Corecivic, Inc. quarterly report, Q1 FY2017

CoreCivic, Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. CoreCivic operates correctional, detention and residential reentry facilities and provides related real estate and management services. At quarter-end, it owned or controlled 48 correctional and detention facilities, 27 residential reentry centers, and managed 11 government-owned facilities, with approximately 88,400 beds of design capacity across 20 states.

Financial performance and condition

Metric	Q1 2017	Q1 2016 / prior date
Revenue	$445.7 million	$447.4 million
Operating income	$69.0 million	$64.9 million
Net income	$50.0 million	$46.3 million
Diluted EPS	$0.42	$0.39
Operating margin	15.5%	14.5%
Net cash from operating activities	$91.5 million	$120.3 million
Cash and cash equivalents	$43.2 million	$37.7 million at Dec. 31, 2016
Total debt, principal	$1.441 billion	$1.455 billion at Dec. 31, 2016
Quarterly dividend declared per share	$0.42	$0.54 in Q1 2016

• Total assets were $3.241 billion and stockholders’ equity was $1.463 billion at March 31, 2017. Net working capital was $28.4 million.
• Liquidity comprised $43.2 million cash and $467.9 million available under the $900 million revolving credit facility. The company said it expected these resources to meet cash expenditure needs for the next year.
• Operating cash flow fell year over year, primarily because of working-capital movements and timing of collections and payments. Investing cash outflow was $19.3 million, including $14.6 million in capital expenditures and $7.1 million for acquisitions. Financing cash outflow was $66.7 million, including $51.5 million in dividends and net debt repayments.
• Facility compensated occupancy increased to 81.0% from 75.1%; average compensated population rose to 67,192 from 63,985. Revenue per compensated man-day fell to $71.98 from $75.30, while operating expenses per man-day fell to $52.04 from $55.30.
• Total debt included $423.0 million outstanding on the revolver, $92.5 million on a variable-rate term loan and $925 million in senior notes. Weighted-average effective interest rate was 4.1%; the company reported compliance with debt covenants. Scheduled principal maturities include $808 million in 2020.

Material changes and operating developments

• Revenue declined 0.4%. Federal revenue fell 8.1%, mainly reflecting the amended South Texas Family Residential Center agreement; state revenue rose 6.2%, and local revenue rose 26.4%, partly due to facility activations and acquisitions.
• Net income and EPS increased despite slightly lower revenue. Operating income benefited in part from lower depreciation and amortization and lower general and administrative costs. Management attributed lower G&A partly to a restructuring and cost-reduction plan implemented in 2016.
• The amended ICE agreement for the South Texas Family Residential Center lowered fixed monthly payments and lease costs and extended the agreement through September 2021. Related Q1 revenue was approximately $42.5 million, versus $70.7 million in Q1 2016; deferred revenue associated with the agreement was $63.6 million at March 31.
• CoreCivic acquired a 135-bed Colorado reentry center and a 100-bed California reentry facility for a combined $7.1 million, excluding transaction costs.
• The Texas Department of Criminal Justice said it would not award CoreCivic the Bartlett State Jail contract; the facility was scheduled to close June 24, 2017. CoreCivic recorded a $0.3 million goodwill impairment. Decisions on three other Texas managed-only contracts, due to expire in August 2017, remained pending.
• The BOP contract at the 1,422-bed Eden Detention Center expired April 30, 2017 and was not renewed. CoreCivic was marketing the facility; its March 31 carrying value was $40.9 million, and it had generated $1.4 million of Q1 2017 facility net operating income.

Outlook, risks and unusual items

• No numerical earnings or revenue guidance was provided. Management cited potential long-term demand from government partners facing capacity and facility-maintenance needs, but said it preferred meaningful utilization and better demand visibility before adding speculative prison capacity.
• Management expected to renew other material contracts expiring within the next 12 months, while acknowledging that renewals and replacement contracts are uncertain. It also expected lower G&A than prior-year periods following its cost-reduction plan.
• Key demand risks include government budgets and appropriations, contract renewals, occupancy, policy changes affecting private corrections, and federal and state inmate populations. The BOP’s population decline and non-renewal of Eden are material examples. The Attorney General rescinded the prior DOJ directive to reduce BOP use of private prisons in February 2017; future federal policy and contracting remain uncertain.
• California’s proposed budget contemplated removing inmates from one of CoreCivic’s two remaining out-of-state facilities in fiscal 2017–2018 and returning any remaining inmates by 2020. The company warned that loss of this business could materially harm results and cash flow.
• The South Texas ICE agreement may be terminated for convenience or non-appropriation with 60 days’ notice. Terminating the related lease without continued facility use could trigger a termination fee, then stated at $10.0 million and declining to zero by October 2020. Litigation challenging family detention policy could also affect the agreement.
• Other risks include variable interest rates, wage and operating-cost inflation, self-insurance claims, legal proceedings and the company’s ability to maintain REIT status. A purported securities class action related to company disclosures and the 2016 DOJ memorandum was pending; management said it believed the suit lacked merit and intended to defend it. Management reported no pending legal proceeding expected to have a material effect, but noted litigation outcomes are uncertain.
• Unusual items included a $0.9 million income tax benefit from adopting share-based payment guidance and a $0.3 million Bartlett goodwill impairment. The company’s Q1 2017 effective tax rate was 4.7%, compared with 2.4% a year earlier.

Important facts for investors to verify

• Subsequent results and replacement-contract progress for Eden, Bartlett, and the three other Texas facilities facing contract decisions.
• Actual occupancy, revenue and margins under the amended South Texas ICE agreement, including deferred-revenue recognition and lease termination exposure.
• Whether California reduces or ends out-of-state inmate placements, and the resulting effect on facility utilization and cash flow.
• Operating cash flow conversion, maintenance and development spending, debt repayments, and liquidity relative to the large 2020 maturity schedule.
• Dividend sustainability given REIT distribution requirements, cash generation, debt covenants and the reduced declared dividend of $0.42 per share.
• Developments in federal contracting policy, government appropriations, the securities class action and other legal or self-insurance exposures.