Corrections Corporation of America (CCA) — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the same periods in 2010. CCA owned 47 correctional and detention facilities (two leased to other operators) and operated 66 facilities across 20 states and the District of Columbia, with approximately 90,000 beds of design capacity. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $435.0 | $427.2 | $1,295.9 | $1,242.8 |
| Operating income | $80.7 | $85.2 | $251.0 | $236.0 |
| Net income | $39.2 | $42.0 | $122.0 | $113.5 |
| Diluted EPS | $0.37 | $0.38 | $1.14 | $1.00 |
| Net cash from operating activities | Not provided separately | Not provided separately | $258.0 | $139.2 |
- Q3 revenue rose 1.8%, while net income declined 6.5%; nine-month revenue increased 4.3% and net income increased 7.5%.
- Operating income margin was approximately 18.6% in Q3 2011 versus 19.9% in Q3 2010, and 19.4% for the first nine months of 2011 versus 19.0% in 2010.
- For all operating facilities, operating margin per compensated man-day was 30.7% in Q3 versus 32.2%; for the nine-month periods it was 31.4% versus 30.8%. Average compensated occupancy was 89.5% in Q3 and 89.8% year to date, down from 90.7% and 90.4%, respectively.
- Cash from operations increased substantially, reflecting higher operating income and favorable working-capital movements, especially collection of past-due California receivables. Investing cash outflow was $66.1 million and financing cash outflow was $169.5 million for the first nine months.
- At September 30, cash was $48.0 million; current assets were $348.7 million and current liabilities $192.6 million, with reported net working capital of $156.1 million. Long-term debt carrying value was $1,209.7 million, compared with $1,156.6 million at year-end 2010. Total liabilities were $1,565.7 million and stockholders’ equity $1,366.9 million.
Material changes and drivers
- Q3 operating income was pressured by the loss of the Bureau of Prisons contract at California City in September 2010: the prior-year quarter included a 95% occupancy guarantee during population ramp-down, contributing to a $6.4 million year-over-year operating-income decline at that facility.
- Q3 facility contribution at owned-and-managed facilities fell 4.0% to $120.8 million, reflecting California City and wage increases implemented in July 2011. Nine-month owned-and-managed contribution rose 3.7% to $365.2 million. Managed-only contribution increased to $39.5 million from $28.9 million, primarily with higher compensated populations and new/expanded contracts.
- Operating expenses increased to $304.7 million in Q3 and $897.8 million year to date. Q3 fixed costs per compensated man-day rose, mainly due to salaries and benefits; variable costs per man-day declined year to date, partly from operating-efficiency initiatives.
- Share repurchases reduced shares outstanding and supported year-to-date EPS growth. CCA repurchased 17.6 million shares for $380.6 million under the program through September 30; $119.4 million of authorization remained, although debt-agreement limits substantially constrained further repurchases.
- Cash and cash equivalents increased from $25.5 million at December 31, 2010 to $48.0 million at September 30, 2011. Debt carrying value rose, while the share repurchase program used $225.3 million of cash during the nine-month period.
Liquidity, debt, outlook and risks
- CCA had $190.3 million available under its $450 million revolving credit facility after $230 million of borrowings and $29.7 million of letters of credit. The facility matures in December 2012; senior-note principal maturities are $375 million in 2013, $150 million in 2014 and $465 million in 2017. CCA reported compliance with its credit-facility covenants.
- Management said it expected to meet cash requirements for the following year using cash, operating cash flow and available revolver capacity. It expected 2011 facility maintenance and technology capital spending of $45–$50 million, ongoing prison construction and potential land expenditures of $51–$56 million, and approximately $73 million for the Lake Erie facility acquisition. Expected 2011 income-tax payments were $70.3–$70.8 million.
- CCA expected to complete the 1,150-bed Jenkins Correctional Center in Georgia in Q1 2012; approximately $17 million remained to complete it at quarter-end. The company expected to acquire Ohio’s 1,798-bed Lake Erie facility for approximately $73 million, with management operations expected to begin January 1, 2012. Subsequent to quarter-end, CCA announced a 454-bed McRae, Georgia expansion, estimated at $17.1 million, with completion expected in Q4 2012.
- Management described long-term growth potential from available beds and constrained government capacity, but said short-term demand was affected by government budget pressures. Approximately 11,200 beds were unoccupied at facilities with at least 100 available beds; filling them was not assured. No formal earnings guidance was provided.
- California policy is a significant uncertainty. A court ruling requires California to reduce its prison population, and the state’s realignment program began October 1, 2011. CCA housed about 9,500 California inmates at September 30; CDCR generated approximately 13% of management revenue. The filing states that reduced use of CCA’s out-of-state beds could materially adversely affect financial results.
- Other risks include contract nonrenewal and appropriations, per-diem reductions, occupancy changes, operating and wage-cost inflation, facility development and financing costs, and interest-rate exposure. CCA noted a renegotiated ICE contract at Elizabeth with a lower per diem and anticipated lower average compensated man-days in Q4 2011. Legal claims are numerous in the ordinary course; management did not expect pending proceedings to have a material effect, while acknowledging adverse rulings could be material. The filing reported $10.9 million accrued for certain legal proceedings and $32.6 million in self-insurance liabilities.
Important facts for investors to verify
- Whether California’s realignment and court-ordered population reductions change CDCR use of CCA’s out-of-state facilities and the status of the proposed additional contract.
- Actual occupancy, per-diem rates and margins, including the impact of the Elizabeth ICE contract change and available-bed utilization.
- Completion, cost and commencement timing for the Georgia construction and Ohio acquisition, and the McRae expansion announced after quarter-end.
- Cash-flow sustainability after the favorable California receivable collection, upcoming capital commitments, and the December 2012 revolver refinancing and related interest costs.
- Capacity for further repurchases under debt covenants, and developments in legal, self-insurance and other contingencies.