cxw-10q_20170630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:  JUNE 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM            TO           

COMMISSION FILE NUMBER: 001-16109

 

CORECIVIC, INC.

(Exact name of registrant as specified in its charter)

 

 

MARYLAND

62-1763875

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE  37215

(Address and zip code of principal executive offices)

(615) 263-3000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

Indicate the number of shares outstanding of each class of Common Stock as of August 2, 2017:

Shares of Common Stock, $0.01 par value per share: 118,179,086 shares outstanding.

 

 

 

 


CORECIVIC, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

 

INDEX

 

 

 

PAGE

PART 1 – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

    a)

 

Consolidated Balance Sheets (Unaudited) as of June 30, 2017 and December 31, 2016

 

1

    b)

 

Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2017 and 2016

 

2

    c)

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2017 and 2016

 

3

    d)

 

Consolidated Statement of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2017

 

4

    e)

 

Consolidated Statement of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2016

 

5

    f)

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

 

Defaults Upon Senior Securities

 

42

Item 4.

 

Mine Safety Disclosures

 

43

Item 5.

 

Other Information

 

43

Item 6.

 

Exhibits

 

43

SIGNATURES

 

44

 

 

 

 


PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS.

CORECIVIC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

ASSETS

 

June 30, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

 

$

46,584

 

 

$

37,711

 

Accounts receivable, net of allowance of $666 and $1,580, respectively

 

 

206,848

 

 

 

229,885

 

Prepaid expenses and other current assets

 

 

25,620

 

 

 

31,228

 

Total current assets

 

 

279,052

 

 

 

298,824

 

Property and equipment, net of accumulated depreciation of $1,413,136 and $1,352,323,

   respectively

 

 

2,806,078

 

 

 

2,837,657

 

Goodwill

 

 

40,402

 

 

 

38,386

 

Non-current deferred tax assets

 

 

11,537

 

 

 

13,735

 

Other assets

 

 

87,247

 

 

 

83,002

 

Total assets

 

$

3,224,316

 

 

$

3,271,604

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

243,975

 

 

$

260,107

 

Income taxes payable

 

 

853

 

 

 

2,086

 

Current portion of long-term debt

 

 

10,000

 

 

 

10,000

 

Total current liabilities

 

 

254,828

 

 

 

272,193

 

Long-term debt, net

 

 

1,407,196

 

 

 

1,435,169

 

Deferred revenue

 

 

46,574

 

 

 

53,437

 

Other liabilities

 

 

52,374

 

 

 

51,842

 

Total liabilities

 

 

1,760,972

 

 

 

1,812,641

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred stock – $0.01 par value; 50,000 shares authorized; none issued and outstanding

   at June 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Common stock – $0.01 par value; 300,000 shares authorized; 118,179 and 117,554 shares

   issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

1,182

 

 

 

1,176

 

Additional paid-in capital

 

 

1,789,337

 

 

 

1,780,350

 

Accumulated deficit

 

 

(327,175

)

 

 

(322,563

)

Total stockholders’ equity

 

 

1,463,344

 

 

 

1,458,963

 

Total liabilities and stockholders’ equity

 

$

3,224,316

 

 

$

3,271,604

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


CORECIVIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES

 

$

436,393

 

 

$

463,331

 

 

$

882,077

 

 

$

910,716

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

307,897

 

 

 

316,446

 

 

 

623,200

 

 

 

630,364

 

General and administrative

 

 

26,417

 

 

 

27,364

 

 

 

51,243

 

 

 

53,844

 

Depreciation and amortization

 

 

36,800

 

 

 

42,345

 

 

 

73,057

 

 

 

84,404

 

Asset impairments

 

 

 

 

 

 

 

 

259

 

 

 

 

 

 

 

371,114

 

 

 

386,155

 

 

 

747,759

 

 

 

768,612

 

OPERATING INCOME

 

 

65,279

 

 

 

77,176

 

 

 

134,318

 

 

 

142,104

 

OTHER (INCOME) EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

16,622

 

 

 

16,796

 

 

 

33,112

 

 

 

34,340

 

Other (income) expense

 

 

(60

)

 

 

132

 

 

 

(43

)

 

 

49

 

 

 

 

16,562

 

 

 

16,928

 

 

 

33,069

 

 

 

34,389

 

INCOME BEFORE INCOME TAXES

 

 

48,717

 

 

 

60,248

 

 

 

101,249

 

 

 

107,715

 

Income tax expense

 

 

(3,242

)

 

 

(2,665

)

 

 

(5,727

)

 

 

(3,825

)

NET INCOME

 

$

45,475

 

 

$

57,583

 

 

$

95,522

 

 

$

103,890

 

BASIC EARNINGS PER SHARE

 

$

0.38

 

 

$

0.49

 

 

$

0.81

 

 

$

0.89

 

DILUTED EARNINGS PER SHARE

 

$

0.38

 

 

$

0.49

 

 

$

0.81

 

 

$

0.88

 

DIVIDENDS DECLARED PER SHARE

 

$

0.42

 

 

$

0.54

 

 

$

0.84

 

 

$

1.08

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


CORECIVIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED AND AMOUNTS IN THOUSANDS)

 

 

 

For the Six Months Ended

June 30,

 

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

95,522

 

 

$

103,890

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

73,057

 

 

 

84,404

 

Asset impairments

 

 

259

 

 

 

 

Amortization of debt issuance costs and other non-cash interest

 

 

1,566

 

 

 

1,577

 

Deferred income taxes

 

 

2,198

 

 

 

2,050

 

Non-cash revenue and other income

 

 

(10,740

)

 

 

(2,204

)

Income tax benefit of equity compensation

 

 

 

 

 

(25

)

Non-cash equity compensation

 

 

8,145

 

 

 

7,873

 

Other expenses and non-cash items

 

 

1,964

 

 

 

2,192

 

Changes in assets and liabilities, net:

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other assets

 

 

27,952

 

 

 

22,079

 

Accounts payable, accrued expenses and other liabilities

 

 

(15,907

)

 

 

(7,754

)

Income taxes payable

 

 

(1,233

)

 

 

(756

)

Net cash provided by operating activities

 

 

182,783

 

 

 

213,326

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Expenditures for facility development and expansions

 

 

(13,862

)

 

 

(18,725

)

Expenditures for other capital improvements

 

 

(20,929

)

 

 

(20,695

)

Acquisitions, net of cash acquired

 

 

(14,077

)

 

 

(43,618

)

Decrease in restricted cash

 

 

 

 

 

240

 

Proceeds from sale of assets

 

 

100

 

 

 

8,192

 

Decrease in other assets

 

 

4,893

 

 

 

833

 

Payments received on direct financing lease and notes receivable

 

 

684

 

 

 

1,231

 

Net cash used in investing activities

 

 

(43,191

)

 

 

(72,542

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt and borrowings from credit facility

 

 

120,500

 

 

 

201,000

 

Scheduled principal repayments

 

 

(5,000

)

 

 

(2,500

)

Other principal repayments of debt

 

 

(144,500

)

 

 

(196,000

)

Payment of debt issuance and other refinancing and related costs

 

 

(65

)

 

 

(68

)

Payment of lease obligations

 

 

(1,149

)

 

 

(6,702

)

Contingent consideration for acquisition of businesses

 

 

 

 

 

(1,073

)

Dividends paid

 

 

(101,064

)

 

 

(128,550

)

Income tax benefit of equity compensation

 

 

 

 

 

25

 

Purchase and retirement of common stock

 

 

(5,818

)

 

 

(3,947

)

Decrease in restricted cash for dividends

 

 

 

 

 

550

 

Proceeds from exercise of stock options

 

 

6,377

 

 

 

2,033

 

Net cash used in financing activities

 

 

(130,719

)

 

 

(135,232

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

8,873

 

 

 

5,552

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

37,711

 

 

 

65,291

 

CASH AND CASH EQUIVALENTS, end of period

 

$

46,584

 

 

$

70,843

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest (net of amounts capitalized of $0 and $164 in 2017 and 2016,

   respectively)

 

$

28,786

 

 

$

28,655

 

Income taxes paid (refunded), net

 

$

2,295

 

 

$

(10,520

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

CORECIVIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2017

(UNAUDITED AND AMOUNTS IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2016

 

 

117,554

 

 

$

1,176

 

 

$

1,780,350

 

 

$

(322,563

)

 

$

1,458,963

 

Net income

 

 

 

 

 

 

 

 

 

 

 

95,522

 

 

 

95,522

 

Retirement of common stock

 

 

(175

)

 

 

(2

)

 

 

(5,816

)

 

 

 

 

 

(5,818

)

Dividends declared on common stock ($0.84 per share)

 

 

 

 

 

 

 

 

 

 

 

(100,134

)

 

 

(100,134

)

Restricted stock compensation, net of forfeitures

 

 

 

 

 

 

 

 

8,145

 

 

 

 

 

 

8,145

 

Restricted stock grants

 

 

507

 

 

 

5

 

 

 

(5

)

 

 

 

 

 

 

Stock options exercised

 

 

293

 

 

 

3

 

 

 

6,663

 

 

 

 

 

 

6,666

 

Balance as of June 30, 2017

 

 

118,179

 

 

$

1,182

 

 

$

1,789,337

 

 

$

(327,175

)

 

$

1,463,344

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


 

CORECIVIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2016

(UNAUDITED AND AMOUNTS IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2015

 

 

117,232

 

 

$

1,172

 

 

$

1,762,394

 

 

$

(300,818

)

 

$

1,462,748

 

Net income

 

 

 

 

 

 

 

 

 

 

 

103,890

 

 

 

103,890

 

Retirement of common stock

 

 

(134

)

 

 

(1

)

 

 

(3,946

)

 

 

 

 

 

(3,947

)

Dividends declared on common stock ($1.08 per share)

 

 

 

 

 

 

 

 

 

 

 

(127,998

)

 

 

(127,998

)

Restricted stock compensation, net of forfeitures

 

 

(1

)

 

 

 

 

 

7,720

 

 

 

57

 

 

 

7,777

 

Income tax benefit of equity compensation

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Stock option compensation expense, net of  forfeitures

 

 

 

 

 

 

 

 

96

 

 

 

 

 

 

96

 

Restricted stock grants

 

 

310

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Stock options exercised

 

 

113

 

 

 

1

 

 

 

2,032

 

 

 

 

 

 

2,033

 

Balance as of June 30, 2016

 

 

117,520

 

 

$

1,175

 

 

$

1,768,321

 

 

$

(324,869

)

 

$

1,444,627

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 

CORECIVIC, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

JUNE 30, 2017

 

1.

ORGANIZATION AND OPERATIONS

CoreCivic, Inc. (together with its subsidiaries, the “Company” or “CoreCivic”) is one of the nation’s largest owners of partnership correctional, detention, and residential reentry facilities and one of the largest prison operators in the United States.  Through three business offerings, CoreCivic Safety, CoreCivic Properties, and CoreCivic Community, the Company provides a broad range of solutions to government partners that serve the public good through high-quality corrections and detention management, innovative and cost-saving government real estate solutions, and a growing network of residential reentry centers to help address America's recidivism crisis.  As of June 30, 2017, CoreCivic owned or controlled 46 correctional and detention facilities, owned or controlled 28 residential reentry centers, and managed an additional 10 correctional and detention facilities owned by its government partners, with a total design capacity of approximately 87,400 beds in 20 states.

In addition to providing fundamental residential services, CoreCivic's facilities offer a variety of rehabilitation and educational programs, including basic education, faith-based services, life skills and employment training, and substance abuse treatment.  These services are intended to help reduce recidivism and to prepare offenders for their successful reentry into society upon their release.  CoreCivic also provides or makes available to offenders certain health care (including medical, dental, and mental health services), food services, and work and recreational programs.

CoreCivic began operating as a real estate investment trust ("REIT") effective January 1, 2013.  The Company provides correctional services and conducts other business activities through taxable REIT subsidiaries ("TRSs"). A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax and certain qualification requirements. The Company's use of TRSs enables CoreCivic to comply with REIT qualification requirements while providing correctional services at facilities it owns and at facilities owned by its government partners and to engage in certain other business operations.  A TRS is not subject to the distribution requirements applicable to REITs so it may retain income generated by its operations for reinvestment.  

2.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated financial statements have been prepared by the Company and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year.  Reference is made to the audited financial statements of CoreCivic included in its Annual Report on Form 10-K as of and for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the "SEC") on February 23, 2017 (File No. 001-16109) (the “2016 Form 10-K”) with respect to certain significant accounting and financial reporting policies as well as other pertinent information of the Company.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", which establishes a single, comprehensive revenue recognition standard for all contracts with customers. For public reporting entities such as CoreCivic, ASU 2014-09 was originally effective for interim and annual periods beginning after December 15, 2016 and early adoption of the ASU was not permitted.  In July 2015, the FASB agreed to defer the effective date of the ASU for public reporting entities by one year, or to interim and annual periods beginning after December 15, 2017.  Early adoption is now allowed as of the original effective date for public companies.  In summary, the core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Companies are allowed to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a modified retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures.  CoreCivic is currently planning to adopt the standard when effective in its fiscal year 2018 and expects to utilize the modified retrospective transition method upon adoption of the ASU.  CoreCivic has begun its analysis of the various contracts and revenue streams in order to determine the potential impact the ASU might have on the Company's results of operations or financial position and its related financial statement disclosure.  

 

6


 

In February 2016, the FASB issued ASU 2016-02, "Leases (ASC 842)", which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting requirements.  ASU 2016-02 also eliminates current real estate-specific provisions for all entities.  For lessors, the ASU modifies the classification criteria and the accounting for sales-type and direct financing leases.  For public reporting entities such as CoreCivic, guidance in ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption of the ASU is permitted.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.  CoreCivic is currently planning to adopt the ASU when effective in its fiscal year 2019.  CoreCivic does not currently expect that the new standard will have a material impact on its financial statements.  

 

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", that changes certain aspects of accounting for share-based payments to employees.  ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled.  The new ASU also allows an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, and to make a policy election to account for forfeitures.  Companies are required to elect whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur, or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as previously required.  For public reporting entities such as CoreCivic, guidance in ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption of the ASU is permitted.  All of the guidance in the ASU must be adopted in the same period.  CoreCivic adopted the ASU in the first quarter of 2017, opting to estimate the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as was previously required.  The amendments in ASU 2016-09 were applied prospectively and the Company's financial statements for prior periods were not adjusted.  Adoption of the ASU resulted in a $1.0 million income tax benefit recognized by the Company in the first six months of 2017.  The new standard will continue to have an impact on the Company's financial statements whenever the vested value of the awards differs from the grant-date fair value of such awards.  

 

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business", that provides guidance to assist entities with evaluating when a set of transferred assets and activities ("set") is a business.  Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets.  If this threshold is met, the set is not a business.  If the threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.  The new ASU provides a more robust framework to use in determining when a set of assets and activities is a business.  For public reporting entities such as CoreCivic, guidance in ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, and is to be applied prospectively to any transactions occurring within the period of adoption.  Early adoption of the ASU is allowed for transactions that occur before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made available for issuance.  CoreCivic adopted ASU 2017-01 in the first quarter of 2017.

 

In January 2017, the FASB issued ASU 2017-04, "Intangibles–Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment", that eliminates the requirement to calculate the implied fair value of goodwill by performing a hypothetical application of the acquisition method as of the date of the impairment test to measure a goodwill impairment charge.  This requirement is the second step in the annual two-step quantitative impairment test that is currently required under Accounting Standards Codification ("ASC") 350, "Intangibles-Goodwill and Other".  Instead, entities will recognize an impairment charge based on the first step of the quantitative impairment test currently required, which is the measurement of the excess of a reporting unit's carrying amount over its fair value.  Entities will still have the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary.  For public reporting entities such as CoreCivic, guidance in ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those years.  Early adoption of the ASU is allowed for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.  CoreCivic is reviewing the ASU to determine the potential impact it might have on the Company's results of operations or financial position and its related financial statement disclosure.

 

7


 

Fair Value of Financial Instruments

 

To meet the reporting requirements of ASC 825, "Financial Instruments", regarding fair value of financial instruments, CoreCivic calculates the estimated fair value of financial instruments using market interest rates, quoted market prices of similar instruments, or discounted cash flow techniques with observable Level 1 inputs for publicly traded debt and Level 2 inputs for all other financial instruments, as defined in ASC 820, "Fair Value Measurement".  At June 30, 2017 and December 31, 2016, there were no material differences between the carrying amounts and the estimated fair values of CoreCivic's financial instruments, other than as follows (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

Note receivable from Agecroft Prison Management, LTD

 

$

3,078

 

 

$

4,738

 

 

$

2,920

 

 

$

4,647

 

Debt

 

$

(1,426,000

)

 

$

(1,456,250

)

 

$

(1,455,000

)

 

$

(1,459,625

)

 

Revenue Recognition – Multiple-Element Arrangement

 

In September 2014, CoreCivic agreed under an expansion of an existing inter-governmental service agreement ("IGSA") between the city of Eloy, Arizona and U.S. Immigration and Customs Enforcement ("ICE") to provide residential space and services at the South Texas Family Residential Center.  The IGSA was further amended in October 2016.  The IGSA qualifies as a multiple-element arrangement under the guidance in ASC 605, "Revenue Recognition".  CoreCivic determined that there were five distinct elements related to the amended IGSA with ICE.  In the three months ended June 30, 2017 and 2016, CoreCivic recognized $42.5 million and $70.8 million, respectively, in revenue associated with the amended IGSA while $85.1 million and $141.5 million in revenue was recognized in the six months ended June 30, 2017 and 2016, respectively.  The unrecognized balance of the fixed monthly payments is reported in deferred revenue.  The current portion of deferred revenue is reflected within accounts payable and accrued expenses while the long-term portion is reflected in deferred revenue in the accompanying consolidated balance sheets.  As of June 30, 2017 and December 31, 2016, total deferred revenue associated with this agreement amounted to $60.2 million and $67.0 million, respectively.

3.

GOODWILL

ASC 350, "Intangibles-Goodwill and Other", establishes accounting and reporting requirements for goodwill and other intangible assets.  Goodwill was $40.4 million and $38.4 million as of June 30, 2017 and December 31, 2016, respectively.  This goodwill was established in connection with multiple business combination transactions.  

Under the provisions of ASC 350, CoreCivic performs a qualitative assessment that may allow it to skip the annual two-step impairment test.  Under ASC 350, a company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  If the two-step impairment test is required, CoreCivic determines the fair value of a reporting unit using a collaboration of various common valuation techniques, including market multiples and discounted cash flows.  These impairment tests are required to be performed at least annually.  CoreCivic performs its impairment tests during the fourth quarter, in connection with its annual budgeting process. CoreCivic performs these impairment tests at least annually and whenever circumstances indicate the carrying value of goodwill may not be recoverable.

In March 2017, the Texas Department of Criminal Justice ("TDCJ") notified CoreCivic that, in light of the current economic climate, as well as the fiscal constraints and budget outlook for the next biennium, the TDCJ would not be awarding the contract for the Bartlett State Jail.  The TDCJ had previously solicited proposals for the rebid of the Bartlett facility, along with three other facilities that CoreCivic currently manages for the state of Texas.  The managed-only contracts at the four facilities were scheduled to expire in August 2017.  However, in collaboration with the TDCJ, the decision was made to close the Bartlett facility on June 24, 2017.  In anticipation of the termination of the contract and closing of the Bartlett facility, CoreCivic recorded an asset impairment of $0.3 million during the first quarter of 2017 for the write-off of goodwill associated with the facility.

8


 

4.

REAL ESTATE TRANSACTIONS

Acquisitions

On January 1, 2017, CoreCivic acquired the Arapahoe Community Treatment Center, a 135-bed residential reentry center in Englewood, Colorado, for $5.5 million in cash, excluding transaction-related expenses. The acquisition included a contract with Arapahoe County whereby CoreCivic will provide residential reentry services for up to 135 residents.  

On February 10, 2017, CoreCivic acquired the Stockton Female Community Corrections Facility, a 100-bed residential reentry center in Stockton, California, in a real estate-only transaction for $1.6 million, excluding transaction-related expenses.  The 100-bed Stockton facility is leased to a third-party operator pursuant to a lease agreement that extends through April 2021 and includes one five-year lease extension option.  The lessee separately contracts with the California Department of Corrections and Rehabilitation ("CDCR") to provide rehabilitative and reentry services to female residents at the leased facility.

On June 1, 2017, CoreCivic acquired the real estate operated by Center Point, Inc. ("Center Point"), a California-based non-profit organization, for $7.0 million in cash, excluding transaction-related expenses.  CoreCivic consolidated a portion of Center Point's operations into the Company's preexisting residential reentry center portfolio and assumed ownership and operations of the Oklahoma City Transitional Center, a 200-bed residential reentry center in Oklahoma City, Oklahoma.

In allocating the purchase price of these three acquisitions, CoreCivic recorded $10.8 million of net tangible assets, $1.0 million of identifiable intangible assets, and $2.3 million of goodwill.  CoreCivic acquired the facilities as strategic investments that further expand the Company's network of residential reentry centers.  

Subsequent to quarter-end, CoreCivic acquired New Beginnings Treatment Center, Inc. ("NBTC"), an Arizona-based community corrections company, along with the real estate used in the operation of NBTC's business from an affiliate of NBTC, for an aggregate purchase price of $6.4 million.  In connection with the acquisition, CoreCivic assumed a contract with the Federal Bureau of Prisons ("BOP") to provide reentry services to male and female adults at the Oracle Transitional Center containing 92 beds located in Tucson, Arizona.  

Idle Facilities

On April 30, 2017, the contract with the BOP at the Company's 1,422-bed Eden Detention Center expired and was not renewed.  CoreCivic idled the Eden facility following the transfer of the offender population, and has begun to market the facility.  The Company can provide no assurance that it will be successful in securing a replacement contract.  CoreCivic performed an impairment analysis of the Eden facility, which had a net carrying value of $40.5 million as of June 30, 2017, and concluded that this asset has a recoverable value in excess of the carrying value.

As of June 30, 2017, CoreCivic had eight idled correctional facilities, including the Eden facility, that are currently available and being actively marketed to potential customers.  The following table summarizes each of the idled facilities and their respective carrying values, excluding equipment and other assets that could generally be transferred and used at other facilities CoreCivic owns without significant cost (dollars in thousands):

 

 

 

Design

 

 

Date

 

Net Carrying Values

 

Facility

 

Capacity

 

 

Idled

 

June 30, 2017

 

 

December 31, 2016

 

Prairie Correctional Facility

 

 

1,600

 

 

2010

 

$

16,585

 

 

$

17,071

 

Huerfano County Correctional Center

 

 

752

 

 

2010

 

 

17,201

 

 

 

17,542

 

Diamondback Correctional Facility

 

 

2,160

 

 

2010

 

 

40,948

 

 

 

41,539

 

Southeast Kentucky Correctional Facility

 

 

656

 

 

2012

 

 

22,287

 

 

 

22,618

 

Marion Adjustment Center

 

 

826

 

 

2013

 

 

11,982

 

 

 

12,135

 

Lee Adjustment Center

 

 

816

 

 

2015

 

 

10,243

 

 

 

10,342

 

Kit Carson Correctional Center

 

 

1,488

 

 

2016

 

 

57,948

 

 

 

58,819

 

Eden Detention Center

 

 

1,422

 

 

2017

 

 

40,473

 

 

 

41,269

 

 

 

 

9,720

 

 

 

 

$

217,667

 

 

$

221,335

 

 

CoreCivic also has two idled non-core facilities containing 440 beds with an aggregate net book value of $3.9 million.  CoreCivic incurred approximately $2.5 million and $2.0 million in operating expenses at the idled facilities for the three months ended June 30, 2017 and 2016, respectively.  CoreCivic incurred approximately $5.4 million and $4.1 million in operating expenses at the idled facilities for the six months ended June 30, 2017 and 2016, respectively.  

CoreCivic considers the cancellation of a contract as an indicator of impairment and tested each of the idled facilities for impairment when it was notified by the respective customers that they would no longer be utilizing such facility.  CoreCivic

9


 

updates the impairment analyses on an annual basis for each of the idled facilities and evaluates on a quarterly basis market developments for the potential utilization of each of these facilities in order to identify events that may cause CoreCivic to reconsider its most recent assumptions.  As a result of CoreCivic's analyses, CoreCivic determined each of the idled facilities to have recoverable values in excess of the corresponding carrying values.  

As a result of declines in federal populations at the Company's 910-bed Torrance County Detention Facility and 1,129-bed Cibola County Corrections Center, during the third quarter of 2017 CoreCivic expects to obtain customer consent to consolidate offender populations into its Cibola facility in order to take advantage of efficiencies gained by consolidating populations into one facility.  CoreCivic has begun to market the Torrance facility, which had a net carrying value of $37.3 million at June 30, 2017, to other potential customers.

5.

DEBT

Debt outstanding as of June 30, 2017 and December 31, 2016 consists of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

$900.0 Million Revolving Credit Facility, principal due at

   maturity in July 2020; interest payable periodically at

   variable interest rates. The weighted average rate at

   June 30, 2017 and December 31, 2016 was 2.6% and 2.2%,

   respectively.

 

$

411,000

 

 

$

435,000

 

Term Loan, scheduled principal payments through maturity in

   July 2020; interest payable periodically at variable interest

   rates. The rate at June 30, 2017 and December 31, 2016

   was 2.7% and 2.3%, respectively.  Unamortized debt

   issuance costs amounted to $0.4 million at both

   June 30, 2017 and December 31, 2016.

 

 

90,000

 

 

 

95,000

 

4.625% Senior Notes, principal due at maturity in May 2023;

   interest payable semi-annually in May and November at

   4.625%. Unamortized debt issuance costs amounted to

   $3.6 million and $3.9 million at June 30, 2017 and

   December 31, 2016, respectively.

 

 

350,000

 

 

 

350,000

 

4.125% Senior Notes, principal due at maturity in April 2020;

   interest payable semi-annually in April and October at

   4.125%. Unamortized debt issuance costs amounted to

   $2.3 million and $2.7 million at June 30, 2017 and

   December 31, 2016, respectively.

 

 

325,000

 

 

 

325,000

 

5.0% Senior Notes, principal due at maturity in October 2022;

   interest payable semi-annually in April and October at 5.0%.

   Unamortized debt issuance costs amounted to $2.5 million

   and $2.8 million at June 30, 2017 and December 31, 2016,

   respectively.

 

 

250,000

 

 

 

250,000

 

Total debt

 

 

1,426,000

 

 

 

1,455,000

 

Unamortized debt issuance costs

 

 

(8,804

)

 

 

(9,831

)

Current portion of long-term debt

 

 

(10,000

)

 

 

(10,000

)

Long-term debt, net

 

$

1,407,196

 

 

$

1,435,169

 

 

Revolving Credit Facility.  During July 2015, CoreCivic entered into an amended and restated $900.0 million senior secured revolving credit facility (the "$900.0 Million Revolving Credit Facility").  The $900.0 Million Revolving Credit Facility has an aggregate principal capacity of $900.0 million and a maturity of July 2020.  The $900.0 Million Revolving Credit Facility also has an "accordion" feature that provides for uncommitted incremental extensions of credit in the form of increases in the revolving commitments or incremental term loans in an aggregate principal amount up to an additional $350.0 million as requested by CoreCivic, subject to bank approval. At CoreCivic's option, interest on outstanding borrowings under the $900.0 Million Revolving Credit Facility is based on either a base rate plus a margin ranging from 0.00% to 0.75% or at LIBOR plus a margin ranging from 1.00% to 1.75% based on CoreCivic's then-current leverage ratio.  The $900.0 Million Revolving Credit Facility includes a $30.0 million sublimit for swing line loans that enables CoreCivic to borrow at the base rate from the Administrative Agent without advance notice.

10


 

Based on CoreCivic's current leverage ratio, loans under the $900.0 Million Revolving Credit Facility bear interest at the base rate plus a margin of 0.50% or at LIBOR plus a margin of 1.50%, and a commitment fee equal to 0.35% of the unfunded balance.  The $900.0 Million Revolving Credit Facility also has a $50.0 million sublimit for the issuance of standby letters of credit. As of June 30, 2017, CoreCivic had $411.0 million in borrowings outstanding under the $900.0 Million Revolving Credit Facility as well as $7.5 million in letters of credit outstanding resulting in $481.5 million available under the $900.0 Million Revolving Credit Facility.  

The $900.0 Million Revolving Credit Facility is secured by a pledge of all of the capital stock of CoreCivic's domestic subsidiaries, 65% of the capital stock of CoreCivic's foreign subsidiaries, all of CoreCivic's accounts receivable, and all of CoreCivic's deposit accounts. The $900.0 Million Revolving Credit Facility requires CoreCivic to meet certain financial covenants, including, without limitation, a maximum total leverage ratio, a maximum secured leverage ratio, and a minimum fixed charge coverage ratio.  As of June 30, 2017, CoreCivic was in compliance with all such covenants.  In addition, the $900.0 Million Revolving Credit Facility contains certain covenants that, among other things, limit the incurrence of additional indebtedness, payment of dividends and other customary restricted payments, transactions with affiliates, asset sales, mergers and consolidations, liquidations, prepayments and modifications of other indebtedness, liens and other encumbrances and other matters customarily restricted in such agreements.  In addition, the $900.0 Million Revolving Credit Facility is subject to certain cross-default provisions with terms of CoreCivic's other indebtedness, and is subject to acceleration upon the occurrence of a change of control.

Incremental Term Loan.  On October 6, 2015, CoreCivic obtained $100.0 million under an Incremental Term Loan ("Term Loan") under the "accordion" feature of the $900.0 Million Revolving Credit Facility.  Interest rates under the Term Loan are the same as the interest rates under the $900.0 Million Revolving Credit Facility.  The Term Loan also has the same collateral requirements, financial and certain other covenants, and cross-default provisions as the $900.0 Million Revolving Credit Facility.  The Term Loan, which is pre-payable, also has a maturity concurrent with the $900.0 Million Revolving Credit Facility due July 2020, with scheduled quarterly principal payments in years 2016 through 2020.  As of June 30, 2017, the outstanding balance of the Term Loan was $90.0 million.  

Senior Notes.  Interest on the $325.0 million aggregate principal amount of CoreCivic's 4.125% senior notes issued in April 2013 (the "4.125% Senior Notes") accrues at the stated rate and is payable in April and October of each year.  The 4.125% Senior Notes are scheduled to mature on April 1, 2020.  Interest on the $350.0 million aggregate principal amount of CoreCivic's 4.625% senior notes issued in April 2013 (the "4.625% Senior Notes") accrues at the stated rate and is payable in May and November of each year.  The 4.625% Senior Notes are scheduled to mature on May 1, 2023.  Interest on the $250.0 million aggregate principal amount of CoreCivic's 5.0% senior notes issued in September 2015 (the "5.0% Senior Notes") accrues at the stated rate and is payable in April and October of each year.  The 5.0% Senior Notes are scheduled to mature on October 15, 2022.

The 4.125% Senior Notes, the 4.625% Senior Notes, and the 5.0% Senior Notes, collectively referred to herein as the "Senior Notes", are senior unsecured obligations of the Company and are guaranteed by all of the Company's subsidiaries that guarantee the $900.0 Million Revolving Credit Facility.  CoreCivic may redeem all or part of the Senior Notes at any time prior to three months before their respective maturity date at a “make-whole” redemption price, plus accrued and unpaid interest thereon to, but not including, the redemption date.  Thereafter, the Senior Notes are redeemable at CoreCivic's option, in whole or in part, at a redemption price equal to 100% of the aggregate principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date.

CoreCivic may also seek to issue additional debt or equity securities from time to time when the Company determines that market conditions and the opportunity to utilize the proceeds from the issuance of such securities are favorable.

Debt Maturities.  Scheduled principal payments as of June 30, 2017 for the remainder of 2017, the next four years, and thereafter were as follows (in thousands):

 

2017 (remainder)

 

$

5,000

 

2018

 

 

10,000

 

2019

 

 

15,000

 

2020

 

 

796,000

 

2021

 

 

 

Thereafter

 

 

600,000

 

Total debt

 

$

1,426,000

 

 

11


 

6.

STOCKHOLDERS’ EQUITY

Dividends on Common Stock

During 2016 and the first six months of 2017, CoreCivic's Board of Directors declared the following quarterly dividends on its common stock:

 

Declaration Date

 

Record Date

 

Payable Date

 

Per Share

 

February 19, 2016

 

April 1, 2016

 

April 15, 2016

 

$

0.54

 

May 12, 2016

 

July 1, 2016

 

July 15, 2016

 

$

0.54

 

August 11, 2016

 

October 3, 2016

 

October 17, 2016

 

$

0.54

 

December 8, 2016

 

January 3, 2017

 

January 13, 2017

 

$

0.42

 

February 17, 2017

 

April 3, 2017

 

April 17, 2017

 

$

0.42

 

May 11, 2017

 

July 3, 2017

 

July 17, 2017

 

$

0.42

 

 

Future dividends will depend on CoreCivic's distribution requirements as a REIT, future earnings, capital requirements, financial condition, opportunities for alternative uses of capital, and on such other factors as the Board of Directors of CoreCivic may consider relevant.

Stock Options

In the first six months of 2017 and during 2016, CoreCivic elected not to issue stock options to its non-employee directors, officers, and executive officers as it had in years prior to 2013 and instead elected to issue all of its equity compensation in the form of restricted common stock units ("RSUs"), as described hereafter.  However, CoreCivic continued to recognize stock option expense during the vesting period of stock options awarded in prior years.  All outstanding stock options were fully vested as of December 31, 2016.  As of June 30, 2017, options to purchase 1.0 million shares of common stock were outstanding with a weighted average exercise price of $19.90.

Restricted Stock Units

During the first six months of 2017, CoreCivic issued approximately 554,000 shares of RSUs to certain of its employees and non-employee directors, with an aggregate value of $18.1 million, including 487,000 RSUs to employees and non-employee directors whose compensation is charged to general and administrative expense and 67,000 RSUs to employees whose compensation is charged to operating expense.  During 2016, CoreCivic issued approximately 635,000 shares of RSUs to certain of its employees and non-employee directors, with an aggregate value of $18.5 million, including 562,000 RSUs to employees and non-employee directors whose compensation is charged to general and administrative expense and 73,000 RSUs to employees whose compensation is charged to operating expense.

CoreCivic established performance-based vesting conditions on the RSUs awarded to its officers and executive officers in years 2015 through 2017.  Unless earlier vested under the terms of the agreements, performance-based RSUs issued to officers and executive officers in those years are subject to vesting over a three-year period based upon the satisfaction of certain annual performance criteria, and no more than one-third of the RSUs may vest in any one performance period.  Time-based RSUs issued to other employees in 2016 and 2017, unless earlier vested under the terms of the agreements, generally vest equally on the first, second, and third anniversary of the award.  Time-based RSUs issued to other employees in 2015, unless earlier vested under the terms of the agreements, "cliff" vest on the third anniversary of the award.  RSUs issued to non-employee directors vest one year from the date of award.  

During the three months ended June 30, 2017, CoreCivic expensed $4.1 million, net of forfeitures, relating to RSUs ($0.5 million of which was recorded in operating expenses and $3.6 million of which was recorded in general and administrative expenses). During the three months ended June 30, 2016, CoreCivic expensed $4.1 million, net of forfeitures, relating to restricted common stock and RSUs ($0.5 million of which was recorded in operating expenses and $3.6 million of which was recorded in general and administrative expenses).

During the six months ended June 30, 2017, CoreCivic expensed $8.1 million, net of forfeitures, relating to RSUs ($1.0 million of which was recorded in operating expenses and $7.1 million of which was recorded in general and administrative expenses). During the six months ended June 30, 2016, CoreCivic expensed $7.8 million, net of forfeitures, relating to restricted common stock and RSUs ($1.0 million of which was recorded in operating expenses and $6.8 million of which was recorded in general and administrative expenses). As of June 30, 2017, approximately 1.1 million RSUs remained outstanding and subject to vesting.

12


 

7.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.  For CoreCivic, diluted earnings per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to restricted share grants and stock options.

A reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation is as follows (in thousands, except per share data):

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

NUMERATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

45,475

 

 

$

57,583

 

 

$

95,522

 

 

$

103,890

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

45,475

 

 

$

57,583

 

 

$

95,522

 

 

$

103,890

 

DENOMINATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

118,164

 

 

 

117,401

 

 

 

117,974

 

 

 

117,318

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

118,164

 

 

 

117,401

 

 

 

117,974

 

 

 

117,318

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

377

 

 

 

514

 

 

398

 

 

 

473

 

Restricted stock-based awards

 

44

 

 

 

94

 

 

51

 

 

 

98

 

Weighted average shares and assumed conversions

 

 

118,585

 

 

 

118,009

 

 

 

118,423

 

 

 

117,889

 

BASIC EARNINGS PER SHARE

 

$

0.38

 

 

$

0.49

 

 

$

0.81

 

 

$

0.89

 

DILUTED EARNINGS PER SHARE

 

$

0.38

 

 

$

0.49

 

 

$

0.81

 

 

$

0.88

 

 

There were no stock options excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2017 and 2016.  


13


 

 

8.

COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The nature of CoreCivic's business results in claims and litigation alleging that it is liable for damages arising from the conduct of its employees, offenders or others.  The nature of such claims includes, but is not limited to, claims arising from employee or offender misconduct, medical malpractice, employment matters, property loss, contractual claims, including claims regarding compliance with contract performance requirements, and personal injury or other damages resulting from contact with CoreCivic's facilities, personnel or offenders, including damages arising from an offender's escape or from a disturbance at a facility.  CoreCivic maintains insurance to cover many of these claims, which may mitigate the risk that any single claim would have a material effect on CoreCivic's consolidated financial position, results of operations, or cash flows, provided the claim is one for which coverage is available.  The combination of self-insured retentions and deductible amounts means that, in the aggregate, CoreCivic is subject to substantial self-insurance risk.  

CoreCivic records litigation reserves related to certain matters for which it is probable that a loss has been incurred and the range of such loss can be estimated.  Based upon management’s review of the potential claims and outstanding litigation and based upon management’s experience and history of estimating losses, and taking into consideration CoreCivic's self-insured retention amounts, management believes a loss in excess of amounts already recognized would not be material to CoreCivic's financial statements.  In the opinion of management, there are no pending legal proceedings that would have a material effect on CoreCivic's consolidated financial position, results of operations, or cash flows.  Any receivable for insurance recoveries is recorded separately from the corresponding litigation reserve, and only if recovery is determined to be probable.  Adversarial proceedings and litigation are, however, subject to inherent uncertainties, and unfavorable decisions and rulings resulting from legal proceedings could occur which could have a material adverse impact on CoreCivic's consolidated financial position, results of operations, or cash flows for the period in which such decisions or rulings occur, or future periods.  Expenses associated with legal proceedings may also fluctuate from quarter to quarter based on changes in CoreCivic's assumptions, new developments, or by the effectiveness of CoreCivic's litigation and settlement strategies.

9.

INCOME TAXES

As discussed in Note 1, the Company began operating in compliance with REIT requirements for federal income tax purposes effective January 1, 2013.  As a REIT, the Company must distribute at least 90 percent of its taxable income (including dividends paid to it by its TRSs) and will not pay federal income taxes on the amount distributed to its stockholders.  In addition, the Company must meet a number of other organizational and operational requirements. It is management's intention to adhere to these requirements and maintain the Company's REIT status. Most states where CoreCivic holds investments in real estate conform to the federal rules recognizing REITs. Certain subsidiaries have made an election with the Company to be treated as TRSs in conjunction with the Company's REIT election; the TRS elections permit CoreCivic to engage in certain business activities in which the REIT may not engage directly. A TRS is subject to federal and state income taxes on the income from these activities and therefore, CoreCivic includes a provision for taxes in its consolidated financial statements.

Income taxes are accounted for under the provisions of ASC 740, "Income Taxes". ASC 740 generally requires CoreCivic to record deferred income taxes for the tax effect of differences between book and tax bases of its assets and liabilities. Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the statement of operations in the period that includes the enactment date.  Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including CoreCivic’s past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

CoreCivic recorded an income tax expense of $3.2 million and $2.7 million for the three months ended June 30, 2017 and 2016, respectively.  CoreCivic recorded an income tax expense of $5.7 million and $3.8 million for the six months ended June 30, 2017 and 2016, respectively.  As a REIT, CoreCivic is entitled to a deduction for dividends paid, resulting in a substantial reduction in the amount of federal income tax expense it recognizes.  Substantially all of CoreCivic's income tax expense is incurred based on the earnings generated by its TRSs.  CoreCivic's overall effective tax rate is estimated based on its current projection of taxable income primarily generated in its TRSs. The Company's consolidated effective tax rate could fluctuate in the future based on changes in estimates of taxable income, the relative amounts of taxable income generated by the TRSs and the REIT, the implementation of additional tax planning strategies, changes in federal or state tax rates or laws affecting tax credits available to the Company, changes in other tax laws, changes in estimates related to uncertain tax positions, or changes

14


 

in state apportionment factors, as well as changes in the valuation allowance applied to the Company's deferred tax assets that are based primarily on the amount of state net operating losses and tax credits that could expire unused.

Income Tax Contingencies

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance prescribed in ASC 740 establishes a recognition threshold of more likely than not that a tax position will be sustained upon examination.  The measurement attribute requires that a tax position be measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.  

CoreCivic had no liabilities recorded for uncertain tax positions as of June 30, 2017.  CoreCivic recognizes interest and penalties related to unrecognized tax positions in income tax expense.  CoreCivic does not currently anticipate that the total amount of unrecognized tax positions will significantly change in the next twelve months.  

10.

SEGMENT REPORTING

As of June 30, 2017, CoreCivic owned and managed 66 facilities, and managed 10 facilities it did not own. In addition, CoreCivic owned eight facilities that it leased to third-party operators.  Management views CoreCivic's operating results in one operating segment.  However, the Company has chosen to report financial performance segregated for (1) owned and managed facilities and (2) managed-only facilities as the Company believes this information is useful to users of the financial statements.  Owned and managed facilities include the operating results of those facilities placed into service that were owned or controlled via a long-term lease and managed by CoreCivic.  Managed-only facilities include the operating results of those facilities owned by a third party and managed by CoreCivic.  The operating performance of the owned and managed and the managed-only facilities can be measured based on their net operating income.  CoreCivic defines facility net operating income as a facility’s operating income or loss from operations before interest, taxes, asset impairments, depreciation, and amortization.  


15


 

 

The revenue and net operating income for the owned and managed and the managed-only facilities and a reconciliation to CoreCivic’s operating income is as follows for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned and managed

 

$

374,849

 

 

$

401,931

 

 

$

759,552

 

 

$

790,552

 

Managed-only

 

 

50,871

 

 

 

51,346

 

 

 

101,432

 

 

 

101,176

 

Total management revenue

 

 

425,720

 

 

 

453,277

 

 

 

860,984

 

 

 

891,728

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned and managed

 

 

254,611

 

 

 

266,249

 

 

 

516,883