Business context and reporting period
Corrections Corporation of America (CCA, now CoreCivic) filed this unaudited Form 10-Q for the quarter ended September 30, 2010. CCA owned 47 correctional and detention facilities and operated 66 facilities across 19 states and the District of Columbia, with approximately 90,000 beds of design capacity. It reported owned-and-managed and managed-only operations.
Financial performance and position
Amounts below are in millions of dollars except per-share data, percentages, and where noted.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $427.2 | $415.4 | $1,242.8 | $1,211.4 |
| Operating income | $85.2 | $76.9 | $236.0 | $223.5 |
| Net income | $42.0 | $45.3 | $113.5 | $112.5 |
| Diluted EPS | $0.38 | $0.39 | $1.00 | $0.96 |
| Operating margin | 19.9% | 18.5% | 19.0% | 18.5% |
- Revenue increased 2.8% in Q3 and 2.6% year to date; operating income rose 10.7% and 5.6%, respectively. Q3 net income fell 7.3%, while nine-month net income increased 0.9%.
- Operating expenses were $292.2 million in Q3 and $868.1 million for nine months, versus $291.5 million and $848.4 million in the comparable periods. Facility operating margin per compensated man-day was 32.2% in Q3 and 30.8% year to date, compared with 30.4% and 30.6%.
- Average compensated occupancy was 90.7% in Q3 and 90.4% year to date. Federal customers generated 43% of nine-month revenue, up from 40%; state revenue declined 2.5% year over year.
- Cash from operations was $139.2 million for nine months, down from $217.4 million. The filing attributes the decline primarily to working-capital movements, notably delayed California collections; accounts receivable and other asset changes used $108.7 million of cash.
- Investing cash outflow was $113.2 million, including $88.0 million for facility development and expansion. Financing cash outflow was $37.5 million, including $131.4 million to repurchase and retire shares. Cash and cash equivalents were $34.4 million at September 30.
- Total assets were $3.02 billion, long-term debt $1.236 billion, and stockholders’ equity $1.439 billion. Net working capital was $219.6 million. Debt increased from $1.149 billion at year-end 2009, principally reflecting higher revolver borrowings.
- The $450 million revolving facility had $258.0 million drawn, $30.3 million in letters of credit, and $149.5 million available. CCA reported compliance with its financial covenants. Debt maturities began in December 2012; the weighted-average effective interest rate was 6.2% and weighted-average maturity 4.1 years.
Material changes, outlook, and risks
- Q3 earnings included $2.6 million of start-up costs at the newly completed Nevada Southern Detention Center. Nine-month 2010 results included about $3.2 million of non-cash charges and other costs related to the Gadsden and Hernando contract exits, and $4.1 million of staff bonuses. The comparable 2009 period benefited from a $5.7 million tax benefit; nine-month 2009 also included $3.8 million of refinancing costs and $4.6 million of consulting fees.
- CCA completed the Nevada Southern facility in Q3, at an approximate cost of $83.5 million; it began receiving prisoners in October 2010. The company also began development of a 1,150-bed Georgia facility, estimated to cost $57 million and targeted for completion in Q1 2012. Construction at Trousdale, Tennessee remained suspended pending better visibility on demand.
- As of September 30, CCA reported approximately 12,800 unoccupied beds at facilities with at least 100 available beds; about 10,200 were not under contract or guarantee. Management said filling capacity could materially increase revenue, cash flow, and EPS, but gave no assurance it would secure populations.
- Management expected to meet the next year’s cash requirements using cash, operating cash flow, and revolver availability. Its 2010 estimates included $42.4–$47.4 million for maintenance and technology and $99.7–$109.7 million for development and expansion. These are estimates, not guaranteed results.
- California owed CCA $95.9 million, including past-due amounts related to delayed state budgeting; CCA expected payments to resume in Q4 2010 after the budget passed. California’s reliance on out-of-state beds, contract appropriations, and the legal and legislative authority for inmate transfers were significant uncertainties. Management warned that a return of California inmates could materially harm results and cash flows.
- Other risks included constrained state budgets and potential population or per-diem reductions, competition for managed-only contracts, contract renewals, unfilled idle facilities, construction cost and timing, variable-rate debt and possible lender failures, and litigation and self-insurance exposure. Lehman Brothers Commercial Bank was a defaulting revolver lender; CCA said the effect was not material at the time, while warning facility capacity could fall if other lenders failed.
- CCA had $33.7 million accrued for employee health, workers’ compensation, and auto claims, and $15.3 million for legal proceedings. Management did not believe pending proceedings would have a material effect, but acknowledged adverse rulings could do so. The company also guaranteed certain debt-service deficits on Hardeman County bonds; outstanding principal was $37.7 million.
- CCA repurchased 6.4 million shares for $128.4 million through September under a $250 million program authorized through June 2011. The filing reported effective tax rates of 37.5% for Q3 and 37.9% year to date, compared with 25.8% and 33.7% in 2009, partly reflecting the prior-year tax benefit.
Important facts for investors to verify
- Whether California paid the past-due receivable as expected, and whether the state continued to authorize and use CCA beds.
- Actual occupancy and ramp-up at California City, Nevada Southern, and other new or expanded facilities, including the status of contracts without population guarantees.
- Progress in filling idle Huerfano, Diamondback, and Prairie capacity, and the financial impact of any lost or renewed contracts.
- Subsequent operating cash flow and receivables collections, given the sharp year-to-date cash-flow decline and $95.9 million California balance.
- Debt, revolver availability, covenant compliance, and the effects of variable interest rates or changes in lender commitments.
- Actual construction spending versus estimates, and developments in legal, insurance, and contingent guarantee exposures.