Corecivic, Inc. quarterly report, Q2 FY2016

Business context and reporting period

Corrections Corporation of America (now identified in the request as CoreCivic, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company operated correctional, detention and residential reentry facilities for government customers and reported as a REIT. At quarter-end it owned or controlled 49 correctional and detention facilities and 25 residential reentry facilities, managed 11 additional government-owned facilities, and reported design capacity of approximately 89,300 beds.

Financial performance and condition

Amounts below are in millions except per-share data.

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Revenue	$463.3	$459.3	$910.7	$885.3
Operating income	$77.2	$79.8	$142.1	$148.6
Net income	$57.6	$65.3	$103.9	$122.6
Diluted EPS	$0.49	$0.55	$0.88	$1.04
Operating cash flow	Not presented separately for the quarter	$213.3	$215.2

• Revenue increased 0.9% in Q2 and 2.9% for the first half. Q2 operating income fell 3.2%; first-half operating income fell 4.4%.
• Q2 facility operating margin was 28.6%, versus 28.2% a year earlier; first-half margin was 27.6%, versus 29.0%. Average compensated occupancy fell to 79.3% from 84.9% in Q2 and to 77.2% from 84.5% for the first half.
• At June 30, cash was $70.8, current assets $325.3 and current liabilities $341.5. The company reported $445.7 available under its $900.0 revolving facility, after outstanding borrowings and letters of credit.
• Debt principal totaled $1,466.5; long-term debt, net of issuance costs and current portion, was $1,448.1. The weighted-average effective interest rate was 3.9%. Scheduled principal maturities include $829.0 in 2020. The company reported covenant compliance.
• First-half investing cash outflow was $72.5, including $39.4 of capital expenditures and $43.6 for acquisitions, partly offset by asset-sale proceeds. Financing cash outflow was $135.2, including $128.6 of dividends paid. Cash increased $5.6 to $70.8.
• Quarterly dividends declared were $0.54 per share; first-half dividends declared were $1.08 per share. Normalized FFO was $81.3 in Q2 and $152.1 for the first half, down from $87.5 and $167.0, respectively.

Material changes versus the prior comparable period

• Revenue growth reflected higher revenue per compensated man-day, including the South Texas Family Residential Center and per diem increases, partly offset by fewer compensated inmates. Average daily compensated population declined 2.6% in Q2.
• Federal revenue rose 2.7% in Q2 and 8.8% year to date, while state revenue declined 5.0% and 6.1%, respectively. Lower California out-of-state populations and contract expirations weighed on state revenue.
• First-half operating expenses increased 1.9%; depreciation and amortization rose to $84.4 from $67.1, and net interest expense rose to $34.3 from $22.0. The filing attributes much of the increases to completed construction at South Texas and Trousdale Turner and the 2015 refinancing.
• First-half net income declined 15.3%. First-half capital expenditures were substantially lower than the prior year, when major development spending and South Texas lease-related payments were higher.

Outlook, commentary, risks and unusual items

• Management said current cash and revolver availability were expected to meet cash expenditure needs for the next year; it reported no debt maturities before April 2020. No specific earnings guidance was provided.
• The Red Rock expansion was estimated at $35–$38 in total cost, with $22.8 invested by June 30; completion was expected late in Q4 2016. The related Arizona contract was expected to generate $22–$25 of incremental annual revenue.
• ICE was reviewing family-residential capacity and costs, and CCA had submitted a lower-cost proposal for the South Texas facility. The contract may be terminated for convenience with 90 days’ notice or for non-appropriation; an early termination could expose CCA to a lease penalty currently estimated at up to $13.7. The impact of court and policy developments on family detention remained uncertain.
• CCA had notice that the District of Columbia did not plan to renew its contract, scheduled to expire in Q1 2017. After quarter-end, on July 29, the BOP elected not to renew the Cibola County contract, scheduled to expire September 30, 2016; CCA expected to idle and market the facility after inmate transfers.
• California population reductions had reduced CCA revenue by $18.5 in Q2 and $40.4 for the first half year over year. Management warned that ending California’s use of out-of-state capacity could materially harm results.
• The company expected additional payroll costs from federal overtime-rule changes effective December 1, 2016, but had not determined the impact. Wage pressure and higher employee benefit costs were also cited.
• Six idled core facilities had $123.8 of carrying value; management’s impairment analyses found recoverable value above carrying value, but noted no assurance of new contracts or avoidance of future impairment. Kit Carson, with $59.3 carrying value at June 30, was idled in Q3 after declining Colorado populations; management also found its recoverable value exceeded carrying value.
• Management reported $7.5 of accrued legal reserves and $29.1 of accrued self-insurance liabilities. It stated no pending legal proceeding was expected to have a material effect, while cautioning that litigation outcomes remain uncertain. CCA also guaranteed debt-service deficits on Hardeman County bonds, with $12.8 principal outstanding plus future interest.
• Other notable activity: CCA acquired Correctional Management, Inc. for $35.0 and a California reentry facility for approximately $7.7; purchase-price allocations were preliminary. A lease of the North Fork facility to Oklahoma commenced July 1, with average annual base-term rent of $7.3.

Important facts for investors to verify

• Progress and final terms of ICE’s South Texas family-residential procurement or any renegotiation, including effects on revenue, margins and lease obligations.
• Timing and financial impact of the Cibola nonrenewal, the D.C. contract expiration, and the leasing and utilization of idled facilities.
• Occupancy and population trends, particularly California out-of-state placements, federal demand and the ramp-up of Trousdale Turner and Red Rock.
• Execution, returns and final purchase-price allocations for recent acquisitions, alongside the remaining development and capital-spending requirements.
• Debt refinancing or repayment capacity around the substantial 2020 maturities, sensitivity to variable rates, and the sustainability of distributions relative to cash generation and REIT requirements.