For the first nine months, revenue rose 2.2%, but operating income fell 5.3%, net income fell 13.7%, and diluted EPS decreased to $0.99 from $1.15.
- Management revenue increased, supported by higher per-diem rates and federal activity, while average daily compensated population fell 1.0% in Q3 and 4.2% year to date. Average compensated occupancy was 80.8% in Q3 versus 79.2% and 80.2% year to date versus 79.7%.
- Federal revenue increased 7.8% in Q3 and 3.4% year to date. State revenue decreased 3.8% and 3.2%, respectively, largely reflecting declining California out-of-state populations and the loss of Texas contracts. Community revenue grew with acquisitions and RMOMS; Properties revenue rose as the portfolio expanded.
- Operating costs increased faster than revenue per compensated man-day: total operating expenses per day were $57.12 in Q3 versus $54.61 and $56.62 year to date versus $53.20. Management cited wage pressures, start-up costs at Lee Adjustment Center, and lower populations at certain facilities. Operating margins for the correctional, detention, and reentry operations were lower in both comparative periods.
- Debt increased alongside acquisitions and property development. CoreCivic acquired government-leased properties, including the $242.0 SSA-Baltimore building, and assumed $157.3 of its financing. Nine-month property and facility investment drove substantially higher capital expenditures than in 2017.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expected available liquidity to cover cash requirements for the next year and said, based on information available at filing, it expected to renew all material contracts expiring within the next 12 months; it cautioned that renewals are not assured. Management cited possible demand from government partners facing overcrowding and aging facilities, and anticipated pursuing additional acquisitions.
- CoreCivic reported eight idled correctional facilities with combined carrying values of $236.4 and two idled non-core facilities with a $3.9 aggregate net book value. Management’s impairment analyses found recoverable values above carrying values, but it gave no assurance of securing new contracts or avoiding future impairment charges.
- California’s 2018–19 budget contemplated ending out-of-state contract beds. All California inmates had left Tallahatchie by the second quarter; the budget contemplated removal from La Palma by January 2019. CoreCivic had approximately 1,600 California inmates at La Palma at quarter-end, alongside approximately 700 ICE detainees. New USMS, ICE, state, and local arrangements were bringing populations into Tallahatchie and La Palma, but contracts and utilization remain subject to change.
- Other risks include government appropriations and payment timing, contract renewals or termination, policy changes affecting private corrections and immigration detention, occupancy, labor and healthcare costs, construction schedules and costs, interest-rate exposure, REIT qualification, and acquisition integration. A 100-basis-point change in rates on revolving-facility and term-loan borrowings would have changed interest expense by an estimated $0.9 for Q3 and $2.5 for the nine-month period.
- Unusual or noteworthy items included a $1.0 tax charge in Q3 related to updated estimates following the Tax Cuts and Jobs Act, $1.6 of year-to-date asset impairment (a headquarters property write-down before its sale), and $1.0 of debt-refinancing expense. The headquarters sale generated $12.6 of proceeds, used to reduce revolving-credit borrowings. Adoption of an accounting standard also reduced opening accumulated deficit by approximately $2.6.
- Legal matters include a securities class action related to statements about the 2016 DOJ memorandum on Bureau of Prisons contracts. The case was in fact discovery and class certification briefing; the company said it believed the case was without merit and intended to defend it. Management reported $11.9 of accrued legal liabilities and stated it did not believe pending proceedings would materially affect results, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether federal and state contract renewals, including the Adams County BOP contract expiring in July 2019, support expected facility utilization and revenue.
- Actual population transitions at La Palma and Tallahatchie, and whether replacement federal, state, or local demand offsets California departures and other contract losses.
- Whether wage inflation, start-up costs, and occupancy trends continue to pressure operating margins and per-day costs.
- Debt and interest-rate exposure, the 2020 senior-note maturity, covenant headroom, and financing needs for acquisitions, dividends, and development.
- Execution, cost, and completion of the Lansing correctional facility and planned Otay Mesa expansion; performance and lease terms of recently acquired government properties.
- Potential outcomes and reserve adequacy for the securities class action and other self-insured claims; management disclosed $32.3 of accrued employee health, workers’ compensation, and automobile insurance claims.