2016
A N N U A L R E P O R T
Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-16109
CORECIVIC, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 62-1763875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE 37215
(Address and zip code of principal executive office)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value per share
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X ] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes [ ] No [X]
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 [ X ] 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.). Yes [ ] No [X]
The aggregate market value of the shares of the registrant’s Common Stock held by non-affiliates was approximately $4,092,088,786 as of June 30, 2016 based on the
closing price of such shares on the New York Stock Exchange on that day. The number of shares of the registrant’s Common Stock outstanding on February 16, 2017
was 117,666,948.
Portions of the registrant’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders, currently scheduled to be held on May 11, 2017, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE:
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CORECIVIC, INC.
FORM 10-K
For the fiscal year ended December 31, 2016
TABLE OF CONTENTS
PART I
Item No.
1.
Business
Page
Overview ...................................................................................................................................................... 5
Operating Procedures and Offender Services .............................................................................................. 7
Business Development ................................................................................................................................. 9
2016 Accomplishments .............................................................................................................................. 13
Facility Portfolio ........................................................................................................................................ 14
Competitive Strengths ................................................................................................................................ 22
Capital Strategy .......................................................................................................................................... 25
Government Regulation ............................................................................................................................. 26
Insurance .................................................................................................................................................... 28
Employees .................................................................................................................................................. 29
Competition ................................................................................................................................................ 29
Risk Factors ....................................................................................................................................................... 30
Unresolved Staff Comments ............................................................................................................................. 51
Properties .......................................................................................................................................................... 51
Legal Proceedings ............................................................................................................................................. 51
Mine Safety Disclosures.................................................................................................................................... 52
1A.
1B.
2.
3.
4.
PART II
5.
Market for Registrant's Common Equity, Related Stockholder Matters and
6.
7.
Issuer Purchases of Equity Securities......................................................................................................... 52
Market Price of and Distributions on Capital Stock ......................................................................... 52
Dividend Policy ................................................................................................................................ 52
Issuer Purchases of Equity Securities ............................................................................................... 53
Selected Financial Data ..................................................................................................................................... 53
Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................ 55
Overview ............................................................................................................................................. 55
Critical Accounting Policies ............................................................................................................... 59
Results of Operations .......................................................................................................................... 63
Liquidity and Capital Resources ........................................................................................................ 84
Inflation ............................................................................................................................................... 90
Seasonality and Quarterly Results ...................................................................................................... 90
7A.
Quantitative and Qualitative Disclosures about Market Risk............................................................................ 90
8.
Financial Statements and Supplementary Data ................................................................................................. 91
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................ 91
Controls and Procedures ................................................................................................................................... 91
9A.
9B. Other Information ............................................................................................................................................. 95
PART III
10.
11.
12.
13.
14.
Directors, Executive Officers and Corporate Governance ................................................................................ 95
Executive Compensation ................................................................................................................................... 95
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ............................................................................................................... 95
Certain Relationships and Related Transactions and Director Independence ................................................... 96
Principal Accounting Fees and Services ........................................................................................................... 96
15.
Exhibits and Financial Statement Schedules ..................................................................................................... 97
PART IV
SIGNATURES
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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains statements that are forward-looking statements as
defined within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give our current expectations of forecasts of future events. All
statements other than statements of current or historical fact contained in this Annual Report,
including statements regarding our future financial position, business strategy, budgets,
projected costs, and plans, and objectives of management for future operations, are forward-
looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,”
“intend,” “could,” “may,” “plan,” “projects,” “will,” and similar expressions, as they relate to
us, are intended to identify forward-looking statements. These forward-looking statements
are based on our current plans and actual future activities, and our results of operations may
be materially different from those set forth in the forward-looking statements. In particular
these include, among other things, statements relating to:
general economic and market conditions, including the impact governmental budgets
can have on our contract renewals and renegotiations, per diem rates, and occupancy;
fluctuations in our operating results because of, among other things, changes in
occupancy levels, competition, increases in costs of operations, fluctuations in
interest rates, and risks of operations;
changes in the privatization of the corrections and detention industry and the public
acceptance of our services;
our ability to obtain and maintain correctional, detention, and reentry facility
management contracts, including, but not limited to, sufficient governmental
appropriations, contract compliance, effects of inmate disturbances, and the timing of
the opening of new facilities and the commencement of new management contracts as
well as our ability to utilize current available beds and new capacity as development
and expansion projects are completed;
increases in costs to develop or expand correctional, detention, and reentry facilities
that exceed original estimates, or the inability to complete such projects on schedule
as a result of various factors, many of which are beyond our control, such as weather,
labor conditions, and material shortages, resulting in increased construction costs;
changes in government policy regarding the utilization of the private sector for
corrections and detention capacity and our services by the U.S. Department of
Justice, or DOJ, and the Department of Homeland Security, or DHS;
changes in government policy and in legislation and regulation of corrections and
detention contractors that affect our business, including, but not limited to,
California's utilization of out-of-state contracted correctional capacity and the
continued utilization of the South Texas Family Residential Center by U.S.
Immigration and Customs Enforcement, or ICE, under terms of the current contract,
and the impact of any changes to immigration reform and sentencing laws (Our
company does not, under longstanding policy, lobby for or against policies or
legislation that would determine the basis for, or duration of, an individual's
incarceration or detention.);
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our ability to successfully integrate operations of our acquisitions and realize
projected returns resulting therefrom;
our ability to meet and maintain qualification for taxation as a real estate investment
trust, or REIT; and
the availability of debt and equity financing on terms that are favorable to us.
Any or all of our forward-looking statements in this Annual Report may turn out to be
inaccurate. We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we believe may
affect our financial condition, results of operations, business strategy, and financial needs.
They can be affected by inaccurate assumptions we might make or by known or unknown
risks, uncertainties and assumptions, including the risks, uncertainties and assumptions
described in “Risk Factors.”
In light of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Annual Report may not occur and actual results could differ
materially from those anticipated or implied in the forward-looking statements. When you
consider these forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this Annual Report, including in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business.”
Our forward-looking statements speak only as of the date made. We undertake no obligation
to publicly update or revise forward-looking statements, whether as a result of new
information, future events or otherwise. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained in this Annual Report.
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PART I.
ITEM 1.
BUSINESS.
Overview
We are a diversified government solutions company with the scale and experience needed to
solve tough government challenges in cost-effective ways. We provide 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.
We have been a flexible and dependable partner for government for more than 30 years. Our
employees are driven by a deep sense of service, high standards of professionalism and a
responsibility to help government better the public good.
Structured as a real estate investment trust, or REIT, we are the nation’s largest owner of
partnership correctional, detention, and residential reentry facilities and one of the largest
prison operators in the United States. As of December 31, 2016, we owned or controlled 49
correctional and detention facilities, owned or controlled 25 residential reentry facilities, and
managed an additional 11 correctional and detention facilities owned by our government
partners, with a total design capacity of approximately 89,700 beds in 20 states and the
District of Columbia. In addition to providing fundamental residential services, our 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. We also provide or make available to offenders
certain health care (including medical, dental, and mental health services), food services, and
work and recreational programs.
Over the past several years, we have successfully executed strategies to diversify our
business and offer a broader range of solutions to government partners. To reflect this
transformation, we announced in October 2016 our decision to rename and rebrand
Corrections Corporation of America to CoreCivic, Inc., or CoreCivic, or the Company. Our
decision to rename the Company was the result of an intense research, brand strategy, and
creative process that began in mid-2015. While the Company was legally renamed in
December 2016, related rebranding efforts are ongoing. Through three business offerings,
CoreCivic Safety, CoreCivic Properties, and CoreCivic Community, we provide 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.
We are a Maryland corporation formed in 1983. Our principal executive offices are located
at 10 Burton Hills Boulevard, Nashville, Tennessee, 37215, and our telephone number at that
location is (615) 263-3000. Our website address is www.corecivic.com. We make our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, definitive proxy statements, and amendments to those reports under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), available on our website, free of
charge, as soon as reasonably practicable after these reports are filed with or furnished to the
Securities and Exchange Commission, or the SEC. Information contained on our website is
not part of this Annual Report.
We began operating as a REIT for federal income tax purposes effective January 1, 2013.
We provide correctional services and conduct other business activities through taxable REIT
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subsidiaries, or TRSs. A TRS is a subsidiary of a REIT that is subject to applicable corporate
income tax and certain qualification requirements. Our use of TRSs enables us to comply
with REIT qualification requirements while providing correctional services at facilities we
own and at facilities owned by our 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.
As a REIT, we generally are not subject to federal income taxes on our REIT taxable income
and gains that we distribute to our stockholders, including the income derived from providing
prison bed capacity and dividends we earn from our TRSs. However, our TRSs will be
required to pay income taxes on their earnings at regular corporate income tax rates.
As a REIT, we generally are required to distribute annually to our stockholders at least 90%
of our REIT taxable income (determined without regard to the dividends paid deduction and
excluding net capital gains). Our REIT taxable income will not typically include income
earned by our TRSs except to the extent our TRSs pay dividends to the REIT.
Our customers primarily consist of federal, state, and local correctional and detention
authorities. Federal correctional and detention authorities primarily consist of the Federal
Bureau of Prisons, or the BOP, the United States Marshals Service, or the USMS, and ICE.
Payments by federal correctional and detention authorities represented 52%, 51%, and 44%
of our total revenue for the years ended December 31, 2016, 2015, and 2014, respectively.
Our customer contracts typically have terms of three to five years and contain multiple
renewal options. Most of our facility contracts also contain clauses that allow the
government agency to terminate the contract at any time without cause, and our contracts are
generally subject to annual or bi-annual legislative appropriations of funds.
We are compensated for providing bed capacity and correctional, detention, and residential
reentry services at a per diem rate based upon actual or minimum guaranteed occupancy
levels. Occupancy rates for a particular facility are typically low when first opened or
immediately following an expansion. However, beyond the start-up period, which typically
ranges from 90 to 180 days, the occupancy rate tends to stabilize. We also lease facilities to
governmental agencies and third-party operators. The average compensated occupancy of
our facilities, based on rated capacity was as follows for the years 2016, 2015, and 2014:
Owned and managed facilities
Managed-only facilities
Total operating facilities
Leased facilities
Total
2016
76%
95%
79%
2015
80%
94%
83%
2014
81%
95%
84%
100%
100%
100%
80%
83%
84%
The average compensated occupancy of our owned and managed facilities, excluding idled
facilities, was 87% for 2016 and 89% for both 2015 and 2014.
We also provide transportation services to governmental agencies through TransCor
America, LLC, or TransCor, a subsidiary of our wholly-owned TRS. During the years ended
December 31, 2016, 2015, and 2014, TransCor generated total revenue of $2.6 million, $4.1
million, and $4.4 million, respectively, or approximately 0.1%, 0.2%, and 0.3% of our total
consolidated revenue in 2016, 2015, and 2014, respectively. We believe TransCor provides a
6
complementary service to our core business that enables us to respond quickly to our
customers’ transportation needs.
Operating Procedures and Offender Services
Pursuant to the terms of our customer contracts, we are responsible for the overall operations
of our facilities, including staff recruitment, general administration of the facilities, facility
maintenance, security, and supervision of the offenders. We are required by our customer
contracts to maintain certain levels of insurance coverage for general liability, workers’
compensation, vehicle liability, and property loss or damage. We also are required to
indemnify our customers for claims and costs arising out of our operations and, in certain
cases, to maintain performance bonds and other collateral requirements.
We are committed to equipping offenders in our care with the services, support, and
resources necessary to return to the community as productive, contributing members of
society. To that end, we provide a wide range of evidence-based reentry programs and
activities at our facilities. At most of the facilities we manage, offenders have the
opportunity to enhance their basic education from literacy through the acquisition of the high
school equivalency diploma endorsed by the respective state and, in some cases,
postsecondary educational achievements and opportunities to participate in college
correspondence classes. In a number of our facilities we offer an adult education curriculum
recognized by a number of nations to which these offenders may return, including curriculum
offered in conjunction with the Mexican government. We also provide the Adult Education
in Spanish program for our offenders with such a distinct need in education.
We recently invested in the equipment necessary for the offenders who are close to taking
their high school equivalency exam (either the GED or the HiSET) to use the GED/HiSET
Academy software program. GED/HiSET Academy is an offline software program that
provides over 200 hours of individualized lessons up to the 12th grade. The GED/HiSET
Academy incorporates best teaching practices and provides an atmosphere to engage and
motivate students to learn everything they need to know to pass the GED/HiSET exam.
During 2016, the number of offenders in facilities we manage who passed high school
equivalency exams increased by 56% from 2015.
In addition, we offer a broad spectrum of vocational/technical education opportunities to
equip individuals with marketable job skills. Our trade programs are certified by the National
Center for Construction Education and Research, or NCCER. NCCER establishes the
curriculum and certification for over 4,000 construction and trade organizations. Graduates
of these programs enter the job market with certified skills that significantly enhance
employability. During 2016, the number of offenders in facilities we manage who earned
vocational certificates increased by 26% compared to 2015. Near the end of 2016, in
coordination with the Georgia Department of Corrections, we developed programs at two
facilities in Georgia to offer courses in welding and diesel truck maintenance, enabling
students to earn trade certificates from nearby colleges.
For those with assessed substance use disorder needs, we offer evidence-based treatment
programs such as the Residential Drug Abuse Program, or RDAP, with proven clinical
outcomes. We offer both Residential Therapeutic Community models and intensive
outpatient programs. We also offer drug and alcohol use education/DWI programs in some
of our locations. Our goal in providing RDAP is to stimulate internal motivation for change
and progress through the stages of change so that lasting personality alterations can occur.
Our drug and alcohol education programs help participants understand their relationships
with drugs and the links between drug use and crime, as well as assisting them to make better
choices and decisions that can lead to healthier relationships in their lives. Our Victim
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Impact Programs, available at a number of our facilities, seek to educate offenders on the
negative effects upon others resulting from their criminal conduct. At all our facilities, we
provide faith-based programs to those seeking spiritual growth and character development.
Our facilities offer opportunities for religious worship and study for a variety of faith groups
and belief systems. Our Reentry and Life Skills programs prepare individuals for life after
incarceration by teaching offenders how to successfully conduct a job search, how to manage
their budget and financial matters, parenting skills, and relationship and family skills.
Equally significant, we offer cognitive behavioral programs aimed at changing anti-social
attitudes and behaviors of offenders, with a focus on altering the level of criminal thinking of
offenders. Across the country, these programs incorporate the use of thousands of
volunteers, along with our staff, who assist in providing guidance, direction, and post-
incarceration services to offenders. We believe that together these efforts help us achieve
reductions in recidivism.
Through our community corrections facilities, we provide an array of services to defendants
and offenders who are serving their full sentence, the last portion of their sentence, waiting to
be sentenced, or awaiting trial while supervised in a community environment. We offer
housing and programs, with a key focus on employment, job readiness, life skills, and various
substance abuse treatment programs, in order to help offenders successfully reenter the
community and reduce the risk of recidivism. We also offer an alternative sentencing option
to the courts which allows offenders who are gainfully employed to pay a significant portion
of their cost of incarceration while serving their sentence in a community facility.
In addition, in some of our community corrections facilities, we offer housing and program
services to parolees who have completed their sentence, but lack a viable home plan.
Through a focus on employment and skill development, we provide a means for these
parolees to successfully reintegrate into their communities.
Lastly, we provide day-reporting and outpatient substance abuse treatment programs at some
of our community corrections facilities. These programs, depending on the needs of the
offender, can provide cognitive behavioral based programs to assist in the offender's
successful reentry while holding the offender accountable while living in the community.
We are proud of the employees who provided these extensive services to the offenders
entrusted in our care. We believe these services will help offenders become more productive
citizens and transition successfully back into society. Through the dedication of our teachers,
counselors, case managers, chaplains, and other inmate support service professionals, our
program highlights during 2016 include:
Our La Palma Correctional Center awarding 964 vocational certificates.
Our Crowley County Correctional Facility leading the Colorado state system in GED
completions.
Our Wheeler Correctional Facility leading the Georgia state system in GED
completions.
Our Northwest New Mexico Correctional Facility re-missioning as a program-
intensive reentry facility.
The American Correctional Association, or ACA, is an independent organization comprised
of corrections professionals that establishes accreditation standards for correctional and
detention institutions. Outside agency standards, such as those established by the ACA,
provide us with the industry’s most widely accepted operational guidelines. ACA accredited
facilities must be audited and re-accredited at least every three years. We have sought and
received ACA accreditation for 41, or approximately 95%, of the eligible facilities we
8
operated as of December 31, 2016, excluding our community corrections facilities. During
2016, 14 of the facilities we manage were re-accredited by the ACA with an average score of
99.6%, making our portfolio average 99.5%.
Beyond the standards provided by the ACA, our facilities are operated in accordance with a
variety of company and facility-specific policies and procedures, as well as various
contractual requirements. Many of these policies and procedures reflect the high standards
generated by a number of sources, including the ACA, The Joint Commission, the National
Commission on Correctional Healthcare, the Occupational Safety and Health Administration,
as well as federal, state, and local government codes and regulations and longstanding
correctional procedures.
In addition, our facilities are operated in compliance with the Prison Rape Elimination Act, or
PREA, standards, which became effective in August 2013. All confinement facilities
covered under the PREA standards must be audited at least every three years to be considered
compliant with the Act. Covered facilities include adult prisons and jails, juvenile facilities,
lockups (housing detainees overnight), and community confinement facilities, whether
operated by the Department of Justice or by a state, local, corporate, or nonprofit authority.
Our facilities operate under these established standards, policies, and procedures, and also are
subject to annual audits by our Quality Assurance Division, or QAD, which operates under
the auspices of, and reports directly to, our Office of General Counsel and independently
from our Operations Division. Through the QAD, we have devoted significant resources to
ensuring that our facilities meet outside agency and accrediting organization standards and
guidelines.
The QAD employs a team of full-time auditors, who are subject matter experts from all major
disciplines within institutional operations. Annually, without advance notice, QAD auditors
conduct on-site evaluations of each facility we operate using specialized audit tools, typically
containing more than 1,000 audit indicators across all major operational areas. In most
instances, these audit tools are tailored to facility and partner specific requirements. In
addition, audit teams often work with facilities to address specific areas of need, such as
meeting requirements of new partner contracts or providing detailed training of new
departmental managers.
The QAD management team coordinates overall operational auditing and compliance efforts
across all CoreCivic facilities. In conjunction with subject matter experts and other
stakeholders having risk management responsibilities, the QAD management team develops
performance measurement tools used in facility audits. The QAD management team provides
governance of the corporate corrective action plan process for any items of nonconformance
identified through internal and external facility reviews. Our QAD also contracts with teams
of ACA certified correctional auditors to evaluate compliance with ACA standards at
accredited facilities. Similarly, the QAD coordinates the work of certified PREA auditors to
help ensure that all facilities operate in compliance with applicable PREA standards.
Business Development
We believe we own approximately 58% of all privately owned prison beds in the United
States, manage nearly 41% of all privately managed prison beds in the United States, and are
currently the second largest private owner and provider of community corrections services in
the nation. Under the direction of our partnership development department, we market our
facilities and services to government agencies responsible for federal, state, and local
correctional, detention, and residential reentry facilities in the United States. Under the
direction of our real estate department, we pursue asset acquisitions and business
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combination transactions that we believe will provide favorable investment returns and
increase value to our stockholders. Our real estate department also pursues mission-critical
real estate solutions for government agencies including, but not limited to, corrections and
detention real estate assets.
We execute cross-departmental efforts to market CoreCivic Safety solutions to government
partners that seek corrections and detention management services, CoreCivic Properties
solutions to customers that need real estate and maintenance services, and CoreCivic
Community solutions to government partners seeking residential reentry services. We also
offer government partners a combination of these business offerings, and currently have two
government partners utilizing all three.
As indicated by the following chart, business from our federal customers, including primarily
the BOP, USMS, and ICE, continues to be a significant component of our business. The
BOP, USMS, and ICE were the only federal partners that accounted for 10% or more of our
total revenue during the last three years.
Percent of Total Revenue
52%
51%
44%
28%
15%
9%
24%
16%
11%
13%
17%
13%
Total Federal
ICE
USMS
BOP
60%
50%
40%
30%
20%
10%
0%
2016
2015
2014
Certain of our contracts with federal partners contain clauses that guarantee the federal
partner access to a minimum bed capacity in exchange for a fixed monthly payment.
However, these contracts also generally provide the government the ability to cancel the
contract for non-appropriation of funds or for convenience.
Despite our increase in federal revenues, inmate populations in federal facilities, particularly
within the BOP system nationwide, have declined over the past two years. Inmate
populations in the BOP system declined in 2015 and 2016 due, in part, to the retroactive
application of changes to sentencing guidelines applicable to certain federal drug trafficking
offenses. Increases in capacity within the federal system could result in a decline in BOP
populations within our facilities, and could negatively impact the future demand for prison
capacity. Further, in a memorandum to the BOP dated August 18, 2016, the DOJ directed
that, as each contract with privately operated prisons reaches the end of its term, the BOP
should either decline to renew that contract or substantially reduce its scope in a manner
consistent with law and the overall decline of the BOP's inmate population. However, in
November 2016, we announced that the BOP exercised a two-year renewal option at our
1,978-bed, McRae Correctional Facility. The amended agreement commenced on December
1, 2016, and provides for housing up to 1,724 federal inmates with a fixed monthly payment
for 1,633 beds, compared to our previous contract which contained a fixed payment for 1,780
beds.
On August 29, 2016, the Secretary of the DHS announced that he directed the Homeland
Security Advisory Council, or HSAC, to establish a Subcommittee of the Council to review
ICE's current policy and practices concerning the use of private immigration detention and
evaluate whether this practice should be eliminated. A written report of the subcommittee's
10
evaluation was provided by the HSAC to the Secretary of the DHS and the Director of ICE
on November 30, 2016. According to the report, fiscal considerations, combined with the
need for realistic capacity to handle sudden increases in detention, suggest that DHS's use of
private for-profit detention will continue. The report indicated that, as of September 12,
2016, 10% of the ICE detainee population was housed in federally owned and directed
facilities, while 65% was housed in facilities operated by private, for-profit contractors, and
25% was housed in facilities operated by county jails or other local or state government
entities. Further, the report indicated that ICE should seek ongoing ways to reduce reliance
on detention in county jails, which generally do not meet Performance-Based National
Detention Standards, or PBNDS, promulgated by ICE.
We believe the utilization of private sector bed capacity and management services provides
ICE with flexible and cost-effective solutions essential to their mission. We also believe the
new contract we signed in October 2016 to provide detention space and services at our
Cibola County Corrections Center to ICE for up to 1,116 detainees, and the new contract
award we announced in December 2016 to provide detention capacity to ICE at our 2,016
bed Northeast Ohio Correctional Center, demonstrate examples of our ability to provide
flexible solutions and fulfill emergent needs of ICE that would be very difficult to replicate in
the public sector. We previously housed inmates from the BOP at the Cibola facility under a
contract that expired in October 2016 and at the Northeast Ohio facility under a contract that
expired in May 2015. Therefore, we believe these new contracts provide further examples of
the marketability of our real estate assets across multiple government customers.
We generated approximately 9% and 28% of our total revenue from the BOP and ICE during
the year ended December 31, 2016, respectively.
State revenues from contracts at correctional, detention, and residential reentry facilities that
we operate constituted 38%, 40%, and 46% of our total revenue during 2016, 2015, and
2014, respectively, and decreased 2.0% from $725.1 million during 2015 to $710.4 million
during 2016. Approximately 6%, 10%, and 12% of our total revenue for 2016, 2015, and
2014, respectively, was generated from the California Department of Corrections and
Rehabilitation, or CDCR, in facilities housing inmates outside the state of California. The
CDCR was our only state partner that accounted for 10% or more of our total revenue during
these years.
Several of our state partners are projecting improvements in their budgets which has helped
us secure recent per diem increases at certain facilities. Further, several of our existing state
partners, as well as state partners with which we do not currently do business, are
experiencing growth in inmate populations and overcrowded conditions. Although we can
provide no assurance that we will enter into any new contracts, we believe we are well
positioned to provide them with needed bed capacity, as well as the programming and reentry
services they are seeking.
We believe the long-term growth opportunities of our business remain attractive as
governments consider their emergent needs, as well as the efficiency, savings, and offender
programming opportunities we can provide along with flexible solutions to match our
partners' needs. Further, we expect our partners to continue to face challenges in maintaining
old facilities, and developing new facilities and additional capacity which could result in
future demand for the solutions we provide.
11
We believe that we can further develop our business by, among other things:
Maintaining and expanding our existing customer relationships and filling existing
beds within our facilities, while maintaining an adequate inventory of available
beds that we believe provides us with flexibility and a competitive advantage
when bidding for new management contracts;
Enhancing the terms of our existing contracts and expanding the services we
provide under those contracts;
Pursuing additional opportunities to purchase and manage existing government-
owned facilities;
Pursuing additional opportunities to lease our facilities to government and other
third-party operators in need of correctional, detention, and residential reentry
capacity;
Pursuing mission-critical real estate solutions for government agencies including,
but not limited to, corrections and detention real estate assets;
Pursuing other asset acquisitions and business combinations through transactions
with non-government third parties;
Maintaining and expanding our focus on community corrections and reentry
programming that align with the needs of our government partners; and
Establishing relationships with new customers who have either previously not
outsourced their correctional facility management needs or have utilized other
private enterprises.
We generally receive inquiries from or on behalf of government agencies that are considering
outsourcing the ownership and/or management of certain facilities or that have already
decided to contract with a private enterprise. When we receive such an inquiry, we
determine whether there is an existing need for our correctional, detention, and residential
reentry facilities and/or services and whether the legal and political climate in which the
inquiring party operates is conducive to serious consideration of outsourcing. Based on these
findings, an initial cost analysis is conducted to further determine project feasibility.
Frequently, government agencies responsible for correctional, detention, and residential
reentry facilities and services procure space and services through solicitations or competitive
procurements. As part of our process of responding to such requests, members of our
management team meet with the appropriate personnel from the agency making the request
to best determine the agency’s needs. If the project fits within our strategy, we submit a
written response. A typical solicitation or competitive procurement requires bidders to
provide detailed information, including, but not limited to, the space and services to be
provided by the bidder, its experience and qualifications, and the price at which the bidder is
willing to provide the facility and services (which services may include the purchase,
renovation, improvement or expansion of an existing facility or the planning, design and
construction of a new facility). The requesting agency selects a firm believed to be able to
provide the requested bed capacity, if needed, and most qualified to provide the requested
services and then negotiates the price and terms of the contract with that firm.
12
2016 Accomplishments
In 2016, we entered into a number of new contracts, renewed several other significant
contracts, and completed numerous other transactions and milestones, including the
following:
Completed the acquisition of Correctional Management, Inc., or CMI, a privately
held community corrections company that operates seven community corrections
facilities with approximately 600 beds in Colorado.
Entered into a five-year lease with unlimited two-year renewal options with the
Oklahoma Department of Corrections, or ODOC, for our previously idled 2,400-
bed North Fork Correctional Facility.
Completed the acquisition of a 112-bed community corrections facility in
California that is leased to a third-party operator under a triple net lease
agreement.
Awarded a contract extension to continue providing residential reentry services for
the BOP at our 120-bed CAI-Boston Avenue and 483-bed CAI-Ocean View
facilities, and agreed to consolidate populations at both facilities into our CAI-
Ocean View facility.
Awarded a new two-year contract, with three one-year renewal options, by the
CDCR to provide residential reentry space and services for up to 120 residents at
our CAI-Boston Avenue facility.
Announced a restructuring of our corporate operations and implementation of a
cost reduction plan that is expected to result in annual expense savings of
approximately $9.0 million. The restructuring realigns the corporate structure to
more effectively serve facility operations, while better supporting our ongoing
business diversification strategy.
ICE amended its agreement to utilize our 2,400-bed South Texas Family
Residential Center. The agreement extends the life of the contract through
September 2021, and can be further extended by bi-lateral modification.
Announced a new contract award to house up to 1,116 ICE detainees at our Cibola
County Corrections Center. The contract contains an initial term of five years,
with renewal options upon mutual agreement. We previously housed inmates
from the BOP at our Cibola facility under a separate contract that expired on
October 30, 2016.
Completed the expansion of our Red Rock Correctional Center in Arizona,
bringing the facility to a design capacity of 2,024 beds. We began receiving
inmates at the expanded Red Rock facility under a December 2015 award to house
up to an additional 1,000 medium-security inmates from the Arizona Department
of Corrections. The award brought the contracted bed capacity at the facility to
2,000 inmates.
13
Announced a new contract award from ICE at our 2,016-bed Northeast Ohio
Correctional Center in order to assist ICE with their current detention needs. The
new contract contains an initial term expiring March 31, 2017, with three six-
month renewal periods at the option of ICE. As of January 31, 2017, we housed
approximately 215 ICE detainees and approximately 520 detainees from the
USMS under a separate contract at the Northeast Ohio facility.
Renamed and began the process of rebranding the Company as CoreCivic in order
to reflect the successful execution of strategies to diversify our business and offer
a broader range of solutions to government partners.
Facility Portfolio
General
Our facilities can generally be classified according to the level(s) of security at such facility.
Minimum security facilities have open housing within an appropriately designed and
patrolled institutional perimeter. Medium security facilities have either cells, rooms or
dormitories, a secure perimeter, and some form of external patrol. Maximum security
facilities have cells, a secure perimeter, and external patrol. Multi-security facilities have
various areas encompassing minimum, medium or maximum security.
Our facilities can also be classified according to their primary function. The primary
functional categories are:
Correctional Facilities. Correctional facilities house and provide contractually agreed
upon programs and services to sentenced adult prisoners, typically prisoners on whom
a sentence in excess of one year has been imposed.
Detention Facilities. Detention facilities house and provide contractually agreed upon
programs and services to (i) prisoners being detained by ICE, (ii) prisoners who are
awaiting trial who have been charged with violations of federal criminal law (and are
therefore in the custody of the USMS) or state criminal law, and (iii) prisoners who
have been convicted of crimes and on whom a sentence of one year or less has been
imposed.
Residential Facilities. Residential facilities provide space and residential
services in an open and safe environment to adults with children who have
been detained by ICE and are awaiting the outcome of immigration hearings
or the return to their home countries. As contractually agreed upon,
residential facilities offer services including, but not limited to, educational
programs, medical care, recreational activities, counseling, and access to
religious and legal services.
Community Corrections. Community corrections/residential reentry facilities offer
housing and programs to offenders who are serving the last portion of their sentence or
who have been assigned to the facility in lieu of a jail or prison sentence, with a key
focus on employment, job readiness, and life skills.
Leased Facilities. Leased facilities are facilities that we own but do not manage and
that are leased to third-party operators. As of December 31, 2016, we leased three
correctional facilities and five community corrections facilities to third-party operators.
14
Facilities and Facility Management Contracts
As of December 31, 2016, we owned or controlled 49 correctional and detention facilities,
three of which we leased to third-party operators, and owned or controlled 25 residential
reentry facilities, five of which we leased to third-party operators, in 18 states and the District
of Columbia. Additionally, we managed 11 correctional and detention facilities owned by
government agencies. We also owned two corporate office buildings. Owned and managed
facilities include facilities placed into service that we own or control via a long-term lease
and manage. Managed-only facilities include facilities we manage that are owned by a third
party. The following table sets forth all of the facilities that, as of December 31, 2016, we
(i) owned and managed, (ii) owned, but were leased to another operator, and (iii)
managed but are owned by a government authority. The table includes certain
information regarding each facility, including the term of the primary customer contract
related to such facility, or, in the case of facilities we owned but leased to a third-party
operator, the term of such lease.
15
Facility Name
Primary
Customer
Design
Capacity (A)
Security
Level
Facility
Type (B)
Term
Remaining
Renewal
Options (C)
Owned and Managed Facilities:
Central Arizona Detention Center
Florence, Arizona
Eloy Detention Center
Eloy, Arizona
Florence Correctional Center
Florence, Arizona
La Palma Correctional Center
Eloy, Arizona
Red Rock Correctional Center (D)
Eloy, Arizona
Saguaro Correctional Facility
Eloy, Arizona
CAI Boston Avenue
San Diego, California
CAI Ocean View
San Diego, California
Leo Chesney Correctional Center
Live Oak, California
USMS
2,304
Multi
Detention
September
2018
(2) 5 year
ICE
1,500
Medium
Detention
Indefinite
-
USMS
1,824
Multi
Detention
September
2018
(2) 5 year
State of California
3,060
Medium
Correctional
June 2019
Indefinite
State of Arizona
2,024
Medium
Correctional
January 2024
(2) 5 year
State of Hawaii
1,896
Medium
Correctional
June 2019
(2) 1 year
State of California
120
BOP
-
483
240
-
-
-
Community
Corrections
Community
Corrections
June 2018
(3) 1 year
May 2017
(4) 1 year
-
-
-
Otay Mesa Detention Center
San Diego, California
ICE
1,482
Minimum/
Medium
Detention
June 2017
(2) 3 year
Bent County Correctional Facility
Las Animas, Colorado
State of Colorado
1,420
Medium
Correctional
June 2017
-
Boulder Community Treatment Center
Boulder, Colorado
Boulder County
69
Centennial Community Transition Center
Englewood, Colorado
Arapahoe County
107
Denver County
60
January 2017
(2) 1 year
-
-
-
Community
Corrections
Community
Corrections
Community
Corrections
June 2017
June 2017
Columbine Facility
Denver, Colorado
Crowley County Correctional Facility
Olney Springs, Colorado
Dahlia Facility
Denver, Colorado
Fox Facility and Training Center
Denver, Colorado
Huerfano County Correctional Center
Walsenburg, Colorado
Kit Carson Correctional Center
Burlington, Colorado
State of Colorado
1,794
Medium
Correctional
June 2017
Denver County
120
Denver County
90
-
-
Community
Corrections
Community
Corrections
June 2017
June 2017
-
-
752
Medium
Correctional
1,488
Medium
Correctional
-
-
16
-
-
-
-
-
-
-
Facility Name
Primary
Customer
Design
Capacity (A)
Security
Level
Facility
Type (B)
Term
Remaining
Renewal
Options (C)
Longmont Community Treatment Center
Longmont, Colorado
Boulder County
Denver County
69
90
-
-
Community
Corrections
Community
Corrections
January 2017
(2) 1 year
June 2017
-
Ulster Facility
Denver, Colorado
Coffee Correctional Facility (E)
Nicholls, Georgia
Jenkins Correctional Center (E)
Millen, Georgia
McRae Correctional Facility
McRae, Georgia
Stewart Detention Center
Lumpkin, Georgia
Wheeler Correctional Facility (E)
Alamo, Georgia
Leavenworth Detention Center
Leavenworth, Kansas
Lee Adjustment Center
Beattyville, Kentucky
Marion Adjustment Center
St. Mary, Kentucky
Southeast Kentucky Correctional
Facility (F)
Wheelwright, Kentucky
Prairie Correctional Facility
Appleton, Minnesota
Adams County Correctional Center
Adams County, Mississippi
Tallahatchie County Correctional
Facility (G)
Tutwiler, Mississippi
Crossroads Correctional Center (H)
Shelby, Montana
Nevada Southern Detention Center
Pahrump, Nevada
Elizabeth Detention Center
Elizabeth, New Jersey
Cibola County Corrections Center
Milan, New Mexico
State of Georgia
2,312
Medium
Correctional
June 2017
(17) 1 year
State of Georgia
1,124
Medium
Correctional
June 2017
(18) 1 year
BOP
1,978
Medium
Correctional
November
2018
(2) 2 year
ICE
1,752
Medium
Detention
Indefinite
-
State of Georgia
2,312
Medium
Correctional
June 2017
(17) 1 year
USMS
1,033
Maximum
Detention
December
2021
(1) 5 year
-
-
-
-
816
826
656
Minimum/
Medium
Minimum/
Medium
Correctional
Correctional
Minimum/
Medium
Correctional
1,600
Medium
Correctional
-
-
-
-
-
-
-
-
BOP
2,232
Medium
Correctional
July 2017
(1) 2 year
State of
California
State of
Montana
Office of the
Federal Detention
Trustee
ICE
ICE
2,672
Medium
Correctional
June 2019
Indefinite
664
Multi
Correctional
June 2017
(1) 2 year
1,072
Medium
Detention
September
2020
(2) 5 year
300
Minimum
Detention
August 2017
(4) 1 year
1,129
Medium
Detention
October 2021
Indefinite
Northwest New Mexico Correctional
Center
Grants, New Mexico
State of
New Mexico
596
Multi
Correctional
June 2020
-
17
Facility Name
Primary
Customer
Design
Capacity (A)
Security
Level
Facility
Type (B)
Term
Remaining
Renewal
Options (C)
Torrance County Detention Facility
Estancia, New Mexico
Lake Erie Correctional Institution (I)
Conneaut, Ohio
Northeast Ohio Correctional Center
Youngstown, Ohio
Carver Transitional Center
Oklahoma City, Oklahoma
Cimarron Correctional Facility (J)
Cushing, Oklahoma
Davis Correctional Facility (J)
Holdenville, Oklahoma
Diamondback Correctional Facility
Watonga, Oklahoma
Tulsa Transitional Center
Tulsa, Oklahoma
Turley Residential Center
Tulsa, Oklahoma
Shelby Training Center
Memphis, Tennessee
Trousdale Turner Correctional Center
Hartsville, Tennessee
West Tennessee Detention Facility
Mason, Tennessee
Whiteville Correctional Facility (K)
Whiteville, Tennessee
Austin Residential Reentry Center
Del Valle, Texas
Austin Transitional Center
Del Valle, Texas
Dallas Transitional Center
Hutchins, Texas
Eden Detention Center
Eden, Texas
El Paso Multi-Use Facility
El Paso, Texas
El Paso Transitional Center
El Paso, Texas
USMS
910
Multi
Detention
Indefinite
-
State of Ohio
1,798
Medium
Correctional
June 2032
Indefinite
USMS
2,016
Medium
Correctional
State of Oklahoma
494
-
Community
Corrections
December
2018
-
June 2017
(1) 1 year
State of Oklahoma
1,692
Medium
Correctional
June 2017
(2) 1 year
State of Oklahoma
1,670
Medium
Correctional
June 2017
(2) 1 year
-
2,160
Medium
Correctional
-
-
State of Oklahoma
390
State of Oklahoma
289
-
200
-
-
-
Community
Corrections
Community
Corrections
June 2017
(1) 1 year
June 2017
(2) 1 year
-
-
State of Tennessee
2,552
Multi
Correctional
USMS
600
Multi
Detention
December
2020
September
2017
State of Tennessee
1,536
Medium
Correctional
June 2016
-
-
(6) 2 year
-
-
BOP
116
State of Texas
460
-
-
-
-
Community
Corrections
Community
Corrections
Community
Corrections
Community
Corrections
August 2017
August 2017
(3) 1 year
August 2017
(1) 2 year
August 2017
(3) 1 year
BOP
1,422
Medium
Correctional
April 2017
-
State of Texas
360
State of Texas
224
-
-
Community
Corrections
Community
Corrections
August 2017
(3) 1 year
August 2017
(3) 1 year
18
Corpus Christi Transitional Center
Corpus Christi, Texas
State of Texas
160
State of Texas
300
Facility Name
Fort Worth Transitional Center
Fort Worth, Texas
Houston Processing Center
Houston, Texas
Laredo Processing Center
Laredo, Texas
South Texas Family Residential Center
Dilley, Texas
T. Don Hutto Residential Center
Taylor, Texas
Webb County Detention Center
Laredo, Texas
Cheyenne Transitional Center
Cheyenne, Wyoming
Primary
Customer
Design
Capacity (A)
Security
Level
Facility
Type (B)
Term
Remaining
Renewal
Options (C)
State of Texas
248
-
Community
Corrections
August 2017
(3) 1 year
ICE
ICE
ICE
ICE
1,000
Medium
Detention
April 2017
258
Minimum/
Medium
Detention
June 2018
2,400
-
Residential
September
2021
-
-
-
512
Medium
Detention
January 2020
Indefinite
USMS
480
Medium
Detention
State of Wyoming
116
-
Community
Corrections
November
2017
-
June 2017
Indefinite
D.C. Correctional Treatment Facility (L)
Washington, D.C.
District of
Columbia
1,500
Medium
Detention
March 2017
-
Managed Only Facilities:
Citrus County Detention Facility
Lecanto, Florida
Lake City Correctional Facility
Lake City, Florida
Marion County Jail
Indianapolis, Indiana
Citrus County,
Florida
State of
Florida
Marion County,
Indiana
760
Multi
Detention
September
2020
Indefinite
893
Medium
Correctional
June 2018
Indefinite
1,030
Multi
Detention
December
2017
(1) 10 year
Hardeman County Correctional Facility
Whiteville, Tennessee
State of Tennessee
2,016
Medium
Correctional
May 2017
Metro-Davidson County Detention
Facility
Nashville, Tennessee
Davidson County,
Tennessee
Silverdale Facilities
Chattanooga, Tennessee
Hamilton County,
Tennessee
1,348
Multi
Detention
January 2020
1,046
Multi
Detention
April 2017
South Central Correctional Center
Clifton, Tennessee
State of Tennessee
1,676
Medium
Correctional
June 2018
Bartlett State Jail
Bartlett, Texas
Bradshaw State Jail
Henderson, Texas
Lindsey State Jail
Jacksboro, Texas
Willacy State Jail
Raymondville, Texas
State of
Texas
State of
Texas
State of
Texas
State of
Texas
1,049
1,980
1,031
1,069
Minimum/
Medium
Minimum/
Medium
Minimum/
Medium
Minimum/
Medium
Correctional
August 2017
Correctional
August 2017
Correctional
August 2017
Correctional
August 2017
-
-
-
-
-
-
-
-
19
Facility Name
Primary
Customer
Design
Capacity (A)
Security
Level
Facility
Type (B)
Term
Remaining
Renewal
Options (C)
CDCR
2,560
Medium
Correctional
112
-
Community
Corrections
November
2020
Indefinite
June 2020
(1) 5 year
Leased Facilities:
California City Correctional Center
California, City, California
Long Beach Community Corrections Center
Long Beach, California
North Fork Correctional Facility
Sayre, Oklahoma
Broad Street Residential Reentry Center
Philadelphia, Pennsylvania
Chester Residential Reentry Center
Chester, Pennsylvania
Roth Hall Residential Reentry Center
Philadelphia, Pennsylvania
Walker Hall Residential Reentry Center
Philadelphia, Pennsylvania
Community
Education
Centers
State of
Oklahoma
Community
Education
Centers
Community
Education
Centers
Community
Education
Centers
Community
Education
Centers
2,400
Medium
Correctional
July 2021
Indefinite
150
135
160
160
-
-
-
-
Community
Corrections
Community
Corrections
Community
Corrections
Community
Corrections
July 2019
(4) 5 year
July 2019
(4) 5 year
July 2019
(4) 5 year
July 2019
(4) 5 year
Bridgeport Pre-Parole Transfer Facility
Bridgeport, Texas
MTC
200
Medium
Correctional
September
2017
-
20
(A) Design capacity measures the number of beds and, accordingly, the number of offenders each facility is
designed to accommodate. Facilities housing detainees on a short-term basis may exceed the original
intended design capacity due to the lower level of services required by detainees in custody for a brief period.
From time to time, we may evaluate the design capacity of our facilities based on customers using the
facilities, and the ability to reconfigure space with minimal capital outlays. As a result, the design capacity of
certain facilities may vary from the design capacity previously presented. We believe design capacity is an
appropriate measure for evaluating our operations, because the revenue generated by each facility is based on
a per diem or monthly rate per offender housed at the facility paid by the corresponding contracting
governmental entity.
(B) We manage numerous facilities that have more than a single function (e.g., housing both long-term sentenced
adult prisoners and pre-trial detainees). The primary functional categories into which facility types are
identified were determined by the relative size of offender populations in a particular facility on December
31, 2016. If, for example, a 1,000-bed facility housed 900 adult offenders with sentences in excess of one
year and 100 pre-trial detainees, the primary functional category to which it would be assigned would be that
of correctional facilities and not detention facilities. It should be understood that the primary functional
category to which multi-user facilities are assigned may change from time to time.
(C) Remaining renewal options represents the number of renewal options, if applicable, and the term of each
option renewal.
(D) Pursuant to the terms of a contract awarded by the state of Arizona in September 2012, the state of Arizona
has an option to purchase the Red Rock facility at any time during the term of the contract, including
extension options, based on an amortization schedule starting with the fair market value and decreasing
evenly to zero over the twenty year term.
(E) These facilities are subject to purchase options held by the Georgia Department of Corrections, or GDOC,
which grants the GDOC the right to purchase the facility for the lesser of the facility’s depreciated book
value, as defined, or fair market value at any time during the term of the contract between the GDOC and us.
(F) The facility, formerly known as the Otter Creek Correctional Center, is subject to a deed of conveyance with
the city of Wheelwright, Kentucky which includes provisions that allow assumption of ownership by the city
of Wheelwright under the following occurrences: (1) we cease to operate the facility for more than two years,
(2) our failure to maintain at least one employee for a period of sixty consecutive days, or (3) a conversion to
a maximum security facility based upon classification by the Kentucky Corrections Cabinet. We have entered
into an agreement with the city of Wheelwright that extends the reversion through July 31, 2018, in exchange
for $20,000 per month or until we resume operations, as defined in the agreement.
(G) The facility is subject to a purchase option held by the Tallahatchie County Correctional Authority which
grants Tallahatchie County Correctional Authority the right to purchase the facility at any time during the
contract at a price generally equal to the cost of the premises less an allowance for amortization originally
over a 20-year period. The amortization period was extended through 2050 in connection with an expansion
completed during the fourth quarter of 2007.
(H) The state of Montana has an option to purchase the facility generally at any time during the term of the
contract with us at fair market value less the sum of a pre-determined portion of per diem payments made to
us by the state of Montana.
(I) The state of Ohio has the irrevocable right to repurchase the facility before we may resell the facility to a
third party, or if we become insolvent or are unable to meet our obligations under the management contract
with the state of Ohio, at a price generally equal to the fair market value, as defined in the Real Estate
Purchase Agreement.
(J) These facilities are subject to purchase options held by the ODOC, which grants the ODOC the right to
purchase the facility at its fair market value at any time during the term of the contract with ODOC.
(K) The state of Tennessee has the option to purchase the facility in the event of our bankruptcy, or upon an
operational or financial breach, as defined, at a price equal to the book value of the facility, as defined.
(L) The District of Columbia has the right to purchase the facility at any time during the term of the contract at a
price generally equal to the present value of the remaining lease payments for the premises. Upon expiration
of the lease in the first quarter of 2017, ownership of the facility automatically reverts to the District of
Columbia. The District assumed operation of the facility in January 2017.
21
Competitive Strengths
Under our three business offerings, CoreCivic Safety, CoreCivic Community, and CoreCivic
Properties, we offer multiple solutions to unique challenges, allowing government
organizations to address their various needs while customizing the solution based on their
unique circumstances. Accordingly, we believe that we benefit from the following
competitive strengths:
The First and Largest Private Prison Owner. Under our CoreCivic Safety platform, our
recognition as the nation's leading private prison owner and one of the largest prison
operators in the United States provides us with significant credibility with our current and
prospective clients. We believe we own approximately 58% of all privately owned prison
beds in the United States and manage nearly 41% of all privately managed prison beds in the
United States.
We pioneered modern-day private prisons with a list of notable
accomplishments, such as being the first company to design, build, and operate a private
prison, the first company to manage a private maximum-security facility under a direct
contract with the federal government, and the first company to purchase a government-owned
correctional facility from a governmental agency in the United States and to manage the
facility for the government agency. We are also the first company to lease a private prison to
a state government. In addition to providing us with extensive experience and institutional
knowledge, our size also helps us deliver value to our customers by providing purchasing
power and allowing us to achieve certain economies of scale.
Available Beds within Our Existing Facilities. As of December 31, 2016, we had
approximately 8,300 beds at seven facilities that are vacant and immediately available to use.
We are actively engaged in marketing this available capacity to existing and prospective
customers. Historically, we have been successful in substantially filling our inventory of
available beds and the beds that we have constructed. Filling these available beds would
provide substantial growth in revenues, cash flow, and earnings per share.
Second Largest Community Corrections Owner and Operator in the United States. Under
our CoreCivic Community and CoreCivic Properties platforms, we have a rapidly growing
network of community corrections facilities that we own and manage and facilities that we
own and lease to third-party operators whose mission it is to help address America's
recidivism crisis. Community corrections facilities offer housing and programs, with a key
focus on employment, job readiness, and life skills, in order to help offenders successfully re-
enter the community and reduce the risk of recidivism.
On April 8, 2016, we closed on the acquisition of 100% of the stock of CMI along with the
real estate used in the operation of CMI's business from two entities affiliated with CMI.
CMI, a privately held community corrections company that operates seven community
corrections facilities, including six owned and one leased, with approximately 600 beds in
Colorado, specializes in community correctional services, drug and alcohol treatment
services, and residential reentry services. CMI provides these services through multiple
contracts with three counties in Colorado, as well as the Colorado Department of Corrections,
a pre-existing partner of ours. We acquired CMI as a strategic investment that continues to
expand the reentry assets we own and the services we provide.
On June 10, 2016, we acquired a residential reentry facility in Long Beach, California from a
privately held owner. The 112-bed facility is leased to Community Education Centers, Inc.,
or CEC, under a triple net lease agreement that extends through June 2020 and includes one
five-year lease extension option. CEC separately contracts with the CDCR to provide
rehabilitative and reentry services to residents at the leased facility. We acquired the facility
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in the real estate–only transaction as a strategic investment that expands our investment in the
residential reentry market.
With the acquisitions of CMI and the Long Beach facility in 2016, along with the
acquisitions of Avalon Correctional Services, Inc., or Avalon, and four community
corrections facilities in Pennsylvania in 2015, and the acquisition of Correctional
Alternatives, Inc., or CAI, in 2013, we have become the second largest community
corrections owner and operator in the United States. We believe this recognition provides us
with a platform for further growth. We believe the demand for the housing and programs
that community corrections facilities offer will continue to grow as offenders are released
from prison and due to an increased awareness of the important role these programs play in
an offender's successful transition from prison to society. We are actively pursuing
opportunities to acquire additional community corrections facilities in order to provide these
services to parolees, defendants, and offenders who are serving their full sentence, the last
portion of their sentence, waiting to be sentenced, or awaiting trial while supervised in a
community environment. We also believe we have the opportunity to maximize utilization of
available beds within our community corrections portfolio.
Attractive REIT Profile. Key characteristics of our business make us a highly attractive
REIT. As of December 31, 2016, we owned or controlled 74 facilities containing
approximately 15 million square feet which, for the year ended December 31, 2016,
generated 98% of our net operating income, or our operating income before general and
administrative expenses, asset impairments, depreciation, and amortization. Land and
buildings comprise approximately 90% of our gross fixed assets. These valuable assets are
located in areas with high barriers to entry, particularly due to the unique permitting and
zoning requirements for these facilities. Further, the majority of our assets are constructed
primarily of concrete and steel, generally requiring lower maintenance capital expenditures
than other types of commercial properties.
We believe we are the largest developer of mission-critical, criminal justice center real estate
projects over the past 15 years. We provide space and services under contracts with federal,
state, and local government agencies that generally have credit ratings of single-A or better.
In addition, a majority of our contracts have terms between one and five years, and we have
historically experienced customer retention of approximately 93%, which contributes to our
relatively predictable and stable revenue base. This stream of revenue combined with our low
maintenance capital expenditure requirement translates into steady predictable cash flow. We
believe the REIT structure also provides us with greater access to capital and flexibility to
pursue growth opportunities.
Attractive Real Estate Assets Portfolio. Under our CoreCivic Properties platform, we offer
our customers an attractive portfolio of facilities that can be leased for various needs as an
alternative to providing "turn-key" correctional, detention, and residential reentry bed space
and services to our government partners. In May 2016, we entered into a lease with the
ODOC for our previously idled 2,400-bed North Fork Correctional Facility. The lease
agreement commenced on July 1, 2016, and includes a five-year base term with unlimited
two-year renewal options. The lease of the North Fork facility, along with the lease of our
California City Correctional Center to the CDCR originating in 2013, exemplify our ability to
react quickly to our partners' needs with innovative and flexible solutions that make the best
use of taxpayer dollars.
We intend to pursue additional opportunities like the aforementioned 2016 acquisition of the
Long Beach facility in California and the 2015 acquisition of four community corrections
facilities in Pennsylvania that are all leased to a third-party operator, and like those with the
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ODOC and CDCR to lease prison facilities to government and other third-party operators in
need of correctional capacity.
Offer Compelling Value. We believe that our government partners seek a compelling value
and service offering when selecting an outsourced correctional services provider. We believe
we offer a cost-effective alternative to our government partners by reducing their correctional
services costs while allowing them to avoid long-term pension obligations for their
employees and large capital investments in new prison beds. We attempt to improve
operating performance and efficiency through the following key operating initiatives: (1)
standardizing supply and service purchasing practices and usage; (2) implementing a
standard approach to staffing and business practices in an effort to reduce our fixed expenses;
(3) improving offender management, resource consumption, and reporting procedures
through the utilization of numerous technological initiatives; (4) reconfiguring facility bed
space to optimize capacity utilization; and (5) improving productivity and reducing employee
turnover. Through ongoing company-wide initiatives, we continue to focus on efforts to
contain costs and improve operating efficiencies, ensuring continuous delivery over the long-
term.
Through our strong commitment to community corrections and reentry programs, we offer
our government partners additional long-term value. Our evidence-based reentry programs,
including academic education, vocational training, substance abuse treatment, life skills
training, and faith-based programming, are customizable based on partner needs and are
applied utilizing best practices and/or industry standards. Through our efforts in community
corrections and reentry programs, we can provide consistency and common standards across
facilities. We can also serve multiple levels of government on an as-needed basis, all toward
reaching the goal we share with our government partners of providing offenders with the
opportunity to succeed when they are released, making our communities safer, and,
ultimately, reducing recidivism.
We also offer a wide variety of specialized services that address the unique needs of various
segments of the offender population. Because the offenders in the facilities we operate differ
with respect to security levels, ages, genders, and cultures, we focus on the particular needs
of an offender population and tailor our services based on local conditions and our ability to
provide services on a cost-effective basis.
We believe that our government partners and other agencies in the criminal justice sector also
seek a compelling value and service offering when pursuing solutions to their unique real
estate needs and circumstances. We believe that our track record of constructing quality
assets on time and within budget, our design and construction methods, and our expertise and
experience enable us to construct real estate assets at a fraction of the cost of the public
sector. We also believe that our robust preventative maintenance program, which is included
in our service offering, significantly reduces the risk of real estate neglect. We also offer
utility management services using environmentally-friendly, state-of-the art technology.
Development and Expansion Opportunities. The demand for capacity in the short-term has
been affected by the budget challenges many of our government partners currently face. At
the same time, these challenges impede our customers’ ability to construct new prison beds
of their own or update older facilities, which we believe could result in further need for
private sector capacity solutions in the long-term. We intend to continue to pursue build-to-
suit opportunities like our 2,552-bed Trousdale Turner Correctional Center recently
constructed in Trousdale County, Tennessee, and alternative solutions like the 2,400-bed
South Texas Family Residential Center whereby we identified a site and lessor to provide
residential housing and administrative buildings for ICE. We also expect to continue to
pursue investment opportunities and are in various stages of due diligence to complete
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additional transactions like the acquisitions of five residential reentry facilities in
Pennsylvania and California over the past two years, and business combination transactions
like the acquisitions of Avalon and CMI. The transactions that have not yet closed are
subject to various customary closing conditions, and we can provide no assurance that any
such transactions will ultimately be completed. We are also pursuing investment
opportunities in other real estate assets used to provide mission critical governmental services
primarily in the criminal justice sector. In the long-term, however, we would like to see
meaningful utilization of our available capacity and better visibility from our customers
before we add any additional prison capacity on a speculative basis.
Proven Senior Management Team. Our senior management team has applied their prior
experience and diverse industry expertise to improve our operations, related financial results,
and capital structure. Under our senior management team’s leadership, we have successfully
executed strategies to diversify our business and offer a broader range of solutions to
government partners over the past several years resulting in the Company being renamed and
rebranded as CoreCivic, created new business opportunities with customers that have not
previously utilized the private corrections sector, converted to a REIT, completed several
business combination transactions, and successfully completed numerous recapitalization and
refinancing transactions, resulting in increases in profitability and enhancing stockholder
value.
Financial Flexibility. As of December 31, 2016, we had cash on hand of $37.7 million and
$455.9 million available under our revolving credit facility, with a total weighted average
effective interest rate of 4.0% on all outstanding debt, while our total weighted average
maturity on all outstanding debt was 4.5 years. For the year ended December 31, 2016, our
fixed charge coverage ratio was 6.8x and our debt leverage was 3.4x. During the year ended
December 31, 2016, we generated $375.4 million in cash through operating activities, and as
of December 31, 2016, we had net working capital of $26.6 million.
Capital Strategy
Our business development strategy includes marketing our available beds to existing and
potential government partners that seek corrections, detention, and reentry management
services. We may also offer government partners the opportunity to lease our idle facilities
as an alternative to providing “turn-key” bed space and services to our government partners.
Successful efforts would generate significant cash flows without the need to incur substantial
capital expenditures.
Our business development strategy also includes acquiring or developing mission critical
government assets primarily in the criminal justice sector and expanding our network of
residential reentry centers through mergers and acquisitions, or M&A, activities. These
business development activities will require capital. We currently expect to fund these
growth opportunities with cash on hand and availability under our revolving credit facility.
As of December 31, 2016, we had cash on hand of $37.7 million and $455.9 million available
under our revolving credit facility. We may also seek to issue debt or equity securities from
time to time when we determine that market conditions and the opportunity to utilize the
proceeds from the issuance of such securities are favorable. We currently anticipate that any
proceeds obtained through capital markets transactions would be used to pay-down our
revolving credit facility. We may also pursue alternative sources of capital that could include
secured indebtedness, subject to limitations set forth in our debt agreements.
On February 26, 2016, we entered into an ATM Equity Offering Sales Agreement, or ATM
Agreement, with multiple sales agents. Pursuant to the ATM Agreement, we may offer and
sell to or through the sales agents from time to time, shares of our common stock, par value
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$0.01 per share, having an aggregate gross sales price of up to $200.0 million. Sales, if any,
of our shares of common stock will be made primarily in "at-the-market" offerings, as
defined in Rule 415 under the Securities Act of 1933, as amended. The shares of common
stock would be offered and sold pursuant to our registration statement on Form S-3 filed with
the SEC on May 15, 2015, and a related prospectus supplement dated February 26, 2016. We
intend to use the net proceeds from any sale of shares of our common stock to repay
borrowings under our revolving credit facility (including the Term Loan under the
"accordion" feature of the revolving credit facility) and for general corporate purposes,
including to fund future acquisitions and development projects. We believe the ATM
program is a useful tool to match fund proceeds from common stock sales with M&A activity
and other capital needs, in order to manage our capital allocation strategy. There were no
shares of our common stock sold under the ATM Agreement during the year ended
December 31, 2016.
We reorganized our corporate structure to facilitate our qualification as a REIT for federal
income tax purposes effective for our taxable year beginning January 1, 2013. To qualify
and be taxed as a REIT, we generally are required to distribute annually to our stockholders
at least 90% of our REIT taxable income (determined without regard to the dividends paid
deduction and excluding net capital gains), and are subject to regular corporate income taxes
to the extent we distribute less than 100% of our REIT taxable income (including capital
gains) each year. The amount, timing and frequency of future distributions, however, will be
at the sole discretion of our Board of Directors and will be declared based upon various
factors, many of which are beyond our control, including our financial condition and
operating cash flows, the amount required to maintain qualification and taxation as a REIT
and reduce any income and excise taxes that we otherwise would be required to pay,
limitations on distributions in our existing and future debt instruments, limitations on our
ability to fund distributions using cash generated through our TRSs, alternative growth
opportunities that require capital deployment, and other factors that our Board of Directors
may deem relevant. Because as a REIT we are required to distribute a substantial portion of
our cash generated from operations to stockholders as a dividend, growth opportunities may
require more external capital resources than were required prior to our conversion to a REIT.
During 2016, our Board of Directors declared a quarterly dividend of $0.54 in each of the
first three quarters and $0.42 in the fourth quarter, totaling $241.7 million for the year,
compared with a total of $254.8 million during 2015 and $239.1 million during 2014.
In addition to the cash on hand and availability under our revolving credit facility, we
currently expect our REIT taxable income to be less than our operating cash flow, primarily
due to the deductibility of non-cash expenses such as depreciation on our real estate assets.
This liquidity provides us with the flexibility to (i) invest in additional facility acquisitions
and developments, which could include acquisitions of facilities from government partners,
third parties, or additional business combinations similar to the acquisitions of Avalon and
CMI, (ii) pay down debt, (iii) increase dividends to our stockholders, or (iv) repurchase our
common stock.
Government Regulation
Business Regulations
The industry in which we operate is subject to extensive federal, state, and local regulations,
including educational, health care, and safety regulations, which are administered by many
governmental and regulatory authorities. Some of the regulations are unique to the
corrections industry. Facility management contracts typically include reporting requirements,
supervision, and on-site monitoring by representatives of the contracting governmental
agencies. Corrections officers are customarily required to meet certain training standards
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and, in some instances, facility personnel are required to be licensed and subject to
background investigation. Certain jurisdictions also require us to award subcontracts on a
competitive basis or to subcontract with businesses owned by members of minority groups.
Our facilities are also subject to operational and financial audits by the governmental
agencies with which we have contracts. Failure to comply with these regulations and
contract requirements can result in material penalties or non-renewal or termination of
facility management contracts.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the costs of removal
or remediation of hazardous or toxic substances on, under, or in such property. Such laws
often impose liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. As an owner of correctional, detention,
and residential reentry facilities, we have been subject to these laws, ordinances, and
regulations as the result of our operation and management of correctional, detention, and
residential reentry facilities. Phase I environmental assessments have been obtained on
substantially all of the properties we currently own. We are not aware of any environmental
matters that are expected to materially affect our financial condition or results of operations;
however, if such matters are detected in the future, the costs of complying with
environmental laws may adversely affect our financial condition and results of operations.
Health Insurance Portability and Accountability Act of 1996 and Privacy and Security
Requirements
In 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996,
or HIPAA. HIPAA was designed to improve the portability and continuity of health
insurance coverage, simplify the administration of health insurance, and protect the privacy
and security of health-related information.
Privacy regulations promulgated under HIPAA regulate the use and disclosure of
individually identifiable health information, whether communicated electronically, on paper,
or orally. The regulations also provide patients with significant rights related to
understanding and controlling how their health information is used or disclosed. Security
regulations promulgated under HIPAA require that covered entities, including most health
care providers, health clearinghouses, group health plans, and their business associates,
implement administrative, physical, and technical safeguards to protect the security of
individually identifiable health information that is maintained or transmitted electronically.
These privacy and security regulations require the implementation of compliance training and
awareness programs for our health care service providers and selected other employees
primarily associated with our employee medical plans. Further, covered entities and their
business associates must provide notification to affected individuals without unreasonable
delay but not to exceed 60 days of discovery of a breach of unsecured protected health
information. Notification must also be made to the U.S. Department of Health and Human
Services, or DHHS, and, in certain situations involving large breaches, to the media. In a
final rule released in January 2013, DHHS modified the breach notification requirement by
creating a presumption that all non-permitted uses or disclosures of unsecured protected
health information are breaches unless the covered entity or business associate establishes
that there is a low probability the information has been compromised.
Violations of the HIPAA privacy and security regulations could result in significant civil and
criminal penalties, and the American Recovery and Reinvestment Act of 2009, or ARRA, has
strengthened the enforcement provisions of HIPAA. ARRA broadens the applicability of the
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criminal penalty provisions to employees of covered entities and requires DHHS to impose
penalties for violations resulting from willful neglect. ARRA also increases the amount of the
civil penalties, with penalties of up to $50,000 per violation for a maximum civil penalty of
$1,500,000 in a calendar year for violations of the same requirement. Further, ARRA
authorizes state attorneys general to bring civil actions for injunctions or damages in response
to violations that threaten the privacy of state residents. In addition, under ARRA, DHHS is
required to perform periodic HIPAA compliance audits of covered entities and their business
associates.
In addition, there are numerous legislative and regulatory initiatives at the federal and state
levels addressing the privacy and security of patient health information and other identifying
information. For example, federal and various state laws and regulations strictly regulate the
disclosure of patient identifiable information related to substance abuse treatment. Further,
various state laws and regulations require providers and other entities to notify affected
individuals in the event of a data breach involving certain types of individually identifiable
health or financial information, and these requirements may be more restrictive than the
regulations issued under HIPAA and ARRA. These statutes vary and could impose additional
penalties and compliance costs.
Healthcare reform could have an impact on our business
The Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010 (collectively, the "Health Reform Law") were signed
into law in the United States. Certain of the provisions that have increased our healthcare
costs since 2010 include the removal of annual plan limits, the expansion of dependent child
coverage up to age 26, the mandate that health plans provide 100% coverage on expanded
preventive care, and, in 2014, the removal of pre-existing condition exclusions. In addition,
beginning with the 2014 benefit year, we became subject to the three-year annual
Transitional Reinsurance Fee, imposed in order to finance a temporary reinsurance fund
established to stabilize individual premiums purchased through the federal and state
insurance exchanges. Our healthcare costs may continue to be negatively affected in the
future, depending upon regulatory guidance, elements of the law that are effective as of
future dates, the impact the law could have on healthcare rates in general, and our response to
these changes. While much of the added cost from the Health Reform Law has occurred, we
anticipate added costs in the future due to provisions being phased in over time. Changes to
the Health Reform Law in the future could impact our response to our healthcare structure
and could have an impact on our business and operating costs.
Beginning in 2016, the Health Reform Law requires applicable large employers to report to
the Internal Revenue Service, or IRS, information regarding health coverage offered to full-
time employees. Compliance with the Health Reform Law reporting rules and any future
changes to the Health Reform Law could impact our operating costs, and non-compliance
could result in material penalties.
Insurance
We maintain general liability insurance for all the facilities we operate, as well as insurance
in amounts we deem adequate to cover property and casualty risks, workers’ compensation,
and directors and officers liability. In addition, each of our leases with third parties provides
that the lessee will maintain insurance on each leased property under the lessee’s insurance
policies providing for the following coverages: (i) fire, vandalism, and malicious mischief,
extended coverage perils, and all physical loss perils; (ii) comprehensive general public
liability (including personal injury and property damage); and (iii) workers’ compensation.
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Under each of these leases, we have the right to periodically review our lessees’ insurance
coverage and provide input with respect thereto.
Each of our management contracts and the statutes of certain states require the maintenance
of insurance. We maintain various insurance policies including employee health, workers’
compensation, automobile liability, and general liability insurance. Because we are
significantly self-insured for employee health, workers’ compensation, automobile liability,
and general liability insurance, the amount of our insurance expense is dependent on claims
experience, and our ability to control our claims experience. Our insurance policies contain
various deductibles and stop-loss amounts intended to limit our exposure for individually
significant occurrences. However, the nature of our self-insurance policies provides little
protection for deterioration in overall claims experience or an increase in medical costs. We
are continually developing strategies to improve the management of our future loss claims
but can provide no assurance that these strategies will be successful. However, unanticipated
additional insurance expenses resulting from adverse claims experience or an increasing cost
environment for general liability and other types of insurance could adversely impact our
results of operations and cash flows.
Employees
As of December 31, 2016, we employed 13,755 employees. Of such employees, 375 were
employed at our corporate offices and 13,380 were employed at our facilities and in our
inmate transportation business. We employ personnel in the following areas: clerical and
administrative, facility administrators/wardens, security, medical, quality assurance,
transportation and scheduling, maintenance, teachers, counselors, case managers, chaplains,
and other support services.
Each of the facilities we currently operate is managed as a separate operational unit by the
facility administrator or warden. All of these facilities follow a standardized code of policies
and procedures.
We have not experienced a strike or work stoppage at any of our facilities. Approximately
790 employees at four of our facilities are represented by labor unions. In the opinion of
management, overall employee relations are good.
Competition
The correctional, detention, and residential reentry facilities we own, operate, or manage, as
well as those facilities we own but are managed by other operators, are subject to competition
for offenders and residents from other private operators. We compete primarily on the basis
of bed availability, cost, the quality and range of services offered, our experience in the
design, construction, and management of correctional and detention facilities, and our
reputation. We compete with government agencies that are responsible for correctional,
detention, and residential reentry facilities and a number of companies, including, but not
limited to, The GEO Group, Inc., Management and Training Corporation, and CEC. We also
compete in some markets with small local companies that may have a better knowledge of
the local conditions and may be better able to gain political and public acceptance. Other
potential competitors may in the future enter into businesses competitive with us without a
substantial capital investment or prior experience. We may also compete in the future for
acquisitions and new development projects with companies that have more financial
resources than we have or those willing to accept lower returns than we are willing to accept.
Competition by other companies may adversely affect occupancy at our facilities, which
could have a material adverse effect on the operating revenue of our facilities. In addition,
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revenue derived from our facilities will be affected by a number of factors, including the
demand for beds, general economic conditions, and the age of the general population.
ITEM 1A. RISK FACTORS.
As the owner and operator of correctional, detention, and residential reentry facilities, we are
subject to certain risks and uncertainties associated with, among other things, the corrections
and detention industry and pending or threatened litigation in which we are involved. In
addition, we are also currently subject to risks associated with our indebtedness as well as our
qualification as a REIT for federal income tax purposes effective for our taxable years
beginning January 1, 2013. The risks and uncertainties set forth below could cause our actual
results to differ materially from those indicated in the forward-looking statements contained
herein and elsewhere. The risks described below are not the only risks we face. Additional
risks and uncertainties not currently known to us or those we currently deem to be immaterial
may also materially and adversely affect our business operations. Any of the following risks
could materially adversely affect our business, financial condition, or results of operations.
Risks Related to Our Business and Industry
Our results of operations are dependent on revenues generated by our correctional,
detention, and residential reentry facilities, which are subject to the following risks
associated with the corrections and detention industry.
We are subject to fluctuations in occupancy levels, and a decrease in occupancy levels could
cause a decrease in revenues and profitability. While a substantial portion of our cost
structure is fixed, a substantial portion of our revenue is generated under facility ownership
and management contracts that specify per diem payments based upon daily occupancy. We
are dependent upon the governmental agencies with which we have contracts to provide
offenders for facilities we operate. We cannot control occupancy levels at the facilities we
operate. Under a per diem rate structure, a decrease in our occupancy rates could cause a
decrease in revenue and profitability. For the years 2016, 2015, and 2014, the average
compensated occupancy of our facilities, based on rated capacity, was 79%, 83%, and 84%,
respectively, for all of the facilities we operated, exclusive of facilities that are leased to
third-party operators where our revenue is generally not based on daily occupancy.
Occupancy rates may, however, decrease below these levels in the future. When combined
with relatively fixed costs for operating each facility, a decrease in occupancy levels could
have a material adverse effect on our profitability.
We are dependent on government appropriations and our results of operations may be
negatively affected by governmental budgetary challenges. Our cash flow is subject to the
receipt of sufficient funding of, and timely payment by, contracting governmental entities. If
the appropriate governmental agency does not receive sufficient appropriations to cover its
contractual obligations, it may terminate our contract or delay or reduce payment to us. Any
delays in payment, or the termination of a contract, could have an adverse effect on our cash
flow and financial condition. In addition, federal, state and local governments are constantly
under pressure to control additional spending or reduce current levels of spending. In prior
years, these pressures have been compounded by economic downturns. Accordingly, we
have been requested and may be requested in the future to reduce our existing per diem
contract rates or forego prospective increases to those rates. Further, our government
partners could reduce offender population levels in facilities we own or manage to contain
their correctional costs. In addition, it may become more difficult to renew our existing
contracts on favorable terms or otherwise.
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Competition may adversely affect the profitability of our business. We compete with
government entities and other private operators on the basis of bed availability, cost, quality
and range of services offered, experience in designing, constructing, and managing facilities,
and reputation of management and personnel. While there are barriers to entering the market
for the ownership and management of correctional, detention, and residential reentry
facilities, these barriers may not be sufficient to limit additional competition. In addition, our
government customers may assume the management of a facility that they own and we
currently manage for them upon the termination of the corresponding management contract
or, if such customers have capacity at their facilities, may take offenders and residents
currently housed in our facilities and transfer them to government-run facilities. Since we are
paid on a per diem basis with no minimum guaranteed occupancy under most of our
contracts, the loss of such offenders and residents, and the resulting decrease in occupancy,
would cause a decrease in our revenues and profitability.
Resistance to privatization of correctional and detention facilities and escapes or inmate
disturbances could result in our inability to obtain new contracts, the loss of existing
contracts, or other unforeseen consequences. The operation of correctional and detention
facilities by private entities has not achieved complete acceptance by either governments or
the public. The movement toward privatization of correctional and detention facilities has
also encountered resistance from certain groups, such as labor unions and others that believe
that correctional and detention facilities should only be operated by governmental agencies.
In the past, legislation has been proposed in the United States Congress to prohibit the federal
government from entering into contracts with private prison operators, and to eliminate state
and local contracts for privately run prisons. Such legislation runs contrary to our primary
business purpose and, if passed, would have a material adverse impact on our business.
Moreover, the belief or market perception that such legislation could be passed could have a
negative impact on our stock price.
Further, negative publicity about an escape, riot or other disturbance or perceived poor
operational performance, contract compliance, or other conditions at a privately managed
facility may result in adverse publicity to us and the private corrections industry in general.
Any of these occurrences or continued trends may make it more difficult for us to renew or
maintain existing contracts or to obtain new contracts, which could have a material adverse
effect on our business.
We are subject to terminations, non-renewals, or competitive re-bids of our government
contracts. We typically enter into facility contracts with governmental entities for terms of
up to five years, with additional renewal periods at the option of the contracting
governmental agency. Notwithstanding any contractual renewal option of a contracting
governmental agency, as of December 31, 2016, 44 of our facility contracts with the
customers listed under “Business – Facility Portfolio – Facilities and Facility Management
Contracts” are currently scheduled to expire on or before December 31, 2017 but have
renewal options (24), or are currently scheduled to expire on or before December 31, 2017
and have no renewal options (20). Although we generally expect these customers to exercise
renewal options or negotiate new contracts with us, one or more of these contracts may not
be renewed by the corresponding governmental agency. In addition, these and any other
contracting agencies may determine not to exercise renewal options with respect to any of
our contracts in the future. Our government partners can also re-bid contracts in a
competitive procurement process upon termination or non-renewal of our contract.
Competitive re-bids may result from the expiration of the term of a contract, including the
initial term and any renewal periods, or the early termination of a contract. Competitive re-
bids are often required by applicable federal or state procurement laws periodically in order
to further competitive pricing and other terms for the government agency. The aggregate
revenue earned during the year ended December 31, 2016 for the 44 contracts with scheduled
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maturity dates, notwithstanding contractual renewal options, on or before December 31, 2017
was $647.6 million, or 35% of total revenue.
Our contract with the District of Columbia, or District, at the D.C. Correctional Treatment
Facility is scheduled to expire in the first quarter of 2017. The District assumed operation of
the facility in January 2017. We incurred facility net operating losses at the facility of $0.1
million and $0.7 million in 2016 and 2015, respectively, and generated facility net operating
income of $1.0 million in 2014. Our investment in the direct financing lease with the District
also expires in the first quarter of 2017. Upon expiration of the lease in 2017, ownership of
the facility automatically reverts to the District.
During 2015, ICE solicited proposals for the rebid of our 1,000-bed Houston Processing
Center. The contract is currently scheduled to expire in April 2017. We have submitted our
response to ICE, but can provide no assurance that we will be awarded a new contract for this
facility.
As previously discussed herein, on August 18, 2016, the DOJ directed that, as each contract
with privately operated prisons reaches the end of its term, the BOP should either decline to
renew that contract or substantially reduce its scope in a manner consistent with law and the
overall decline of the BOP's inmate population. Currently, we have two owned and managed
facilities that house BOP inmates with contracts that expire in the next twelve months. We
can provide no assurance that we will be awarded new contracts for these two facilities or
that the contracts will not be substantially reduced in scope. These two facilities have a total
capacity of 3,654 beds and contributed $91.4 million in revenue during 2016. The total net
carrying value of the two facilities was $144.5 million as of December 31, 2016. We have a
third owned and managed facility housing BOP inmates under a contract that was renewed in
November 2016 for two additional years through November 2018. This facility generated
$40.5 million of revenue during 2016.
During the third quarter of 2016, the Texas Department of Criminal Justice, or TDCJ,
solicited proposals for the rebid of four facilities we currently manage for the state of Texas.
The current managed-only contracts for these four facilities are scheduled to expire in August
2017. The four facilities have a total capacity of 5,129 beds and generated $2.3 million in
facility net operating income during 2016. We have submitted our response to the
solicitation, but can provide no assurance that we will be awarded new managed-only
contracts for these four facilities.
Based on information available at this filing, notwithstanding the contracts at facilities
described above, we expect to renew all other material contracts that have expired or are
scheduled to expire within the next twelve months. We believe our renewal rate on existing
contracts remains high for a variety of reasons including, but not limited to, the constrained
supply of available beds within the U.S. correctional system, our ownership of the majority
of the beds we operate, and the quality of our operations.
Governmental agencies typically may terminate a facility contract at any time without cause
or use the possibility of termination to negotiate a lower per diem rate. In the event any of
our contracts are terminated or are not renewed on favorable terms or otherwise, we may not
be able to obtain additional replacement contracts. The non-renewal, termination, or
competitive re-bid of any of our contracts with governmental agencies could materially
adversely affect our financial condition, results of operations and liquidity, including our
ability to secure new facility contracts from others.
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Our ability to secure new contracts to develop and manage correctional, detention, and
residential reentry facilities depends on many factors outside our control. Our growth is
generally dependent upon our ability to obtain new contracts to develop and manage
correctional, detention, and residential reentry facilities. This possible growth depends on a
number of factors we cannot control, including crime rates and sentencing patterns in various
jurisdictions, governmental budgetary constraints, and governmental and public acceptance
of privatization. The demand for our facilities and services could be adversely affected by
the relaxation of enforcement efforts, leniency in conviction or parole standards and
sentencing practices or through the decriminalization of certain activities that are currently
proscribed by criminal laws. For instance, any changes with respect to drugs and controlled
substances or illegal immigration could affect the number of persons arrested, convicted, and
sentenced, thereby potentially reducing demand for correctional facilities to house them.
Immigration reform laws are currently a focus for legislators and politicians at the federal,
state, and local level. Legislation has also been proposed in numerous jurisdictions that could
lower minimum sentences for some non-violent crimes and make more inmates eligible for
early release based on good behavior. Also, sentencing alternatives under consideration
could put some offenders on probation with electronic monitoring who would otherwise be
incarcerated. Similarly, reductions in crime rates or resources dedicated to prevent and
enforce crime could lead to reductions in arrests, convictions and sentences requiring
incarceration at correctional facilities. Our company does not, under longstanding policy,
lobby for or against policies or legislation that would determine the basis for, or duration of,
an individual's incarceration or detention.
Moreover, certain jurisdictions recently have required successful bidders to make a
significant capital investment in connection with the financing of a particular project, a trend
that will require us to have sufficient capital resources to compete effectively. We may
compete for such projects with companies that have more financial resources than we have.
Further, we may not be able to obtain the capital resources when needed. A prolonged
downturn in the financial capital markets could make it more difficult to obtain capital
resources at favorable rates of return or obtain capital resources at all.
We may face community opposition to facility location, which may adversely affect our
ability to obtain new contracts. Our success in obtaining new awards and contracts
sometimes depends, in part, upon our ability to locate land that can be leased or acquired, on
economically favorable terms, by us or other entities working with us in conjunction with our
proposal to construct and/or manage a facility. Some locations may be in or near populous
areas and, therefore, may generate legal action or other forms of opposition from residents in
areas surrounding a proposed site. When we select the intended project site, we attempt to
conduct business in communities where local leaders and residents generally support the
establishment of a privatized correctional, detention, or residential reentry facility. Future
efforts to find suitable host communities may not be successful. We may incur substantial
costs in evaluating the feasibility of the development of a correctional or detention facility.
As a result, we may report significant charges if we decide to abandon efforts to develop a
correctional or detention facility on a particular site. In many cases, the site selection is made
by the contracting governmental entity. In such cases, site selection may be made for reasons
related to political and/or economic development interests and may lead to the selection of
sites that have less favorable environments.
Providing family residential services increases certain unique risks and difficulties compared
to operating our other facilities. In September 2014, we signed an amended agreement to
provide safe and humane residential housing, as well as educational opportunities, to women
and children under the custody of ICE, who are awaiting their due process before
immigration courts. In October 2016, we entered into an amended agreement that extended
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the life of the 2014 agreement through September 2021. This is an important service to our
federal government partner. At the same time, providing this type of residential service
subjects us to unique risks such as unanticipated increased costs and litigation that could
materially adversely affect our business, financial condition, or results of operations. For
instance, the contract mandates resident to staff ratios that are higher than our typical
contract, requires services unique to this contract (e.g. child care and primary education
services), and limits the use of security protocols and techniques typically utilized in
correctional and detention settings. These operational risks and others associated with
privately managing this type of residential facility could result in higher costs associated with
staffing and lead to increased litigation.
In June 2015, ICE announced a policy change regarding family unit detention that has
shortened the duration of ICE detention for those who are awaiting further process before
immigration courts. Public policies and views regarding family detention, as well as
proposals pertaining to the most effective means to address families crossing the border
illegally, continue to evolve. In addition, numerous lawsuits, to which we are not a party,
have challenged the government’s policy of detaining migrant families.
One such lawsuit in the United States District Court for the Central District of California
concerns a settlement agreement between ICE and a plaintiffs’ class consisting of detained
minors, whereby the court issued an order on August 21, 2015, enforcing the settlement
agreement and requiring compliance by October 23, 2015. The court’s order clarified that the
government has the flexibility to hold class members for longer periods of time in unlicensed
and secure facilities during influxes of large numbers of undocumented migrant families via
the southern U.S. border. After announcing its intention to comply fully with the court's
order, the federal government appealed. In July 2016, the U.S. Court of Appeals for the
Ninth Circuit affirmed most aspects of the District Court's order, but ruled that ICE is not
required to release a parent simply because the settlement agreement might require release of
that parent's minor child. The impact of these rulings on family residential programs is not
yet known.
In December 2016, a Texas state court judge blocked efforts by Texas state officials to
license the South Texas Family Residential Center as a child care center, ruling that the state
officials lacked authority to license such facilities. The state of Texas has appealed this
ruling, and the impact of the judge's decision on family residential detention programs is not
yet known. Any court decision or government action that impacts our existing contract for
the South Texas Family Residential Center could materially affect our cash flows, financial
condition, and results of operations.
We may incur significant start-up and operating costs on new contracts before receiving
related revenues, which may impact our cash flows and not be recouped. When we are
awarded a contract to provide or manage a facility, we may incur significant start-up and
operating expenses, including the cost of constructing the facility, purchasing equipment and
staffing the facility, before we receive any payments under the contract. These expenditures
could result in a significant reduction in our cash reserves and may make it more difficult for
us to meet other cash obligations. In addition, a contract may be terminated prior to its
scheduled expiration and as a result we may not recover these expenditures or realize any
return on our investment.
Government agencies may investigate and audit our contracts and, if any improprieties are
found, we may be required to cure those improprieties, refund revenues we have received, to
forego anticipated revenues, and we may be subject to penalties and sanctions, including
prohibitions on our bidding in response to RFPs. Certain of the governmental agencies with
which we contract have the authority to audit and investigate our contracts with them. As
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part of that process, government agencies may review our performance of the contract, our
pricing practices, our cost structure and our compliance with applicable performance
requirements, laws, regulations and standards. The regulatory and contractual environment
in which we operate is complex and many aspects of our operations remain subject to manual
processes and oversight that make compliance monitoring difficult and resource intensive. A
governmental agency review could result in a request to cure a performance or compliance
issue, and if we are unable to do so, the failure could lead to termination of the contract in
question or other contracts that we have with that governmental agency. Similarly, for
contracts that actually or effectively provide for certain reimbursement of expenses, if an
agency determines that we have improperly allocated costs to a specific contract, we may not
be reimbursed for those costs, and we could be required to refund the amount of any such
costs that have been reimbursed. If a government audit asserts improper or illegal activities
by us, we may be subject to civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeitures of profits, suspension of payments, fines and
suspension or disqualification from doing business with certain government entities. In
addition to the potential civil and criminal penalties and administrative sanctions, any adverse
determination with respect to contractual or regulatory violations could negatively impact our
ability to bid in response to RFPs in one or more jurisdictions.
Failure to comply with facility contracts or with unique and increased governmental
regulation could result in material penalties or non-renewal or termination of noncompliant
contracts or our other contracts to provide or manage correctional, detention, and
residential reentry facilities. The industry in which we operate is subject to extensive
federal, state, and local regulations, including educational, health care, and safety regulations,
which are administered by many regulatory authorities. Some of the regulations are unique
to the corrections industry, some are unique to government contractors, and the combination
of regulations we face is unique and complex. Facility contracts typically include reporting
requirements, supervision, and on-site monitoring by representatives of the contracting
governmental agencies. Corrections officers are customarily required to meet certain training
standards and, in some instances, facility personnel are required to be licensed and subject to
background investigation. Certain jurisdictions also require us to award subcontracts on a
competitive basis or to subcontract with certain types of businesses, such as small businesses
and businesses owned by members of minority groups. Our facilities are also subject to
operational and financial audits by the governmental agencies with which we have contracts.
Federal regulations also require federal government contractors like us to self-report evidence
of certain forms of misconduct. We may not always successfully comply with these
regulations and contract requirements, and failure to comply can result in material penalties,
including financial penalties, non-renewal or termination of noncompliant contracts or our
other facility contracts, and suspension or debarment from contracting with certain
government entities.
In addition, private prison managers are subject to government legislation and regulation
attempting to restrict the ability of private prison managers to house certain types of inmates,
such as inmates from other jurisdictions or inmates at medium or higher security levels.
Legislation has been enacted in several states, and has previously been proposed in the
United States Congress, containing such restrictions. Such legislation may have an adverse
effect on us.
Our inmate transportation subsidiary, TransCor, is subject to regulations promulgated by the
Departments of Transportation and Justice. TransCor must also comply with the Interstate
Transportation of Dangerous Criminals Act of 2000, which covers operational aspects of
transporting prisoners, including, but not limited to, background checks and drug testing of
employees; employee training; employee hours; staff-to-inmate ratios; prisoner restraints;
communication with local law enforcement; and standards to help ensure the safety of
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prisoners during transport. We are subject to changes in such regulations, which could result
in an increase in the cost of our transportation operations.
On August 4, 2016, the Federal Communications Commission, or FCC, which regulates
telecommunications, published an Order in the Federal Register, which set numerous rate
caps on interstate and intrastate calling services, or ICS. Those rate caps were stayed by a
federal appeals court pending judicial review, however, leaving existing rate caps established
in an earlier FCC ruling in place. The stayed Order applies directly to ICS providers who
offer their services pursuant to contracts with correctional facilities, including those that we
manage. The vast majority of our facilities will be subject to the rate caps applicable to state
and federal prisons. A separate tiered rate cap structure will apply at small jails we operate,
however an effective date is not known at this time due to pending judicial review.
This Order, when effective, could reduce ICS-related revenue, as it expands coverage to
intrastate ICS, but due to the unpredictability of call volume increases that may occur as a
result of lower rates, the financial impact cannot be anticipated at this time. The impact to
our revenue is limited as a significant amount of commissions paid by our ICS providers are
passed along to our customers or are reserved and used for the benefit of inmates in our care.
Our failure to comply with, or changes to, existing regulations or adoption of new regulations
in the areas discussed above could result in further increases to our costs or reductions in our
revenue. On January 31, 2017, the FCC, through its counsel, informed the federal appeals
court that it would no longer defend the portions of the 2016 Order imposing intrastate rate
caps. The impact of this position change is not yet known as litigation over this issue is still
ongoing.
In previous notices, the FCC sought comment on various topics including the development of
international ICS rate caps; the potential regulation of rates associated with technology-based
ICS alternatives, such as videoconferencing; and whether additional reforms are necessary
for effective regulation of revenue sharing agreements. All of these reforms, if pursued,
could impact revenue to correctional facility operators, both public and private.
We depend on a limited number of governmental customers for a significant portion of our
revenues. We currently derive, and expect to continue to derive, a significant portion of our
revenues from a limited number of governmental agencies. The loss of, or a significant
decrease in, business from the BOP, ICE, USMS, or various state agencies could seriously
harm our financial condition and results of operations. The three primary federal
governmental agencies with correctional and detention responsibilities, the BOP, ICE, and
USMS, accounted for 52% of our total revenues for the year ended December 31, 2016
($953.9 million). ICE accounted for 28% of our total revenues for the year ended December
31, 2016 ($511.8 million), USMS accounted for 15% of our total revenues for the year ended
December 31, 2016 ($277.2 million), and BOP accounted for 9% of our total revenues for the
year ended December 31, 2016 ($164.9 million). Although the revenue generated from each
of these agencies is derived from numerous management contracts, the loss or substantial
reduction in value of one or more of such contracts could have a material adverse impact on
our financial condition, results of operations, and cash flows. We expect to continue to
depend upon these federal agencies and a relatively small group of other governmental
customers for a significant percentage of our revenues.
As previously discussed herein, in a memorandum to the BOP dated August 18, 2016, the
DOJ directed that, as each contract with privately operated prisons reaches the end of its
term, the BOP should either decline to renew that contract or substantially reduce its scope in
a manner consistent with law and the overall decline of the BOP's inmate population. In
addition to the decline in the BOP's inmate population, the DOJ memorandum cites purported
operational, programming, and cost efficiency factors as reasons for the new DOJ directive.
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In addition, on August 29, 2016, the Secretary of the DHS announced that he directed the
HSAC to establish a Subcommittee of the Council to review ICE's current policy and
practices concerning the use of private immigration detention and evaluate whether this
practice should be eliminated. A written report of the subcommittee's evaluation was
provided by the HSAC to the Secretary of the DHS and the Director of ICE on November 30,
2016. According to the report, fiscal considerations, combined with the need for realistic
capacity to handle sudden increases in detention, suggest that DHS's use of private for-profit
detention will continue. The report indicated that, as of September 12, 2016, 10% of the ICE
detainee population was housed in federally owned and directed facilities, while 65% was
housed in facilities operated by private, for-profit contractors, and 25% was housed in
facilities operated by county jails or other local or state government entity. Further, the
report indicated that ICE should seek ongoing ways to reduce reliance on detention in county
jails, which generally do not meet PBNDS promulgated by ICE.
Revenue from our South Texas Family Residential Center was $267.3 million in 2016. The
loss or further reduction in value of this contract would have a material adverse impact on our
financial condition, results of operations, and cash flows. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations, or MD&A, - Results of
Operations" for a further discussion regarding our contract at the South Texas Family
Residential Center, and anticipated reduction in revenue in 2017 resulting from an
amendment to this contract.
Approximately 6% of our total revenues for the year ended December 31, 2016 ($113.4
million) was generated from the CDCR in facilities housing inmates outside the state of
California, a decrease from $170.5 million, or 10%, of our total revenues in 2015, and $204.4
million, or 12% of our total revenues in 2014. Our management agreement with the CDCR,
as well as the status of legal and legislative action contributing to the reduction in the state of
California inmate populations, are more fully described hereafter in "MD&A - Results of
Operations".
On January 10, 2017, the Governor of California issued a proposed budget for fiscal 2017-
2018. The proposed budget contemplates that implementation of initiatives to reduce prison
populations will allow the CDCR to remove all inmates from one of our two remaining out-
of-state facilities in fiscal 2017-2018. Additionally, as a result of such prison population
reduction initiatives, the CDCR anticipates returning any remaining inmates from our out-of-
state facilities by 2020. Although the proposed budget acknowledges that estimates of
population reductions are preliminary and subject to considerable uncertainty, we can provide
no assurance that we would be able to replace the cash flows associated with our contract
with the CDCR, if CDCR inmates are removed from our Tallahatchie and La Palma facilities.
We are dependent upon our senior management and our ability to attract and retain
sufficient qualified personnel.
The success of our business depends in large part on the ability and experience of our senior
management. The unexpected loss of any of these persons could materially adversely affect
our business and operations.
In addition, the services we provide are labor-intensive. When we are awarded a facility
management contract or open a new facility, we must hire operating management,
correctional officers, and other personnel. The success of our business requires that we
attract, develop, and retain these personnel. Our inability to hire sufficient qualified
personnel on a timely basis or the loss of significant numbers of personnel at existing
facilities could adversely affect our business and operations. Under many of our contracts, we
are subject to financial penalties for insufficient staffing.
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Adverse developments in our relationship with our employees could adversely affect our
business, financial condition or results of operations.
As of December 31, 2016, we employed 13,755 employees. Approximately 790 of our
employees at four of our facilities, or approximately 6% of our workforce, are represented by
labor unions. We have not experienced a strike or work stoppage at any of our facilities and
in the opinion of management overall employee relations are good. New executive orders,
administrative rules and changes in National Labor Relations could increase organizational
activity at locations where employees are currently not represented by a labor organization.
Increases in organizational activity or any future work stoppages could have a material
adverse effect on our business, financial condition, or results of operations.
Changes to Federal wage regulations could have an impact on our future results of
operations.
As a labor-intensive business, changes in labor regulations can materially impact our
business. In May 2016, the U.S. Department of Labor, or DOL, released updated overtime
and exemption rules under the Fair Labor Standards Act which would have increased the
minimum salary needed to qualify for the standard white collar employee exemption from
$455 to $913 per week, or to $47,476 annually for a full-year worker. The updated rules also
would have increased the threshold to qualify for the highly compensated employee, or HCE,
exemption from $100,000 to $134,004 per year. Additionally, the updated rules established a
mechanism for automatically updating the minimum salary and compensation levels every
three years. The initial increases to the standard salary level and HCE total annual
compensation requirement were to have taken effect on December 1, 2016. Future automatic
updates to those thresholds were to have occurred every three years, beginning on January 1,
2020. However, in late November 2016, a federal judge in Texas issued a nationwide
preliminary injunction against implementation of the updated overtime rules. Therefore, the
updated overtime rules did not go into effect on December 1, 2016, and the future of the
announced overtime rule changes continues to be uncertain. We had developed plans to
comply with the new regulations as of the effective date, and proceeded to implement certain
aspects of our plans following the preliminary injunction. We are currently monitoring
developments with the litigation and will continue to analyze the impact of any developments
on our payroll costs and results of operations.
We are subject to necessary insurance costs.
Workers’ compensation, auto liability, employee health, and general liability insurance
represent significant costs to us. Because we are significantly self-insured for workers’
compensation, auto liability, employee health, and general liability risks, the amount of our
insurance expense is dependent on claims experience, our ability to control our claims
experience, and in the case of workers’ compensation and employee health, rising health care
costs in general. Unanticipated additional insurance costs could adversely impact our results
of operations and cash flows, and the failure to obtain or maintain any necessary insurance
coverage could have a material adverse effect on us.
We may be adversely affected by inflation.
Many of our facility contracts provide for fixed fees or fees that increase by only small
amounts during their terms. If, due to inflation or other causes, our operating expenses, such
as wages and salaries of our employees, insurance, medical, and food costs, increase at rates
faster than increases, if any, in our revenues, then our profitability would be adversely
affected. See “MD&A – Inflation.”
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We are subject to legal proceedings associated with owning and managing correctional
and detention facilities.
Our ownership and management of correctional and detention facilities, and the provision of
inmate transportation services by a subsidiary, expose us to potential third-party claims or
litigation by prisoners or other persons relating to personal injury or other damages resulting
from contact with a facility, its managers, personnel or other prisoners, including damages
arising from a prisoner’s escape from, or a disturbance or riot at, a facility we own or
manage, or from the misconduct of our employees. To the extent the events serving as a
basis for any potential claims are alleged or determined to constitute illegal or criminal
activity, we could also be subject to criminal liability. Such liability could result in
significant monetary fines and could affect our ability to bid on future contracts and retain
our existing contracts. In addition, as an owner of real property, we may be subject to a
variety of proceedings relating to personal injuries of persons at such facilities. The claims
against our facilities may be significant and may not be covered by insurance. Even in cases
covered by insurance, our deductible (or self-insured retention) may be significant.
We are subject to risks associated with ownership of real estate.
Our ownership of correctional, detention, and residential reentry facilities subjects us to risks
typically associated with investments in real estate. Investments in real estate and, in
particular, correctional and detention facilities have limited or no alternative use and thus, are
relatively illiquid. Therefore, our ability to divest ourselves of one or more of our facilities
promptly in response to changing conditions is limited. Investments in correctional,
detention, and residential reentry facilities subject us to risks involving potential exposure to
environmental liability and uninsured loss. Our operating costs may be affected by the
obligation to pay for the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future legislation. In addition, although we
maintain insurance for many types of losses, there are certain types of losses, such as losses
from earthquakes and acts of terrorism, which may be either uninsurable or for which it may
not be economically feasible to obtain insurance coverage, in light of the substantial costs
associated with such insurance. As a result, we could lose both our capital invested in, and
anticipated profits from, one or more of the facilities we own. Further, it is possible to
experience losses that may exceed the limits of insurance coverage.
In addition, facility development and expansion projects pose additional risks, including cost
overruns caused by various factors, many of which are beyond our control, such as weather,
labor conditions, and material shortages, resulting in increased construction costs. Further, if
we are unable to utilize this new bed capacity, our financial results could deteriorate.
Certain of our facilities are subject to options to purchase and reversions. Eleven of our
facilities are subject to an option to purchase by certain governmental agencies, including the
aforementioned D.C. Correctional Treatment Facility, ownership of which reverted to the
District in the first quarter of 2017. Such options are exercisable by the corresponding
contracting governmental entity generally at any time during the term of the respective
facility contract. Certain of these purchase options are based on the depreciated book value
of the facility, which essentially results in the transfer of ownership of the facility to the
governmental agency at the end of the life used for accounting purposes. See “Business –
Facility Portfolio – Facilities and Facility Management Contracts.” If any of these options
are exercised, there exists the risk that we will be unable to invest the proceeds from the sale
of the facility in one or more properties that yield as much cash flow as the property acquired
by the government entity. In addition, in the event any of these options is exercised, there
exists the risk that the contracting governmental agency will terminate the management
39
contract associated with such facility. For the year ended December 31, 2016, the eleven
facilities currently subject to these options generated $354.8 million in revenue (19.2% of
total revenue) and incurred $272.0 million in operating expenses. Certain of the options to
purchase are exercisable at prices below fair market value. See “Business – Facility Portfolio
– Facilities and Facility Management Contracts.”
Risks related to facility construction and development activities may increase our costs
related to such activities. When we are engaged to perform construction and design services
for a facility, we typically act as the primary contractor and subcontract with other companies
who act as the general contractors. As primary contractor, we are subject to the various risks
associated with construction (including, without limitation, shortages of labor and materials,
work stoppages, labor disputes, and weather interference which could cause construction
delays). In addition, we are subject to the risk that the general contractor will be unable to
complete construction at the budgeted costs or be unable to fund any excess construction
costs, even though we require general contractors to post construction bonds and insurance.
Under such contracts, we are ultimately liable for all late delivery penalties and cost
overruns.
We may be adversely affected by an increase in costs or difficulty of obtaining adequate
levels of surety credit on favorable terms.
We are often required to post bid or performance bonds issued by a surety company as a
condition to bidding on or being awarded a contract. Availability and pricing of these surety
commitments are subject to general market and industry conditions, among other factors.
Increases in surety costs could adversely affect our operating results if we are unable to
effectively pass along such increases to our customers. We cannot assure you that we will
have continued access to surety credit or that we will be able to secure bonds economically,
without additional collateral, or at the levels required for any potential facility development
or contract bids. If we are unable to obtain adequate levels of surety credit on favorable
terms, we would have to rely upon letters of credit under our revolving credit facility, which
could entail higher costs even if such borrowing capacity was available when desired at the
time, and our ability to bid for or obtain new contracts could be impaired.
Interruption, delay or failure of the provision of our technology services or information
systems, or the compromise of the security thereof, could adversely affect our business,
financial condition or results of operations.
Components of our business depend significantly on effective information systems and
technologies. As with all companies that utilize information systems, we are vulnerable to
negative impacts if the operation of those systems is interrupted, delayed, or certain
information contained therein is compromised. As a matter of course, we exchange data with
our government partners and other third-party providers. We employ industry-standard
methodologies to ensure the availability and security of such systems and information.
Despite the security measures we have in place, and any additional measures we may
implement in the future, our facilities and systems, and those of our third-party service
providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data,
programming errors, human errors, acts of vandalism, or other events. For example, several
well-known companies have recently disclosed high-profile security breaches, involving
sophisticated and highly targeted attacks on their company’s infrastructure or their
customers’ data, which were not recognized or detected until after such companies had been
affected notwithstanding the preventative measures they had in place. Any security breach or
event resulting in the interruption, delay or failure of our services or information systems, or
the misappropriation, loss, or other unauthorized disclosure of customer data or confidential
40
information, including confidential information about our employees, whether by us directly
or our third-party service providers, could damage our reputation, expose us to the risks of
litigation and liability, disrupt our business, result in lost business, or otherwise adversely
affect our results of operations.
Risks Related to Our Indebtedness
Our indebtedness could adversely affect our financial health and prevent us from fulfilling
our obligations under our debt securities.
We have a significant amount of indebtedness. As of December 31, 2016, we had total
indebtedness of $1,455.0 million. Our indebtedness could have important consequences. For
example, it could:
make it more difficult for us to satisfy our obligations with respect to our
indebtedness;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our cash flow
to fund working capital, capital expenditures, dividends, and other general
corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less
debt; and
limit our ability to borrow additional funds or refinance existing indebtedness on
favorable terms.
Our senior bank credit facility and other debt instruments have restrictive covenants that
could limit our financial flexibility.
The indentures related to our aggregate original principal amount of $325.0 million 4.125%
senior notes due 2020, $350.0 million 4.625% senior notes due 2023, and $250.0 million
5.0% senior notes due 2022, collectively referred to herein as our senior notes, and our senior
bank credit facility, contain financial and other restrictive covenants that limit our ability to
engage in activities that may be in our long-term best interests. Our ability to borrow under
our senior bank credit facility is subject to compliance with certain financial covenants,
including leverage and interest coverage ratios. Our senior bank credit facility includes other
restrictions that, among other things, limit our ability to incur indebtedness; grant liens;
engage in mergers, consolidations and liquidations; make asset dispositions, restricted
payments and investments; enter into transactions with affiliates; and amend, modify or
prepay certain indebtedness. The indentures related to our senior notes contain limitations
on our ability to effect mergers and change of control events, as well as other limitations on
our ability to create liens on our assets.
Our failure to comply with these covenants could result in an event of default that, if not
cured or waived, could result in the acceleration of all or a substantial portion of our debts.
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We do not have sufficient working capital to satisfy our debt obligations in the event of an
acceleration of all or a significant portion of our outstanding indebtedness.
Servicing our indebtedness will require a significant amount of cash. Our ability to
generate cash depends on many factors beyond our control.
Our ability to make payments on our indebtedness, to refinance our indebtedness, and to fund
planned capital expenditures will depend on our ability to generate cash in the future. This,
to a certain extent, is subject to general economic, financial, competitive, legislative,
regulatory, and other factors that are beyond our control.
The risk exists that our business will be unable to generate sufficient cash flow from
operations or that future borrowings will not be available to us under our senior bank credit
facility in an amount sufficient to enable us to pay our indebtedness, including our existing
senior notes, or to fund our other liquidity needs. We may need to refinance all or a portion
of our indebtedness, including our senior notes, on or before maturity. We may not,
however, be able to refinance any of our indebtedness, including our senior bank credit
facility and including our senior notes, on commercially reasonable terms or at all.
We are required to repurchase all or a portion of our senior notes upon a change of
control, and our senior bank credit facility is subject to acceleration upon a change of
control.
Upon certain change of control events, as that term is defined in the indentures for our senior
notes, including a change of control caused by an unsolicited third party, we are required to
make an offer in cash to repurchase all or any part of each holder’s notes at a repurchase
price equal to 101% of the principal thereof, plus accrued interest. The source of funds for
any such repurchase would be our available cash or cash generated from operations or other
sources, including borrowings, sales of equity or funds provided by a new controlling person
or entity. Sufficient funds may not be available to us, however, at the time of any change of
control event to repurchase all or a portion of the tendered notes pursuant to this requirement.
Our failure to offer to repurchase notes, or to repurchase notes tendered, following a change
of control will result in a default under the respective indentures, which could lead to a cross-
default under our senior bank credit facility and under the terms of our other indebtedness. In
addition, our senior bank credit facility which is subject to acceleration upon the occurrence
of a change in control (as described therein), may prohibit us from making any such required
repurchases. Prior to repurchasing the notes upon a change of control event, we must either
repay outstanding indebtedness under our senior bank credit facility or obtain the consent of
the lenders under our senior bank credit facility. If we do not obtain the required consents or
repay our outstanding indebtedness under our senior bank credit facility, we would remain
effectively prohibited from offering to purchase the notes.
Despite current indebtedness levels, we may still incur more debt.
The terms of the indentures for our senior notes and our senior bank credit facility restrict our
ability to incur indebtedness; however, we may nevertheless incur additional indebtedness in
the future and in the future, we may refinance all or a portion of our indebtedness, including
our senior bank credit facility, and may incur additional indebtedness as a result. As of
December 31, 2016, we had $455.9 million of additional borrowing capacity available under
our revolving credit facility. In addition, we may issue an indeterminate amount of debt
securities from time to time when we determine that market conditions and the opportunity to
utilize the proceeds from the issuance of such debt securities are favorable. If new debt is
added to our and our subsidiaries’ current debt levels, the related risks that we and they now
face could intensify.
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Our access to capital may be affected by general macroeconomic conditions.
Credit markets may tighten significantly such that our ability to obtain new capital will be
more challenging and more expensive. We can provide no assurance that the banks that have
made commitments under our senior bank credit facility will continue to operate as going
concerns in the future or will agree to extend commitments beyond the maturity date. If any
of the banks in the lending group were to fail, or fail to renew their commitments, it is
possible that the capacity under our senior bank credit facility would be reduced. In the event
that the availability under our senior bank credit facility was reduced significantly, we could
be required to obtain capital from alternate sources in order to continue with our business and
capital strategies. Our options for addressing such capital constraints would include, but not
be limited to (i) delaying certain capital expenditure projects, (ii) obtaining commitments
from the remaining banks in the lending group or from new banks to fund increased amounts
under the terms of our senior bank credit facility, (iii) accessing the public capital markets, or
(iv) reducing our dividend (but not less than amounts required to maintain our status as a
REIT and avoid income and excise taxes). Such alternatives could be on terms less favorable
than under existing terms, which could have a material effect on our consolidated financial
position, results of operations, or cash flows.
Rising interest rates would increase the cost of our variable rate debt.
We have incurred and expect in the future to incur indebtedness that bears interest at variable
rates. Accordingly, increases in interest rates would increase our interest costs, which could
have a material adverse effect on us and our ability to make distributions to our stockholders
and pay amounts due on our debt or cause us to be in default under certain debt instruments.
In December 2015, and again in December 2016, the Federal Reserve System raised the
federal funds interest rate by 25 basis points after having held interest rates at almost zero
over recent years. Per the Federal Reserve System’s statement, additional gradual increases
are expected during 2017, subject to market-based uncertainties such as changes in inflation,
the condition of the labor market, and other global economic and financial developments. In
addition, an increase in market interest rates may lead holders of our common stock to
demand a higher yield on their shares from distributions by us, which could adversely affect
the market price for our common stock.
Risks Related to our REIT Structure
If we fail to remain qualified as a REIT, we would be subject to corporate income taxes
and would not be able to deduct distributions to stockholders when computing our taxable
income.
We currently operate in a manner that is intended to allow us to qualify as a REIT for federal
income tax purposes commencing with our taxable year beginning January 1, 2013.
However, we cannot assure you that we have qualified or will remain qualified as a REIT.
Qualification as a REIT requires us to satisfy numerous requirements established under
highly technical and complex sections of the Internal Revenue Code of 1986, as amended, or
the Code, which may change from time to time and for which there are only limited judicial
and administrative interpretations, and involves the determination of various factual matters
and circumstances not entirely within our control. For example, in order to qualify as a REIT,
the REIT must derive at least 95% of its gross income in any year from qualifying sources. In
addition, a REIT is required to distribute annually to its stockholders at least 90% of its REIT
taxable income (determined without regard to the dividends paid deduction and by excluding
capital gains) and must satisfy specified asset tests on a quarterly basis.
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If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income computed in the
usual manner for corporate taxpayers without deduction for distributions to our stockholders
and we may need to borrow additional funds or issue securities to pay such additional tax
liability. Any such corporate income tax liability could be substantial and would reduce the
amount of cash available for other purposes because, unless we are entitled to relief under
certain statutory provisions, we would be taxable as a C-corporation, beginning in the year in
which the failure occurs, and we would not be allowed to re-elect to be taxed as a REIT for
the following four years.
Even if we remain qualified as a REIT, we may be required to pay taxes under certain
circumstances.
Even though we qualify as a REIT, we will be subject to certain U.S. federal, state and local
taxes on our income and property, on taxable income that we do not distribute to our
stockholders, and on net income from certain “prohibited transactions”. In addition, the
REIT provisions of the Code are complex and are not always subject to clear interpretation.
For example, a REIT must derive at least 95% of its gross income in any year from
qualifying sources, including rents from real property. Rents from real property includes
amounts received for the use of limited amounts of personal property and for certain
services. Whether amounts constitute rents from real property or other qualifying income
may not be entirely clear in all cases. We may fail to qualify as a REIT if we exceed the
permissible amounts of non-qualifying income unless such failures qualify under certain
statutory relief provisions. Even if we qualify for statutory relief, we may be required to pay
an excise or penalty tax (which could be significant in amount) in order to utilize one or more
such relief provisions under the Code to maintain our qualification as a REIT. Furthermore,
we conduct substantial activities through TRSs, and the income of those subsidiaries is
subject to U.S. federal income tax at regular corporate rates.
To maintain our REIT status, we may be forced to obtain capital during unfavorable
market conditions, which could adversely affect our overall financial performance.
In order to qualify as a REIT, we will be required each year to distribute to our stockholders
at least 90% of our REIT taxable income (determined without regard to the dividends paid
deduction and by excluding any net capital gain), and we will be subject to tax to the extent
our net taxable income (including net capital gain) is not fully distributed. In addition, we
will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions
we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our
net capital gains, and 100% of our undistributed income from prior years. We intend to
continue to make distributions to our stockholders to comply with the distribution
requirements of the Code as well as to reduce our exposure to federal income taxes and the
nondeductible excise tax. Differences in timing between the receipt of income and the
payment of expenses to arrive at taxable income, along with the effect of required debt
amortization payments, could require us to borrow funds on a short-term basis to meet the
distribution requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT. We may acquire additional capital through our issuance of securities
senior to our common stock, including additional borrowings or other indebtedness or the
issuance of additional securities. Issuance of such senior securities creates additional risks
because leverage is a speculative technique that may adversely affect common stockholders
or noteholders. If the return on assets acquired with borrowed funds or other leverage
proceeds does not exceed the cost of the leverage, the use of leverage could negatively affect
our cash flow.
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Additionally, the issuance of senior securities involves offering expenses and other costs,
including interest payments, which are borne indirectly by our common stockholders.
Fluctuations in interest rates could increase interest payments on our senior securities, and
could reduce cash available for distribution on common stock or for payment on our debt
securities. Increased operating costs, including the financing cost associated with any
leverage, may reduce our total return to common stockholders. Rating agency guidelines
applicable to any senior securities may impose asset coverage requirements, dividend
limitations, voting right requirements (in the case of the senior equity securities), and other
restrictions. Further, the terms of any senior securities or other borrowings may impose
additional requirements, restrictions and limitations that are more stringent than those
required by a rating agency that rates outstanding senior securities that may have an adverse
effect on us and may affect our ability to pay distributions to our stockholders. On the other
hand, we may not be able to raise such additional capital in the future on favorable terms or
at all. Unfavorable economic conditions could increase our funding costs, limit our access to
the capital markets or result in a decision by lenders not to extend credit to us.
Further, in order to maintain our REIT status, we may need to borrow funds to meet the REIT
distribution requirements even if the then-prevailing market conditions are not favorable for
these borrowings. These borrowing needs could result from differences in timing between the
actual receipt of cash and inclusion of income for federal income tax purposes or the effect of
non-deductible capital expenditures, the creation of reserves, or required debt or amortization
payments. Our ability to access debt and equity capital on favorable terms or at all is
dependent upon a number of factors, including general market conditions, the market’s
perception of our growth potential, our current and potential future earnings and cash
distributions, and the market price of our securities. Issuance of debt or equity securities will
expose us to typical risks associated with leverage, including increased risk of loss.
To the extent our ability to issue debt or other senior securities such as preferred stock is
constrained, we may depend on issuance of additional shares of common stock to finance
new investments. If we raise additional funds by issuing more shares of our common stock
or senior securities convertible into, or exchangeable for, shares of our common stock, the
percentage ownership of our stockholders at that time would decrease, and you may
experience dilution.
There are uncertainties relating to our estimate of the E&P Distribution.
To qualify for taxation as a REIT effective for the year ended December 31, 2013, we were
required to distribute to our stockholders on or before December 31, 2013, our undistributed
accumulated earnings and profits attributable to taxable periods ending prior to January 1,
2013. On May 20, 2013, we distributed $675.0 million to stockholders of record as of April
19, 2013 in satisfaction of this requirement, or the E&P Distribution. We believe that the total
value of the E&P Distribution was sufficient to fully distribute our accumulated earnings and
profits and that a portion of the E&P Distribution exceeded our accumulated earnings and
profits. However, the amount of our accumulated earnings and profits is a complex factual
and legal determination. We may have had less than complete information at the time we
estimated our earnings and profits or may have interpreted the applicable law differently
from the IRS. Substantial uncertainties exist relating to the computation of our undistributed
accumulated earnings and profits, including the possibility that the IRS could, in auditing tax
years through 2012, successfully assert that our taxable income should be increased, which
could increase our pre-REIT accumulated earnings and profits. Thus, we could fail to satisfy
the requirement that we distribute all of our pre-REIT accumulated earnings and profits by
the close of our first taxable year as a REIT. Moreover, although there are procedures
available to cure a failure to distribute all of our pre-REIT accumulated earnings and profits,
45
we cannot now determine whether we would be able to take advantage of them or the
economic impact to us of doing so.
Performing services through our TRSs may increase our overall tax liability relative to
other REITs or subject us to certain excise taxes.
A TRS may hold assets and earn income, including income earned from the performance of
correctional services, that would not be qualifying assets or income if held or earned directly
by a REIT. We conduct a significant portion of our business activities through our TRSs.
Our TRSs are subject to federal, foreign, state and local income tax on their taxable income,
and their after-tax net income generally is available for distribution to us but is not required
to be distributed to us. The TRS rules also impose a 100% excise tax on certain transactions
between a TRS and its parent REIT that are not conducted on an arm’s-length basis. In
addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its
parent REIT to ensure that the TRS is subject to an appropriate level of corporate income
taxation. We believe our arrangements with our TRSs are on arm’s-length terms and intend
to continue to operate in a manner that allows us to avoid incurring the 100% excise tax
described above. There can be no assurance, however, that we will be able to avoid
application of the 100% excise tax or the limitations on interest deductions discussed above.
The value of the securities we own in our TRS is limited under the REIT asset tests.
Under the Code, no more than 25% (20% for taxable years beginning after December 31,
2017) of the value of the gross assets of a REIT may be represented by securities of one or
more TRSs. This limitation may affect our ability to increase the size of our TRSs’
operations and assets, and there can be no assurance that we will be able to comply with the
applicable limitation. If we are unable to comply with the applicable limitation, we would fail
to qualify as a REIT. Furthermore, our significant use of TRSs may cause the market to value
shares of our common stock differently than the stock of other REITs, which may not use
TRSs as extensively. Although we intend to monitor the value of our investments in TRSs,
there can be no assurance that we will be able to comply with the applicable limitations
discussed above.
We may be limited in our ability to fund distributions using cash generated through our
TRSs.
At least 75% of gross income for each taxable year as a REIT must be derived from passive
real estate sources and no more than 25% of gross income may consist of dividends from our
TRSs and other non-real estate income. This limitation on our ability to receive dividends
from our TRSs may affect our ability to fund cash distributions to our stockholders using
cash from our TRSs. Moreover, our TRSs are not required to distribute their net income to
us, and any income of our TRSs that is not distributed to us will not be subject to the REIT
income distribution requirement.
REIT ownership limitations may restrict or prevent you from engaging in certain transfers
of our common stock.
In order to satisfy the requirements for REIT qualification, no more than 50% in value of all
classes or series of our outstanding shares of stock may be owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain entities) at any time
during the last half of each taxable year beginning with our 2014 taxable year. To assist us in
satisfying this share ownership requirement, our charter imposes ownership limits on each
class and series of our shares of stock. Under applicable constructive ownership rules, any
shares of stock owned by certain affiliated owners generally would be added together for
46
purposes of the common stock ownership limits, and any shares of a given class or series of
preferred stock owned by certain affiliated owners generally would be added together for
purposes of the ownership limit on such class or series.
If anyone transfers shares of our common stock in a manner that would violate the ownership
limits, or prevent us from qualifying as a REIT under the federal income tax laws, those
shares of common stock instead would be transferred to a trust for the benefit of a charitable
beneficiary and will be either redeemed by us or sold to a person whose ownership of the
shares will not violate the ownership limit. If this transfer to a trust fails to prevent such a
violation or fails to permit our continued qualification as a REIT, then the initial intended
transfer would be null and void from the outset. The intended transferee of those shares will
be deemed never to have owned the shares. Anyone who acquires shares in violation of the
ownership limit or the other restrictions on transfer bears the risk of suffering a financial loss
when the shares of common stock are redeemed or sold if the market price of our shares of
common stock falls between the date of purchase and the date of redemption or sale.
Complying with REIT requirements may cause us to forego otherwise attractive
opportunities or liquidate otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests
concerning, among other things, the sources of our income, the nature and diversification of
our assets, the amounts we distribute to our stockholders and the ownership of our common
stock. If we fail to comply with one or more of the asset tests at the end of any calendar
quarter, we may be able to avail ourselves of certain statutory relief provisions to avoid
losing our REIT qualification and suffering adverse tax consequences. We may be subject to
a penalty for failure to comply with one or more of these tests. In order to meet these tests,
we may be required to forego investments we might otherwise make or to liquidate otherwise
attractive investments. Thus, compliance with the REIT requirements may hinder our
performance and reduce amounts available for distribution to our stockholders.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to
engage in transactions which would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In
general, prohibited transactions are sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the ordinary course of business.
Although we do not intend to hold any properties that would be characterized as held for sale
to customers in the ordinary course of our business, unless a sale or disposition qualifies
under certain statutory safe harbors, such characterization is a factual determination and no
guarantee can be given that the IRS would agree with our characterization of our properties
or that we will always be able to make use of the available safe harbors.
We have not established a minimum distribution payment level, and we may be unable to
generate sufficient cash flows from our operations to make distributions to our
stockholders at any time in the future.
We are generally required to distribute to our stockholders at least 90% of our net taxable
income (excluding net capital gains) each year to qualify as a REIT under the Code. To the
extent we satisfy the 90% distribution requirement but distribute less than 100% of our net
taxable income (including net capital gains), we will be subject to federal corporate income
tax on our undistributed net taxable income. We intend to distribute at least 100% of our net
taxable income (excluding net capital gains). However, our ability to make distributions to
our stockholders may be adversely affected by the issues described in the risk factors set
forth in this annual report. Subject to satisfying the requirements for REIT qualification, we
47
intend to continue to make regular quarterly distributions to our stockholders. Our Board of
Directors has the sole discretion to determine the timing, form and amount of any
distributions to our stockholders. Our Board of Directors makes determinations regarding
distributions based upon, among other factors, our historical and projected results of
operations, financial condition, cash flows and liquidity, satisfaction of the requirements for
REIT qualification and other tax considerations, capital expenditure and other expense
obligations, debt covenants, contractual prohibitions or other limitations and applicable law
and such other matters as our Board of Directors may deem relevant from time to time.
It is possible that we will not be able to continue to make distributions to our stockholders or
that the level of any distributions we do make to our stockholders will achieve a market yield
or increase or even be maintained over time, any of which could materially and adversely
affect the market price of our shares of common stock. Distributions could be dilutive to our
financial results and may constitute a return of capital to our investors, which would have the
effect of reducing each stockholder's basis in its shares of common stock. We also could use
borrowed funds or proceeds from the sale of assets to fund distributions.
Dividends payable by REITs, including us, generally do not qualify for the reduced tax
rates available for some dividends.
"Qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates
generally are subject to tax at preferential rates. Subject to limited exceptions, dividends
payable by REITs are not eligible for these reduced rates and are taxable at ordinary income
tax rates. The more favorable rates applicable to regular corporate qualified dividends could
cause investors who are individuals, trusts and estates to perceive investments in REITs to be
relatively less attractive than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of REITs, including the shares
of our common stock.
Distributions that we make to our stockholders are treated as dividends to the extent of our
earnings and profits as determined for federal income tax purposes and are generally taxable
to our stockholders as ordinary income. However, our dividends are eligible for the lower
rate applicable to “qualified dividends” to the extent they are attributable to income that was
previously subject to corporate income tax, such as the dividends we receive from our TRSs
or attributable to the accumulated earnings and profits in connection with acquisitions of C-
corporations. Also, a portion of our distributions may be designated by us as long-term
capital gains to the extent that they are attributable to capital gain income recognized by us.
Our distributions may constitute a return of capital to the extent that they exceed our earnings
and profits as determined for federal income tax purposes. A return of capital generally is not
taxable, but has the effect of reducing the basis of a stockholder's investment in our shares of
common stock. Any such distributions that exceed a stockholder's tax basis in our shares of
common stock generally will be taxable as capital gains.
We could have potential deferred and contingent tax liabilities from our REIT conversion
that could limit, delay or impede future sales of our properties.
Even though we qualify for taxation as a REIT, if we acquire any asset from a corporation
which is or has been a C-corporation in a transaction in which the basis of the asset in our
hands is less than the fair market value of the asset (including as a result of the REIT
conversion), in each case determined at the time we acquired the asset or converted to a
REIT, as applicable, and we subsequently recognize a gain on the disposition of the asset
during the five-year period beginning on the date on which we acquired the asset or
converted to a REIT, as applicable, then we will be required to pay tax at the highest regular
corporate tax rate on this gain to the extent of the excess of (a) the fair market value of the
48
asset over (b) its adjusted basis in the asset, in each case determined as of the date on which
we acquired the asset or converted to a REIT, as applicable. These requirements could limit,
delay or impede future sales of our properties. We currently do not expect to sell any asset if
the sale would result in the imposition of a material tax liability. We cannot, however, assure
you that we will not change our plans in this regard.
Tax liabilities and attributes inherited in connection with acquisitions.
From time to time we may acquire other corporations or entities and, in connection with such
acquisitions, we may succeed to the historic tax attributes and liabilities of such entities. For
example, in order to qualify as a REIT, at the end of any taxable year, we must not have any
earnings and profits accumulated in a non-REIT year. As a result, if we acquire a C-
corporation in certain transactions, we must distribute the corporation’s earnings and profits
accumulated prior to the acquisition before the end of the taxable year in which we acquire
the C-corporation. We also could be required to pay the acquired entity’s unpaid taxes even
though such liabilities arose prior to the time we acquired the entity. These issues are
applicable to Avalon and CMI, which were C-corporations prior to our acquisitions of these
companies.
Legislative or regulatory action affecting REITs could adversely affect us or our
stockholders.
In recent years, numerous legislative, judicial and administrative changes have been made to
the federal income tax laws applicable to investments in REITs and similar entities. At any
time, the federal income tax laws governing REITs or the administrative interpretations of
those laws may be amended. Changes to the tax laws, regulations and administrative
interpretations, which may have retroactive application, could adversely affect us and may
impact our taxation or that of our stockholders. Accordingly, we cannot assure you that any
such change will not significantly affect our ability to qualify for taxation as a REIT or the
federal income tax consequences to us of such qualification.
Other Risks Related to Our Securities
The market price of our equity securities may vary substantially, which may limit our
stockholders' ability to liquidate their investment.
The trading prices of equity securities issued by REITs have historically been affected by
changes in market interest rates. One of the factors that may influence the price of our
common stock in public trading markets is the annual yield from distributions on our
common stock as compared to yields on other financial instruments. An increase in market
interest rates, or a decrease in our distributions to stockholders, may lead prospective
purchasers of our shares to demand a higher annual yield, which could reduce the market
price of our equity securities.
Other factors that could affect the market price of our equity securities include the following:
actual or anticipated variations in our quarterly results of operations;
changes in market valuations of companies in the corrections or detention industries;
changes in expectations of future financial performance or changes in estimates of
securities analysts;
fluctuations in stock market prices and volumes;
issuances of common shares or other securities in the future; and
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announcements by us or our competitors of acquisitions, investments or strategic
actions.
The number of shares of our common stock available for future sale could adversely affect
the market price of our common stock.
We cannot predict the effect, if any, of future sales of common stock, or the availability of
common stock for future sale, on the market price of our common stock. Sales of substantial
amounts of common stock (including stock issued under equity compensation plans or stock
issued pursuant to our ATM Equity Offering Sales Agreement), or the perception that these
sales could occur, may adversely affect prevailing market prices for our common stock.
Future offerings of debt or equity securities ranking senior to our common stock or
incurrence of debt (including under our senior bank credit facility) may adversely affect
the market price of our common stock.
If we decide to issue debt or equity securities in the future ranking senior to our common
stock or otherwise incur indebtedness (including under our senior bank credit facility), it is
possible that these securities or indebtedness will be governed by an indenture or other
instrument containing covenants restricting our operating flexibility and limiting our ability
to make distributions to our stockholders. Additionally, any convertible or exchangeable
securities that we issue in the future may have rights, preferences and privileges, including
with respect to distributions, more favorable than those of our common stock and may result
in dilution to owners of our common stock. Because our decision to issue debt or equity
securities in any future offering or otherwise incur indebtedness will depend on market
conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of our future offerings or financings, any of which could reduce the market
price of our common stock and dilute the value of our common stock.
Our issuance of preferred stock could adversely affect holders of our common stock and
discourage a takeover.
Our Board of Directors has the authority to issue up to 50.0 million shares of preferred stock
without any action on the part of our stockholders. Our Board of Directors also has the
authority, without stockholder approval, to set the terms of any new series of preferred stock
that may be issued, including voting rights, dividend rights, liquidation rights and other
preferences superior to our common stock. In the event that we issue shares of preferred
stock in the future that have preferences superior to our common stock, the rights of the
holders of our common stock or the market price of our common stock could be adversely
affected. In addition, the ability of our Board of Directors to issue shares of preferred stock
without any action on the part of our stockholders may impede a takeover of us and
discourage or prevent a transaction favorable to our stockholders.
Our charter and bylaws and Maryland law could make it difficult for a third party to
acquire our company.
The Maryland General Corporation Law and our charter and bylaws contain provisions that
could delay, deter, or prevent a change in control of our company or our management. These
provisions could also discourage proxy contests and make it more difficult for our
stockholders to elect directors and take other corporate actions. These provisions:
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authorize us to issue “blank check” preferred stock, which is preferred stock that can
be created and issued by our Board of Directors, without stockholder approval, with
rights senior to those of common stock;
provide that directors may be removed with or without cause only by the affirmative
vote of at least a majority of the votes of shares entitled to vote thereon; and
establish advance notice requirements for submitting nominations for election to the
Board of Directors and for proposing matters that can be acted upon by stockholders
at a meeting.
We are also subject to anti-takeover provisions under Maryland law, which could delay or
prevent a change of control. Together, these provisions of our charter and bylaws and
Maryland law may discourage transactions that otherwise could provide for the payment of a
premium over prevailing market prices for our common stock, and also could limit the price
that investors are willing to pay in the future for shares of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
The properties we owned at December 31, 2016 are described under Item 1 and in Note 4 of
the Notes to the Consolidated Financial Statements contained in this Annual Report, as well
as in Schedule III in Part IV to this Annual Report.
ITEM 3.
LEGAL PROCEEDINGS.
In a memorandum to the BOP dated August 18, 2016, the DOJ directed that, as each contract
with privately operated prisons reaches the end of its term, the BOP should either decline to
renew that contract or substantially reduce its scope in a manner consistent with law and the
overall decline of the BOP's inmate population. In addition to the decline in the BOP's
inmate population, the DOJ memorandum cites purported operational, programming, and
cost efficiency factors as reasons for the new DOJ directive.
Following the release of the DOJ memorandum, a purported securities class action lawsuit
was filed against us and certain of our current and former officers in the United States
District Court for the Middle District of Tennessee, captioned Grae v. Corrections
Corporation of America et al., Case No. 3:16-cv-02267. The lawsuit is brought on behalf of
a putative class of shareholders who purchased or acquired our securities between February
27, 2012 and August 17, 2016. In general, the lawsuit alleges that, during this timeframe, our
public statements were false and/or misleading regarding the purported operational,
programming, and cost efficiency factors cited in the DOJ memorandum and, as a result, our
stock price was artificially inflated. The lawsuit alleges that the publication of the DOJ
memorandum on August 18, 2016 revealed the alleged fraud, causing the per share price of
our stock to decline, thereby causing harm to the putative class of shareholders. We believe
the lawsuit is entirely without merit and intend to vigorously defend against it. In addition,
we maintain insurance, with certain self-insured retention amounts, to cover the alleged
claims which mitigates the risk such litigation would have a material adverse effect on our
financial condition, results of operations, or cash flows.
51
See additional information required under this section described in Note 15 of the Notes to
the Consolidated Financial Statements contained in this Annual Report.
ITEM 4.
None.
ITEM 5.
MINE SAFETY DISCLOSURES
PART II.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF
EQUITY SECURITIES.
Market Price of and Distributions on Capital Stock
Our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol
“CXW.” On February 16, 2017, the last reported sale price of our common stock was $32.69
per share and there were approximately 3,000 registered holders and approximately 47,000
beneficial holders, respectively, of our common stock.
The following table sets forth, for the fiscal quarters indicated, the range of high and low
sales prices of the common stock.
Common Stock
FISCAL YEAR 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL YEAR 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividend Policy
SALES PRICE
HIGH
LOW
$
$
$
$
32.94
35.05
34.71
26.00
$
$
$
$
25.81
30.00
13.04
12.99
SALES PRICE
HIGH
LOW
$
$
$
$
42.31
40.89
35.48
31.76
$
$
$
$
36.34
32.98
28.00
24.21
During 2015 and 2016, CoreCivic's Board of Directors declared the following quarterly
dividends on its common stock:
Declaration Date
February 20, 2015
May 14, 2015
August 13, 2015
December 10, 2015
February 19, 2016
May 12, 2016
August 11, 2016
December 8, 2016
Record Date
April 2, 2015
July 2, 2015
October 2, 2015
January 4, 2016
April 1, 2016
July 1, 2016
October 3, 2016
January 3, 2017
Payable Date
April 15, 2015
July 15, 2015
October 15, 2015
January 15, 2016
April 15, 2016
July 15, 2016
October 17, 2016
January 13, 2017
Per Share
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.42
52
In order to qualify as a REIT, we are required each year to distribute to our stockholders at
least 90% of our REIT taxable income (determined without regard to the dividends paid
deduction and excluding net capital gains) and we will be subject to tax to the extent our net
taxable income (including net capital gains) is not fully distributed. While we intend to
continue paying regular quarterly cash dividends at levels expected to fully distribute our
annual REIT taxable income, future dividends will be paid at the discretion of our Board of
Directors and will depend on our future earnings, our capital requirements, our financial
condition, alternative uses of capital, the annual distribution requirements under the REIT
provisions of the Code and on such other factors as our Board of Directors may consider
relevant.
Issuer Purchases of Equity Securities
None.
ITEM 6.
SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December 31, 2016, was
derived from our consolidated financial statements and the related notes thereto after any
applicable reclassification of discontinued operations. This data should be read in
conjunction with our audited consolidated financial statements, including the related notes,
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Our audited consolidated financial statements, including the related notes, as of
December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015, and 2014
are included in this Annual Report.
53
CORECIVIC, INC. AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
STATEMENT OF OPERATIONS:
2016
2015
2014
2013
2012
For the Years Ended December 31,
Revenues
$ 1,849,785
$ 1,793,087
$ 1,646,867
$ 1,694,297
$ 1,723,657
Expenses:
Operating
General and administrative
Depreciation and amortization
Restructuring charges
Asset impairments
1,275,586
107,027
166,746
4,010
-
1,553,369
1,256,128
103,936
151,514
-
955
1,512,533
1,156,135
106,429
113,925
-
30,082
1,406,571
1,220,351
103,590
112,692
-
6,513
1,443,146
1,217,051
88,935
113,063
-
-
1,419,049
Operating income
296,416
280,554
240,296
251,151
304,608
Other (income) expense:
Interest expense, net
Expenses associated with debt
refinancing transactions
Other (income) expense
Income from continuing
operations before income taxes
67,755
-
489
68,244
49,696
701
(58)
50,339
39,535
45,126
-
(1,204)
38,331
36,528
(100)
81,554
58,363
2,099
(333)
60,129
228,172
230,215
201,965
169,597
244,479
Income tax (expense) benefit
(8,253)
(8,361)
(6,943)
134,995
(87,513)
Income from continuing operations
219,919
221,854
195,022
304,592
156,966
Loss from discontinued
operations, net of taxes
-
-
-
(3,757)
(205)
Net income
$
219,919
$ 221,854
$ 195,022
$ 300,835
$ 156,761
Basic earnings per share:
Income from continuing operations
Loss from discontinued operations,
net of taxes
Net income
$
$
1.87
-
1.87
Diluted earnings per share:
Income from continuing operations
Loss from discontinued operations,
net of taxes
Net income
$ 1.87
-
$ 1.87
$
$
$
$
1.90
-
1.90
1.88
-
1.88
$
$
$
$
1.68
-
1.68
1.66
-
1.66
$
$
$
$
2.77
(0.03)
2.74
2.73
(0.03)
2.70
$
$
$
$
1.58
-
1.58
1.56
-
1.56
Weighted average common shares
outstanding:
Basic
Diluted
117,384
117,791
116,949
117,785
116,109
117,312
109,617
111,250
99,545
100,623
BALANCE SHEET DATA:
2016
2015
2014
2013
2012
December 31,
Total assets
Total debt
Total liabilities
Stockholders’ equity
$ 3,271,604
$ 1,445,169
$ 1,812,641
$ 1,458,963
$ 3,356,018
$ 1,452,077
$ 1,893,270
$ 1,462,748
$ 3,117,646
$ 1,190,455
$ 1,636,146
$ 1,481,500
$ 2,996,427
$ 1,194,002
$ 1,493,920
$ 1,502,507
$ 2,968,267
$ 1,105,070
$ 1,446,647
$ 1,521,620
54
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those described under
Item 1A, “Risk Factors” and included in other portions of this report.
OVERVIEW
We are a diversified government solutions company with the scale and experience needed to
solve tough government challenges in cost-effective ways. We provide 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.
We have been a flexible and dependable partner for government for more than 30 years. Our
employees are driven by a deep sense of service, high standards of professionalism and a
responsibility to help government better the public good.
As of December 31, 2016, we owned or controlled 49 correctional and detention facilities,
owned or controlled 25 residential reentry facilities, and managed an additional 11
correctional and detention facilities owned by our government partners, with a total design
capacity of approximately 89,700 beds in 20 states and the District of Columbia. We are the
nation’s largest owner of partnership correctional, detention, and residential reentry facilities
and one of the largest prison operators in the United States. Our size and experience provide
us with significant credibility with our current and prospective customers, and enable us to
generate economies of scale in purchasing power for food services, health care and other
supplies and services we offer to our government partners.
We are structured as a real estate investment trust, or REIT. We began operating as a REIT
for federal income tax purposes effective January 1, 2013. See Item 1, "Business –
Overview" for a description of how we are organized and provide correctional services and
conduct other operations through taxable REIT subsidiaries, or TRSs, in order to comply
with REIT qualification requirements. We believe that operating as a REIT maximizes our
ability to create stockholder value given the nature of our assets, helps lower our cost of
capital, draws a larger base of potential stockholders, provides greater flexibility to pursue
growth opportunities, and creates a more efficient operating structure.
Over the past several years, we have successfully executed strategies to diversify our
business and offer a broader range of solutions to government partners. To reflect this
transformation, we announced in October 2016, our decision to rename and rebrand
Corrections Corporation of America to CoreCivic, Inc., or CoreCivic, or the Company. Our
decision to rename the Company was the result of an intense research, brand strategy, and
creative process that began in mid-2015. While the Company was legally renamed in
December 2016, related rebranding efforts are ongoing. Through three business offerings,
CoreCivic Safety, CoreCivic Properties, and CoreCivic Community, we provide 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.
55
Our Business
We are compensated for providing bed capacity and correctional, detention, and residential
reentry services at a per diem rate based upon actual or minimum guaranteed occupancy
levels. Federal, state, and local governments are constantly under budgetary constraints
putting pressure on governments to control correctional budgets, including per diem rates our
customers pay to us as well as pressure on appropriations for building new prison capacity.
Despite our increase in federal revenues, inmate populations in federal facilities, particularly
within the Federal Bureau of Prisons, or the BOP, system nationwide, have declined over the
past two years. Inmate populations in the BOP system declined in 2015 and 2016 due, in
part, to the retroactive application of changes to sentencing guidelines applicable to certain
federal drug trafficking offenses. Increases in capacity within the federal system could result
in a decline in BOP populations within our facilities, and could negatively impact the future
demand for prison capacity. Further, in a memorandum to the BOP dated August 18, 2016,
the Department of Justice, or DOJ, directed that, as each contract with privately operated
prisons reaches the end of its term, the BOP should either decline to renew that contract or
substantially reduce its scope in a manner consistent with law and the overall decline of the
BOP's inmate population. However, in November 2016, we announced that the BOP
exercised a two-year renewal option at our 1,978-bed, McRae Correctional Facility. The
amended agreement commenced on December 1, 2016, and provides for housing up to 1,724
federal inmates with a fixed monthly payment for 1,633 beds, compared to our previous
contract which contained a fixed payment for 1,780 beds.
On August 29, 2016, the Secretary of the Department of Homeland Security, or DHS,
announced that he directed the Homeland Security Advisory Council, or HSAC, to establish
a Subcommittee of the Council to review the U.S. Immigration and Customs Enforcement's,
or ICE's, current policy and practices concerning the use of private immigration detention and
evaluate whether this practice should be eliminated. A written report of the subcommittee's
evaluation was provided by the HSAC to the Secretary of the DHS and the Director of ICE
on November 30, 2016. According to the report, fiscal considerations, combined with the
need for realistic capacity to handle sudden increases in detention, suggest that DHS's use of
private for-profit detention will continue. The report indicated that, as of September 12,
2016, 10% of the ICE detainee population was housed in federally owned and directed
facilities, while 65% was housed in facilities operated by private, for-profit contractors, and
25% was housed in facilities operated by county jails or other local or state government
entities. Further, the report indicated that ICE should seek ongoing ways to reduce reliance
on detention in county jails, which generally do not meet Performance-Based National
Detention Standards, or PBNDS, promulgated by ICE.
We believe the utilization of private sector bed capacity and management services provides
ICE with flexible and cost-effective solutions essential to their mission. We also believe the
new contract we signed in October 2016 to provide detention space and services at our
Cibola County Corrections Center to ICE for up to 1,116 detainees, and the new contract
award we announced in December 2016 to provide detention capacity to ICE at our 2,016
bed Northeast Ohio Correctional Center, demonstrate examples of our ability to provide
flexible solutions and fulfill emergent needs of ICE that would be very difficult to replicate in
the public sector. We previously housed inmates from the BOP at the Cibola facility under a
contract that expired in October 2016 and at the Northeast Ohio facility under a contract that
expired in May 2015. Therefore, we believe these new contracts provide further examples of
the marketability of our real estate assets across multiple government customers.
56
We generated approximately 9% and 28% of our total revenue from the BOP and ICE during
the year ended December 31, 2016, respectively.
Several of our state partners are projecting improvements in their budgets which has helped
us secure recent per diem increases at certain facilities. Further, several of our existing state
partners, as well as state partners with which we do not currently do business, are
experiencing growth in inmate populations and overcrowded conditions. Although we can
provide no assurance that we will enter into any new contracts, we believe we are well
positioned to provide them with needed bed capacity, as well as the programming and reentry
services they are seeking.
We believe the long-term growth opportunities of our business remain attractive as
governments consider their emergent needs, as well as the efficiency, savings, and offender
programming opportunities we can provide along with flexible solutions to match our
partners' needs. Further, we expect our partners to continue to face challenges in maintaining
old facilities, and developing new facilities and additional capacity which could result in
future demand for the solutions we provide.
Governments continue to experience many significant spending demands which have
constrained correctional budgets limiting their ability to expand existing facilities or
construct new facilities. We believe the outsourcing of prison management services to private
operators allows governments to manage increasing inmate populations while simultaneously
controlling correctional costs and improving correctional services. We believe our customers
discover that partnering with private operators to provide residential services to their
offenders introduces competition to their prison system, resulting in improvements to the
quality and cost of corrections services throughout their correctional system. Further, the use
of facilities owned and managed by private operators allows governments to expand
correctional capacity without incurring large capital commitments and allows them to avoid
long-term pension obligations for their employees.
We also believe that having beds immediately available to our partners provides us with a
distinct competitive advantage when bidding on new contracts. While we have been
successful in winning contract awards to provide management services for facilities we do
not own, and will continue to pursue such management contracts selectively, we believe the
most significant opportunities for growth are in providing our government partners with
available beds within facilities we currently own or that we develop. We also believe that
owning the facilities in which we provide management services enables us to more rapidly
replace business lost compared with managed-only facilities, since we can offer the same
beds to new and existing customers and, with customer consent, may have more flexibility in
moving our existing inmate populations to facilities with available capacity. Our
management contracts generally provide our customers with the right to terminate our
management contracts at any time without cause.
We are actively engaged in marketing our available capacity to existing and prospective
customers. Historically, we have been successful in substantially filling our inventory of
available beds and the beds that we have constructed. Filling these available beds would
provide substantial growth in revenues, cash flow, and earnings per share. However, we can
provide no assurance that we will be able to fill our available beds.
The demand for capacity in the short-term has been affected by the budget challenges many
of our government partners currently face. At the same time, these challenges impede our
customers’ ability to construct new prison beds of their own or update older facilities, which
we believe could result in further need for private sector capacity solutions in the long-term.
57
We intend to continue to pursue build-to-suit opportunities like our 2,552-bed Trousdale
Turner Correctional Center recently constructed in Trousdale County, Tennessee, and
alternative solutions like the 2,400-bed South Texas Family Residential Center whereby we
identified a site and lessor to provide residential housing and administrative buildings for
ICE. We also expect to continue to pursue investment opportunities and are in various stages
of due diligence to complete additional transactions like the acquisitions of five residential
reentry facilities in Pennsylvania and California over the past two years, and business
combination transactions like the acquisitions of Avalon Correctional Services, Inc., or
Avalon, in the fourth quarter of 2015 and Correctional Management, Inc., or CMI, in the
second quarter of 2016. The transactions that have not yet closed are subject to various
customary closing conditions, and we can provide no assurance that any such transactions
will ultimately be completed. We are also pursuing investment opportunities in other real
estate assets used to provide mission critical governmental services primarily in the criminal
justice sector. In the long-term, however, we would like to see meaningful utilization of our
available capacity and better visibility from our customers before we add any additional
prison capacity on a speculative basis.
We also remain steadfast in our efforts to contain costs. Approximately 59% of our operating
expenses consist of salaries and benefits. The turnover rate for correctional officers for our
company, and for the corrections industry in general, remains high. We are making
investments in systems and processes intended to help manage our workforce more
efficiently and effectively, especially with respect to overtime and costs of turnover. We are
also focused on workers' compensation and medical benefits costs for our employees due to
continued rising healthcare costs throughout the country and the uncertainty of the impact of
the Patient Protection and Affordable Care Act, and any changes thereto, on future healthcare
costs. Reducing these staffing costs requires a long-term strategy to control such costs, and
we continue to dedicate resources to enhance our benefits, provide specialized training and
career development opportunities to our staff and attract and retain quality personnel.
Through ongoing company-wide initiatives, we continue to focus on efforts to contain costs
and improve operating efficiencies, ensuring continuous delivery of quality services over the
long-term.
Through the combination of our initiatives to (i) increase our revenues by taking advantage of
our available beds, (ii) deliver new bed capacity through new facility construction and
expansion opportunities, (iii) invest in real estate-only solutions, (iv) acquire community
corrections facilities, and (v) contain our operating expenses, we believe we will be able to
maintain our competitive advantage and continue to improve the quality services we provide
to our customers at an economical price, thereby producing value to our stockholders.
58
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States. As such, we are required to make certain estimates,
judgments and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. A summary of our significant accounting
policies is described in Note 2 of the Notes to the Consolidated Financial Statements
contained in this Annual Report. The significant accounting policies and estimates which we
believe are the most critical to aid in fully understanding and evaluating our reported
financial results include the following:
Asset impairments. The primary risk we face for asset impairment charges, excluding
goodwill, is associated with correctional facilities we own. As of December 31, 2016, we
had $2.8 billion in property and equipment, including $180.1 million in long-lived assets,
excluding equipment, at seven idled correctional facilities. The impairment analyses we
performed for each of these facilities excluded the net book value of equipment, as a
substantial portion of the equipment is easily transferrable to other company-owned facilities
without significant cost. The carrying values of the seven idled facilities as of December 31,
2016 were as follows (in thousands):
Prairie Correctional Facility
Huerfano County Correctional Center
Diamondback Correctional Facility
Southeast Kentucky Correctional Facility (1)
Marion Adjustment Center
Lee Adjustment Center
Kit Carson Correctional Center
(1) Formerly known as the Otter Creek Correctional Center.
$ 17,071
17,542
41,539
22,618
12,135
10,342
58,819
$ 180,066
From the date each facility became idle, the idled facilities incurred combined operating
expenses of approximately $8.5 million, $7.3 million, and $6.5 million for the years ended
December 31, 2016, 2015, and 2014, respectively. The 2014 amount excludes expenses
incurred in connection with the activation of the Diamondback Correctional Facility which
began in the third quarter of 2013 and continued until near the end of the second quarter of
2014, as further described hereafter.
We evaluate the recoverability of the carrying values of our long-lived assets, other than
goodwill, when events suggest that an impairment may have occurred. Such events primarily
include, but are not limited to, the termination of a management contract or a significant
decrease in inmate populations within a correctional facility we own or manage.
Accordingly, we tested each of the aforementioned idled facilities for impairment when we
were notified by the respective customers that they would no longer be utilizing such facility.
We re-perform the impairment analyses on an annual basis for each of the idle facilities and
evaluate on a quarterly basis market developments for the potential utilization of each of
these facilities in order to identify events that may cause us to reconsider our most recent
assumptions. Such events could include negotiations with a prospective customer for the
utilization of an idle facility at terms significantly less favorable than used in our most recent
59
impairment analysis, or changes in legislation surrounding a particular facility that could
impact our ability to house certain types of inmates at such facility, or a demolition or
substantial renovation of a facility. Further, a substantial increase in the number of available
beds at other facilities we own could lead to a deterioration in market conditions and cash
flows that we might be able to obtain under a new management contract at our idle facilities.
We have historically secured contracts with customers at existing facilities that were already
operational, allowing us to move the existing population to other idle facilities. Although
they are not frequently received, an unsolicited offer to purchase any of our idle facilities at
amounts that are less than the carrying value could also cause us to reconsider the
assumptions used in our most recent impairment analysis.
In performing our annual impairment analyses, the estimates of recoverability are initially
based on projected undiscounted cash flows that are comparable to historical cash flows from
management contracts at similar facilities to the idled facilities and sensitivity analyses that
consider reductions to such cash flows. Our sensitivity analyses included reductions in
projected cash flows by as much as half of the historical cash flows generated by the
respective facility as well as prolonged periods of vacancies. In all cases, the projected
undiscounted cash flows in our analyses as of December 31, 2016, exceeded the carrying
amounts of each facility.
Our impairment evaluations also take into consideration our historical experience in securing
new management contracts to utilize facilities that had been previously idled for periods
comparable to the periods that our currently idle facilities have been idle. Such previously
idled facilities are currently being operated under contracts that generate cash flows resulting
in the recoverability of the net book value of the previously idled facilities by substantial
amounts. Due to a variety of factors, the lead time to negotiate contracts with our federal and
state partners to utilize idle bed capacity is generally lengthy and has historically resulted in
periods of idleness similar to the ones we are currently experiencing at our idle facilities. As
a result of our analyses, we determined each of the idled facilities to have recoverable values
in excess of the corresponding carrying values. However, we can provide no assurance that
we will be able to secure agreements to utilize our idle facilities, or that we will not incur
impairment charges in the future.
By their nature, these estimates contain uncertainties with respect to the extent and timing of
the respective cash flows due to potential delays or material changes to historical terms and
conditions in contracts with prospective customers that could impact the estimate of cash
flows. Notwithstanding the effects the recent economic downturn has had on our customers’
demand for prison beds in the short-term which led to our decision to idle certain facilities,
we believe the long-term trends favor an increase in the utilization of our correctional
facilities and management services. This belief is based on our experience in operating in
difficult economic environments and in working with governmental agencies faced with
significant budgetary challenges, which is a primary contributing factor to the lack of
appropriated funding since 2009 to build new bed capacity by the federal and state
governments with which we partner.
Based on a decline in offender populations within the state of Colorado and available
capacity at other facilities we own in Colorado, we idled our 1,488-bed Kit Carson
Correctional Center during the third quarter of 2016. Inmate populations from the Kit Carson
Correctional Center were transferred to the remaining two company-owned facilities that we
continue to operate for the Colorado Department of Corrections, the Bent County
Correctional Facility and the Crowley County Correctional Facility. We idled the Kit Carson
Correctional Center following the transfer of the inmate population, and we are marketing the
facility to other customers. We incurred a facility net operating loss at the Kit Carson
Correctional Center of $2.5 million during the time the facility was active in 2016. We
60
performed an impairment analysis of the Kit Carson Correctional Center, which had a net
carrying value of $58.8 million as of December 31, 2016, and concluded that this asset has a
recoverable value in excess of the carrying value.
On July 29, 2016, the BOP elected not to renew its contract at our owned and managed
1,129-bed Cibola County Corrections Center located in New Mexico. We prepared to idle
the facility upon expiration of the contract on October 30, 2016. We performed an
impairment analysis of the Cibola County Corrections Center, which had a net carrying value
of $29.4 million as of December 31, 2016, and concluded that this asset has a recoverable
value in excess of the carrying value. On October 31, 2016, we announced a new contract
award to house up to 1,116 ICE detainees at our Cibola facility and began receiving detainees
in December 2016 under the new contract. The contract contains an initial term of five years,
with renewal options upon mutual agreement. We believe this new contract provides a
further example of the marketability of our real estate assets across multiple government
customers.
Revenue Recognition – Multiple-Element Arrangement. In September 2014, we agreed under
an expansion of an existing inter-governmental service agreement, or IGSA, between the city
of Eloy, Arizona and ICE to provide residential space and services at our South Texas Family
Residential Center. The amended IGSA qualifies as a multiple-element arrangement under
the guidance in Accounting Standards Codification, or ASC, 605, "Revenue Recognition".
We evaluate each deliverable in an arrangement to determine whether it represents a separate
unit of accounting. A deliverable constitutes a separate unit of accounting when it has
standalone value to the customer. ASC 605 requires revenue to be allocated to each unit of
accounting based on a selling price hierarchy. The selling price for a deliverable is based on
its vendor specific objective evidence, or VSOE, of selling price, if available, third-party
evidence, or TPE, if VSOE of selling price is not available, or estimated selling price, or
ESP, if neither VSOE of selling price nor TPE is available. We establish VSOE of selling
price using the price charged for a deliverable when sold separately. We establish TPE of
selling price by evaluating similar products or services in standalone sales to similarly
situated customers. We establish ESP based on management judgment considering internal
factors such as margin objectives, pricing practices and controls, and market conditions. In
arrangements with multiple elements, we allocate the transaction price to the individual units
of accounting at inception of the arrangement based on their relative selling price. The
allocation of revenue to each element requires considerable judgment and estimations which
could change in the future. In October 2016, we entered into an amended IGSA that
extended the life of the contract through September 2021. As a result of this amendment, the
deferred revenue associated with the multiple elements will be recognized over future periods
based on the delivery of future services. If the IGSA were to be further amended or
terminated before the expiration of the five-year term, we would determine the allocation of
any deferred revenues to the separate units of accounting to be recognized immediately for
services previously provided and, if amended, over future periods based on the delivery of
future services.
Self-funded insurance reserves. As of December 31, 2016 and 2015, we had $29.8 million
and $30.1 million, respectively, in accrued liabilities for employee health, workers’
compensation, and automobile insurance claims. We are significantly self-insured for
employee health, workers’ compensation, and automobile liability insurance claims. As
such, our insurance expense is largely dependent on claims experience and our ability to
control our claims. We have consistently accrued the estimated liability for employee health
insurance claims based on our history of claims experience and the estimated time lag
between the incident date and the date we pay the claims. We have accrued the estimated
liability for workers’ compensation claims based on an actuarial valuation of the outstanding
liabilities, discounted to the net present value of the outstanding liabilities, using a
61
combination of actuarial methods used to project ultimate losses, and our automobile
insurance claims based on estimated development factors on claims incurred. The liability for
employee health, workers’ compensation, and automobile insurance includes estimates for
both claims incurred and for claims incurred but not reported. These estimates could change
in the future. It is possible that future cash flows and results of operations could be
materially affected by changes in our assumptions, new developments, or by the effectiveness
of our strategies.
Legal reserves. As of December 31, 2016 and 2015, we had $9.3 million and $4.2 million,
respectively, in accrued liabilities related to certain legal proceedings in which we are
involved. We have accrued our best estimate of the probable costs for the resolution of these
claims based on a range of potential outcomes. In addition, we are subject to current and
potential future legal proceedings for which little or no accrual has been reflected because our
current assessment of the potential exposure is nominal. These estimates have been
developed in consultation with our General Counsel’s office and, as appropriate, outside
counsel handling these matters, and are based upon an analysis of potential results, assuming
a combination of litigation and settlement strategies. It is possible that future cash flows and
results of operations could be materially affected by changes in our assumptions, new
developments, or by the effectiveness of our strategies.
62
RESULTS OF OPERATIONS
Our results of operations are impacted by the number of facilities we owned and managed,
the number of facilities we managed but did not own, the number of facilities we leased to
other operators, and the facilities we owned that were not in operation. The following table
sets forth the changes in the number of facilities operated for the years ended December 31,
2016, 2015, and 2014.
Effective
Date
Owned
and
Managed
Managed
Only
Leased
Total
Facilities as of December 31, 2013
49
16
4
69
Facilities as of December 31, 2014
49
Termination of the management contracts
for the Bay, Graceville and
Moore Haven Correctional Facilities
Termination of the contract at the North
Georgia Detention Center
Termination of the management contract
for the Idaho Correctional Center
Sale of the Houston Educational Facility
Activation of the South Texas Family
Residential Center
Impairment of non-core assets
Acquisition of four community corrections
facilities in Pennsylvania
Termination of the management contract
for the Winn Correctional Center
Termination of the lease contract at the
Leo Chesney Correctional Center
Acquisition of eleven community
corrections facilities in Oklahoma (3),
Texas (7), and Wyoming (1)
Activation of the Trousdale Turner
Correctional Center
January 2014
February 2014
July 2014
November 2014
-
(1)
-
-
(3)
-
-
-
(1)
-
-
(1)
(3)
(1)
(1)
(1)
October 2014
1
January 2015
August 2015
September 2015
(2)
-
-
-
12
-
-
(1)
-
3
-
4
-
1
64
(2)
4
(1)
October 2015
1
-
(1)
-
October 2015
11
December 2015
1
Facilities as of December 31, 2015
60
Acquisition of seven community
corrections facilities in Colorado
Lease of the North Fork Correctional
Facility
Acquisition of the Long Beach Community
Corrections Center in California
April 2016
7
May 2016
(1)
-
-
11
-
-
-
-
11
1
6
77
-
1
7
-
June 2016
-
-
1
1
Facilities as of December 31, 2016
66
11
8
85
63
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
During the year ended December 31, 2016, we generated net income of $219.9 million, or
$1.87 per diluted share, compared with net income of $221.9 million, or $1.88 per diluted
share, for the previous year. Financial results for the year ended December 31, 2016, include
$4.0 million of restructuring charges resulting from the realignment of our corporate structure
to more effectively serve facility operations and support the progression of our business
diversification strategy via the acquisitions of residential reentry facilities and a focus on real
estate-only solutions for our government partners.
Facility Operations
A key performance indicator we use to measure the revenue and expenses associated with the
operation of the facilities we own or manage is expressed in terms of a compensated man-
day, which represents the revenue we generate and expenses we incur for one offender for
one calendar day. Revenue and expenses per compensated man-day are computed by
dividing facility revenue and expenses by the total number of compensated man-days during
the period. A compensated man-day represents a calendar day for which we are paid for the
occupancy of an offender. We believe the measurement is useful because we are
compensated for operating and managing facilities at an offender per-diem rate based upon
actual or minimum guaranteed occupancy levels. We also measure our ability to contain
costs on a per-compensated man-day basis, which is largely dependent upon the number of
offenders we accommodate. Further, per compensated man-day measurements are also used
to estimate our potential profitability based on certain occupancy levels relative to design
capacity. Revenue and expenses per compensated man-day for all of the facilities placed into
service that we owned or managed, exclusive of those held for lease, were as follows for the
years ended December 31, 2016 and 2015:
Revenue per compensated man-day
Operating expenses per compensated man-day:
Fixed expense
Variable expense
Total
For the Years Ended
December 31,
2016
2015
$
74.77
$
72.76
38.53
15.21
53.74
37.53
14.96
52.49
Operating income per compensated man-day
$
21.03
$
20.27
Operating margin
Average compensated occupancy
Average available beds
Average compensated population
28.1%
78.8%
83,882
66,112
27.9%
82.5%
80,121
66,111
Fixed expenses per compensated man-day for the year ended December 31, 2016 include
depreciation expense of $38.7 million and interest expense of $10.0 million in order to more
properly reflect the cash flows associated with the lease at the South Texas Family
Residential Center. Fixed expenses per compensated man-day for the year ended December
31, 2015 include depreciation expense of $29.9 million and interest expense of $8.5 million
associated with the lease at the South Texas Family Residential Center.
64
Revenue
Total revenue consists of revenue we generate in the operation and management of
correctional, detention, and residential reentry facilities, as well as rental revenue generated
from facilities we lease to third-party operators, and from our inmate transportation
subsidiary. The following table reflects the components of revenue for the years ended
December 31, 2016 and 2015 (in millions):
Management revenue:
Federal
State
Local
Other
Total management revenue
Rental and other revenue
For the Years Ended
December 31,
2016
2015
$ Change
% Change
$
954.8
710.4
78.1
65.8
1,809.1
40.7
$
912.1
725.1
65.7
52.9
1,755.8
$ 42.7
(14.7)
12.4
12.9
53.3
4.7%
(2.0%)
18.9%
24.4%
3.0%
37.3
3.4
9.1%
Total revenue
$ 1,849.8
$ 1,793.1
$ 56.7
3.2%
The $53.3 million, or 3.0%, increase in revenue associated with the operation and
management of correctional, detention, and residential reentry facilities consisted of an
increase in revenue of approximately $48.5 million resulting from an increase of 2.8% in
average revenue per compensated man-day and an increase in revenue of approximately $4.8
million generated primarily by one additional day of operations due to leap year in 2016.
The increase in average revenue per compensated man-day from 2015 to 2016 was primarily
a result of the full activation of the South Texas Family Residential Center in the second
quarter of 2015, as further described hereafter, and per diem increases at several of our other
facilities.
Average daily compensated population was consistent from 2015 to 2016. However, there
were several notable offsetting factors that affected the average daily compensated
population when comparing 2015 to 2016. Average compensated population in 2016 was
positively affected by the acquisition of Avalon in the fourth quarter of 2015, the acquisition
of CMI in the second quarter of 2016, and the activation of the Trousdale Turner Correctional
Center in the fourth quarter of 2015. We began housing state of Tennessee inmates at the
Trousdale facility in January 2016. Average compensated population was also positively
affected by the full activation of the South Texas Family Residential Center in the second
quarter of 2015. Average compensated population in 2016 was negatively affected by the
expiration of our contract with the BOP at our Northeast Ohio Correctional Center effective
May 31, 2015, and the decline in California inmates held in our out-of-state facilities, both as
further described hereafter. Average compensated population was also negatively affected by
the aforementioned decline in offender populations within the state of Colorado and the
expiration of our managed-only contract at the Winn Correctional Facility effective
September 30, 2015, as further described hereafter.
Business from our federal customers, including primarily the BOP, the United States
Marshals Service, or USMS, and ICE, continues to be a significant component of our
business. Our federal customers generated approximately 52% and 51% of our total revenue
for the years ended December 31, 2016 and 2015, respectively, increasing $42.7 million, or
4.7%. The increase in federal revenues primarily resulted from the full activation of the
South Texas Family Residential Center in the second quarter of 2015, partially offset by a
65
decline in federal populations at our Northeast Ohio Correctional Center. The combined
effect of per diem increases for several of our federal contracts and a net increase in federal
populations at certain other facilities, primarily from ICE, also contributed to the increase in
federal revenues.
State revenues from contracts at correctional, detention, and residential reentry facilities that
we operate decreased 2.0% from 2015 to 2016 primarily as a result of a decline in California
inmates held in our out-of-state facilities. In addition, the decrease in state revenues was a
result of the expiration of our managed-only contract with the state of Louisiana at the state-
owned Winn Correctional Facility effective September 30, 2015. The decline in offender
populations within the state of Colorado also contributed to the decrease in state revenues.
The decrease in state revenues was partially offset by the revenue generated at our newly
activated Trousdale Turner Correctional Center, and as a result of the acquisitions of
Avalon's eleven community corrections facilities in the fourth quarter of 2015 and CMI's
seven community corrections facilities in the second quarter of 2016, each as further
described hereafter. The acquisition of CMI also contributed to the $12.4 million, or 18.9%,
increase in the revenue from local authorities from 2015 to 2016.
Operating Expenses
Operating expenses totaled $1,275.6 million and $1,256.1 million for the years ended
December 31, 2016 and 2015, respectively. Operating expenses consist of those expenses
incurred in the operation and management of correctional, detention, and residential reentry
facilities, as well as at facilities we lease to third-party operators, and for our inmate
transportation subsidiary.
Expenses incurred in connection with the operation and management of correctional,
detention, and residential reentry facilities increased $23.6 million, or 1.9% during 2016
compared with 2015. The increase in operating expenses was primarily a result of the
activation of the Trousdale Turner Correctional Center in the fourth quarter of 2015, and the
acquisitions of Avalon and CMI. The one additional day of operations due to leap year in
2016 also contributed to the increase in operating expenses. The increase in operating
expenses was partially offset by a reduction in expenses resulting from the expiration of our
BOP contract at our Northeast Ohio Correctional Center effective May 31, 2015 and the
expiration of our managed-only contract with the state of Louisiana at the state-owned Winn
Correctional Facility effective September 30, 2015. In addition, the increase in operating
expenses was partially offset by a reduction in expenses that resulted from idling our Kit
Carson Correctional Center in the third quarter of 2016, and from idling our North Fork
Correctional Facility in the fourth quarter of 2015. We idled the North Fork facility as a
result of a decline in California inmates held in our out-of-state program. In May 2016, we
announced that we leased the North Fork Correctional Facility to the Oklahoma Department
of Corrections, or ODOC. The lease agreement commenced on July 1, 2016, as further
described hereafter.
66
Fixed expenses per compensated man-day increased to $38.53 during the year ended
December 31, 2016 from $37.53 during the year ended December 31, 2015. Fixed expenses
per compensated man-day increased primarily as a result of an increase in salaries and
benefits per compensated man-day. The increase in salaries and benefits per compensated
man-day was partially a result of these expenses being leveraged over smaller offender
populations at certain facilities and due to wage adjustments implemented during 2015. The
increase in salaries and benefits per compensated man-day was also due to more favorable
claims experience in our employee self-insured medical plan in the prior year. As the
economy has improved, we have experienced wage pressures in certain markets across the
country, and have provided wage increases to remain competitive. We continually monitor
compensation levels very closely along with overall economic conditions and will set wage
levels necessary to help ensure the long-term success of our business. Salaries and benefits
represent
the most significant component of our operating expenses, representing
approximately 59% of our total operating expenses during both 2016 and 2015.
In May 2016, the U.S. Department of Labor released updated overtime and exemption rules
under the Fair Labor Standards Act. Among other provisions, the updated rules were to have
increased the minimum salary needed to qualify for the standard white collar employee
exemption from $455 to $913 per week, or to $47,476 annually for a full-year worker. The
effective date for this provision was to have been December 1, 2016. However, in late
November 2016, a federal judge in Texas issued a nationwide preliminary injunction against
implementation of the updated overtime rules. Therefore, the updated overtime rules did not
go into effect on December 1, 2016, and the future of the announced overtime rule changes
continues to be uncertain. We had developed plans to comply with the new regulations as of
the effective date, and proceeded to implement certain aspects of our plans following the
preliminary injunction. We are currently monitoring developments with the litigation and
will continue to analyze the impact of any developments on our payroll costs and results of
operations.
Facility Management Contracts
We typically enter into facility contracts to provide prison bed capacity and management
services to governmental entities for terms typically ranging from three to five years, with
additional renewal periods at the option of the contracting governmental agency.
Accordingly, a substantial portion of our facility contracts are scheduled to expire each year,
notwithstanding contractual renewal options that a government agency may exercise.
Although we generally expect these customers to exercise renewal options or negotiate new
contracts with us, one or more of these contracts may not be renewed by the corresponding
governmental agency.
Our contract with the District of Columbia, or District, at the D.C. Correctional Treatment
Facility is scheduled to expire in the first quarter of 2017. The District assumed operation of
the facility in January 2017. We incurred facility net operating losses at the facility of $0.1
million and $0.7 million in 2016 and 2015, respectively, and generated facility net operating
income of $1.0 million in 2014. Our investment in the direct financing lease with the District
also expires in the first quarter of 2017. Upon expiration of the lease in 2017, ownership of
the facility automatically reverts to the District.
67
During 2015, ICE solicited proposals for the rebid of our 1,000-bed Houston Processing
Center. The contract is currently scheduled to expire in April 2017. We have submitted our
response to ICE, but can provide no assurance that we will be awarded a new contract for this
facility.
As previously discussed herein, on August 18, 2016, the DOJ directed that, as each contract
with privately operated prisons reaches the end of its term, the BOP should either decline to
renew that contract or substantially reduce its scope in a manner consistent with law and the
overall decline of the BOP's inmate population. Currently, we have two owned and managed
facilities that house BOP inmates with contracts that expire in the next twelve months. We
can provide no assurance that we will be awarded new contracts for these two facilities or
that the contracts will not be substantially reduced in scope. These two facilities have a total
capacity of 3,654 beds and contributed $91.4 million in revenue during 2016. The total net
carrying value of the two facilities was $144.5 million as of December 31, 2016. We have a
third owned and managed facility housing BOP inmates under a contract that was renewed in
November 2016 for two additional years through November 2018. This facility generated
$40.5 million of revenue during 2016.
During the third quarter of 2016, the Texas Department of Criminal Justice, or TDCJ,
solicited proposals for the rebid of four facilities we currently manage for the state of Texas.
The current managed-only contracts for these four facilities are scheduled to expire in August
2017. The four facilities have a total capacity of 5,129 beds and generated $2.3 million in
facility net operating income during 2016. We have submitted our response to the
solicitation, but can provide no assurance that we will be awarded new managed-only
contracts for these four facilities.
Based on information available at this filing, notwithstanding the contracts at facilities
described above, we believe we will renew all other material contracts that have expired or
are scheduled to expire within the next twelve months. We believe our renewal rate on
existing contracts remains high as a result of a variety of reasons including, but not limited to,
the constrained supply of available beds within the U.S. correctional system, our ownership
of the majority of the beds we operate, and the quality of our operations.
The operation of the facilities we own carries a higher degree of risk associated with a facility
contract than the operation of the facilities we manage but do not own because we incur
significant capital expenditures to construct or acquire facilities we own. Additionally,
correctional and detention facilities have limited or no alternative use. Therefore, if a
contract is terminated on a facility we own, we continue to incur certain operating expenses,
such as real estate taxes, utilities, and insurance, which we would not incur if a management
contract were terminated for a managed-only facility. As a result, revenue per compensated
man-day is typically higher for facilities we own and manage than for managed-only
facilities. Because we incur higher expenses, such as repairs and maintenance, real estate
taxes, and insurance, on the facilities we own and manage, our cost structure for facilities we
own and manage is also higher than the cost structure for the managed-only facilities.
Accordingly, the following tables display the revenue and expenses per compensated man-
day for the facilities placed into service that we own and manage and for the facilities we
manage but do not own, which we believe is useful to our financial statement users:
68
Owned and Managed Facilities:
Revenue per compensated man-day
Operating expenses per compensated man-day:
Fixed expense
Variable expense
Total
For the Years Ended
December 31,
2016
2015
$
82.76
$
81.32
41.44
16.19
57.63
40.55
16.16
56.71
Operating income per compensated man-day
$ 25.13
$
24.61
Operating margin
Average compensated occupancy
Average available beds
Average compensated population
30.4%
75.6%
69,984
52,942
30.3%
79.9%
65,073
52,007
Managed Only Facilities:
Revenue per compensated man-day
Operating expenses per compensated man-day:
Fixed expense
Variable expense
Total
$
42.62
$
41.18
26.81
11.29
38.10
26.38
10.53
36.91
Operating income per compensated man-day
$ 4.52
$
4.27
Operating margin
Average compensated occupancy
Average available beds
Average compensated population
Owned and Managed Facilities
10.6%
94.8%
13,898
13,170
10.4%
93.7%
15,048
14,104
Facility net operating income, or the operating income or loss from operations before interest,
taxes, asset impairments, depreciation and amortization, at our owned and managed facilities
increased by $29.9 million, from $505.7 million in 2015 to $535.6 million in 2016, an
increase of 5.9%. Facility net operating income at our owned and managed facilities in 2016
was favorably impacted by the full activation of the South Texas Family Residential Center.
The aforementioned $48.7 million and $38.4 million aggregate depreciation and interest
expense associated with the lease at the South Texas Family Residential Center in the years
ended December 31, 2016 and 2015, respectively, are not included in the facility net
operating income amounts reported above, but are included in the per compensated man-day
statistics.
In September 2014, we announced that we agreed to an expansion of an existing inter-
governmental service agreement, or IGSA, between the city of Eloy, Arizona and ICE to
house up to 2,400 individuals at the South Texas Family Residential Center, a facility we
lease in Dilley, Texas. The expanded agreement gives ICE additional capacity to
accommodate the influx of Central American female adults with children arriving illegally on
69
the Southwest border while they await the outcome of immigration hearings. As part of the
agreement, we are responsible for providing space and residential services in an open and
safe environment which offers residents indoor and outdoor recreational activities,
counseling, group interaction, and access to religious and legal services. In addition, we
provide educational programs through a third party and food services through the lessor. ICE
Health Service Corps, a division of ICE, is responsible for medical services provided to
residents. The services provided under the original amended IGSA commenced in the fourth
quarter of 2014 and had an original term of up to four years.
In October 2016, we entered into an amended IGSA that provides for a new, lower fixed
monthly payment commencing in November 2016, and extends the term of the contract
through September 2021. The agreement can be further extended by bi-lateral modification.
However, ICE can also terminate the agreement for convenience or non-appropriation of
funds, without penalty, by providing us with at least a 60-day notice. In the event we cancel
the lease with the third-party lessor prior to its expiration as a result of the termination of the
IGSA by ICE for convenience, and if we are unable to reach an agreement for the continued
use of the facility within 90 days from the termination date, we are required to pay a
termination fee based on the termination date, currently equal to $10.0 million and declining
to zero by October 2020.
We lease the South Texas Family Residential Center and the site upon which it was
constructed from a third-party lessor. Concurrent with the aforementioned amendment to the
IGSA entered into in October 2016, we modified our lease agreement with the third-party
lessor of the facility to reflect a reduced monthly lease expense effective in November 2016,
with a new term concurrent with the amended IGSA. ICE began housing the first residents at
the facility in the fourth quarter of 2014, and the site was completed during the second
quarter of 2015. In accordance with the multiple-element arrangement guidance, a portion of
the fixed monthly payments to us pursuant to the IGSA is recognized as lease and service
revenue. During the years ended December 31, 2016 and 2015, we recognized $267.3
million and $244.7 million, respectively, in total revenue associated with the facility. The
original IGSA with ICE had a favorable impact on the revenue and net operating income of
our owned and managed facilities during the years ended December 31, 2016 and 2015.
Operating margin percentages at this facility were comparable to those of our average owned
and managed facilities during 2015, but increased during 2016 as expenses normalized for
stabilized operations. Under terms of the aforementioned amended IGSA entered into in
October 2016, we anticipate that the revenues generated at the South Texas Family
Residential Center will be reduced by 40% and operating margin percentages at the facility
will be comparable to those of our average owned and managed facilities, resulting in a
material reduction to our facility net operating income in 2017.
In June 2015, ICE announced a policy change regarding family unit detention that has
shortened the duration of ICE detention for those who are awaiting further process before
immigration courts. Public policies and views regarding family detention, as well as
proposals pertaining to the most effective means to address families crossing the border
illegally, continue to evolve. In addition, numerous lawsuits, to which we are not a party,
have challenged the government’s policy of detaining migrant families.
One such lawsuit in the United States District Court for the Central District of California
concerns a settlement agreement between ICE and a plaintiffs’ class consisting of detained
minors, whereby the court issued an order on August 21, 2015, enforcing the settlement
agreement and requiring compliance by October 23, 2015. The court’s order clarified that the
government has the flexibility to hold class members for longer periods of time in unlicensed
and secure facilities during influxes of large numbers of undocumented migrant families via
the southern U.S. border. After announcing its intention to comply fully with the court's
70
order, the federal government appealed. In July 2016, the U.S. Court of Appeals for the
Ninth Circuit affirmed most aspects of the District Court's order, but ruled that ICE is not
required to release a parent simply because the settlement agreement might require release of
that parent's minor child. The impact of these rulings on family residential programs is not
yet known.
In December 2016, a Texas state court judge blocked efforts by Texas state officials to
license the South Texas Family Residential Center as a child care center, ruling that the state
officials lacked authority to license such facilities. The state of Texas has appealed this
ruling, and the impact of the judge's decision on family residential detention programs is not
yet known. Any court decision or government action that impacts our existing contract for
the South Texas Family Residential Center could materially affect our cash flows, financial
condition, and results of operations.
In December 2015, we announced that we were awarded a new contract from the Arizona
Department of Corrections, or ADOC, to house up to an additional 1,000 medium-security
inmates at our Red Rock facility, bringing the contracted bed capacity to 2,000 inmates. The
new management contract contains an initial term of ten years, with two five-year renewal
options upon mutual agreement and provides for an occupancy guarantee of 90% of the
contracted beds once the 90% occupancy rate is achieved. The government partner included
the occupancy guarantee in its RFP in order to guarantee its access to the beds. In connection
with the new award, we expanded our Red Rock facility to a design capacity of 2,024 beds
and added additional space for inmate reentry programming. Construction was substantially
completed at December 31, 2016, although we began receiving inmates under the new
contract during the third quarter of 2016. The new contract is expected to generate
approximately $22.0 million to $25.0 million of incremental annual revenue.
In May 2011, in response to a lawsuit brought by inmates against the state of California, the
U.S. Supreme Court upheld a lower court ruling issued by a three judge panel requiring
California to reduce its inmate population to 137.5% of its capacity. In an effort to meet the
Federal court ruling, the state of California enacted legislation that shifted the responsibilities
for housing certain lower level inmates from state government to local jurisdictions. This
realignment plan commenced on October 1, 2011 and, along with other actions to reduce
inmate populations, has resulted in a reduction in state inmate populations of approximately
30,000 as of December 31, 2016.
During the first quarter of 2015, the adult inmate population held in state of California
institutions first met the Federal court order to reduce inmate populations below 137.5% of
its capacity. Inmate populations in the state continued to decline below the court ordered
capacity limit which has resulted in declining inmate populations in the out-of-state program
at facilities we own and operate. As of December 31, 2016, the adult inmate population held
in state of California institutions remained in compliance with the Federal court order at
approximately 134.0% of capacity, or approximately 114,000 inmates, which did not include
the California inmates held in our out-of-state facilities. During the years ended December
31, 2016 and 2015, we housed an average daily population of approximately 4,900 and 7,300
California inmates, respectively, in facilities outside the state as a partial solution to the
State's overcrowding. This decline in population, net of the revenue generated by one
additional day of operations due to leap year in 2016, resulted in a decrease in revenue of
$57.1 million from the year ended December 31, 2015 to the year ended December 31, 2016.
Approximately 6% and 10% of our total revenue for the years ended December 31, 2016 and
2015, respectively, was generated from the California Department of Corrections and
Rehabilitation, or CDCR, in facilities housing inmates outside the state of California.
71
On January 10, 2017, the Governor of California issued a proposed budget for fiscal 2017-
2018. The proposed budget contemplates that implementation of initiatives to reduce prison
populations will allow the CDCR to remove all inmates from one of our two remaining out-
of-state facilities in fiscal 2017-2018. Additionally, as a result of such prison population
reduction initiatives, the CDCR anticipates returning any remaining inmates from our out-of-
state facilities by 2020. Although the proposed budget acknowledges that estimates of
population reductions are preliminary and subject to considerable uncertainty, we can provide
no assurance that we would be able to replace the cash flows associated with our contract
with the CDCR, if CDCR inmates are removed from our Tallahatchie and La Palma facilities.
An elimination of the use of our out-of-state solutions by the state of California would have a
significant adverse impact on our financial position, results of operations, and cash flows.
During December 2014, the BOP announced that it elected not to renew its contract with us
at our owned and managed 2,016-bed Northeast Ohio Correctional Center. The contract with
the BOP at this facility expired on May 31, 2015. Facility net operating income decreased by
$9.8 million from the year ended December 31, 2015 to the year ended December 31, 2016
as a result of this reduction in inmate population. In December 2016, we announced a new
contract award from ICE at the Northeast Ohio facility in order to assist ICE with their
current detention needs. The new contract contains an initial term expiring March 31, 2017,
with three six-month renewal periods at the option of ICE. As of January 31, 2017, we
housed approximately 215 ICE detainees and approximately 520 detainees from the USMS
pursuant to a separate contract that expires December 31, 2018, with no renewal options
remaining. While the new contract provides ICE with the flexibility to increase detainee
populations, it also provides us with the option to house other inmate populations at the
facility.
During the fourth quarter of 2015, we closed on the acquisition of 100% of the stock of
Avalon, along with two additional facilities operated by Avalon. The acquisition included 11
community corrections facilities with approximately 3,000 beds in Oklahoma, Texas, and
Wyoming. We acquired Avalon, which specializes in community correctional services, drug
and alcohol treatment services, and residential reentry services, as a strategic investment that
continues to expand the reentry assets we own and the services we provide.
On April 8, 2016, we closed on the acquisition of 100% of the stock of CMI along with the
real estate used in the operation of CMI's business from two entities affiliated with CMI.
CMI, a privately held community corrections company that operates seven community
corrections facilities, including six owned and one leased, with approximately 600 beds in
Colorado, specializes in community correctional services, drug and alcohol treatment
services, and residential reentry services. CMI provides these services through multiple
contracts with three counties in Colorado, as well as the Colorado Department of Corrections,
a pre-existing partner of ours. We acquired CMI as a strategic investment that continues to
expand the reentry assets we own and the services we provide. We currently expect the
annualized revenues to be generated by these seven facilities to range from approximately
$12.0 million to $13.0 million.
Total revenue generated from the acquisitions of Avalon and CMI during 2016 totaled $45.1
million.
Managed-Only Facilities
Total revenue at our managed-only facilities decreased $6.6 million, from $212.0 million in
2015 to $205.4 million in 2016. The decrease in revenues at our managed-only facilities was
largely the result of our decision to exit the contract at the Winn Correctional Center effective
September 30, 2015. Facility net operating income at our managed-only facilities decreased
72
$0.2 million, from $22.0 million during the year ended December 31, 2015 to $21.8 million
during the year ended December 31, 2016. During 2016 and 2015, managed-only facilities
generated 3.9% and 4.2%, respectively, of our total facility net operating income.
We expect the managed-only business to remain competitive and we will only pursue
opportunities for managed-only business where we are sufficiently compensated for the risk
associated with this competitive business. Further, we may terminate existing contracts from
time to time when we are unable to achieve per diem increases that offset increasing
expenses and enable us to maintain safe, effective operations. In April 2015, we provided
notice to the state of Louisiana that we would cease management of the contract at the 1,538-
bed Winn Correctional Center within 180 days, in accordance with the notice provisions of
the contract. Management of the facility transitioned to another operator effective September
30, 2015. We incurred a facility net operating loss at the Winn Correctional Center of $3.9
million during the time the facility was active in 2015. In anticipation of terminating the
contract at this facility, we also recorded an asset impairment of $1.0 million during the first
quarter of 2015 for the write-off of goodwill associated with the Winn facility.
Other Facility-Related Activity
On August 27, 2015, we acquired four community corrections facilities from a privately held
owner of community corrections facilities and other government leased assets. The four
acquired community corrections facilities have a capacity of approximately 600 beds and are
leased to Community Education Centers, Inc., or CEC, under triple net lease agreements that
extend through July 2019 and include multiple five-year lease extension options. CEC
separately contracts with the Pennsylvania Department of Corrections and the Philadelphia
Prison System to provide rehabilitative and reentry services to residents and inmates at the
leased facilities. We acquired the four facilities in the real estate-only transaction as a
strategic investment that expands our investment in residential reentry facilities.
In May 2016, we entered into a lease with the ODOC for our previously idled 2,400-bed
North Fork Correctional Facility. The lease agreement commenced on July 1, 2016, and
includes a five-year base term with unlimited two-year renewal options. However, the lease
agreement permitted the ODOC to utilize the facility for certain activation activities and,
therefore, revenue recognition began upon execution of the lease. The average annual rent to
be recognized during the five-year base term is $7.3 million, including annual rent in the fifth
year of $12.0 million. After the five-year base term, the annual rent will be equal to the rent
due during the prior lease year, adjusted for increases in the Consumer Price Index, or CPI.
We are responsible for repairs and maintenance, property taxes and property insurance, while
all other aspects and costs of facility operations are the responsibility of the ODOC.
On June 10, 2016, we acquired a residential reentry facility in Long Beach, California from a
privately held owner. The 112-bed facility is leased to CEC under a triple net lease
agreement that extends through June 2020 and includes one five-year lease extension option.
CEC separately contracts with the CDCR to provide rehabilitative and reentry services to
residents at the leased facility. We acquired the facility in the real estate–only transaction as
a strategic investment that further expands our investment in residential reentry facilities.
General and administrative expense
For the years ended December 31, 2016 and 2015, general and administrative expenses
totaled $107.0 million and $103.9 million, respectively. General and administrative expenses
consist primarily of corporate management salaries and benefits, professional fees and other
administrative expenses. We incurred $1.6 million and $3.6 million of expenses in the years
ended December 31, 2016 and 2015, respectively, associated with mergers and acquisitions.
73
As we pursue additional mergers and acquisitions, we could incur significant general and
administrative expenses in the future associated with our due diligence efforts, whether or not
such transactions are completed. These expenses could create volatility in our earnings.
However, notwithstanding these expenses, we currently expect general and administrative
expenses to decrease in the future as a result of a cost reduction plan we implemented at the
end of the third quarter of 2016 as part of a restructuring of our corporate operations, as
described hereafter.
Depreciation and Amortization
For the years ended December 31, 2016 and 2015, depreciation and amortization expense
totaled $166.7 million and $151.5 million, respectively. Our depreciation and amortization
expense increased as a result of completion of construction of the 2,400-bed South Texas
Family Residential Center in the second quarter of 2015. Prior to the second quarter of 2015,
residents had been housed in pre-existing housing units on the property. Our lease agreement
with the third-party lessor resulted in our being deemed the owner of the newly constructed
assets for accounting purposes, in accordance with ASC 840-40-55, formerly Emerging
Issues Task Force No. 97-10, "The Effect of Lessee Involvement in Asset Construction".
Accordingly, our balance sheet reflects the costs attributable to the building assets
constructed by the third-party lessor, which, beginning in the second quarter of 2015, began
depreciating over the remainder of the four-year term of the original lease. Depreciation
expense for the constructed assets at this facility was $38.7 million and $29.9 million during
the years ended December 31, 2016 and 2015, respectively. As previously described herein,
we modified our lease agreement with the third-party lessor of the facility in October 2016,
which resulted in a reduced monthly lease rate effective in November 2016 and extended the
term of the contract. As a result of the lease modification, depreciation expense for the
constructed assets at the South Texas Family Residential Center is expected to decline in
2017 to approximately $16.6 million. Depreciation expense also increased in 2016 due to the
completion of the Trousdale Turner Correctional Center construction project in the fourth
quarter of 2015.
Restructuring charges
During the third quarter of 2016, we announced a restructuring of our corporate operations
and implementation of a cost reduction plan, resulting in the elimination of approximately
12% of the corporate workforce at our headquarters. The restructuring realigns the corporate
structure to more effectively serve facility operations and support the progression of our
business diversification strategy. We reported a charge in the third quarter of 2016 of $4.0
million associated with this restructuring. This charge primarily consists of cash payments
for severance and related benefits to terminated employees and a non-cash charge associated
with the voluntary forfeiture by our chief executive officer of a restricted stock unit award.
The impact of these staffing reductions, together with the implementation of the cost
reduction plan, are expected to result in annual expense savings of approximately $9.0
million, most of which are general and administrative expenses. A substantial portion of
these expense savings commenced in the fourth quarter of 2016.
Interest expense, net
Interest expense was reported net of interest income and capitalized interest for the years
ended December 31, 2016 and 2015. Gross interest expense, net of capitalized interest, was
$68.9 million and $51.8 million for 2016 and 2015, respectively. Gross interest expense is
based on outstanding borrowings under our $900.0 million revolving credit facility, or
revolving credit facility, our outstanding Incremental Term Loan, or Term Loan, and our
outstanding senior notes, as well as the amortization of loan costs and unused facility fees.
74
We also incur interest expense associated with the lease of the South Texas Family
Residential Center, in accordance with ASC 840-40-55. Our interest expense increased in
2016 as a result of completion of construction of the 2,400-bed South Texas Family
Residential Center in the second quarter of 2015. Interest expense associated with the lease
of this facility was $10.0 million and $8.5 million during the years ended December 31, 2016
and 2015, respectively. As previously described herein, we modified our lease agreement
with the third-party lessor of the facility in October 2016, which resulted in a reduced
monthly lease rate effective in November 2016 and extended the term of the contract. As a
result of the lease modification, interest expense associated with the lease of the South Texas
Family Residential Center is expected to decline in 2017 to approximately $6.4 million.
We have benefited from relatively low interest rates on our revolving credit facility, which is
largely based on the London Interbank Offered Rate, or LIBOR. It is possible that LIBOR
could increase in the future. The interest rate on our revolving credit facility was at LIBOR
plus a margin of 1.75% during the first six months of 2015. During July 2015, we amended
and restated the revolving credit facility agreement to, among other modifications, reduce by
0.25% the applicable margin of base rate and LIBOR loans. Based on our leverage ratio,
loans under our revolving credit facility during the last six months of 2015 and during 2016
were 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.
In October 2015, we obtained $100.0 million under a Term Loan under the "accordion"
feature of our revolving credit facility. Interest rates under the Term Loan are the same as the
interest rates under our revolving credit facility, except that the interest rate on the Term
Loan was at a base rate plus a margin of 0.50% or at LIBOR plus a margin of 1.75% during
the first two fiscal quarters following closing of the Term Loan. We used net proceeds from
the Term Loan to pay down a portion of our revolving credit facility. The Term Loan has a
maturity of July 2020, with scheduled principal payments in years 2016 through 2020.
On September 25, 2015, we completed the offering of $250.0 million aggregate principal
amount of 5.0% senior notes due October 15, 2022. We used net proceeds from the offering
to pay down a portion of our revolving credit facility which had a variable weighted average
interest rate of 2.2% at December 31, 2016. While our interest expense increased during the
year ended December 31, 2016 compared with the prior year as a result of this refinancing
transaction completed in 2015, we reduced our exposure to variable rate debt, extended our
weighted average maturity, and increased the availability under our revolving credit facility.
Gross interest income was $1.1 million and $2.1 million for the years ended December 31,
2016 and 2015, respectively. Gross interest income is earned on a direct financing lease,
notes receivable, investments, and cash and cash equivalents. Capitalized interest was $0.6
million and $5.5 million during the years ended December 31, 2016 and 2015, respectively.
Capitalized interest decreased as a result of the completion of the Otay Mesa Detention
Center and the Trousdale Turner Correctional Center construction projects in the fourth
quarter of 2015. Capitalized interest in 2016 was primarily associated with the expansion
project at our Red Rock Correctional Center, as further described under “Liquidity and
Capital Resources” hereafter.
Income tax expense
During the years ended December 31, 2016 and 2015, our financial statements reflected an
income tax expense of $8.3 million and $8.4 million, respectively. Our effective tax rate was
3.6% during both the years ended December 31, 2016 and 2015. As a REIT, we are entitled
to a deduction for dividends paid, resulting in a substantial reduction in the amount of federal
income tax expense we recognize. Substantially all of our income tax expense is incurred
75
based on the earnings generated by our TRSs. Our overall effective tax rate is estimated
based on the current projection of taxable income primarily generated in our TRSs. Our
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 us, changes in other tax laws, changes in estimates
related to uncertain tax positions, or changes in state apportionment factors, as well as
changes in the valuation allowance applied to our deferred tax assets that are based primarily
on the amount of state net operating losses and tax credits that could expire unused.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
During the year ended December 31, 2015, we generated net income of $221.9 million, or
$1.88 per diluted share, compared with net income of $195.0 million, or $1.66 per diluted
share, for the previous year. Net income was negatively impacted during 2014 by $30.0
million of asset impairments, net of taxes, or $0.26 per diluted share, at the Houston
Educational Facility, Queensgate Correctional Facility, and Mineral Wells Pre-Parole
Transfer Facility. The asset impairments were recorded in the fourth quarter of 2014.
Facility Operations
Revenue and expenses per compensated man-day for all of the facilities placed into service
that we owned or managed, exclusive of those held for lease, were as follows for the years
ended December 31, 2015 and 2014:
Revenue per compensated man-day
Operating expenses per compensated man-day:
Fixed expense
Variable expense
Total
For the Years Ended
December 31,
2015
2014
$
72.76
$
63.54
37.53
14.96
52.49
33.06
11.60
44.66
Operating income per compensated man-day
$
20.27
$
18.88
Operating margin
Average compensated occupancy
Average available beds
Average compensated population
27.9%
82.5%
80,121
66,111
29.7%
83.8%
82,942
69,536
Fixed expenses per compensated man-day for 2015 include depreciation expense of $29.9
million and interest expense of $8.5 million in order to more properly reflect the cash flows
associated with the lease at the South Texas Family Residential Center. The calculations of
expenses per compensated man-day for 2014 exclude expenses incurred during the first six
months of 2014 for start-up efforts associated with the Diamondback facility because of the
distorted impact they have on the statistics. The Diamondback expenses were incurred in
connection with the activation of the facility in anticipation of a new contract. As further
described hereafter, in April 2014, we made the decision to once again idle the facility in the
absence of a definitive contract. The de-activation was completed near the end of the second
quarter of 2014.
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Revenue
Total revenue consists of revenue we generate in the operation and management of
correctional, detention, and residential reentry facilities, as well as rental revenue generated
from facilities we lease to third-party operators, and from our inmate transportation
subsidiary. The following table reflects the components of revenue for the years ended
December 31, 2015 and 2014 (in millions):
Management revenue:
Federal
State
Local
Other
Total management revenue
Rental and other revenue
For the Years Ended
December 31,
2015
2014
$ Change
% Change
$
912.1
725.1
65.7
52.9
1,755.8
37.3
$
728.3
759.3
68.6
56.5
1,612.7
$ 183.8
(34.2)
(2.9)
(3.6)
143.1
25.2%
(4.5%)
(4.2%)
(6.4%)
8.9%
34.2
3.1
9.1%
Total revenue
$ 1,793.1
$ 1,646.9
$ 146.2
8.9%
The $143.1 million, or 8.9%, increase in revenue associated with the operation and
management of correctional and detention facilities consisted of an increase in revenue of
approximately $222.5 million resulting from an increase of 14.5% in average revenue per
compensated man-day, partially offset by a decrease in revenue of approximately $79.4
million caused by a decrease in the average daily compensated population from 2014 to
2015. Most notably, the increase in average revenue per compensated man-day was a result
of the activation of the South Texas Family Residential Center in the fourth quarter of 2014,
as further described hereafter. Per diem increases at several of our other facilities also
contributed to the increase in average revenue per compensated man-day from 2014 to 2015.
Excluding the impact of revenue at the South Texas Family Residential Center, revenue per
compensated man-day increased 2.5% from 2014 to 2015.
Average daily compensated population decreased 3,425, or 4.9%, from 2014 to 2015. The
decline in average compensated population primarily resulted from the expiration of our
contract with the BOP at our Northeast Ohio Correctional Center effective May 31, 2015, and
due to a decline in California inmates held in our out-of-state facilities, both as further
described hereafter. A decline in federal populations at certain of our other facilities also
contributed to the decrease in average compensated population from 2014 to 2015.
The decline in average compensated population also resulted from the expiration of our
contract at the Idaho Correctional Center after the state of Idaho assumed management of the
facility effective July 1, 2014. In addition, the decline in average compensated population
resulted from the expiration of our managed-only contracts at the Bay Correctional Facility,
Graceville Correctional Facility, and Moore Haven Correctional Facility, collectively
referred to herein as the "Three Florida Facilities," after the Florida Department of
Management Services, or DMS, awarded the management of these contracts to another
operator effective January 31, 2014. Combined, these four managed-only facilities generated
facility net operating losses of $1.9 million during the time they were active in 2014. The
decline in average compensated population was also a result of the expiration of our contract
with the state of Vermont at our Lee Adjustment Center effective June 30, 2015, and the
expiration of our managed-only contract with the state of Louisiana at the state-owned Winn
Correctional Facility effective September 30, 2015, as further described hereafter. The
77
decline in average compensated population was partially offset by an increase in populations
at our newly activated South Texas Family Residential Center and at our Red Rock
Correctional Center, both as further described hereafter.
Our federal customers generated approximately 51% and 44% of our total revenue for the
years ended December 31, 2015 and 2014, respectively, increasing $183.8 million, or 25.2%.
The increase in federal revenues primarily resulted from the activation of the South Texas
Family Residential Center in the fourth quarter of 2014, as further described hereafter, and
per diem increases at several of our other facilities, partially offset by a decline in federal
populations at several facilities, including the BOP population at our Northeast Ohio
Correctional Center, as further described hereafter.
State revenues from correctional, detention, and residential reentry facilities that we operate
decreased 4.5% from 2014 to 2015. The decrease in state revenues was primarily a result of
a decline in California inmates held in our out-of-state facilities, as further described
hereafter. In addition, the decrease in state revenues was a result of the expiration of our
contract with the state of Vermont at our Lee Adjustment Center effective June 30, 2015, and
the expiration of our managed-only contract with the state of Louisiana at the state-owned
Winn Correctional Facility effective September 30, 2015, as further described hereafter. The
decrease in state revenues was also a result of the expiration of our contracts at the Idaho
Correctional Center effective July 1, 2014 and at the Three Florida Facilities effective
January 31, 2014. The decrease in state revenues was partially offset by an increase in
revenue at our Red Rock Correctional Center in Arizona and as a result of the acquisition of
Avalon, both as further described hereafter.
Rental and other revenue increased from 2014 to 2015 as a result of a contract adjustment in
the fourth quarter of 2013 by one of our government partners. The contract adjustment
resulted in an accrual of $13.0 million of revenue and an equal accrual of operating expenses
during the fourth quarter of 2013, which were revised to $9.0 million during the first quarter
of 2014, resulting in the reduction of both revenue and operating expenses by $4.0 million in
the first quarter of 2014.
Operating Expenses
Operating expenses totaled $1,256.1 million and $1,156.1 million for the years ended
December 31, 2015 and 2014, respectively. Operating expenses consist of those expenses
incurred in the operation and management of correctional, detention, and residential reentry
facilities, as well as at facilities we lease to third-party operators, and for our inmate
transportation subsidiary.
Expenses incurred in connection with the operation and management of correctional,
detention, and residential reentry facilities increased $91.9 million, or 8.1% during 2015
compared with 2014. Similar to our increase in revenues, operating expenses increased most
notably as a result of the activation of our South Texas Family Residential Center in the
fourth quarter of 2014, as further described hereafter. The additional inmate population at
our Red Rock Correctional Center, as further described hereafter, the transition of operations
from the San Diego Correctional Facility to the newly constructed Otay Mesa Detention
Center during the fourth quarter of 2015, and the acquisition of Avalon also contributed to
the increase in operating expenses. The increase in operating expenses was partially offset
by a reduction in expenses resulting from the expiration of our BOP contract at our Northeast
Ohio Correctional Center effective May 31, 2015, as further described hereafter, and the
expiration of our contract with the state of Vermont at our Lee Adjustment Center effective
June 30, 2015. In addition, the increase in operating expenses was partially offset by a
reduction in expenses that resulted from idling our North Fork Correctional Facility in the
78
fourth quarter of 2015, and by a reduction in expenses resulting from the expiration of our
contracts at the managed-only Idaho Correctional Center effective July 1, 2014 and at the
Three Florida Facilities effective January 31, 2014. We temporarily idled the North Fork
facility as a result of a decline in California inmates held in our out-of-state program.
Fixed expenses per compensated man-day increased to $37.53 during the year ended
December 31, 2015 from $33.06 during the year ended December 31, 2014. Fixed expenses
per compensated man-day for the year ended December 31, 2015 include depreciation
expense of $29.9 million and interest expense of $8.5 million in order to more properly
reflect the cash flows associated with the lease at the South Texas Family Residential Center.
In total, fixed expenses at the fully constructed 2,400-bed South Texas Family Residential
Center contributed to an increase of $2.73 per compensated man-day for the year ended
December 31, 2015.
Fixed expenses per compensated man-day increased from 2014 to 2015 due to an increase in
salaries and benefits per compensated man-day of $2.42. The increase in salaries and
benefits per compensated man-day resulted primarily from a higher average wage rate at our
South Texas Family Residential Center, which accounted for an increase of $1.11 per
compensated man-day. The increase in salaries and benefits per compensated man-day was
also due to necessary staffing required during the decline in California inmate populations,
expenses associated with the termination of the contract at the Winn Correctional Center,
inflationary increases, and higher employee benefits. Salaries and benefits represent the most
significant component of our operating expenses, representing approximately 59% and 62%
of our total operating expenses during 2015 and 2014, respectively.
Variable expenses per compensated man-day increased $3.36 during the year ended
December 31, 2015 from the year ended December 31, 2014. The increase was primarily due
to expenses associated with activating our South Texas Family Residential Center, and due to
an increase in other variable expenses. Variable expenses at the South Texas Family
Residential Center accounted for an increase of $2.47 per compensated man-day.
Operating expenses also increased from the year ended December 31, 2014 to the year ended
December 31, 2015 as a result of the contract adjustment by one of our government partners
which reduced both revenue and operating expenses by $4.0 million in the first quarter of
2014, as previously described. In addition, operating expenses in the first quarter of 2015
included a $3.0 million bad debt charge associated with a facility we no longer manage.
Operating expenses also increased in 2015 as a result of preparing the newly constructed
Trousdale Turner Correctional Center for the intake of inmate populations in the first quarter
of 2016.
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The following tables display the revenue and expenses per compensated man-day for the
facilities placed into service that we own and manage and for the facilities we manage but do
not own, which we believe is useful to our financial statement users:
Owned and Managed Facilities:
Revenue per compensated man-day
Operating expenses per compensated man-day:
Fixed expense
Variable expense
Total
For the Years Ended
December 31,
2015
2014
$
81.32
$
70.55
40.55
16.16
56.71
35.25
12.09
47.34
Operating income per compensated man-day
$ 24.61
$
23.21
Operating margin
Average compensated occupancy
Average available beds
Average compensated population
30.3%
79.9%
65,073
52,007
32.9%
81.0%
66,179
53,592
Managed Only Facilities:
Revenue per compensated man-day
Operating expenses per compensated man-day:
Fixed expense
Variable expense
Total
$
41.18
$
39.98
26.38
10.53
36.91
25.68
9.95
35.63
Operating income per compensated man-day
$ 4.27
$
4.35
Operating margin
Average compensated occupancy
Average available beds
Average compensated population
Owned and Managed Facilities
10.4%
93.7%
15,048
14,104
10.9%
95.1%
16,763
15,944
Facility net operating income at our owned and managed facilities increased by $54.6
million, from $451.1 million in 2014 to $505.7 million in 2015, an increase of 12.1%.
Facility net operating income at our owned and managed facilities for the year ended
December 31, 2015 was favorably impacted by the activation of the South Texas Family
Residential Center, as further described hereafter. The aforementioned $38.4 million
aggregate depreciation and interest expense associated with the lease at the South Texas
Family Residential Center in the year ended December 31, 2015 is not included in the facility
net operating income amounts reported above, but is included in the per compensated man-
day statistics.
In September 2014, we announced that we agreed under an expansion of an IGSA between
the city of Eloy, Arizona, and ICE to house up to 2,400 individuals at the South Texas Family
Residential Center, a facility we lease in Dilley, Texas. We lease the South Texas Family
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Residential Center and the site upon which it was constructed from a third-party lessor. Our
lease agreement with the lessor is over a period co-terminus with the aforementioned
amended IGSA with ICE. ICE began housing the first residents at the facility in the fourth
quarter of 2014, and the site was completed during the second quarter of 2015. The
agreement provides for a fixed monthly payment in accordance with a graduated schedule.
In accordance with the multiple-element arrangement guidance, a portion of the fixed
monthly payments is recognized as lease and service revenue. During the years ended
December 31, 2015 and 2014, we recognized $244.7 million and $21.0 million, respectively,
in total revenue associated with the facility. The expanded agreement with ICE had a
favorable impact on the revenue and net operating income of our owned and managed
facilities during the year ended December 31, 2015.
In September 2012, we announced that we were awarded a new management contract from
the ADOC to house up to 1,000 medium-security inmates at our 1,596-bed Red Rock
Correctional Center in Arizona. The management contract, which commenced in January
2014, contains an initial term of ten years, with two five-year renewal options upon mutual
agreement and provides an occupancy guarantee of 90% of the contracted beds, was
implemented in two phases. The government partner included the occupancy guarantee in its
RFP in order to guarantee its access to the beds. We received approximately 500 inmates
from Arizona during the first quarter of 2014 and received approximately 500 additional
inmates during the first quarter of 2015. In addition, in July 2015, we entered into a
temporary agreement with the state of Arizona to house approximately 560 inmates for a
period not to exceed 180 days. The temporary agreement ended in December 2015.
Revenue increased by $17.7 million from the year ended December 31, 2014 to the year
ended December 31, 2015 as a result of these increases in inmate populations.
On October 13, 2015, we announced that we renewed our contract with the CDCR through
June 30, 2019. The contract renewal provides for up to 6,562 beds to be made available to
CDCR during the renewal term at any of our facilities. The contract includes renewal options
to extend beyond the three-year term upon mutual agreement by both parties. The remaining
terms and conditions of the new contract are substantially unchanged from the previous
contract, which was scheduled to expire June 30, 2016.
During the first quarter of 2015, the adult inmate population held in state of California
institutions met the Federal court order to reduce inmate populations below 137.5% of its
capacity. Inmate populations in the state continued to decline below the court ordered
capacity limit which resulted in declining inmate populations in the out-of-state program.
During the years ended December 31, 2015 and 2014, we housed an average daily population
of approximately 7,300 and 8,800 California inmates, respectively, in facilities outside the
state as a partial solution to the State's overcrowding. This decline in population resulted in a
decrease in revenue of $33.9 million from the year ended December 31, 2014 to the year
ended December 31, 2015. Approximately 10% and 12% of our total revenue for the years
ended December 31, 2015 and 2014, respectively, was generated from the CDCR in facilities
housing inmates outside the state of California.
During December 2014, the BOP announced that it elected not to renew its contract with us
at our owned and operated 2,016-bed Northeast Ohio Correctional Center. The contract with
the BOP at this facility expired on May 31, 2015. Facility net operating income decreased by
$11.8 million from the year ended December 31, 2014 to the year ended December 31, 2015
as a result of this reduction in inmate population.
During the third quarter of 2013, we began hiring staff at the Diamondback Correctional
Facility in order to reactivate the facility for future operations. Our decision to activate the
facility was made as a result of potential need for additional beds by certain state customers.
81
In January 2014, the state of Oklahoma issued an RFP for bed capacity in the state of
Oklahoma and anticipated that an award announcement would be made in the second quarter
of 2014. When it became evident the contract would not be awarded and commence in the
near-term, we made the decision to re-idle the facility. The de-activation was completed near
the end of the second quarter of 2014. In the preceding table, the calculations of expenses
per man-day for the year ended December 31, 2014 exclude expenses incurred during the
first six months of 2014 for the Diamondback facility because of the distorted impact they
have on the statistics.
During the fourth quarter of 2015, we closed on the acquisition of 100% of the stock of
Avalon, along with two additional facilities operated by Avalon. Avalon, a privately held
community corrections company that operates 11 community corrections facilities with
approximately 3,000 beds in Oklahoma, Texas, and Wyoming, specializes in community
correctional services, drug and alcohol treatment services, and residential re-entry services.
Avalon provides these services for various federal, state, and local agencies, many with
which we currently partner. We acquired Avalon as a strategic investment that continues to
expand the reentry assets owned and services we provide.
Managed-Only Facilities
Total revenue at our managed-only facilities decreased $20.7 million from $232.7 million in
2014 to $212.0 million in 2015. The decrease in revenues at our managed-only facilities was
largely the result of the expiration of our contracts at the Winn Correctional Center effective
September 30, 2015, the Idaho Correctional Center effective July 1, 2014, and at the Three
Florida Facilities effective January 31, 2014. Revenue per compensated man-day increased
to $41.18 in 2015 from $39.98 in 2014, or 3.0%. Operating expenses per compensated man-
day increased to $36.91 in 2015 from $35.63 in 2014. Facility net operating income at our
managed-only facilities decreased $3.3 million from $25.3 million during the year ended
December 31, 2014 to $22.0 million during the year ended December 31, 2015. During 2015
and 2014, managed-only facilities generated 4.2% and 5.3%, respectively, of our total facility
net operating income.
During the third quarter of 2013, the state of Idaho reported that they expected to solicit bids
for the management of the Idaho Correctional Center upon the expiration of our contract in
June 2014. During the third quarter of 2013, we decided not to submit a bid for the continued
management of this facility. The state announced in early 2014 that it would assume
management of the facility effective July 1, 2014. The transition of our operations to the
state of Idaho was completed successfully on July 1, 2014. This facility incurred a facility
net operating loss of $1.9 million during the time it was active in 2014.
In April 2015, we provided notice to the state of Louisiana that we would cease management
of the contract at the 1,538-bed Winn Correctional Center within 180 days, in accordance
with the notice provisions of the contract. Management of the facility transitioned to another
operator effective September 30, 2015. We generated facility net operating income at this
facility of $0.9 million for the year ended December 31, 2014. We incurred a facility net
operating loss at the Winn Correctional Center of $3.9 million during the time the facility
was active in 2015. In anticipation of terminating the contract at this facility, we also
recorded an asset impairment of $1.0 million during the first quarter of 2015 for the write-off
of goodwill associated with the Winn facility.
82
General and administrative expense
For the years ended December 31, 2015 and 2014, general and administrative expenses
totaled $103.9 million and $106.4 million, respectively. General and administrative expenses
consist primarily of corporate management salaries and benefits, professional fees and other
administrative expenses. The decrease in general and administrative expenses was primarily
a result of decreased incentive compensation and professional fees, partially offset by $3.6
million of expenses incurred during 2015 associated with mergers and acquisitions, including
primarily expenses for the acquisition of Avalon, which closed in the fourth quarter of 2015.
Depreciation and Amortization
For the years ended December 31, 2015 and 2014, depreciation and amortization expense
totaled $151.5 million and $113.9 million, respectively. Our depreciation and amortization
expense increased as a result of completion of construction of the 2,400-bed South Texas
Family Residential Center in the second quarter of 2015. Prior to the second quarter of 2015,
residents had been housed in pre-existing housing units on the property. In accordance with
ASC 840-40-55, we incurred depreciation expense for the constructed assets at this facility of
$29.9 million during the year ended December 31, 2015.
Interest expense, net
Interest expense was reported net of interest income and capitalized interest for the years
ended December 31, 2015 and 2014. Gross interest expense, net of capitalized interest, was
$51.8 million and $43.1 million for 2015 and 2014, respectively. Gross interest expense
during these periods was based on outstanding borrowings under our $900.0 million
revolving credit facility, our outstanding Term Loan, and our outstanding senior notes, as
well as the amortization of loan costs and unused facility fees. We also incur interest
expense associated with the lease of the South Texas Family Residential Center, in
accordance with ASC 840-40-55. Our interest expense increased in 2015 as a result of
completion of construction of the 2,400-bed South Texas Family Residential Center in the
second quarter of 2015. Interest expense associated with the lease of this facility was $8.5
million during the year ended December 31, 2015.
We benefited from relatively low interest rates on our revolving credit facility, which is
largely based on the LIBOR. The interest rate on our revolving credit facility was at LIBOR
plus a margin of 1.75% during 2014 and the first six months of 2015. Based on our leverage
ratio, following an amendment to our revolving credit facility executed in July 2015, loans
under our revolving credit facility bore interest at the base rate plus a margin of 0.25% or at
LIBOR plus a margin of 1.25%, and a commitment fee equal to 0.30% of the unfunded
balance.
In October 2015, we obtained $100.0 million under a Term Loan under the "accordion"
feature of our revolving credit facility. Interest rates under the Term Loan are the same as the
interest rates under our revolving credit facility, except that the interest rate on the Term
Loan is at a base rate plus a margin of 0.50% or at LIBOR plus a margin of 1.75% during the
first two fiscal quarters following closing of the Term Loan. We used net proceeds from the
Term Loan to pay down a portion of our revolving credit facility. The Term Loan has a
maturity of July 2020, with scheduled principal payments in years 2016 through 2020.
On September 25, 2015, we completed the offering of $250.0 million aggregate principal
amount of 5.0% senior notes due October 15, 2022. We used net proceeds from the offering
to pay down a portion of our revolving credit facility which had a variable weighted average
83
interest rate of 1.9% at December 31, 2015. While our interest expense increased during
2015 as a result of the refinancing transactions, we reduced our exposure to variable rate
debt, extended our weighted average maturity, and increased the availability under our
revolving credit facility.
Gross interest income was $2.1 million and $3.6 million for the years ended December 31,
2015 and 2014, respectively. Gross interest income is earned on a direct financing lease,
notes receivable, investments, and cash and cash equivalents. Interest income generated on
investments we hold in a rabbi trust were higher during the year ended December 31, 2014
compared to the same period in 2015. Capitalized interest was $5.5 million and $2.5 million
during the years ended December 31, 2015 and 2014, respectively. Capitalized interest was
associated with various construction and expansion projects.
Income tax expense
During the years ended December 31, 2015 and 2014, our financial statements reflected an
income tax expense of $8.4 million and $6.9 million, respectively. Our effective tax rate was
3.6% and 3.4% during the years ended December 31, 2015 and 2014, respectively. As a
REIT, we are entitled to a deduction for dividends paid, resulting in a substantial reduction in
the amount of federal income tax expense we recognize. Substantially all of our income tax
expense is incurred based on the earnings generated by our TRSs. Our overall effective tax
rate is estimated based on the current projection of taxable income primarily generated in our
TRSs.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for working capital, stockholder distributions, capital
expenditures, and debt service payments. Capital requirements may also include cash
expenditures associated with our outstanding commitments and contingencies, as further
discussed in the notes to our financial statements. Additionally, we may incur capital
expenditures to expand the design capacity of certain of our facilities (in order to retain
management contracts) and to increase our inmate bed capacity for anticipated demand from
current and future customers. We may acquire additional correctional and residential reentry
facilities as well as other real estate assets used to provide mission critical governmental
services primarily in the criminal justice sector, that we believe have favorable investment
returns and increase value to our stockholders. We will also consider opportunities for
growth, including, but not limited to, potential acquisitions of businesses within our lines of
business and those that provide complementary services, provided we believe such
opportunities will broaden our market share and/or increase the services we can provide to
our customers.
To qualify and be taxed as a REIT, we generally are required to distribute annually to our
stockholders at least 90% of our REIT taxable income (determined without regard to the
dividends paid deduction and excluding net capital gains). Our REIT taxable income will not
typically include income earned by our TRSs except to the extent our TRSs pay dividends to
the REIT. Our Board of Directors declared a quarterly dividend of $0.54 for each of the first
three quarters of 2016 and $0.42 in the fourth quarter of 2016 totaling $241.7 million. The
amount, timing and frequency of future distributions will be at the sole discretion of our
Board of Directors and will be declared based upon various factors, many of which are
beyond our control, including our financial condition and operating cash flows, the amount
required to maintain qualification and taxation as a REIT and reduce any income and excise
taxes that we otherwise would be required to pay, limitations on distributions in our existing
and future debt instruments, limitations on our ability to fund distributions using cash
84
generated
deployment, and other factors that our Board of Directors may deem relevant.
through our TRSs, alternative growth opportunities
that require capital
As of December 31, 2016, our liquidity was provided by cash on hand of $37.7 million, and
$455.9 million available under our revolving credit facility. During the years ended
December 31, 2016 and 2015, we generated $375.4 million and $399.8 million, respectively,
in cash through operating activities, and as of December 31, 2016, we had net working
capital of $26.6 million. We currently expect to be able to meet our cash expenditure
requirements for the next year utilizing these resources. We have no debt maturities until
April 2020.
Our cash flow is subject to the receipt of sufficient funding of and timely payment by
contracting governmental entities. If the appropriate governmental agency does not receive
sufficient appropriations to cover its contractual obligations, it may terminate our contract or
delay or reduce payment to us. Delays in payment from our major customers or the
termination of contracts from our major customers could have an adverse effect on our cash
flow, financial condition and, consequently, dividend distributions to our shareholders.
Debt and equity
As of December 31, 2016, we had $350.0 million principal amount of unsecured notes
outstanding with a fixed stated interest rate of 4.625%, $325.0 million principal amount of
unsecured notes outstanding with a fixed stated interest rate of 4.125%, and $250.0 million
principal amount of unsecured notes outstanding with a fixed stated interest rate of 5.0%. In
addition, we had $95.0 million outstanding under our Term Loan with a variable interest rate
of 2.3%, and $435.0 million outstanding under our revolving credit facility with a variable
weighted average interest rate of 2.2%. As of December 31, 2016, our total weighted
average effective interest rate was 4.0%, while our total weighted average maturity was 4.5
years. We may also seek to issue debt or equity securities from time to time when we
determine that market conditions and the opportunity to utilize the proceeds from the
issuance of such securities are favorable.
On February 26, 2016, we entered into an ATM Equity Offering Sales Agreement, or ATM
Agreement, with multiple sales agents. Pursuant to the ATM Agreement, we may offer and
sell to or through the sales agents from time to time, shares of our common stock, par value
$0.01 per share, having an aggregate gross sales price of up to $200.0 million. Sales, if any,
of our shares of common stock will be made primarily in "at-the-market" offerings, as
defined in Rule 415 under the Securities Act of 1933, as amended. The shares of common
stock will be offered and sold pursuant to our registration statement on Form S-3 filed with
the SEC on May 15, 2015, and a related prospectus supplement dated February 26, 2016. We
intend to use the net proceeds from any sale of shares of our common stock to repay
borrowings under our revolving credit facility (including the Term Loan under the
"accordion" feature of the revolving credit facility) and for general corporate purposes,
including to fund future acquisitions and development projects. There were no shares of our
common stock sold under the ATM Agreement during the year ended December 31, 2016.
On August 19, 2016, Moody's downgraded our senior unsecured debt rating to "Ba1" from
"Baa3". Also on August 19, 2016, S&P Global Ratings, or S&P, lowered our corporate
credit and senior unsecured debt ratings to "BB" from “BB+”. Additionally, S&P lowered
our revolving credit facility rating to "BBB-" from "BBB". Both Moody's and S&P lowered
our ratings as a result of the DOJ announcing its plans on August 18, 2016 to reduce the
BOP's utilization of privately operated prisons. On February 7, 2012, Fitch Ratings assigned
a rating of "BBB-" to our revolving credit facility and "BB+" ratings to our unsecured debt
and corporate credit.
85
Facility development and capital expenditures
In December 2015, we announced we were awarded a new contract from the ADOC to house
up to an additional 1,000 medium-security inmates at our 1,596-bed Red Rock Correctional
Center in Arizona. In connection with the new contract, we expanded our Red Rock facility
to a design capacity of 2,024 beds and added additional space for inmate reentry
programming. Total cost of the expansion was approximately $37.0 million. Construction
was substantially completed at December 31, 2016, although we began receiving inmates
under the new contract during the third quarter of 2016.
The demand for capacity in the short-term has been affected by the budget challenges many
of our government partners currently face. At the same time, these challenges impede our
customers’ ability to construct new prison beds of their own or update older facilities, which
we believe could result in further need for private sector capacity solutions in the long-term.
We intend to continue to pursue build-to-suit opportunities like our 2,552-bed Trousdale
Turner Correctional Center recently constructed in Trousdale County, Tennessee, and
alternative solutions like the 2,400-bed South Texas Family Residential Center whereby we
identified a site and lessor to provide residential housing and administrative buildings for
ICE. We also expect to continue to pursue investment opportunities and are in various stages
of due diligence to complete additional transactions like the acquisitions of five residential
reentry facilities in Pennsylvania and California over the past two years, and business
combination transactions like the acquisitions of Avalon and CMI. The transactions that
have not yet closed are subject to various customary closing conditions, and we can provide
no assurance that any such transactions will ultimately be completed. We are also pursuing
investment opportunities in other real estate assets used to provide mission critical
governmental services primarily in the criminal justice sector. In the long-term, however, we
would like to see meaningful utilization of our available capacity and better visibility from
our customers before we add any additional prison capacity on a speculative basis.
Operating Activities
Our net cash provided by operating activities for the year ended December 31, 2016 was
$375.4 million compared with $399.8 million in 2015 and $423.6 million in 2014. Cash
provided by operating activities represents our net income plus depreciation and
amortization, changes in various components of working capital, and various non-cash
charges. The decrease in cash provided by operating activities during 2016 was primarily
due to negative fluctuations in working capital balances when compared to the same period in
the prior year, including the decrease in deferred revenues associated with the South Texas
Family Residential Center and routine timing differences in the payment of accounts
payables, accrued salaries and wages, and other liabilities, net of the collection of accounts
receivables and higher operating income.
The decrease in cash provided by operating activities during 2015 was primarily due to
negative fluctuations in working capital balances when compared to the same period in the
prior year, including the decrease in deferred revenues associated with the South Texas
Family Residential Center and routine timing differences in the payment of accounts
payables, accrued salaries and wages, and other liabilities, partially offset by an increase in
operating income.
86
Investing Activities
Our cash flow used in investing activities was $122.2 million for the year ended December
31, 2016 and was primarily attributable to capital expenditures of $93.4 million, including
expenditures for facility development and expansions of $41.8 million primarily related to
the aforementioned expansion project at our Red Rock Correctional Center, and $51.6
million for facility maintenance and information technology capital expenditures. Our cash
flow used in investing activities also included $43.8 million attributable to the acquisitions of
CMI and a residential reentry facility in California during the second quarter of 2016.
Partially offsetting these cash outflows, we received proceeds of $8.4 million primarily
related to the sale of undeveloped land.
Our cash flow used in investing activities was $409.3 million for the year ended December
31, 2015 and was primarily attributable to capital expenditures of $224.3 million, including
expenditures for facility development and expansions of $164.9 million primarily related to
the facility development projects at our Trousdale and Otay Mesa facilities, and $59.4 million
for facility maintenance and information technology capital expenditures. In addition, cash
flow used in investing activities during the year ended December 31, 2015 included $34.5
million of capitalized lease payments related to the South Texas Family Residential Center.
Our cash flow used in investing activities during the year ended December 31, 2015 also
included $158.4 million related to the aforementioned acquisitions of four community
corrections facilities in the third quarter of 2015 and Avalon in the fourth quarter of 2015.
Our cash flow used in investing activities was $196.9 million for the year ended December
31, 2014 and was primarily attributable to capital expenditures during the year of $135.1
million, including expenditures for facility development and expansions of $85.8 million and
$49.3 million for facility maintenance and information technology capital expenditures. In
addition, cash flow used in investing activities included $70.8 million of capitalized lease
payments related to the South Texas Family Residential Center. Cash flow used in investing
activities for the year ended December 31, 2014 was partially offset by proceeds from the
sale of assets and net decreases in restricted cash and other assets.
Financing Activities
Cash flow used in financing activities was $280.8 million for the year ended December 31,
2016 and was primarily attributable to dividend payments of $255.5 million and $4.0 million
for the purchase and retirement of common stock that was issued in connection with equity-
based compensation. In addition, cash flow used in financing activities included $11.8
million of cash payments associated with the financing components of the lease related to the
South Texas Family Residential Center, $4.0 million of net repayments under our revolving
credit facility, and $5.0 million of scheduled principal repayments under our Term Loan.
Cash flow provided by financing activities was $0.4 million for the year ended December 31,
2015. Cash flow used in financing activities included dividend payments of $250.7 million
and $9.5 million for the purchase and retirement of common stock that was issued in
connection with equity-based compensation. Cash flow used in financing activities for the
year ended December 31, 2015 also included $5.7 million for the payment of debt issuance
and other refinancing costs associated with refinancing transactions. In addition, cash flow
used in financing activities included $6.5 million of cash payments associated with the
financing components of the lease related to the South Texas Family Residential Center.
These payments were offset by $264.0 million of net proceeds from issuance of debt and
principal repayments under our revolving credit facility, as well as the cash flows associated
87
with exercising stock options, including the related income tax benefit of equity
compensation, totaling $8.2 million.
Cash flow used in financing activities was $230.2 million for the year ended December 31,
2014 and was primarily attributable to dividend payments of $234.0 million. Additionally,
cash flow used in financing activities included $4.0 million for the purchase and retirement of
common stock that was issued in connection with equity-based compensation and $5.0
million of net payments on our revolving credit facility. These payments were partially offset
by cash flows associated with exercising stock options, including the related income tax
benefit of equity compensation, totaling $13.1 million.
Funds from Operations
Funds From Operations, or FFO, is a widely accepted supplemental non-GAAP measure
utilized to evaluate the operating performance of real estate companies. The National
Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income
computed in accordance with generally accepted accounting principles, excluding gains or
losses from sales of property and extraordinary items, plus depreciation and amortization of
real estate and impairment of depreciable real estate and after adjustments for unconsolidated
partnerships and joint ventures calculated to reflect funds from operations on the same basis.
We believe FFO is an important supplemental measure of our operating performance and
believe it is frequently used by securities analysts, investors and other interested parties in the
evaluation of REITs, many of which present FFO when reporting results.
We also present Normalized FFO as an additional supplemental measure as we believe it is
more reflective of our core operating performance. We may make adjustments to FFO from
time to time for certain other income and expenses that we consider non-recurring, infrequent
or unusual, even though such items may require cash settlement, because such items do not
reflect a necessary component of our ongoing operations. Even though expenses associated
with mergers and acquisitions, or M&A, may be recurring, the magnitude and timing
fluctuate based on the timing and scope of M&A activity, and therefore, such expenses,
which are not a necessary component of our ongoing operations, may not be comparable
from period to period. Normalized FFO excludes the effects of such items.
FFO and Normalized FFO are supplemental non-GAAP financial measures of real estate
companies’ operating performances, which do not represent cash generated from operating
activities in accordance with GAAP and therefore should not be considered an alternative for
net income or as a measure of liquidity. Our method of calculating FFO and Normalized FFO
may be different from methods used by other REITs and, accordingly, may not be
comparable to such other REITs.
88
Our reconciliation of net income to FFO and Normalized FFO for the years ended December
31, 2016, 2015, and 2014 is as follows (in thousands):
FUNDS FROM OPERATIONS:
Net income
Depreciation of real estate assets
Impairment of real estate assets
Income tax benefit for special items
Funds From Operations
For the Years Ended December 31
2015
2016
2014
$ 219,919
94,346
-
-
314,265
$ 221,854
90,219
-
-
312,073
$ 195,022
85,560
29,915
(72)
310,425
Expenses associated with debt refinancing
transactions
Expenses associated with mergers and
acquisitions
Gain on settlement of contingent consideration
Restructuring charges
Goodwill and other impairments
Income tax benefit for special items
Normalized Funds From Operations
-
701
-
1,586
(2,000)
4,010
-
(215)
$ 317,646
3,643
-
-
955
(26)
$ 317,346
-
-
-
167
(48)
$ 310,544
Contractual Obligations
The following schedule summarizes our contractual obligations by the indicated period as of
December 31, 2016 (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Payments Due By Year Ended December 31,
Long-term debt
Interest on senior notes
Contractual facility
developments and
other commitments
South Texas Family
Residential Center
Operating leases
Total contractual
cash obligations
$ 10,000
42,094
$ 10,000 $ 15,000
42,094
42,094
$ 820,000
35,390
$ -
28,688
$ 600,000 $ 1,455,000
227,141
36,781
9,143
50,808
589
-
-
-
-
-
9,143
50,808
605
50,808
615
50,947
563
38,976
574
-
290
242,347
3,236
$ 112,634
$ 103,507
$ 108,517
$ 906,900
$ 68,238
$ 637,071
$ 1,936,867
The cash obligations in the table above do not include future cash obligations for variable
interest expense associated with our Term Loan or the balance on our outstanding revolving
credit facility as projections would be based on future outstanding balances as well as future
variable interest rates, and we are unable to make reliable estimates of either. Further, the
cash obligations in the table above also do not include future cash obligations for uncertain
tax positions as we are unable to make reliable estimates of the timing of such payments, if
any, to the taxing authorities. The contractual facility developments included in the table
above represent development projects for which we have already entered into a contract with
a customer that obligates us to complete the development project. Certain of our other
ongoing construction projects are not currently under contract and thus are not included as a
contractual obligation above as we may generally suspend or terminate such projects without
substantial penalty. With respect to the South Texas Family Residential Center, the cash
obligations included in the table above reflect the full contractual obligations of the lease of
the site, excluding contingent payments, even though the lease agreement provides us with
the ability to terminate if ICE terminates the amended IGSA, as previously described herein.
89
We had $9.1 million of letters of credit outstanding at December 31, 2016 primarily to
support our requirement to repay fees and claims under our self-insured workers’
compensation plan in the event we do not repay the fees and claims due in accordance with
the terms of the plan. The letters of credit are renewable annually. We did not have any
draws under any outstanding letters of credit during 2016, 2015, or 2014.
INFLATION
Many of our management contracts include provisions for inflationary indexing, which
mitigates an adverse impact of inflation on net income. However, a substantial increase in
personnel costs, workers’ compensation or food and medical expenses could have an adverse
impact on our results of operations in the future to the extent that these expenses increase at a
faster pace than the per diem or fixed rates we receive for our management services. We
outsource our food service operations to a third party. The contract with our outsourced food
service vendor contains certain protections against increases in food costs.
SEASONALITY AND QUARTERLY RESULTS
Our business is subject to seasonal fluctuations. Because we are generally compensated for
operating and managing facilities at an inmate per diem rate, our financial results are
impacted by the number of calendar days in a fiscal quarter. Our fiscal year follows the
calendar year and therefore, our daily profits for the third and fourth quarters include two
more days than the first quarter (except in leap years) and one more day than the second
quarter. Further, salaries and benefits represent the most significant component of operating
expenses. Significant portions of the Company’s unemployment taxes are recognized during
the first quarter, when base wage rates reset for unemployment tax purposes. Finally,
quarterly results are affected by government funding initiatives, the timing of the opening of
new facilities, or the commencement of new management contracts and related start-up
expenses which may mitigate or exacerbate the impact of other seasonal influences. Because
of these seasonality factors, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Our primary market risk exposure is to changes in U.S. interest rates. We are exposed to
market risk related to our revolving credit facility and Term Loan because the interest rates
on our revolving credit facility and Term Loan are subject to fluctuations in the market. If
the interest rate for our outstanding indebtedness under the revolving credit facility and Term
Loan was 100 basis points higher or lower during the years ended December 31, 2016, 2015,
and 2014, our interest expense, net of amounts capitalized, would have been increased or
decreased by $5.7 million, $5.9 million, and $5.7 million, respectively.
As of December 31, 2016, we had outstanding $325.0 million of senior notes due 2020 with a
fixed interest rate of 4.125%, $350.0 million of senior notes due 2023 with a fixed interest
rate of 4.625%, and $250.0 million of senior notes due 2022 with a fixed interest rate of
5.0%. Because the interest rates with respect to these instruments are fixed, a hypothetical
100 basis point increase or decrease in market interest rates would not have a material impact
on our financial statements.
We may, from time to time, invest our cash in a variety of short-term financial instruments.
These instruments generally consist of highly liquid investments with original maturities at
the date of purchase of three months or less. While these investments are subject to interest
rate risk and will decline in value if market interest rates increase, a hypothetical 100 basis
90
point increase or decrease in market interest rates would not materially affect the value of
these instruments. See the risk factor discussion captioned “Rising interest rates would
increase the cost of our variable rate debt” under Item 1A of this Annual Report on Form 10-
K for more discussion on interest rate risks that may affect our financial condition.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X are included in
this Annual Report on Form 10-K commencing on Page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
CONTROLS AND PROCEDURES.
Management’s Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our senior
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act as of the end of the period covered by this Annual Report.
Based on that evaluation, our officers, including our Chief Executive Officer and Chief
Financial Officer, concluded that as of the end of the period covered by this Annual Report
our disclosure controls and procedures are effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules and forms and
information required to be disclosed in the reports we file or submit under the Exchange Act
is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. The Company’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over financial reporting
includes those policies and procedures that:
(i)
(ii)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only
in accordance with authorizations of
management and directors of the Company; and
(iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.
91
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2016. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework released in 2013. Based on this
assessment, management believes that, as of December 31, 2016, the Company's internal
control over financial reporting was effective.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has
issued an attestation report on the Company’s internal control over financial reporting. That
report begins on page 93.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred
during the fourth fiscal quarter of 2016 that have materially affected, or are likely to
materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of CoreCivic, Inc. and Subsidiaries
We have audited CoreCivic, Inc. (formerly Corrections Corporation of America) and Subsidiaries’
internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). CoreCivic, Inc. and Subsidiaries’
management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, CoreCivic, Inc. and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on the COSO criteria.
93
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of CoreCivic, Inc. and Subsidiaries as of
December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2016, of CoreCivic,
Inc. and Subsidiaries and our report dated February 23, 2017 expressed an unqualified opinion thereon.
Our audits also included the financial statement schedule listed in the Index at Item 15(2).
/s/ Ernst & Young LLP
Nashville, Tennessee
February 23, 2017
94
ITEM 9B.
OTHER INFORMATION
Dividend Declared for First Quarter 2017
On February 17, 2017, the Company’s Board of Directors declared a dividend for the first quarter of
2017 of $0.42 per share to be paid on April 17, 2017 to stockholders of record as of the close of
business on April 3, 2017.
PART III.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item 10 will appear in, and is hereby incorporated by reference from,
the information under the headings “Proposal 1 – Election of Directors-Directors Standing for
Election,” “Executive Officers-Information Concerning Executive Officers Who Are Not Directors,”
“Corporate Governance – Board of Directors Meetings and Committees,” “Corporate Governance –
Independence and Financial Literacy of Audit Committee Members,” and “Security Ownership of
Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting
Compliance” in our definitive proxy statement for the 2017 Annual Meeting of Stockholders.
Our Board of Directors has adopted a Code of Ethics and Business Conduct applicable to the members
of our Board of Directors and our officers, including our Chief Executive Officer and Chief Financial
Officer. In addition, the Board of Directors has adopted Corporate Governance Guidelines and
charters for our Audit Committee, Risk Committee, Compensation Committee, Nominating and
Governance Committee and Executive Committee. You can access our Code of Ethics and Business
Conduct, Corporate Governance Guidelines and current committee charters on our website at
www.corecivic.com.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this Item 11 will appear in, and is hereby incorporated by reference from,
the information under the headings “Executive and Director Compensation” in our definitive proxy
statement for the 2017 Annual Meeting of Stockholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item 12 will appear in, and is hereby incorporated by reference from,
the information under the heading “Security Ownership of Certain Beneficial Owners and Management
– Ownership of Common Stock” in our definitive proxy statement for the 2017 Annual Meeting of
Stockholders.
95
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2016 regarding compensation
plans under which our equity securities are authorized for issuance.
(a)
(b)
Number of Securities
to be Issued Upon
Exercise of Outstanding
Options
Weighted – Average
Exercise Price of
Outstanding
Options
(c)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plan
(Excluding Securities
Reflected in Column
(a))
1,327,067
$ 20.53
9,410,006 (1)
-
-
-
1,327,067
$ 20.53
9,410,006
Plan Category
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by stockholders
Total
(1)
Reflects shares of common stock available for issuance under our Amended and Restated 2008 Stock Incentive Plan
and our Non-Employee Directors’ Compensation Plan, the only equity compensation plans approved by our
stockholders under which we continue to grant awards.
ITEM 13.
DIRECTOR INDEPENDENCE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
The information required by this Item 13 will appear in, and is hereby incorporated by reference from,
the information under the heading “Corporate Governance – Certain Relationships and Related
Transactions” and “Corporate Governance – Director Independence” in our definitive proxy statement
for the 2017 Annual Meeting of Stockholders.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item 14 will appear in, and is hereby incorporated by reference from,
the information under the heading “Proposal 2 – Ratification of Appointment of Independent
Registered Public Accounting Firm” in our definitive proxy statement for the 2017 Annual Meeting of
Stockholders.
96
PART IV.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this Annual Report:
(1)
Financial Statements:
The financial statements as set forth under Item 8 of this Annual Report on Form 10-K
have been filed herewith, beginning on page F-1 of this Annual Report.
(2)
Financial Statement Schedules:
Schedule III-Real Estate Assets and Accumulated Depreciation.
Information with respect to this item begins on page F-51 of this Annual Report on
Form 10-K. Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the financial
statements or notes thereto.
(3)
The Exhibits required by Item 601 of Regulation S-K are listed in the Index of Exhibits
included herewith.
97
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORECIVIC, INC.
Date: February 23, 2017
/s/ Damon T. Hininger
By:
Damon T. Hininger, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the
following persons on behalf of the registrant and in the capabilities and on the dates indicated.
/s/ Damon T. Hininger
Damon T. Hininger, President and Chief Executive Officer
(Principal Executive Officer and Director)
/s/ David M. Garfinkle
David M. Garfinkle, Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Mark A. Emkes
Mark A. Emkes, Chairman of the Board of Directors
/s/ Donna M. Alvarado
Donna M. Alvarado, Director
/s/ Robert J. Dennis
Robert J. Dennis, Director
/s/ Stacia A. Hylton
Stacia A. Hylton, Director
/s/ C. Michael Jacobi
C. Michael Jacobi, Director
/s/ Anne L. Mariucci
Anne L. Mariucci, Director
/s/ Thurgood Marshall, Jr.
Thurgood Marshall, Jr., Director
/s/ Charles L. Overby
Charles L. Overby, Director
/s/ John R. Prann, Jr.
John R. Prann, Jr., Director
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
98
INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Exhibits marked with ** are furnished herewith. Other
exhibits have previously been filed with the Securities and Exchange Commission (the “Commission”)
and are incorporated herein by reference.
Exhibit Number
Description of Exhibits
3.1
3.2
3.3
4.1
4.2
4.3
4.4
Articles of Amendment and Restatement of the Company (previously
filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K
(Commission File no. 001-16109), filed with the Commission on May
20, 2013 and incorporated herein by this reference).
Articles of Amendment of the Company (previously filed as Exhibit 3.1
to the Company’s Current Report on Form 8-K (Commission File no.
001-16109), filed with the Commission on November 10, 2016 and
incorporated herein by this reference).
Eighth Amended and Restated Bylaws of the Company (previously filed
as Exhibit 3.2 to the Company’s Current Report on Form 8-K
(Commission File no. 001-16109), filed with the Commission on
November 10, 2016 and incorporated herein by this reference).
Specimen of certificate representing shares of the Company’s Common
Stock (previously filed as Exhibit 4.1 to the Company’s Current Report
on Form 8-K (Commission File no. 001-16109), filed with the
Commission on November 10, 2016 and incorporated herein by this
reference).
Indenture (2020 Notes), dated as of April 4, 2013, by and among the
Company, certain of
its subsidiaries, and U.S. Bank National
Association, as Trustee (previously filed as Exhibit 4.2 to the Company’s
Current Report on Form 8-K (Commission File no. 001-16109), filed
with the Commission on April 8, 2013 and incorporated herein by this
reference).
Indenture (2023 Notes), dated as of April 4, 2013, by and among the
Company, certain of
its subsidiaries, and U.S. Bank National
Association, as Trustee (previously filed as Exhibit 4.3 to the Company’s
Current Report on Form 8-K (Commission File no. 001-16109), filed
with the Commission on April 8, 2013 and incorporated herein by this
reference).
Indenture (2022 Notes), dated as of September 25, 2015, by and between
the Company and U.S. Bank National Association, as Trustee (previously
filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K
(Commission File no. 001-16109), filed with the Commission on
September 25, 2015 and incorporated herein by this reference).
4.5
Form of 4.125% Senior Note due 2020 (incorporated by reference to
Exhibit A to Exhibit 4.2 hereof).
99
Exhibit Number
Description of Exhibits
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
Form of 4.625% Senior Note due 2023 (incorporated by reference to
Exhibit A to Exhibit 4.3 hereof).
Form of 5.00% Senior Note due 2022 (incorporated by reference to
Exhibit A to Exhibit 4.10 hereof).
Supplemental Indenture (2020 Notes), dated as of September 4, 2013, by
and among the Company, certain of its subsidiaries, and U.S. Bank
National Association, as Trustee (previously filed as Exhibit 4.1 to the
Company’s Quarterly Report on Form 10-Q (Commission File no. 001-
16109), filed with the Commission on November 7, 2013 and
incorporated herein by this reference).
Supplemental Indenture (2023 Notes), dated as of September 4, 2013, by
and among the Company, certain of its subsidiaries, and U.S. Bank
National Association, as Trustee (previously filed as Exhibit 4.2 to the
Company’s Quarterly Report on Form 10-Q (Commission File no. 001-
16109), filed with the Commission on November 7, 2013 and
incorporated herein by this reference).
First Supplemental Indenture (2022 Notes), dated as of September 25,
2015, by and among the Company, certain of its subsidiaries, and U.S.
Bank National Association, as Trustee (previously filed as Exhibit 4.2 to
the Company’s Current Report on Form 8-K (Commission File no. 001-
16109), filed with the Commission on September 25, 2015 and
incorporated herein by this reference).
Schedule of additional Supplemental Indentures (2020 Notes), relating to
the Supplemental Indenture in Exhibit 4.8 hereof (previously filed as
Exhibit 4.11
the Company’s Annual Report on Form 10-K
(Commission File no. 001-16109), filed with the Commission on
February 25, 2016 and incorporated herein by this reference).
to
Schedule of additional Supplemental Indentures (2023 Notes), relating to
the Supplemental Indenture in Exhibit 4.9 hereof (previously filed as
the Company’s Annual Report on Form 10-K
Exhibit 4.12
(Commission File no. 001-16109), filed with the Commission on
February 25, 2016 and incorporated herein by this reference).
to
Schedule of additional Supplemental Indentures (2022 Notes), relating to
the Supplemental Indenture in Exhibit 4.10 hereof (previously filed as
Exhibit 4.13
the Company’s Annual Report on Form 10-K
(Commission File no. 001-16109), filed with the Commission on
February 25, 2016 and incorporated herein by this reference).
to
100
Exhibit Number
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Description of Exhibits
Amended and Restated Credit Agreement, dated as of January 6, 2012,
by and among the Company, as Borrower, certain lenders and Bank of
America, N.A., as Administrative Agent and Wells Fargo Bank, National
Association, as Syndication Agent for the lenders (previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K (Commission
File no. 001-16109), filed with the Commission on January 10, 2012 and
incorporated herein by this reference).
Amendment to the Amended and Restated Credit Agreement, dated as of
March 22, 2013, by and among the Company, as Borrower, certain
lenders and Bank of America, N.A., as Administrative Agent and Wells
Fargo Bank, National Association, as Syndication Agent for the lenders
(previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K (Commission File no. 001-16109), filed with the Commission
on March 25, 2013 and incorporated herein by this reference).
Second Amendment to the Amended and Restated Credit Agreement,
dated as of July 22, 2015, by and among the Company, as Borrower,
certain lenders and Bank of America, N.A., as Administrative Agent
(previously filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K (Commission File no. 001-16109), filed with the Commission
on July 24, 2015 and incorporated herein by this reference).
Third Amendment and Incremental Term Loan Agreement to the
Amended and Restated Credit Agreement, dated as of October 6, 2015,
by and among the Company, as Borrower, certain lenders and Bank of
America, N.A., as Administrative Agent (previously filed as Exhibit 10.1
to the Company's Current Report on Form 8-K (Commission File no.
001-16109), filed with the Commission on October 7, 2015 and
incorporated herein by this reference).
The Company’s Amended and Restated 1997 Employee Share Incentive
Plan (previously filed as Exhibit 10.15 to the Company’s Annual Report
on Form 10-K (Commission File no. 001-16109), filed with the
Commission on March 12, 2004 and incorporated herein by this
reference).
Form of Non-qualified Stock Option Agreement for the Company’s
Amended and Restated 1997 Employee Share Incentive Plan (previously
filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K
(Commission File no. 001-16109), filed with the Commission on March
7, 2005 and incorporated herein by this reference).
The Company’s Amended and Restated 2000 Stock Incentive Plan
(previously filed as Exhibit 10.20 to the Company’s Annual Report on
Form 10-K (Commission File no. 001-16109), filed with the Commission
on March 12, 2004 and incorporated herein by this reference).
101
Exhibit Number
Description of Exhibits
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Amendment No. 1 to the Company’s Amended and Restated 2000 Stock
Incentive Plan (previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q (Commission File no. 001-16109), filed
with the Commission on November 5, 2004 and incorporated herein by
this reference).
First Amendment to Amended and Restated 2000 Stock Incentive Plan of
the Company (previously filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q (Commission File no. 001-16109), filed
with the Commission on August 7, 2008 and incorporated herein by this
reference).
Second Amendment to Amended and Restated 2000 Stock Incentive Plan
of the Company (previously filed as Exhibit 10.3 to the Company’s
Current Report on Form 8-K (Commission File no. 001-16109), filed
with the Commission on August 18, 2009 and incorporated herein by this
reference).
The Company’s Non-Employee Directors’ Compensation Plan
(previously filed as Appendix C to the Company’s definitive Proxy
Statement relating to its Annual Meeting of Stockholders (Commission
File no. 001-16109), filed with the Commission on April 11, 2003 and
incorporated herein by this reference).
Form of Employee Non-qualified Stock Option Agreement for the
Company’s Amended and Restated 2000 Stock Incentive Plan
(previously filed as Exhibit 10.15 to the Company’s Annual Report on
Form 10-K (Commission File no. 001-16109), filed with the Commission
on March 7, 2006 and incorporated herein by this reference).
Form of Director Non-qualified Stock Option Agreement for the
Company’s Amended and Restated 2000 Stock Incentive Plan
(previously filed as Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q (Commission File no. 001-16109), filed with the Commission
on August 7, 2007 and incorporated herein by this reference).
The Company’s 2008 Stock Incentive Plan (previously filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K (Commission File
no. 001-16109), filed with the Commission on May 11, 2007 and
incorporated herein by this reference).
Form of Executive Non-qualified Stock Option Agreement for the
Company’s 2008 Stock Incentive Plan (previously filed as Exhibit 10.2
to the Company’s Current Report on Form 8-K (Commission File no.
001-16109), filed with the Commission on February 21, 2008 and
incorporated herein by this reference).
102
Exhibit Number
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Description of Exhibits
Amended Form of Executive Non-qualified Stock Option Agreement for
the Company’s 2008 Stock Incentive Plan (previously filed as Exhibit
10.2 to the Company’s Current Report on Form 8-K (Commission File
no. 001-16109), filed with the Commission on February 23, 2009 and
incorporated herein by this reference).
Form of Director Non-qualified Stock Option Agreement for the
Company’s 2008 Stock Incentive Plan (previously filed as Exhibit 10.3
to the Company’s Current Report on Form 8-K (Commission File no.
001-16109), filed with the Commission on February 21, 2008 and
incorporated herein by this reference).
The Company's Amended and Restated 2008 Stock Incentive Plan
(previously filed as Exhibit 10.1 of the Company's Current Report on
Form 8-K (Commission File no. 001-16109), filed with the Commission
on May 17, 2011 and incorporated herein by this reference).
Form of Executive Restricted Stock Unit Award Agreement for the
Company’s Amended and Restated 2008 Stock Incentive Plan
(previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K (Commission File no. 001-16109), filed with the Commission
on March 21, 2012 and incorporated herein by this reference).
Form of Non-Employee Directors Restricted Stock Unit Award
Agreement with deferral provisions for the Company’s Amended and
Restated 2008 Stock Incentive Plan (previously filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K (Commission File no. 001-
16109), filed with the Commission on March 21, 2012 and incorporated
herein by this reference).
Form of Non-Employee Directors Restricted Stock Unit Award
Agreement for the Company’s Amended and Restated 2008 Stock
Incentive Plan (previously filed as Exhibit 10.3 to the Company’s
Current Report on Form 8-K (Commission File no. 001-16109), filed
with the Commission on March 21, 2012 and incorporated herein by this
reference).
Form of Restricted Stock Unit Award Agreement for the Company's
Amended and Restated 2008 Stock Incentive Plan (Time-Vesting Form
for Executive Officers) (previously filed as Exhibit 10.23 to the
Company's Annual Report on Form 10-K (Commission File no. 001-
16109), filed with
the Commission on February 27, 2013 and
incorporated herein by this reference).
Amended and Restated Non-Employee Director Deferred Compensation
Plan (previously filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K (Commission File no. 001-16109), filed with the
Commission on August 16, 2007 and incorporated herein by this
reference).
103
Exhibit Number
Description of Exhibits
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
21.1*
23.1*
Amendment to the Amended and Restated Non-Employee Director
Deferred Compensation Plan (previously filed as Exhibit 10.35 to the
Company's Annual Report on Form 10-K (Commission File no. 001-
16109), filed with
the Commission on February 24, 2010 and
incorporated herein by this reference).
Amended and Restated Executive Deferred Compensation Plan
(previously filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K (Commission File no. 001-16109), filed with the Commission
on August 16, 2007 and incorporated herein by this reference).
Form of Indemnification Agreement (previously filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K (Commission File no. 001-
16109), filed with the Commission on August 18, 2009 and incorporated
herein by this reference).
Notice Letter from John D. Ferguson to the Company (previously filed as
Exhibit 10.2
the Company’s Current Report on Form 8-K
(Commission File no. 001-16109), filed with the Commission on August
18, 2009 and incorporated herein by this reference).
to
Letter Agreement, dated as of October 15, 2009, with John D. Ferguson
(previously filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K (Commission File no. 001-16109), filed with the Commission
on October 15, 2009 and incorporated herein by this reference).
Form of Executive Employment Agreement, effective as of January 1,
2015 (previously filed as Exhibit 10.32 to the Company’s Current Report
on Form 10-K (Commission File no. 001-16109), filed with the
Commission on February 25, 2015 and incorporated herein by this
reference).
Transition Agreement, effective as of June 15, 2016, with Steven E.
Groom (previously filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K (Commission File no. 001-16109), filed with the
Commission on June 15, 2016 and incorporated herein by this reference).
Restricted Stock Unit Award Cancellation Agreement, dated as of
September 27, 2016, with Damon T. Hininger (previously filed as
the Company’s Current Report on Form 8-K
Exhibit 10.1
(Commission File no. 001-16109), filed with the Commission on
September 27, 2016 and incorporated herein by this reference).
to
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
104
Exhibit Number
Description of Exhibits
31.1*
31.2*
32.1**
32.2**
Certification of the Company’s Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Company’s Chief Financial Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Company’s Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification of the Company’s Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
105
Exhibit 21.1
LIST OF SUBSIDIARIES OF CORECIVIC, INC.
ACS Corrections of Texas, L.L.C., a Texas limited liability company
Avalon Corpus Christi Transitional Center, LLC, a Texas limited liability company
Avalon Correctional Services, Inc., a Nevada corporation
Avalon Transitional Center Dallas, LLC, a Texas limited liability company
Avalon Tulsa, L.L.C., an Oklahoma limited liability company
Carver Transitional Center, L.L.C., an Oklahoma limited liability company
CCA Health Services, LLC, a Tennessee limited liability company
CCA International, LLC, a Delaware limited liability company
CCA South Texas, LLC, a Maryland limited liability company
CCA (UK) Ltd., a United Kingdom limited company
CoreCivic, LLC, a Delaware limited liability company
CoreCivic of Tennessee, LLC, a Tennessee limited liability company
CoreCivic TRS, LLC, a Maryland limited liability company
Correctional Alternatives, LLC, a California limited liability company
Correctional Management, Inc., a Colorado corporation
EP Horizon Management, LLC, a Texas limited liability company
Fort Worth Transitional Center, L.L.C., an Oklahoma limited liability company
Prison Realty Management, LLC, a Tennessee limited liability company
Southern Corrections System of Wyoming, L.L.C., an Oklahoma limited liability company
Technical and Business Institute of America, LLC, a Tennessee limited liability company
TransCor America, LLC, a Tennessee limited liability company
TransCor Puerto Rico, Inc., a Puerto Rico corporation
Turley Residential Center, L.L.C., an Oklahoma limited liability company
106
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
Exhibit 23.1
(1) Registration Statement (Form S-8 No. 333-69352) pertaining to the Corrections Corporation of
America Amended and Restated 2000 Stock Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-115492) pertaining to the registration of additional
shares for the Corrections Corporation of America Amended and Restated 2000 Stock
Incentive Plan,
(3) Registration Statement (Form S-8 No. 333-70625) pertaining to the Corrections Corporation of
America 1997 Employee Share Incentive Plan,
(4) Registration Statement (Form S-8 No. 333-115493) pertaining to the Corrections Corporation
of America Non-Employee Directors’ Compensation Plan,
(5) Registration Statement (Form S-8 No. 333-69358) pertaining to the Corrections Corporation of
America 401(k) Savings and Retirement Plan,
(6) Registration Statement (Form S-8 No. 333-143046) pertaining to the Corrections Corporation
of America 2008 Stock Incentive Plan,
(7) Registration Statement (Form S-8 No. 333-176140) pertaining to the registration of additional
shares for the Corrections Corporation of America Amended and Restated 2008 Stock
Incentive Plan, and
(8) Registration Statement (Form S-3 No. 333-204234) pertaining to a shelf registration of debt
securities, guarantees of debt securities, preferred stock, common stock, warrants, or units;
of our reports dated February 23, 2017 with respect to the consolidated financial statements and
schedule of CoreCivic, Inc. and Subsidiaries and the effectiveness of internal control over
financial reporting of CoreCivic, Inc. and Subsidiaries, included in this Annual Report (Form 10-
K) of CoreCivic, Inc. and Subsidiaries for the year ended December 31, 2016.
Nashville, Tennessee
February 23, 2017
/s/ Ernst & Young LLP
107
CERTIFICATION OF THE CEO PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Damon T. Hininger, certify that:
1. I have reviewed this Annual Report on Form 10-K of CoreCivic, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statement made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in
this Annual Report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this Annual
Report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
Annual Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this Annual Report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this Annual
Report based on such evaluation;
d) Disclosed in this Annual Report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
108
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: February 23, 2017
/s/ Damon T. Hininger
Damon T. Hininger
President and Chief Executive Officer
109
CERTIFICATION OF THE CFO PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, David M. Garfinkle, certify that:
1. I have reviewed this Annual Report on Form 10-K of CoreCivic, Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statement made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in
this Annual Report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this Annual
Report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
Annual Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this Annual Report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this Annual
Report based on such evaluation;
d) Disclosed in this Annual Report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
110
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: February 23, 2017
/s/ David M. Garfinkle
David M. Garfinkle
Executive Vice President, Chief
Financial Officer, and Principal
Accounting Officer
111
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of CoreCivic, Inc. (the “Company”) on Form 10-K for the period
ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Damon T. Hininger, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company
and will be retained by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
/s/ Damon T. Hininger
Damon T. Hininger
President and Chief Executive Officer
February 23, 2017
112
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of CoreCivic, Inc. (the “Company”) on Form 10-K for the period
ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, David M. Garfinkle, Executive Vice President, Chief Financial Officer, and Principal
Accounting Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906
of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company
and will be retained by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
/s/ David M. Garfinkle
David M. Garfinkle
Executive Vice President, Chief
Financial Officer, and Principal
Accounting Officer
February 23, 2017
113
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of CoreCivic, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm ................................................................F-2
Consolidated Balance Sheets as of December 31, 2016 and 2015 ......................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 2016, 2015 and 2014 ................................................................................................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2016, 2015 and 2014 ................................................................................................F-5
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2016, 2015 and 2014 ................................................................................................F-6
Notes to Consolidated Financial Statements .......................................................................................F-9
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
CoreCivic, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of CoreCivic, Inc. (formerly Corrections
Corporation of America) and Subsidiaries as of December 31, 2016 and 2015, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item
15(2). These financial statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of CoreCivic, Inc. and Subsidiaries at December 31, 2016 and 2015, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), CoreCivic, Inc. and Subsidiaries’ internal control over financial reporting as of December 31,
2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23,
2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 23, 2017
F - 2
CORECIVIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $1,580 and $459, respectively
Prepaid expenses and other current assets
Total current assets
Property and equipment, net of accumulated depreciation of $1,352,323
and $1,193,723, respectively
Restricted cash
Investment in direct financing lease
Goodwill
Non-current deferred tax assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term debt, net
Deferred revenue
Other liabilities
Total liabilities
Commitments and contingencies
December 31,
2016
2015
$
37,711
-
229,885
31,228
298,824
$
65,291
877
234,456
41,434
342,058
2,837,657
2,883,060
218
-
38,386
13,735
82,784
131
684
35,557
9,824
84,704
$ 3,271,604
$
3,356,018
$ 260,107
2,086
10,000
272,193
$
1,435,169
53,437
51,842
1,812,641
317,675
1,920
5,000
324,595
1,447,077
63,289
58,309
1,893,270
Preferred stock - $0.01 par value; 50,000 shares authorized; none issued and outstanding at
December 31, 2016 and 2015, respectively
Common stock - $0.01 par value; 300,000 shares authorized; 117,554 and 117,232 shares
issued and outstanding at December 31, 2016 and 2015, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
-
-
1,176
1,780,350
(322,563)
1,458,963
1,172
1,762,394
(300,818)
1,462,748
Total liabilities and stockholders’ equity
$
3,271,604
$
3,356,018
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
CORECIVIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Years Ended December 31,
2015
2014
2016
REVENUES
$ 1,849,785
$ 1,793,087
$
1,646,867
EXPENSES:
Operating
General and administrative
Depreciation and amortization
Restructuring charges
Asset impairments
OPERATING INCOME
OTHER (INCOME) EXPENSE:
Interest expense, net
Expenses associated with debt refinancing transactions
Other (income) expense
INCOME BEFORE INCOME TAXES
Income tax expense
NET INCOME
1,275,586
107,027
166,746
4,010
-
1,553,369
1,256,128
103,936
151,514
-
955
1,512,533
1,156,135
106,429
113,925
-
30,082
1,406,571
296,416
280,554
240,296
67,755
-
489
68,244
228,172
(8,253)
49,696
701
(58)
50,339
230,215
(8,361)
39,535
-
(1,204)
38,331
201,965
(6,943)
$ 219,919
$
221,854
$
195,022
BASIC EARNINGS PER SHARE
$ 1.87
$ 1.90
$ 1.68
DILUTED EARNINGS PER SHARE
$ 1.87
$ 1.88
$ 1.66
DIVIDENDS DECLARED PER SHARE
$ 2.04
$ 2.16
$ 2.04
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
CORECIVIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Asset impairments
Amortization of debt issuance costs and other non-cash interest
Expenses associated with debt refinancing transactions
Deferred income taxes
Other expenses and non-cash items
Non-cash revenue and other income
Income tax benefit of equity compensation
Non-cash equity compensation
Changes in assets and liabilities, net:
Accounts receivable, prepaid expenses and other assets
Accounts payable, accrued expenses and other liabilities
Income taxes payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for facility development and expansions
Expenditures for other capital improvements
Capitalized lease payments
Acquisition of businesses, net of cash acquired
Decrease in restricted cash
Proceeds from sale of assets
Decrease (increase) in other assets
Payments received on direct financing lease and notes receivable
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt
Scheduled principal repayments
Other principal repayments of debt
Payment of debt issuance and other refinancing and related costs
Payment of lease obligations
Contingent consideration for acquisition of businesses
Proceeds from exercise of stock options
Purchase and retirement of common stock
Income tax benefit of equity compensation
Decrease (increase) in restricted cash for dividends
Dividends paid
Net cash provided by (used in) financing activities
For the Years Ended December 31,
2015
2014
2016
$ 219,919
$ 221,854
$
195,022
166,746
-
3,147
-
(3,911)
5,265
(8,518)
(1,479)
17,903
14,059
(39,403)
1,645
375,373
(41,816)
(51,647)
-
(43,769)
240
8,412
3,853
2,539
(122,188)
389,000
(5,000)
(393,000)
(68)
(11,789)
(5,073)
2,638
(4,006)
1,479
550
(255,496)
(280,765)
151,514
955
2,973
701
5,706
3,732
(2,639)
(525)
15,394
1,266
(2,210)
1,077
399,798
(164,880)
(59,414)
(34,470)
(158,366)
1,350
563
3,686
2,250
(409,281)
807,000
-
(543,000)
(5,727)
(6,468)
-
7,700
(9,454)
525
500
(250,695)
381
(9,102)
74,393
113,925
30,082
3,102
-
(3,211)
4,594
(3,880)
(665)
13,975
(12,549)
82,396
790
423,581
(85,791)
(49,315)
(70,793)
-
2,983
5,136
(1,101)
1,994
(196,887)
250,000
-
(255,000)
-
-
-
12,450
(4,036)
665
(251)
(234,048)
(230,220)
(3,526)
77,919
NET DECREASE IN CASH AND CASH EQUIVALENTS
(27,580)
CASH AND CASH EQUIVALENTS, beginning of year
65,291
CASH AND CASH EQUIVALENTS, end of year
$ 37,711
$ 65,291
$
74,393
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $552, $5,478, and $2,525
in 2016, 2015, and 2014, respectively)
Income taxes paid (refunded), net
$ 55,966
$ (2,137)
$
$
36,992
9,966
$
$
39,928
19,717
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
CORECIVIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(in thousands)
BALANCE, December 31, 2015
117,232
$ 1,172
$ 1,762,394
$ (300,818)
$ 1,462,748
Common Stock
Shares
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Net income
Retirement of common stock
Dividends declared on common stock ($2.04 per share)
Restricted stock compensation, net of
forfeitures
Stock option compensation expense, net of
forfeitures
Income tax benefit of equity compensation
Restricted stock grants
Stock options exercised
-
(135)
-
(1)
-
-
318
140
-
(1)
-
-
-
-
3
2
-
219,919
219,919
(4,005)
-
(4,006)
-
(241,721)
(241,721)
17,735
57
17,792
111
-
111
1,479
-
1,479
-
-
3
2,636
-
2,638
BALANCE, December 31, 2016
117,554
$ 1,176
$ 1,780,350
$ (322,563)
$ 1,458,963
(Continued)
F - 6
CORECIVIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(in thousands)
BALANCE, December 31, 2014
116,764
$ 1,168
$ 1,748,303
$ (267,971)
$ 1,481,500
Common Stock
Shares
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Net income
Retirement of common stock
Dividends declared on common stock ($2.16 per share)
Restricted stock compensation, net of
forfeitures
Stock option compensation expense, net of
forfeitures
Income tax benefit of equity compensation
Restricted stock grants
Stock options exercised
-
(237)
-
(11)
-
-
303
413
-
(3)
-
-
-
-
3
4
-
221,854
221,854
(9,451)
-
(9,454)
-
(254,774)
(254,774)
14,639
73
14,712
682
-
682
525
-
525
-
-
3
7,696
-
7,700
BALANCE, December 31, 2015
117,232
$ 1,172
$ 1,762,394
$ (300,818)
$ 1,462,748
(Continued)
F - 7
CORECIVIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(in thousands)
BALANCE, December 31, 2013
115,923
$ 1,159
$ 1,725,363
$ (224,015)
$ 1,502,507
Common Stock
Shares
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Net income
Retirement of common stock
-
(118)
Dividends declared on common stock ($2.04 per share)
-
Restricted stock compensation, net of
forfeitures
Stock option compensation expense, net of
forfeitures
Income tax benefit of equity compensation
Restricted stock grants
Stock options exercised
(20)
-
-
267
712
-
(1)
-
-
-
-
3
7
-
195,022
195,022
(4,035)
-
(4,036)
-
(239,086)
(239,086)
11,985
108
12,093
1,882
-
1,882
665
-
-
-
665
3
12,443
-
12,450
BALANCE, December 31, 2014
116,764
$ 1,168
$ 1,748,303
$ (267,971)
$ 1,481,500
The accompanying notes are an integral part of these consolidated financial statements.
F - 8
CORECIVIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016, 2015 AND 2014
1. ORGANIZATION AND OPERATIONS
CoreCivic, Inc. (together with its subsidiaries, the “Company” or “CoreCivic”) is the nation’s
largest owner of partnership correctional, detention, and residential reentry facilities and one of the
largest prison operators in the United States. As of December 31, 2016, CoreCivic owned or
controlled 49 correctional and detention facilities, owned or controlled 25 residential reentry
facilities, and managed an additional 11 correctional and detention facilities owned by its
government partners, with a total design capacity of approximately 89,700 beds in 20 states and the
District of Columbia. 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.
Over the past several years, the Company has successfully executed strategies to diversify its
business and offer a broader range of solutions to government partners. To reflect this
transformation, management announced in October 2016, its decision to rename and rebrand the
Company from Corrections Corporation of America to CoreCivic. The decision to rename the
Company was the result of an intense research, brand strategy, and creative process that began in
mid-2015. While the Company was legally renamed in December 2016, related rebranding efforts
are ongoing. 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.
CoreCivic began operating as a real estate investment trust ("REIT") for federal income tax
purposes 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.
F - 9
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles and include the accounts of CoreCivic on a consolidated basis with its wholly-
owned subsidiaries. All intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
CoreCivic considers all liquid debt instruments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
At December 31, 2016 and 2015, accounts receivable of $229.9 million and $234.5 million were net
of allowances for doubtful accounts totaling $1.6 million and $0.5 million, respectively. Accounts
receivable consist primarily of amounts due from federal, state, and local government agencies for
the utilization of CoreCivic's correctional, detention, and residential reentry facilities, as well as for
operating and managing such facilities.
Accounts receivable are stated at estimated net realizable value. CoreCivic recognizes allowances
for doubtful accounts to ensure receivables are not overstated due to uncollectibility. Bad debt
reserves are maintained for customers based on a variety of factors, including the length of time
receivables are past due, significant one-time events, and historical experience. If circumstances
related to customers change, estimates of the recoverability of receivables would be further
adjusted.
Property and Equipment
Property and equipment are carried at cost. Assets acquired by CoreCivic in conjunction with
acquisitions are recorded at estimated fair market value at the time of purchase. Betterments,
renewals and significant repairs that extend the life of an asset are capitalized; other repair and
maintenance costs are expensed. Interest is capitalized to the asset to which it relates in connection
with the construction or expansion of facilities. Construction costs directly associated with the
development of a correctional facility are capitalized as part of the cost of the development project.
Such costs are written-off to general and administrative expense whenever a project is abandoned.
The cost and accumulated depreciation applicable to assets retired are removed from the accounts
and the gain or loss on disposition is recognized in income. Depreciation is computed over the
estimated useful lives of depreciable assets using the straight-line method. Useful lives for property
and equipment are as follows:
Land improvements
Buildings and improvements
Equipment and software
Office furniture and fixtures
5 – 20 years
5 – 50 years
3 – 10 years
5 years
F - 10
Accounting for the Impairment of Long-Lived Assets Other Than Goodwill
Long-lived assets other than goodwill are reviewed for impairment when circumstances indicate the
carrying value of an asset may not be recoverable. When circumstances indicate an asset may not
be recoverable, impairment is recognized when the estimated undiscounted cash flows associated
with the asset or group of assets is less than their carrying value. If impairment exists, an
adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference
between the carrying value and fair value. Fair values are determined based on quoted market
values, comparable sales data, discounted cash flows or internal and external appraisals, as
applicable.
Goodwill
Goodwill represents the cost in excess of the net assets of businesses acquired. As further discussed
in Note 3, goodwill is tested for impairment at least annually using a fair-value based approach.
Investment in Direct Financing Lease
Investment in direct financing lease represents the portion of CoreCivic's management contract with
a governmental agency that represents lease payments on buildings and equipment. The lease is
accounted for using the financing method and, accordingly, the minimum lease payments to be
received over the term of the lease less unearned income are capitalized as CoreCivic's investment
in the lease. Unearned income is recognized as income over the term of the lease using the interest
method.
Investment in Affiliates
Investments in affiliates that are equal to or less than 50%-owned over which CoreCivic can
exercise significant influence are accounted for using the equity method of accounting. Investments
under the equity method are recorded at cost and subsequently adjusted for contributions,
distributions, and net income attributable to the Company's ownership based on the governing
agreement.
Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") 2015-03, "Interest – Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs". The new standard was further amended by ASU 2015–15
issued in August 2015. Under the standard, debt issuance costs, excluding those costs incurred
related to revolving credit facilities, are to be presented as a direct deduction from the face amount
of the related liability, rather than as a deferred charge, or asset, on the balance sheet as previously
required. For public reporting entities such as CoreCivic, the new standard was effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption of the new standard was permitted and retrospective application was required. CoreCivic
elected to early adopt the new standard in the fourth quarter of 2015.
Debt issuance costs are capitalized and amortized into interest expense using the interest method, or
on a straight-line basis over the term of the related debt, if not materially different than the interest
method. However, certain debt issuance costs incurred in connection with debt refinancings are
charged to expense in accordance with Accounting Standards Codification ("ASC") 470-50,
"Modifications and Extinguishments".
F - 11
Revenue Recognition
CoreCivic maintains contracts with certain governmental entities to manage their facilities for fixed
per diem rates. CoreCivic also maintains contracts with various federal, state, and local
governmental entities for the housing of offenders in company-owned facilities at fixed per diem
rates or monthly fixed rates. These contracts usually contain expiration dates with renewal options
ranging from annual to multi-year renewals. Most of these contracts have current terms that require
renewal every two to five years. Additionally, most facility management contracts contain clauses
that allow the government agency to terminate a contract without cause, and are generally subject to
legislative appropriations. CoreCivic generally expects to renew these contracts for periods
consistent with the remaining renewal options allowed by the contracts or other reasonable
extensions; however, no assurance can be given that such renewals will be obtained. Fixed monthly
rate revenue is recorded in the month earned and fixed per diem revenue, including revenue under
those contracts that include guaranteed minimum populations, is recorded based on the per diem
rate multiplied by the number of offenders housed or guaranteed during the respective period.
CoreCivic recognizes any additional management service revenues upon completion of services
provided to the customer. Certain of the government agencies also have the authority to audit and
investigate CoreCivic's contracts with them. If the agency determines that CoreCivic has
improperly allocated costs to a specific contract or otherwise was unable to perform certain
contractual services, CoreCivic may not be reimbursed for those costs and could be required to
refund the amount of any such costs that have been reimbursed.
Rental revenue is recognized in accordance with ASC 840, "Leases". In accordance with ASC 840,
minimum rental revenue is recognized on a straight-line basis over the term of the related lease.
Leasehold incentives are recognized as a reduction to rental revenue on a straight-line basis over the
term of the related lease. Rental revenue associated with expense reimbursements from tenants is
recognized in the period that the related expenses are incurred based upon the tenant lease
provision.
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, as described in Note 5. The
IGSA qualifies as a multiple-element arrangement under the guidance in ASC 605, "Revenue
Recognition". CoreCivic evaluates each deliverable in an arrangement to determine whether it
represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting
when it has standalone value to the customer. ASC 605 requires revenue to be allocated to each
unit of accounting based on a selling price hierarchy. The selling price for a deliverable is based on
its vendor specific objective evidence ("VSOE") of selling price, if available, third-party evidence
("TPE") if VSOE of selling price is not available, or estimated selling price ("ESP") if neither
VSOE of selling price nor TPE is available. CoreCivic establishes VSOE of selling price using the
price charged for a deliverable when sold separately. CoreCivic establishes TPE of selling price by
evaluating similar products or services in standalone sales to similarly situated customers.
CoreCivic establishes ESP based on management judgment considering internal factors such as
margin objectives, pricing practices and controls, and market conditions. In arrangements with
multiple elements, CoreCivic allocates the transaction price to the individual units of accounting at
inception of the arrangement based on their relative selling price.
Other revenue consists primarily of ancillary revenues associated with operating correctional,
detention and residential reentry facilities, such as commissary, phone, and vending sales, and are
F - 12
recorded in the period the goods and services are provided. Revenues generated from prisoner
transportation services for governmental agencies are recorded in the period the inmates have been
transported to their destination.
Self-Funded Insurance Reserves
CoreCivic is significantly self-insured for employee health, workers’ compensation, automobile
liability claims, and general liability claims. As such, CoreCivic's insurance expense is largely
dependent on claims experience and CoreCivic's ability to control its claims experience. CoreCivic
has consistently accrued the estimated liability for employee health insurance based on its history of
claims experience and time lag between the incident date and the date the cost is paid by CoreCivic.
CoreCivic has accrued the estimated liability for workers’ compensation claims based on an
actuarially determined liability, discounted to the net present value of the outstanding liabilities,
using a combination of actuarial methods used to project ultimate losses, and the Company's
automobile insurance claims based on estimated development factors on claims incurred. The
liability for employee health, workers’ compensation, and automobile insurance includes estimates
for both claims incurred and for claims incurred but not reported. CoreCivic records litigation
reserves related to general liability matters for which it is probable that a loss has been incurred and
the range of such loss can be estimated. These estimates could change in the future.
Income Taxes
CoreCivic began operating as a REIT for federal income tax purposes effective January 1, 2013. As
a REIT, the Company generally is not subject to corporate level federal income tax on taxable
income it distributes to its stockholders as long as it meets the organizational and operational
requirements under the REIT rules. However, 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, so long as these activities are conducted in entities that elect to be treated as TRSs
under the Internal Revenue Code. 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.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred
Taxes", which requires that all deferred tax assets and liabilities be classified as non-current on the
balance sheet rather than separating deferred taxes into current and non-current amounts, as
previously required. For public reporting entities such as CoreCivic, the new standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.
F - 13
Early adoption of the new standard is permitted and the guidance may be adopted on either a
prospective or retrospective basis. CoreCivic elected to early adopt ASU 2015-17 in the fourth
quarter of 2015 and to apply the new standard retrospectively. See Note 11 for further discussion
of the significant components of CoreCivic's deferred tax assets and liabilities.
Income tax contingencies are accounted for under the provisions of ASC 740. 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.
Foreign Currency Transactions
CoreCivic has extended a working capital loan to Agecroft Prison Management, Ltd. (“APM”), the
operator of a correctional facility in Salford, England previously owned by a subsidiary of
CoreCivic. The working capital loan is denominated in British pounds; consequently, CoreCivic
adjusts these receivables to the current exchange rate at each balance sheet date and recognizes the
unrealized currency gain or loss in current period earnings. See Note 7 for further discussion of
CoreCivic’s relationship with APM.
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 December 31, 2016
and 2015, 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):
Investment in direct financing lease
Note receivable from APM
Debt
December 31,
2016
2015
Carrying
Amount
$ 684
$ 2,920
$ (1,455,000)
Fair Value
$
$ 694
$
$ 4,647
$ (1,459,625) $
Carrying
Amount
3,223
3,504
(1,464,000)
Fair Value
$ 3,408
$ 5,864
$ (1,452,719)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the
date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates and those differences could be
material.
F - 14
Concentration of Credit Risks
CoreCivic's credit risks relate primarily to cash and cash equivalents, restricted cash, accounts
receivable, and an investment in a direct financing lease. Cash and cash equivalents and restricted
cash are primarily held in bank accounts and overnight investments. CoreCivic maintains deposits
of cash in excess of federally insured limits with certain financial institutions. CoreCivic's accounts
receivable and investment in direct financing lease represent amounts due primarily from
governmental agencies. CoreCivic's financial instruments are subject to the possibility of loss in
carrying value as a result of either the failure of other parties to perform according to their
contractual obligations or changes in market prices that make the instruments less valuable.
CoreCivic derives its revenues primarily from amounts earned under federal, state, and local
government contracts. For each of the years ended December 31, 2016, 2015, and 2014, federal
correctional and detention authorities represented 52%, 51%, and 44%, respectively, of CoreCivic's
total revenue. Federal correctional and detention authorities consist primarily of the Federal Bureau
of Prisons ("BOP"), the United States Marshals Service ("USMS"), and ICE. The BOP accounted
for 9%, 11%, and 13% of total revenue for 2016, 2015, and 2014, respectively. The USMS
accounted for 15%, 16%, and 17% of total revenue for 2016, 2015, and 2014, respectively. ICE
accounted for 28%, 24%, and 13% of total revenue for 2016, 2015, and 2014, respectively, with the
increases in 2016 and 2015 resulting in part from the contract at the South Texas Family Residential
Center, as further described in Note 5. These federal customers have management contracts at
facilities CoreCivic owns and at facilities CoreCivic manages but does not own. State revenues
from contracts at correctional, detention, and residential reentry facilities that CoreCivic operates
represented 38%, 40%, and 46% of total revenue during the years ended December 31, 2016, 2015,
and 2014, respectively. Approximately 6%, 10%, and 12% of total revenue for the years ended
December 31, 2016, 2015, and 2014, respectively, was generated from the State of California
Department of Corrections and Rehabilitation (the “CDCR”) in facilities housing inmates outside
the state of California. No other customer generated more than 10% of total revenue during 2016,
2015, or 2014. Although the revenue generated from each of these agencies is derived from
numerous management contracts, the loss of one or more of such contracts could have a material
adverse impact on CoreCivic's financial condition and results of operations.
Accounting for Stock-Based Compensation
Restricted Stock and Units
CoreCivic accounts for restricted stock-based compensation under the recognition and measurement
principles of ASC 718, "Compensation-Stock Compensation". CoreCivic amortizes the fair market
value as of the grant date of restricted stock and unit awards over the vesting period using the
straight-line method. The fair market value of performance-based restricted stock units is amortized
over the vesting period as long as CoreCivic expects to meet the performance criteria. If
achievement of the performance criteria becomes improbable, an adjustment is made to reverse the
expense previously recognized.
Stock Options
CoreCivic's stock option plans are described more fully in Note 12. CoreCivic accounts for those
plans under the recognition and measurement principles of ASC 718. All options granted under
those plans had an exercise price equal to the market value of the underlying common stock on the
date of grant.
F - 15
Recent Accounting Pronouncements
In May 2014, the FASB issued 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 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.
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.
F - 16
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment
Accounting", that will change certain aspects of accounting for share-based payments to employees.
ASU 2016-09 will require all income tax effects of awards to be recognized in the income statement
when the awards vest or are settled. The new ASU will also allow an employer to repurchase more
of an employee's shares than it can currently for tax withholding purposes without triggering
liability accounting, and to make a policy election to account for forfeitures. Companies will be
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 is currently 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 will
adopt the ASU in its fiscal year 2017. CoreCivic also expects that the new standard will have an
impact on its 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 it's 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
expects to early adopt 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 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 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.
3. GOODWILL
ASC 350, "Intangibles-Goodwill and Other", establishes accounting and reporting requirements for
goodwill and other intangible assets. Goodwill was $38.4 million and $35.6 million as of December
31, 2016 and 2015, respectively. This goodwill was established in connection with the acquisitions
F - 17
of Correctional Management, Inc. ("CMI") in the second quarter of 2016 and Avalon Correctional
Services, Inc. ("Avalon") in the fourth quarter of 2015, both as further described in Note 6, the
acquisition of Correctional Alternatives, Inc. ("CAI") during 2013, and the acquisitions of two
service companies during 2000.
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 performed its impairment tests
during the fourth quarter, in connection with CoreCivic's annual budgeting process, and concluded
no impairments had occurred. CoreCivic will perform these impairment tests at least annually and
whenever circumstances indicate the carrying value of goodwill may not be recoverable.
In April 2015, CoreCivic provided notice to the state of Louisiana that it would cease management
of the Winn Correctional Center within 180 days, in accordance with the notice provisions of the
contract. Management of the facility transitioned to another operator effective September 30, 2015.
In anticipation of terminating the contract at this facility, CoreCivic recorded an asset impairment of
$1.0 million during the first quarter of 2015 for the write-off of goodwill associated with the Winn
facility.
4. PROPERTY AND EQUIPMENT
At December 31, 2016, CoreCivic owned 76 real estate properties, including 49 correctional and
detention facilities, three of which CoreCivic leased to third-party operators, 25 residential reentry
facilities, five of which CoreCivic leased to third-party operators, and two corporate office
buildings. At December 31, 2016, CoreCivic also managed 11 correctional and detention facilities
owned by governmental agencies.
Property and equipment, at cost, consists of the following (in thousands):
Land and improvements
Buildings and improvements
Equipment and software
Office furniture and fixtures
Construction in progress
Less: Accumulated depreciation
December 31,
2016
2015
$
$ 234,862
3,509,825
379,811
35,651
29,831
4,189,980
(1,352,323)
207,405
3,443,791
360,168
35,018
30,401
4,076,783
(1,193,723)
$ 2,837,657
$
2,883,060
Construction in progress primarily consists of correctional facilities under construction or
expansion. Interest is capitalized on construction in progress and amounted to $0.6 million, $5.5
million, and $2.5 million in 2016, 2015, and 2014, respectively.
F - 18
Depreciation expense was $165.8 million, $151.4 million, and $114.0 million for the years ended
December 31, 2016, 2015, and 2014, respectively.
Eleven of the facilities owned by CoreCivic are subject to options that allow various governmental
agencies to purchase those facilities. Certain of these options to purchase are based on a
depreciated book value while others are based on a fair market value calculation. In addition, one
facility, which is also subject to a purchase option, is constructed on land that CoreCivic leases from
a governmental agency under a ground lease. Under the terms of the ground lease, the facility
becomes the property of the governmental agency upon expiration of the ground lease in 2017.
CoreCivic depreciates this property over the shorter of the term of the applicable ground lease or the
estimated useful life of the property.
CoreCivic leases land and building at the Elizabeth Detention Center under operating leases that
expire in June 2022. CoreCivic leased portions of the land and building of the San Diego
Correctional Facility under an operating lease that expired December 31, 2015 pursuant to amended
lease terms executed between CoreCivic and the County of San Diego in January 2010. During
December 2013, CoreCivic elected to terminate the lease of land and building at the North Georgia
Detention Center effective during the first quarter of 2014.
CoreCivic leases the South Texas Family Residential Center and the site upon which it was
constructed from a third-party lessor. CoreCivic's lease agreement with the lessor is over a base
period concurrent with an IGSA with ICE which was amended in October 2016, as further
described in Note 5. However, ICE can terminate the agreement for convenience or non-
appropriation of funds, without penalty, by providing CoreCivic with at least a 60-day notice. In
the event CoreCivic cancels the lease with the third-party lessor prior to its expiration as a result of
the termination of the IGSA by ICE for convenience, and if CoreCivic is unable to reach an
agreement for the continued use of the facility within 90 days from the termination date, CoreCivic
is required to pay a termination fee based on the termination date, currently equal to $10.0 million
and declining to zero by October 2020.
CoreCivic's original lease agreement with the third-party lessor required CoreCivic to pay $70.0
million in September 2014, which resulted in CoreCivic being deemed the owner of the constructed
assets for accounting purposes, in accordance with ASC 840-40-55, formerly Emerging Issues Task
Force No. 97-10, "The Effect of Lessee Involvement in Asset Construction". Accordingly,
CoreCivic recorded an asset representing the costs incurred attributable to the building assets
constructed by the third-party lessor and a related financing liability. CoreCivic is depreciating the
asset over the term of the lease, as amended and extended through September 2021, and is imputing
interest on the financing liability. Additionally, CoreCivic determined that the lease with the third-
party lessor also included separate units of account for the land and pre-existing cottages as well as
food services provided by the third-party lessor. The amount of consideration allocated to each of
these separate deliverables was determined based on the relative selling price of the lessor-
financing, the land lease, the lease of pre-existing cottages, and the food services. The operating
lease term for the land is equivalent to the term of the lease and is recognized on a straight-line basis
over the lease term. The operating lease term for the pre-existing cottages was the four-month
period in which CoreCivic used the cottages for housing residents. The food services provided by
the third-party lessor are recognized proportionally based on the number of beds available to ICE.
The expense incurred for the leases at these four facilities, inclusive of the expenses recognized for
the South Texas lease, as described above, was $103.0 million, $85.9 million, and $9.1 million for
the years ended December 31, 2016, 2015, and 2014, respectively. Future minimum lease payments
as of December 31, 2016 under these and other operating leases, inclusive of $242.3 million of
F - 19
payments expected to be made under the cancelable lease at the South Texas facility, are as follows
(in thousands):
2017
2018
2019
2020
2021
Thereafter
$ 51,397
51,413
51,423
51,510
39,550
290
In June 2013, CoreCivic entered into an Economic Development Agreement ("EDA") with the
Development Authority of Telfair County ("Telfair County") in Telfair County, Georgia to
implement a tax abatement plan related to CoreCivic's bed expansion project at its McRae
Correctional Facility. The tax abatement plan provides for 90% abatement of real property taxes in
the first year, decreasing by 10% over the subsequent nine years. In June 2013, Telfair County
issued bonds in a maximum principal amount of $15.0 million. According to the EDA, legal title of
CoreCivic's real property was transferred to Telfair County. Pursuant to the EDA, the bonds were
issued to CoreCivic, so no cash exchanged hands. Telfair County then leased the real property back
to CoreCivic. The lease payments are equal to the amount of the payments on the bonds. At any
time, CoreCivic has the option to purchase the real property by paying off the bonds, plus $100.
Due to the form of the transactions, CoreCivic has not recorded the bonds or the capital lease
associated with the sale lease-back transaction. The original cost of CoreCivic's property and
equipment is recorded on the balance sheet and is being depreciated over its estimated useful life.
5. REAL ESTATE TRANSACTIONS
Activations
In September 2014, CoreCivic announced that it had agreed under an expansion of an existing
IGSA between the city of Eloy, Arizona and ICE to house up to 2,400 individuals at the South
Texas Family Residential Center, a facility leased by CoreCivic in Dilley, Texas. Services provided
under the original amended IGSA commenced in the fourth quarter of 2014, had an original term of
up to four years, and could be extended by bi-lateral modifications. The agreement provided for a
fixed monthly payment in accordance with a graduated schedule. In October 2016, CoreCivic
entered into an amended IGSA that provides for a new, lower fixed monthly payment commencing
in November 2016, and extends the life of the contract through September 2021. The agreement
can be further extended by bi-lateral modification. However, ICE can also terminate the agreement
for convenience or non-appropriation of funds, without penalty, by providing CoreCivic with at
least a 60-day notice. ICE began housing the first residents at the facility in December 2014, and
the site was completed during the second quarter of 2015.
Under the fixed monthly payment schedule of the original amended IGSA, ICE agreed to pay
CoreCivic $70.0 million in two $35.0 million installments during the fourth quarter of 2014 and
graduated fixed monthly payments over the remaining months of the contract. As described in Note
2, CoreCivic used the multiple-element arrangement guidance prescribed in ASC 605, "Revenue
Recognition" in determining the total revenue to be recognized over the term of the amended IGSA.
CoreCivic determined that there were five distinct elements related to the amended IGSA with ICE.
The lease revenue element, representing the operating lease of the site and constructed assets, was
valued based on the estimated selling price of the land and building improvements provided to ICE
and is recognized proportionately based on the number of beds available. The correctional services
revenue element, representing the correctional management services provided to ICE, was valued
based on the estimated selling price of similar services CoreCivic provides and is recognized based
on labor efforts expended over the contract. The food services revenue element was valued based on
F - 20
the TPE of the contracted outsourced service and is recognized proportionately based on the number
of beds available. The educational services revenue element, representing the grade-level
appropriate juvenile educational program prescribed under the IGSA, was based on the TPE of the
contracted outsourced service and is recognized on a straight-line basis over the period educational
services are required to be performed. The construction management services revenue element,
representing CoreCivic's site development and construction management services, was valued based
on the estimated selling price of similar services CoreCivic provides and was recognized on a
straight-line basis during the first seven months of the IGSA representing the period over which the
construction activity was ongoing. During the years ended December 31, 2016, 2015, and 2014,
CoreCivic recognized $266.8 million, $244.2 million, and $21.0 million, respectively, in revenue
associated with the amended IGSA with the unrecognized balance of the fixed monthly payments
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 December 31, 2016 and 2015, total deferred
revenue associated with this agreement amounted to $67.0 million and $94.6 million, respectively.
In June 2015, ICE announced a policy change regarding family unit detention that has shortened the
duration of ICE detention for those who are awaiting further process before immigration courts.
Public policies and views regarding family detention, as well as proposals pertaining to the most
effective means to address families crossing the border illegally, continue to evolve. In addition,
numerous lawsuits, to which CoreCivic is not a party, have challenged the government’s policy of
detaining migrant families.
One such lawsuit in the United States District Court for the Central District of California concerns a
settlement agreement between ICE and a plaintiffs’ class consisting of detained minors, whereby the
court issued an order on August 21, 2015, enforcing the settlement agreement and requiring
compliance by October 23, 2015. The court’s order clarified that the government has the flexibility
to hold class members for longer periods of time in unlicensed and secure facilities during influxes
of large numbers of undocumented migrant families via the southern U.S. border. After announcing
its intention to comply fully with the court's order, the federal government appealed. In July 2016,
the U.S. Court of Appeals for the Ninth Circuit affirmed most aspects of the District Court's order,
but ruled that ICE is not required to release a parent simply because the settlement agreement might
require release of that parent's minor child. The impact of these rulings on family residential
programs is not yet known.
In December 2016, a Texas state court judge blocked efforts by Texas state officials to license the
South Texas Family Residential Center as a child care center, ruling that the state officials lacked
authority to license such facilities. The state of Texas has appealed this ruling, and the impact of the
judge's decision on family residential detention programs is not yet known. Any court decision or
government action that impacts CoreCivic's existing contract for the South Texas Family
Residential Center could materially affect the Company's cash flows, financial condition, and results
of operations.
In December 2015, CoreCivic announced it was awarded a new contract from the Arizona
Department of Corrections to house up to an additional 1,000 medium-security inmates at its 1,596-
bed Red Rock Correctional Center in Arizona, bringing the contracted bed capacity to 2,000
inmates. In connection with the new contract, CoreCivic expanded its Red Rock facility to a design
capacity of 2,024 beds and added additional space for inmate reentry programming. Total cost of
the expansion was approximately $37.0 million. Construction was substantially completed at
December 31, 2016, although CoreCivic began receiving inmates under the new contract during the
third quarter of 2016. As of December 31, 2016, CoreCivic housed approximately 1,700 inmates at
the Red Rock Correctional Center.
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Pursuant to an agreement with Trousdale County, Tennessee, CoreCivic agreed to finance, design,
construct, and operate a 2,552-bed facility to meet the responsibilities of a separate IGSA between
Trousdale County and the state of Tennessee regarding correctional services. CoreCivic invested
approximately $144.0 million in the Trousdale Turner Correctional Center and construction was
completed in the fourth quarter of 2015. In order to guarantee access to the beds at the facility, the
IGSA with the state of Tennessee includes a minimum monthly payment plus a per diem payment
for each inmate housed in the facility in excess of 90% of the design capacity following completion
of the ramp, which occurred in the third quarter of 2016. CoreCivic began housing state of
Tennessee inmates at the newly activated facility in January 2016. As of December 31, 2016,
CoreCivic housed approximately 2,300 inmates at the Trousdale Turner Correctional Center.
In April 2016, CoreCivic was awarded a contract to continue providing residential reentry services
for the BOP, which was a rebid of existing contracts at both of CoreCivic's CAI facilities, CAI-
Boston Avenue and CAI-Ocean View. During the contract rebid process, CoreCivic identified an
opportunity to consolidate BOP resident populations at both facilities into the 483-bed CAI-Ocean
View facility in order to make available the CAI-Boston Avenue facility for other potential partners
and more efficiently utilize available capacity. On July 18, 2016, CoreCivic announced that it
received an award from the CDCR to house up to 120 residents as part of The Male Community
Reentry Program ("MCRP") at CoreCivic's 120-bed CAI-Boston Avenue residential reentry facility
in San Diego, California. The MCRP was designed by the CDCR to provide a range of community-
based, rehabilitative services to help participants successfully reenter the community and reduce
recidivism. The new contract commenced on August 1, 2016 and contains an initial term extending
to June 30, 2018, with three one-year renewal options.
Leasing Transactions
In May 2016, CoreCivic entered into a lease with the Oklahoma Department of Corrections
("ODOC") for its previously idled 2,400-bed North Fork Correctional Facility. The lease agreement
commenced on July 1, 2016, and includes a five-year base term with unlimited two-year renewal
options. However, the lease agreement permitted the ODOC to utilize the facility for certain
activation activities and, therefore, revenue recognition began upon execution of the lease. The
average annual rent to be recognized during the base term is $7.3 million, including annual rent in
the fifth year of $12.0 million. After the five-year base term, the annual rent will be equal to the
rent due during the prior lease year, adjusted for increases in the Consumer Price Index ("CPI").
CoreCivic is responsible for repairs and maintenance, property taxes and property insurance, while
all other aspects and costs of facility operations are the responsibility of the ODOC.
Acquisitions
On August 27, 2015, CoreCivic acquired four community corrections facilities from a privately held
owner of community corrections facilities and other government leased assets. The four acquired
community corrections facilities have a capacity of approximately 600 beds and are leased to
Community Education Centers, Inc. ("CEC") under triple net lease agreements that extend through
July 2019 and include multiple five-year lease extension options. CEC separately contracts with the
Pennsylvania Department of Corrections and the Philadelphia Prison System to provide
rehabilitative and reentry services to residents and inmates at the leased facilities. CoreCivic
acquired the four facilities in the real estate-only transaction as a strategic investment that expands
the Company's investment in the residential reentry market. The consideration paid for the asset
portfolio consisted of approximately $13.8 million in cash, excluding transaction related expenses.
In allocating the purchase price, CoreCivic recorded $13.4 million of net tangible assets and $0.4
million of identifiable intangible assets.
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On June 10, 2016, CoreCivic acquired a residential reentry facility in Long Beach, California from a
privately held owner for approximately $7.7 million in cash, excluding transaction-related expenses.
In allocating the purchase price, CoreCivic recorded $7.4 million of net tangible assets and $0.3
million of identifiable intangible assets. The 112-bed facility is leased to CEC under a triple net
lease agreement that extends through June 2020 and includes one five-year lease extension option.
CEC separately contracts with the CDCR to provide rehabilitative and reentry services to residents
at the leased facility. CoreCivic acquired the facility in the real estate–only transaction as a
strategic investment that expands the Company's investment in the residential reentry market.
Real Estate Closures and Idle Facilities
On July 29, 2016, the BOP elected not to renew its contract at CoreCivic's owned and managed
1,129-bed Cibola County Corrections Center located in New Mexico. CoreCivic prepared to idle
the facility upon expiration of the contract on October 30, 2016. CoreCivic performed an
impairment analysis of the Cibola County Corrections Center, which had a net carrying value of
$29.4 million as of December 31, 2016, and concluded that this asset has a recoverable value in
excess of the carrying value. On October 31, 2016, CoreCivic announced a new contract award to
house up to 1,116 ICE detainees at the Cibola facility and began receiving detainees in December
2016 under the new contract. The contract contains an initial term of five years, with renewal
options upon mutual agreement.
Based on a decline in offender populations within the state of Colorado and available capacity at
other facilities CoreCivic owns in Colorado, CoreCivic idled its 1,488-bed Kit Carson Correctional
Center during the third quarter of 2016. Inmate populations from the Kit Carson Correctional
Center were transferred to the remaining two company-owned facilities that CoreCivic continues to
operate for the Colorado Department of Corrections, the Bent County Correctional Facility and the
Crowley County Correctional Facility. CoreCivic idled the Kit Carson Correctional Center
following the transfer of the inmate population, and is continuing to market the facility to other
customers. CoreCivic performed an impairment analysis of the Kit Carson Correctional Center,
which had a net carrying value of $58.8 million as of December 31, 2016, and concluded that this
asset has a recoverable value in excess of the carrying value.
CoreCivic also has six additional idled facilities 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):
Facility
Prairie Correctional Facility
Huerfano County Correctional Center
Diamondback Correctional Facility
Southeast Kentucky Correctional Facility (1)
Marion Adjustment Center
Lee Adjustment Center
Kit Carson Correctional Center
Design
Capacity
1,600
752
2,160
656
826
816
1,488
8,298
Date
Idled
2010
2010
2010
2012
2013
2015
2016
Net Carrying Values at December 31,
$
2016
17,071
17,542
41,539
22,618
12,135
10,342
58,819
$ 180,066
2015
$
17,961
18,276
43,030
23,270
12,536
10,840
60,039
$ 185,952
(1) Formerly known as the Otter Creek Correctional Center.
From the date each of the aforementioned seven facilities became idle, CoreCivic incurred
approximately $8.5 million, $7.3 million, and $6.5 million in operating expenses for the years ended
F - 23
December 31, 2016, 2015, and 2014, respectively. The operating expenses incurred in 2014
exclude the incremental expenses incurred in connection with the activation of the Diamondback
facility which began in the third quarter of 2013 and continued until near the end of the second
quarter of 2014, when anticipated opportunities to activate the facility were deferred.
CoreCivic considers the cancellation of a contract as an indicator of impairment and tested each of
the aforementioned facilities for impairment when it was notified by the respective customers that
they would no longer be utilizing such facility. CoreCivic 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.
In the fourth quarter of 2014, CoreCivic made the decision to actively pursue the sale of the
Queensgate Correctional Facility, idle since 2009, and the Mineral Wells Pre-Parole Transfer
Facility, idle since 2013. CoreCivic reviewed comparable sales data and concluded that either the
exit value in the principle market or comparable sales prices for similar properties in the respective
geographical areas represented the fair value of these assets. CoreCivic determined the principle
market for these assets will be buyers who intend to use the assets for purposes other than as
correctional facilities. The aggregate net book value of these facilities prior to the evaluation for
impairment was $28.8 million and, as a result of the impairment indicator resulting from the
potential sale of the facilities, CoreCivic recorded non-cash impairments totaling $27.8 million
during the fourth quarter of 2014 to write down the book values of the Queensgate and Mineral
Wells facilities to the estimated fair values using Level 2 inputs for quoted prices of similar assets
and assuming asset sales for uses other than correctional facilities.
Sales
In the third quarter of 2014, CoreCivic entered into a purchase and sale agreement with a third party
to sell its idled Houston Educational Facility in Houston, Texas for $4.5 million. The Houston
Educational Facility was an asset that was previously leased to a charter school operator. CoreCivic
closed on the sale during the fourth quarter of 2014. The net book value of this facility prior to the
evaluation for impairment was $6.4 million and, as a result of the impairment indicator resulting
from the potential sale of the facility, CoreCivic recorded a non-cash impairment of $2.2 million
during the second quarter of 2014 to write-down the book value of the facility to the estimated fair
value using Level 2 inputs. The ultimate sale price was used as a proxy for the fair value of the
facility.
6.
BUSINESS COMBINATIONS
During the fourth quarter of 2015, CoreCivic closed on the acquisition of 100% of the stock of
Avalon, along with two additional facilities operated by Avalon. The acquisition included 11
community corrections facilities with approximately 3,000 beds in Oklahoma, Texas, and
Wyoming. CoreCivic acquired Avalon, which specializes in community correctional services, drug
and alcohol treatment services, and residential reentry services, as a strategic investment that
continues to expand the reentry assets CoreCivic owns and the services the Company provides. The
aggregate purchase price of $157.5 million, excluding transaction-related expenses, includes two
earn-outs. One earn-out for $5.5 million, which was based on the completion of and transition to a
newly constructed facility that delivers the contracted services provided at the Dallas Transitional
Center, was paid in the second quarter of 2016. The second earn-out for up to $2.0 million was
based on the achievement of certain utilization milestones over 12 months following the acquisition.
F - 24
The utilization milestones were not achieved resulting in a $2.0 million gain recognized in the third
quarter of 2016. The gain is reported as revenue in the accompanying statement of operations for
the year ended December 31, 2016. The acquisition was funded utilizing cash from CoreCivic's
$900.0 Million Revolving Credit Facility, as defined hereafter.
In allocating the purchase price for the transaction, CoreCivic recorded the following (in millions):
Property and equipment
Intangible assets
Total identifiable assets
Goodwill
Total consideration
$ 119.2
18.5
137.7
19.8
$ 157.5
Several factors gave rise to the goodwill recorded in the acquisition, such as the expected benefit
from synergies of the combination and the long-term contracts for community corrections services
that continue to broaden the scope of solutions CoreCivic provides, from incarceration through
release. The results of operations for Avalon have been included in the Company's consolidated
financial statements from the date of acquisition.
On April 8, 2016, CoreCivic closed on the acquisition of 100% of the stock of CMI, along with the
real estate used in the operation of CMI's business from two entities affiliated with CMI. CMI, a
privately held community corrections company that operates seven community corrections
facilities, including six owned and one leased, with approximately 600 beds in Colorado, specializes
in community correctional services, drug and alcohol treatment services, and residential reentry
services. CMI provides these services through multiple contracts with three counties in Colorado,
as well as the Colorado Department of Corrections, a pre-existing partner of CoreCivic's. CoreCivic
acquired CMI as a strategic investment that continues to expand the reentry assets CoreCivic owns
and the services the Company provides. The aggregate purchase price of the transaction was $35.0
million, excluding transaction-related expenses. The transaction was funded utilizing cash from
CoreCivic's $900.0 Million Revolving Credit Facility.
In allocating the purchase price for the transaction, CoreCivic recorded the following (in millions):
Tangible current assets and liabilities, net
Property and equipment
Intangible assets
Total identifiable assets
Goodwill
Total consideration
$ 1.0
29.2
1.5
31.7
3.3
$ 35.0
Several factors gave rise to the goodwill recorded in the acquisition, such as the expected benefit
from synergies of the combination and the long-term contracts for community corrections services
that continues to broaden the scope of solutions CoreCivic provides, from incarceration through
release. The results of operations for CMI have been included in the Company's consolidated
financial statements from the date of acquisition.
F - 25
7. INVESTMENT IN AFFILIATE
CoreCivic has a 50% ownership interest in APM, an entity holding the management contract for a
correctional facility, HM Prison Forest Bank, under a 25-year prison management contract with an
agency of the United Kingdom government. CoreCivic has determined that its joint venture
investment in APM represents a variable interest entity (“VIE”) in accordance with ASC 810,
"Consolidation" of which CoreCivic is not the primary beneficiary. The Forest Bank facility,
located in Salford, England, was previously constructed and owned by a wholly-owned subsidiary
of CoreCivic, which was sold in April 2001. All gains and losses under the joint venture are
accounted for using the equity method of accounting. During 2000, CoreCivic extended a working
capital loan to APM, which has an outstanding balance of $2.9 million as of December 31, 2016.
For the years ended December 31, 2016 and 2015, equity in losses of the joint venture was $41,000
and $126,000, respectively. For the year ended December 31, 2014, equity in earnings of the joint
venture was $720,000. The equity in losses and earnings of the joint venture is included in other
(income) expense in the consolidated statements of operations. As of December 31, 2016,
CoreCivic's equity investment in APM was $0.5 million and is reported in other assets in the
accompanying consolidated balance sheets. The outstanding working capital loan of $2.9 million,
combined with the $0.5 million investment in APM, represents CoreCivic's maximum exposure to
loss in connection with APM.
8. OTHER ASSETS
Other assets consist of the following (in thousands):
Debt issuance costs, less accumulated amortization
of $1,633 and $542, respectively
Intangible lease value, less accumulated amortization
of $4,990 and $3,118, respectively
Other intangible assets, less accumulated amortization
of $1,421 and $363, respectively
Deferred leasing costs
Notes receivable, net
Cash equivalents and cash surrender value of life insurance held in
Rabbi trust
Deposits
Straight-line rent receivable
Other
December 31,
2016
2015
$ 3,526
$ 4,879
36,598
4,434
7,380
5,858
37,430
4,191
8,021
7,743
13,110
2,117
9,229
532
$ 82,784
16,946
2,020
3,324
150
$ 84,704
The gross carrying amount of intangible assets amounted to $47.4 million and $45.1 million at
December 31, 2016 and 2015, respectively. Of these amounts, $41.6 million and $40.5
million, respectively, was related to intangible lease values. Amortization expense related to
intangible assets was $2.9 million, $1.5 million, and $1.4 million for 2016, 2015, and 2014,
respectively, and depending upon the nature of the asset, was either reported as operating
expense or depreciation and amortization in the accompanying statement of operations for the
respective periods.
F - 26
As of December 31, 2016, the estimated amortization expense related to intangible assets for
each of the next five years is as follows (in thousands):
2017
2018
2019
2020
2021
$ 3,010
3,010
2,718
2,181
1,483
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LONG-TERM
LIABILITIES
Accounts payable and accrued expenses consist of the following (in thousands):
December 31,
2016
2015
Trade accounts payable
Accrued salaries and wages
Accrued dividends
Accrued workers’ compensation and auto liability
Accrued litigation
Accrued employee medical insurance
Accrued property taxes
Accrued interest
Deferred revenue
Construction payable
Lease financing obligation
Other
$ 49,866 $
29,766
51,496
6,652
9,290
8,413
27,707
9,526
14,332
7,845
11,785
33,429
72,689
28,871
65,232
6,978
4,176
7,911
24,796
9,780
31,844
8,483
19,775
37,140
$ 260,107 $
317,675
The total liability for workers’ compensation and auto liability was $21.4 million and $22.2 million
as of December 31, 2016 and 2015, respectively, with the long-term portion included in other long-
term liabilities in the accompanying consolidated balance sheets. These liabilities were discounted
to the net present value of the outstanding liabilities using a 3.0% rate in 2016 and 2015. These
liabilities amounted to $23.9 million and $25.0 million on an undiscounted basis as of December 31,
2016 and 2015, respectively.
Other long-term liabilities consist of the following (in thousands):
December 31,
2016
2015
Intangible lease liability
Accrued workers' compensation
Accrued deferred compensation
Lease financing obligation
Other
$ 6,578 $
14,726
9,850
18,832
1,856
6,965
15,188
13,253
21,047
1,856
$ 51,842 $
58,309
F - 27
10. DEBT
Debt outstanding consists of the following (in thousands):
$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 December 31, 2016 and 2015
was 2.2% and 1.9%, respectively.
Term Loan, scheduled principal payments through maturity in July
2020; interest payable periodically at variable interest rates.
The rate at December 31, 2016 and 2015 was 2.3% and 2.0%,
respectively. Unamortized debt issuance costs amounted to
$0.4 million and $0.6 million at December 31, 2016 and
2015, respectively.
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 $3.9 million and
$4.5 million at December 31, 2016 and 2015, respectively.
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 $2.7 million and
$3.5 million at December 31, 2016 and 2015, respectively.
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 $2.8 million and
$3.3 million at December 31, 2016 and 2015, respectively.
Total debt
December 31,
2016
2015
$ 435,000
$ 439,000
95,000
100,000
350,000
350,000
325,000
325,000
250,000
250,000
1,455,000
1,464,000
Unamortized debt issuance costs
(9,831)
(11,923)
Current portion of long-term debt
(10,000)
(5,000)
Long-term debt, net
$ 1,435,169
$ 1,447,077
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 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.
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%,
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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
December 31, 2016, CoreCivic had $435.0 million in borrowings under the $900.0 Million
Revolving Credit Facility as well as $9.1 million in letters of credit outstanding resulting in $455.9
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 December 31, 2016, 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. As of April 1, 2016, interest rates under the Term Loan are the same as
the interest rates under the $900.0 Million Revolving Credit Facility. The interest rate on the Term
Loan was at a base rate plus a margin of 0.50% or at LIBOR plus a margin of 1.75% during the first
two fiscal quarters following closing of the Term Loan. The Term Loan 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
coterminous with the $900.0 Million Revolving Credit Facility due July 2020, with scheduled
quarterly principal payments in years 2016 through 2020. As of December 31, 2016, the
outstanding balance of the Term Loan was $95.0 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
F - 29
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.
Guarantees and Covenants. All of the domestic subsidiaries of CoreCivic (as the parent
corporation) have provided full and unconditional guarantees of the Senior Notes. Each of
CoreCivic's subsidiaries guaranteeing the Senior Notes are 100% owned subsidiaries of CoreCivic;
the subsidiary guarantees are full and unconditional and are joint and several obligations of the
guarantors; and all non-guarantor subsidiaries are minor (as defined in Rule 3-10(h)(6) of
Regulation S-X).
As of December 31, 2016, neither CoreCivic nor any of its subsidiary guarantors had any material
or significant restrictions on CoreCivic's ability to obtain funds from its subsidiaries by dividend or
loan or to transfer assets from such subsidiaries.
The indentures governing the Senior Notes contain certain customary covenants that, subject to
certain exceptions and qualifications, restrict CoreCivic's ability to, among other things, make
restricted payments; incur additional debt or issue certain types of preferred stock; create or permit
to exist certain liens; consolidate, merge or transfer all or substantially all of CoreCivic's assets; and
enter into transactions with affiliates. In addition, if CoreCivic sells certain assets (and generally
does not use the proceeds of such sales for certain specified purposes) or experiences specific kinds
of changes in control, CoreCivic must offer to repurchase all or a portion of the Senior Notes. The
offer price for the Senior Notes in connection with an asset sale would be equal to 100% of the
aggregate principal amount of the notes repurchased plus accrued and unpaid interest and liquidated
damages, if any, on the notes repurchased to the date of purchase. The offer price for the Senior
Notes in connection with a change in control would be 101% of the aggregate principal amount of
the notes repurchased plus accrued and unpaid interest and liquidated damages, if any, on the notes
repurchased to the date of purchase. The Senior Notes are also subject to certain cross-default
provisions with the terms of CoreCivic's $900.0 Million Revolving Credit Facility, as more fully
described hereafter.
Other Debt Transactions
Letters of Credit. At December 31, 2016 and 2015, CoreCivic had $9.1 million and $14.5 million,
respectively, in outstanding letters of credit. The letters of credit were issued to secure CoreCivic's
workers’ compensation and general liability insurance policies, performance bonds, and utility
deposits. The letters of credit outstanding at December 31, 2016 and 2015 were provided by a sub-
facility under the $900.0 Million Revolving Credit Facility.
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Debt Maturities
Scheduled principal payments as of December 31, 2016 for the next five years and thereafter were
as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total debt
Cross-Default Provisions
$ 10,000
10,000
15,000
820,000
-
600,000
$ 1,455,000
The provisions of CoreCivic's debt agreements relating to the $900.0 Million Revolving Credit
Facility and the Senior Notes contain certain cross-default provisions. Any events of default under
the $900.0 Million Revolving Credit Facility that results in the lenders’ actual acceleration of
amounts outstanding thereunder also result in an event of default under the Senior Notes.
Additionally, any events of default under the Senior Notes that give rise to the ability of the holders
of such indebtedness to exercise their acceleration rights also result in an event of default under the
$900.0 Million Revolving Credit Facility.
If CoreCivic were to be in default under the $900.0 Million Revolving Credit Facility, and if the
lenders under the $900.0 Million Revolving Credit Facility elected to exercise their rights to
accelerate CoreCivic's obligations under the $900.0 Million Revolving Credit Facility, such events
could result in the acceleration of all or a portion of CoreCivic's Senior Notes, which would have a
material adverse effect on CoreCivic's liquidity and financial position. CoreCivic does not have
sufficient working capital to satisfy its debt obligations in the event of an acceleration of all or a
substantial portion of CoreCivic's outstanding indebtedness.
11.
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.
F - 31
Income tax expense is comprised of the following components (in thousands):
Current income tax expense
Federal
State
Deferred income tax expense (benefit)
Federal
State
For the Years Ended December 31,
2016
2015
2014
$
10,181 $
1,983
12,164
2,519
136
2,655
$
9,326
828
10,154
(3,400)
(511)
(3,911)
5,589
117
5,706
(2,280)
(931)
(3,211)
Income tax expense
$ 8,253
$ 8,361
$
6,943
Significant components of CoreCivic's deferred tax assets and liabilities as of December 31, 2016
and 2015, are as follows (in thousands):
Noncurrent deferred tax assets:
Asset reserves and liabilities not yet deductible for tax
Tax over book basis of certain assets
Net operating loss and tax credit carryforwards
Intangible contract value
Other
Total noncurrent deferred tax assets
Less valuation allowance
December 31,
2016
2015
$ 29,198
866
5,487
2,570
346
38,467
(3,436)
$ 28,589
893
5,287
2,717
460
37,946
(3,780)
Total noncurrent deferred tax assets
35,031
34,166
Noncurrent deferred tax liabilities:
Book over tax basis of certain assets
Intangible lease value
Other
Total noncurrent deferred tax liabilities
(9,386)
(8,368)
(3,542)
(21,296)
(15,238)
(8,862)
(242)
(24,342)
Net total noncurrent deferred tax assets
$ 13,735
$ 9,824
The tax benefits associated with equity-based compensation reduced income taxes payable by $1.5
million, $0.5 million, and $0.7 million during 2016, 2015, and 2014, respectively. Such benefits
were recorded as increases to stockholders’ equity.
F - 32
A reconciliation of the income tax provision at the statutory income tax rate and the effective tax
rate as a percentage of income from continuing operations before income taxes for the years ended
December 31, 2016, 2015, and 2014 is as follows:
Statutory federal rate
Dividends paid deduction
State taxes, net of federal tax benefit
Permanent differences
Other items, net
2016
2015
2014
35.0%
(32.5)
1.1
0.3
(0.3)
3.6%
35.0%
(31.9)
0.9
0.4
(0.8)
3.6%
35.0%
(31.1)
0.8
0.1
(1.4)
3.4%
CoreCivic's effective tax rate was 3.6%, 3.6%, and 3.4% during 2016, 2015, and 2014, 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 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.
CoreCivic had no liabilities for uncertain tax positions as of December 31, 2016 and 2015.
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. CoreCivic had an income tax receivable of
$8.8 million and $21.2 million as of December 31, 2016 and 2015, respectively, representing
overpayment of federal income tax, which is included in prepaid expenses and other current assets
in the accompanying consolidated balance sheets.
CoreCivic's U.S. federal income tax returns for tax years 2013 through 2015 remain subject to
examination by the Internal Revenue Service ("IRS"). The IRS completed an audit during the first
quarter of 2016 of one of the Company's TRSs for the year ended December 31, 2013 with no
material adjustments. All states in which CoreCivic files income tax returns follow the same statute
of limitations as federal, with the exception of the following states whose open tax years include
2012 through 2015: Arizona, California, Colorado, Kentucky, Minnesota, New Jersey, Texas, and
Wisconsin.
F - 33
12. STOCKHOLDERS’ EQUITY
Dividends on Common Stock
The tax characterization of dividends per share on common shares as reported to stockholders was
as follows for the years ended December 31, 2016, 2015, and 2014:
Declaration Date
February 20, 2014
May 15, 2014
August 14, 2014
December 11, 2014
February 20, 2015
May 14, 2015
August 13, 2015
December 10, 2015
February 19, 2016
May 12, 2016
August 11, 2016
December 8, 2016
Record Date
April 2, 2014
July 2, 2014
October 2, 2014
January 2, 2015
April 2, 2015
July 2, 2015
October 2, 2015
January 4, 2016
April 1, 2016
July 1, 2016
October 3, 2016
January 3, 2017
Payable Date
April 15, 2014
July 15, 2014
October 15, 2014
January 15, 2015
April 15, 2015
July 15, 2015
October 15, 2015
January 15, 2016
April 15, 2016
July 15, 2016
October 17, 2016
January 13, 2017
Ordinary
Income
0.51 (1)
0.51 (1)
0.51 (1)
0.382836 (2)
0.405355 (3)
0.405355 (3)
0.405355 (3)
0.487167 (4)
0.487167 (4)
0.487167 (4)
0.487167 (4)
-(5)
Return of
Capital
-
-
-
0.127164
0.134645
0.134645
0.134645
0.052833
0.052833
0.052833
0.052833
-(5)
Total
Per Share
$ 0.51
$ 0.51
$ 0.51
$ 0.51
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.54
$ 0.42
(1) $0.076573 of this amount constitutes a "Qualified Dividend", as defined by the IRS.
(2) $0.048357 of this amount constitutes a "Qualified Dividend", as defined by the IRS.
(3) $0.051202 of this amount constitutes a "Qualified Dividend", as defined by the IRS.
(4) $0.030979 of this amount constitutes a "Qualified Dividend", as defined by the IRS.
(5) Taxable in 2017.
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.
Common Stock
Restricted shares. During 2016, CoreCivic issued approximately 635,000 shares of restricted
common stock units ("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. During 2015, CoreCivic issued
approximately 438,000 RSUs to certain of its employees and non-employee directors, with an
aggregate value of $17.5 million, including 385,000 RSUs to employees and non-employee
directors whose compensation is charged to general and administrative expense and 53,000 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 2014 through 2016. Unless earlier vested under the terms of the
agreements, RSUs issued to officers and executive officers in 2015 and 2016 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. With respect to RSUs
issued in 2014, no more than one-third of such shares or RSUs may vest in the first performance
period; however, the performance criteria are cumulative for the three-year period. RSUs issued to
other employees in 2016, unless earlier vested under the terms of the agreements, generally vest
F - 34
equally on the first, second, and third anniversary of the award. Shares of restricted stock and RSUs
issued to other employees in years prior to 2016, 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.
Nonvested restricted common stock transactions as of December 31, 2016 and for the year then
ended are summarized below (in thousands, except per share amounts).
Nonvested at December 31, 2015
Granted
Cancelled
Vested
Nonvested at December 31, 2016
Shares of restricted
common stock and RSUs
Weighted average
grant date fair value
975
635
(152)
(414)
1,044
$
$
$
$
$
36.65
29.08
31.53
36.52
32.84
During 2016, 2015, and 2014, CoreCivic expensed $17.8 million ($1.7 million of which was
recorded in operating expenses, $14.4 million of which was recorded in general and administrative
expenses, and $1.7 million of which was recorded in restructuring charges), $14.7 million ($1.5
million of which was recorded in operating expenses and $13.2 million of which was recorded in
general and administrative expenses), and $12.1 million ($1.4 million of which was recorded in
operating expenses and $10.7 million of which was recorded in general and administrative
expenses), net of forfeitures, relating to the restricted common stock and RSUs, respectively. As of
December 31, 2016, CoreCivic had $16.5 million of total unrecognized compensation cost related to
RSUs that is expected to be recognized over a remaining weighted-average period of 1.7 years. The
total fair value of restricted common stock and RSUs that vested during 2016, 2015, and 2014 was
$15.1 million, $13.9 million, and $9.8 million, respectively.
Restricted stock-based compensation expense of $1.7 million for the year ended December 31, 2016
included in restructuring charges in the consolidated statement of operations reflects the voluntary
forfeiture of RSUs awarded in February 2016 to CoreCivic's chief executive officer, in connection
with a restructuring and cost reduction plan implemented during the third quarter of 2016, as further
described in Note 13.
Preferred Stock
CoreCivic has the authority to issue 50.0 million shares of $0.01 par value per share preferred stock
(the “Preferred Stock”). The Preferred Stock may be issued from time to time upon authorization
by the Board of Directors, in such series and with such preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or other provisions as may be
fixed by CoreCivic's Board of Directors.
Stock Option Plans
CoreCivic has equity incentive plans under which, among other things, incentive and non-qualified
stock options are granted to certain employees and non-employee directors of CoreCivic by the
compensation committee of CoreCivic's Board of Directors. The options are granted with exercise
prices equal to the fair market value on the date of grant. Vesting periods for options granted to
employees generally range from three to four years. Options granted to non-employee directors
vest on a date approximately following the first anniversary of the grant date. The term of such
options is ten years from the date of grant.
F - 35
In years after 2012, CoreCivic elected not to issue stock options to its non-employee directors,
officers, and executive officers as it had in the past and instead elected to issue all of its equity
compensation in the form of restricted common stock and RSUs as previously described herein.
During 2016, 2015, and 2014, CoreCivic expensed $0.1 million, $0.7 million, and $1.9 million,
respectively, net of estimated forfeitures, relating to its outstanding stock options, all of which was
charged to general and administrative expenses.
Stock option transactions relating to CoreCivic's non-qualified stock option plans are summarized
below (in thousands, except exercise prices):
Weighted-
Average
Exercise Price
of options
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at December 31, 2015
Granted
Exercised
Cancelled
Outstanding at December 31, 2016
No. of
options
1,467
-
(140)
-
1,327
$ 20.37
-
18.81
-
$ 20.53
Exercisable at December 31, 2016
1,327
$ 20.53
3.2
3.2
$
5,442
$ 5,442
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between CoreCivic's stock price as of December 31, 2016 and the exercise price,
multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on December 31, 2016. This amount changes
based on the fair market value of CoreCivic's stock. The total intrinsic value of options exercised
during the years ended December 31, 2016, 2015, and 2014 was $1.7 million, $7.3 million, and
$12.3 million, respectively.
Nonvested stock option transactions relating to CoreCivic's non-qualified stock option plans as of
December 31, 2016 and changes during the year ended December 31, 2016 are summarized below
(in thousands, except grant date fair values):
Nonvested at December 31, 2015
Granted
Cancelled
Vested
Number of
options
Weighted
average grant
date fair value
51
-
-
(51)
$
6.50
$ -
$ -
6.50
$
Nonvested at December 31, 2016
-
$ -
As of December 31, 2016, CoreCivic had no unrecognized compensation cost related to stock
options.
At CoreCivic's 2011 annual meeting of stockholders held in May 2011, CoreCivic's stockholders
approved an amendment to the 2008 Stock Incentive Plan that increased the authorized limit on
issuance of new awards to an aggregate of up to 18.0 million shares. In addition, during the 2003
annual meeting the stockholders approved the adoption of CoreCivic's Non-Employee Directors’
F - 36
Compensation Plan, authorizing CoreCivic to issue up to 225,000 shares of common stock pursuant
to the plan. As of December 31, 2016, CoreCivic had 9.2 million shares available for issuance
under the Amended and Restated 2008 Stock Incentive Plan and 0.2 million shares available for
issuance under the Non-Employee Directors’ Compensation Plan.
13. RESTRUCTURING AND COST REDUCTION PLAN
During the third quarter of 2016, CoreCivic announced a restructuring of its corporate operations
and implementation of a cost reduction plan, resulting in the elimination of approximately 12% of
the corporate workforce at its headquarters. The restructuring realigns the corporate structure to
more effectively serve facility operations and support the progression of CoreCivic's business
diversification strategy. CoreCivic reported a charge in the third quarter of 2016 of $4.0 million
associated with this restructuring. This charge primarily consists of cash payments for severance
and related benefits to terminated employees and a non-cash charge associated with the voluntary
forfeiture by CoreCivic's chief executive officer of an RSU award, as described in Note 12. The
impact of these staffing reductions, together with the implementation of the cost reduction plan, are
expected to result in annual expense savings of approximately $9.0 million, most of which are
general and administrative expenses. A substantial portion of these expense savings commenced in
the fourth quarter of 2016.
14. 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.
F - 37
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):
NUMERATOR
Basic:
Net income
Diluted:
Net income
DENOMINATOR
Basic:
Weighted average common shares outstanding
Diluted:
Weighted average common shares outstanding
Effect of dilutive securities:
Stock options
Restricted stock-based awards
Weighted average shares and assumed conversions
For the Years Ended December 31,
2015
2014
2016
$ 219,919
$
221,854
$
195,022
$ 219,919
$
221,854
$
195,022
117,384
116,949
116,109
117,384
306
101
117,791
116,949
631
205
117,785
116,109
895
308
117,312
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
$ 1.87
$ 1.87
$
$
1.90
1.88
$ 1.68
$ 1.66
Approximately 268,000, 8,000, and 12,000 stock options were excluded from the computations of
diluted earnings per share for the years ended December 31, 2016, 2015, and 2014, respectively,
because they were anti-dilutive.
15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
General. 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
F - 38
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.
Insurance Contingencies
Each of CoreCivic's management contracts and the statutes of certain states require the maintenance
of insurance. CoreCivic maintains various insurance policies including employee health, workers’
compensation, automobile liability, and general liability insurance. These policies are fixed
premium policies with various deductible amounts that are self-funded by CoreCivic. Reserves are
provided for estimated incurred claims for which it is probable that a loss has been incurred and the
range of such loss can be estimated.
Guarantees
Hardeman County Correctional Facilities Corporation (“HCCFC”) is a nonprofit, mutual benefit
corporation organized under the Tennessee Nonprofit Corporation Act to purchase, construct,
improve, equip, finance, own and manage a detention facility located in Hardeman County,
Tennessee. HCCFC was created as an instrumentality of Hardeman County to implement the
County’s incarceration agreement with the state of Tennessee to house certain inmates.
During 1997, HCCFC issued $72.7 million of revenue bonds, which were primarily used for the
construction of a 2,016-bed medium security correctional facility. In addition, HCCFC entered into
a construction and management agreement with CoreCivic in order to assure the timely and
coordinated acquisition, construction, development, marketing and operation of the correctional
facility.
HCCFC leases the correctional facility to Hardeman County in exchange for all revenue from the
operation of the facility. HCCFC has, in turn, entered into a management agreement with
CoreCivic for the correctional facility.
In connection with the issuance of the revenue bonds, CoreCivic is obligated, under a debt service
deficit agreement, to pay the trustee of the bond’s trust indenture (the “Trustee”) amounts necessary
to pay any debt service deficits consisting of principal and interest requirements (outstanding
principal balance of $6.6 million at December 31, 2016 plus future interest payments). In the event
the state of Tennessee, which is currently utilizing the facility to house certain inmates, exercises its
option to purchase the correctional facility, CoreCivic is also obligated to pay the difference
between principal and interest owed on the bonds on the date set for the redemption of the bonds
and amounts paid by the state of Tennessee for the facility plus all other funds on deposit with the
Trustee and available for redemption of the bonds. At the option of the state of Tennessee,
ownership of the facility would revert to the State in August 2017 at no cost. Therefore, CoreCivic
does not currently believe the state of Tennessee will exercise its option to purchase the facility. At
December 31, 2016, the outstanding principal balance of the bonds exceeded the purchase price
option by $4.6 million.
F - 39
Retirement Plan
All employees of CoreCivic are eligible to participate in the Corrections Corporation of America
401(k) Savings and Retirement Plan (the “Plan”) upon reaching age 18 and completing one year of
qualified service. Eligible employees may contribute up to 90% of their eligible compensation,
subject to IRS limitations. For the years ended December 31, 2016, 2015, and 2014, CoreCivic
provided a discretionary matching contribution equal to 100% of the employee’s contributions up to
5% of the employee’s eligible compensation to employees with at least one thousand hours of
employment in the plan year. Prior to January 1, 2012, employer contributions were made to those
who were employed by CoreCivic on the last day of the plan year, and investment earnings or losses
thereon become vested 20% after two years of service, 40% after three years of service, 80% after
four years of service, and 100% after five or more years of service. Effective January 1, 2012, the
Plan adopted a safe harbor provision that provides, among other changes, future employer matching
contributions to be paid into the Plan each pay period and vest immediately.
During 2016, 2015, and 2014, CoreCivic's discretionary contributions to the Plan, net of forfeitures,
were $12.0 million, $12.0 million, and $11.1 million, respectively.
Deferred Compensation Plans
During 2002, the compensation committee of the board of directors approved CoreCivic's adoption
of two non-qualified deferred compensation plans (the “Deferred Compensation Plans”) for non-
employee directors and for certain senior executives. The Deferred Compensation Plans are
unfunded plans maintained for the purpose of providing CoreCivic's directors and certain of its
senior executives the opportunity to defer a portion of their compensation. Under the terms of the
Deferred Compensation Plans, certain senior executives may elect to contribute on a pre-tax basis
up to 50% of their base salary and up to 100% of their cash bonus, and non-employee directors may
elect to contribute on a pre-tax basis up to 100% of their director retainer and meeting fees. During
the years ended December 31, 2016, 2015, and 2014, CoreCivic matched 100% of employee
contributions up to 5% of total cash compensation. CoreCivic also contributes a fixed rate of return
on balances in the Deferred Compensation Plans, determined at the beginning of each plan year.
Matching contributions and investment earnings thereon become vested 20% after two years of
service, 40% after three years of service, 80% after four years of service, and 100% after five or
more years of service. Distributions are generally payable no earlier than five years subsequent to
the date an individual becomes a participant in the Plan, or upon termination of employment (or the
date a director ceases to serve as a director of CoreCivic), at the election of the participant.
Distributions to senior executives must commence on or before the later of 60 days after the
participant's separation from service or the fifteenth day of the month following the month the
individual attains age 65.
During 2016, 2015, and 2014, CoreCivic provided a fixed return of 5.45%, 5.6%, and 5.6%,
respectively, to participants in the Deferred Compensation Plans. CoreCivic has purchased life
insurance policies on the lives of certain employees of CoreCivic, which are intended to fund
distributions from the Deferred Compensation Plans. CoreCivic is the sole beneficiary of such
policies. At the inception of the Deferred Compensation Plans, CoreCivic established an
irrevocable Rabbi Trust to secure the plans’ obligations. However, assets in the Deferred
Compensation Plans are subject to creditor claims in the event of bankruptcy. During 2016, 2015,
and 2014, CoreCivic recorded $0.2 million, $0.3 million, and $0.2 million, respectively, of
matching contributions as general and administrative expense associated with the Deferred
Compensation Plans. Assets in the Rabbi Trust were $13.1 million and $16.9 million as of
December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, CoreCivic's
F - 40
liability related to the Deferred Compensation Plans was $10.6 million and $15.1 million,
respectively, which was reflected in accounts payable and accrued expenses and other liabilities in
the accompanying balance sheets.
Employment and Severance Agreements
CoreCivic currently has employment agreements with several of its executive officers, which
provide for the payment of certain severance amounts upon termination of employment under
certain circumstances or a change of control, as defined in the agreements.
16.
SEGMENT REPORTING
As of December 31, 2016, CoreCivic owned and managed 66 facilities, and managed 11 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.
F - 41
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 years ended
December 31, 2016, 2015, and 2014 (in thousands):
Revenue:
Owned and managed
Managed-only
Total management revenue
Operating expenses:
Owned and managed
Managed-only
Total operating expenses
Facility net operating income
Owned and managed
Managed-only
Total facility net operating income
Other revenue (expense):
Rental and other revenue
Other operating expense
General and administrative
Depreciation and amortization
Restructuring charges
Asset impairments
Operating income
For the Years Ended December 31,
2015
2016
2014
$ 1,603,671
205,420
1,809,091
$
1,543,750
211,995
1,755,745
$
1,379,986
232,685
1,612,671
1,068,031
183,643
1,251,674
535,640
21,777
557,417
40,694
(23,912)
(107,027)
(166,746)
(4,010)
-
$ 296,416
$
1,038,070
190,010
1,228,080
928,857
207,355
1,136,212
505,680
21,985
527,665
37,342
(28,048)
(103,936)
(151,514)
-
(955)
280,554
451,129
25,330
476,459
34,196
(19,923)
(106,429)
(113,925)
-
(30,082)
240,296
$
The following table summarizes capital expenditures including accrued amounts for the years ended
December 31, 2016, 2015, and 2014 (in thousands):
Capital expenditures:
Owned and managed
Managed-only
Corporate and other
Total capital expenditures
The total assets are as follows (in thousands):
For the Years Ended December 31,
2015
2014
2016
$ 108,241
5,749
20,541
$ 134,531
$ 382,781
4,049
28,611
$ 415,441
$
$
246,333
3,171
13,056
262,560
Assets:
Owned and managed
Managed-only
Corporate and other
Total assets
December 31,
2016
2015
$
$
2,841,799
62,292
367,513
3,271,604
$
$
2,966,762
54,491
334,765
3,356,018
F - 42
17.
SUBSEQUENT EVENTS
During February 2017, CoreCivic issued approximately 0.5 million RSUs to certain of CoreCivic's
employees and non-employee directors, with an aggregate value of $17.7 million. Unless earlier
vested under the terms of the RSU agreement, approximately 0.3 million RSUs were issued to
officers and executive officers and are subject to vesting over a three-year period based upon
satisfaction of certain annual performance criteria for the fiscal years ending December 31, 2017,
2018, and 2019. Approximately 0.2 million RSUs issued to other employees vest evenly on the
first, second, and third anniversary of the award. Shares of RSUs issued to non-employee directors
vest on the first anniversary of the award. Any RSUs that become vested will be settled in shares of
CoreCivic's common stock.
On February 17, 2017, the Company's Board of Directors declared a quarterly dividend of $0.42 per
common share payable April 17, 2017 to stockholders of record on April 3, 2017.
18. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF CORECIVIC AND
SUBSIDIARIES
The following condensed consolidating financial statements of CoreCivic and subsidiaries have
been prepared pursuant to Rule 3-10 of Regulation S-X. These condensed consolidating financial
statements have been prepared from the Company’s financial information on the same basis of
accounting as the consolidated financial statements.
F - 43
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2016
(in thousands)
ASSETS
Parent
Combined
Subsidiary
Guarantors
Consolidating
Adjustments
and Other
Total
Consolidated
Amounts
Cash and cash equivalents
Accounts receivable, net of allowance
Prepaid expenses and other current assets
Total current assets
$ 11,378
237,495
7,582
256,455
$ 26,333
270,952
30,123
327,408
$ -
(278,562)
(6,477)
(285,039)
$ 37,711
229,885
31,228
298,824
Property and equipment, net
2,493,025
344,632
-
2,837,657
Restricted cash
Goodwill
Non-current deferred tax assets
Other assets
218
23,231
-
339,173
-
15,155
14,056
57,873
-
-
(321)
(314,262)
218
38,386
13,735
82,784
Total assets
$ 3,112,102
$ 759,124
$ (599,622)
$ 3,271,604
LIABILITIES AND STOCKHOLDERS’
EQUITY
Accounts payable and accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
$ 203,074
1,850
10,000
214,924
$ 342,072
236
-
342,308
$ (285,039)
-
-
(285,039)
$ 260,107
2,086
10,000
272,193
Long-term debt, net
Non-current deferred tax liabilities
Deferred revenue
Other liabilities
Total liabilities
Total stockholders’ equity
1,436,186
321
-
1,708
1,653,139
1,458,963
113,983
-
53,437
50,134
559,862
199,262
(115,000)
(321)
-
-
(400,360)
1,435,169
-
53,437
51,842
1,812,641
(199,262)
1,458,963
Total liabilities and stockholders’ equity
$ 3,112,102
$ 759,124
$ (599,622)
$ 3,271,604
F - 44
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2015
(in thousands)
ASSETS
Parent
Combined
Subsidiary
Guarantors
Consolidating
Adjustments
and Other
Total
Consolidated
Amounts
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance
Prepaid expenses and other current assets
Total current assets
$ 15,666
637
300,632
3,760
320,695
$ 49,625
240
159,286
43,706
252,857
$ -
-
(225,462)
(6,032)
(231,494)
$ 65,291
877
234,456
41,434
342,058
Property and equipment, net
2,526,278
356,782
-
2,883,060
Restricted cash
Investment in direct financing lease
Goodwill
Non-current deferred tax assets
Other assets
131
684
20,402
-
241,510
-
-
15,155
10,217
57,120
-
-
-
(393)
(213,926)
131
684
35,557
9,824
84,704
Total assets
$ 3,109,700
$ 692,131
$ (445,813)
$ 3,356,018
LIABILITIES AND STOCKHOLDERS’
EQUITY
Accounts payable and accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
$ 191,600
-
5,000
196,600
$ 357,569
1,920
-
359,489
$ (231,494)
-
-
(231,494)
$ 317,675
1,920
5,000
324,595
Long-term debt, net
Non-current deferred tax liabilities
Deferred revenue
Other liabilities
Total liabilities
Total stockholders’ equity
1,448,316
393
-
1,643
1,646,952
1,462,748
113,761
-
63,289
56,666
593,205
98,926
(115,000)
(393)
-
-
(346,887)
1,447,077
-
63,289
58,309
1,893,270
(98,926)
1,462,748
Total liabilities and stockholders’ equity
$ 3,109,700
$ 692,131
$ (445,813)
$ 3,356,018
F - 45
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 2016
(in thousands)
Parent
Combined
Subsidiary
Guarantors
Consolidating
Adjustments
and Other
Total
Consolidated
Amounts
REVENUES
$ 1,182,765
$ 1,542,231
$ (875,211)
$ 1,849,785
EXPENSES:
Operating
General and administrative
Depreciation and amortization
Restructuring charges
904,750
35,440
84,842
197
1,025,229
1,246,047
71,587
81,904
3,813
1,403,351
(875,211)
-
-
-
(875,211)
OPERATING INCOME
157,536
138,880
1,275,586
107,027
166,746
4,010
1,553,369
296,416
67,755
489
68,244
228,172
(8,253)
15,827
(548)
15,279
123,601
(6,357)
-
-
42
42
(42)
-
117,244
(42)
219,919
-
(117,202)
-
OTHER (INCOME) EXPENSE:
Interest expense, net
Other (income) expense
INCOME BEFORE INCOME TAXES
Income tax expense
INCOME BEFORE EQUITY IN
SUBSIDIARIES
Income from equity in subsidiaries
51,928
995
52,923
104,613
(1,896)
102,717
117,202
NET INCOME
$ 219,919
$ 117,244
$ (117,244)
$ 219,919
F - 46
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 2015
(in thousands)
Parent
Combined
Subsidiary
Guarantors
Consolidating
Adjustments
and Other
Total
Consolidated
Amounts
REVENUES
$ 1,184,878
$ 1,469,105
$ (860,896)
$ 1,793,087
EXPENSES:
Operating
General and administrative
Depreciation and amortization
Asset impairments
889,203
33,248
82,745
-
1,005,196
1,227,821
70,688
68,769
955
1,368,233
OPERATING INCOME
179,682
100,872
OTHER (INCOME) EXPENSE:
Interest expense, net
Expenses associated with debt refinancing
transactions
Other (income) expense
INCOME BEFORE INCOME TAXES
Income tax expense
INCOME BEFORE EQUITY IN
SUBSIDIARIES
Income from equity in subsidiaries
35,919
701
232
36,852
142,830
(1,541)
141,289
80,565
13,777
-
(414)
13,363
87,509
(6,820)
(860,896)
-
-
-
(860,896)
-
-
-
124
124
(124)
-
1,256,128
103,936
151,514
955
1,512,533
280,554
49,696
701
(58)
50,339
230,215
(8,361)
80,689
(124)
221,854
-
(80,565)
-
NET INCOME
$ 221,854
$ 80,689
$ (80,689)
$ 221,854
F - 47
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 2014
(in thousands)
Parent
Combined
Subsidiary
Guarantors
Consolidating
Adjustments
and Other
Total
Consolidated
Amounts
REVENUES
$ 1,250,199
$ 1,268,654
$ (871,986)
$ 1,646,867
EXPENSES:
Operating
General and administrative
Depreciation and amortization
Asset impairments
896,470
33,508
80,820
29,915
1,040,713
1,131,651
72,921
33,105
167
1,237,844
(871,986)
-
-
-
(871,986)
1,156,135
106,429
113,925
30,082
1,406,571
OPERATING INCOME
209,486
30,810
-
240,296
OTHER (INCOME) EXPENSE:
Interest expense, net
Other (income) expense
INCOME BEFORE INCOME TAXES
Income tax expense
INCOME BEFORE EQUITY IN
SUBSIDIARIES
Income from equity in subsidiaries
35,138
302
35,440
174,046
(552)
173,494
21,528
4,397
(786)
3,611
27,199
(6,391)
20,808
-
(720)
(720)
720
-
720
-
(21,528)
39,535
(1,204)
38,331
201,965
(6,943)
195,022
-
NET INCOME
$ 195,022
$ 20,808
$ (20,808)
$ 195,022
F - 48
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2016
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net decrease in cash and cash equivalents
Parent
$ 295,366
(19,317)
(280,337)
(4,288)
Combined
Subsidiary
Guarantors
$ 80,007
(69,571)
(33,728)
(23,292)
Consolidating
Adjustments
And Other
$ -
(33,300)
33,300
-
Total
Consolidated
Amounts
$ 375,373
(122,188)
(280,765)
(27,580)
CASH AND CASH EQUIVALENTS, beginning of year
15,666
49,625
-
65,291
CASH AND CASH EQUIVALENTS, end of year
$ 11,378
$ 26,333
$ -
$ 37,711
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2015
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Parent
$ 102,371
(93,891)
(5,151)
3,329
Combined
Subsidiary
Guarantors
$ 297,427
(212,215)
(97,643)
(12,431)
Consolidating
Adjustments
And Other
$ -
(103,175)
103,175
-
Total
Consolidated
Amounts
$ 399,798
(409,281)
381
(9,102)
CASH AND CASH EQUIVALENTS, beginning of year
12,337
62,056
-
74,393
CASH AND CASH EQUIVALENTS, end of year
$ 15,666
$ 49,625
$ -
$ 65,291
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2014
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Parent
$ 296,087
(73,404)
(241,993)
(19,310)
Combined
Subsidiary
Guarantors
$ 127,494
(102,337)
(9,373)
15,784
Consolidating
Adjustments
And Other
$ -
(21,146)
21,146
-
Total
Consolidated
Amounts
$ 423,581
(196,887)
(230,220)
(3,526)
CASH AND CASH EQUIVALENTS, beginning of year
31,647
46,272
-
77,919
CASH AND CASH EQUIVALENTS, end of year
$ 12,337
$ 62,056
$ -
$ 74,393
F - 49
19. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the years ended December 31,
2016 and 2015 is as follows (in thousands, except per share data):
Revenue
Operating income
Net income
Basic earnings per share:
Net income
Diluted earnings per share:
Net income
Revenue
Operating income
Net income
Basic earnings per share:
Net income
Diluted earnings per share:
Net income
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
$
447,385
64,928
46,307
$
463,331
77,176
57,583
$
474,935
73,953
55,340
$ 464,134
80,359
60,689
$ 0.39
$ 0.49
$ 0.47
$ 0.52
$ 0.39
$ 0.49
$ 0.47
$ 0.52
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
$
426,000
68,826
57,277
$
459,295
79,753
65,303
$
459,957
65,436
50,676
$ 447,835
66,539
48,598
$ 0.49
$ 0.56
$ 0.43
$ 0.41
$ 0.49
$ 0.55
$ 0.43
$ 0.41
F - 50
APPENDIX TO 2016 ANNUAL LETTER
Reconciliation of Non-GAAP Disclosures
($ in thousands, except per share amounts)
Net Income
Special items:
Expenses associated with debt refinancing transactions
Expenses associated with mergers and acquisitions
Gain on settlement of contingent consideration
Restructuring charges
Asset impairments
Income tax benefit for special items
Diluted adjusted net income (A)
2016
$
For the Years Ended December 31,
2015
$
221,854
219,919
2014
$
195,022
-
1,586
(2,000)
4,010
-
(215)
223,300
$
701
3,643
-
-
955
(26)
227,127
$
-
-
-
-
30,082
(120)
224,984
$
Weighted average common shares outstanding - basic
117,384
116,949
116,109
Effect of dilutive securities:
Stock options
Restricted stock-based awards
Weighted average shares and assumed conversions - diluted
306
101
117,791
631
205
117,785
895
308
117,312
Adjusted Diluted Earnings Per Share
$
1.90
$
1.93
$
1.92
Net income
Depreciation of real estate assets
Impairment of real estate assets
Income tax benefit for special items
Funds From Operations (A)
Expenses associated with debt refinancing transactions
Expenses associated with mergers and acquisitions
Gain on settlement of contingent consideration
Restructuring charges
Goodwill and other impairments
Income tax benefit for special items
Normalized Funds From Operations (A)
Maintenance capital expenditures on real estate assets
Stock-based compensation
Amortization of debt costs
Other non-cash revenue and expenses
Adjusted Funds From Operations (A)
2016
$
For the Years Ended December 31,
2015
$
2014
$
219,919
94,346
-
-
314,265
221,854
90,219
-
-
312,073
195,022
85,560
29,915
(72)
310,425
$
$
$
-
1,586
(2,000)
4,010
-
(215)
317,646
$
701
3,643
-
-
955
(26)
317,346
$
-
-
-
-
167
(48)
310,544
$
(28,044)
16,257
3,147
(4,634)
304,372
$
(26,609)
15,394
2,973
(64)
309,040
$
(25,481)
13,975
3,102
(64)
302,076
$
NORMALIZED FUNDS FROM OPERATIONS PER SHARE:
Diluted
$
2.70
$
2.69
$
2.65
ADJUSTED FUNDS FROM OPERATIONS PER SHARE:
Diluted
$
2.58
$
2.62
$
2.57
A-1
APPENDIX TO 2016 ANNUAL LETTER
Reconciliation of Non-GAAP Disclosures
($ in thousands, except per share amounts)
Net Income
Interest expense, net
Depreciation and amortization
Income tax expense
EBITDA (A)
Expenses associated with debt refinancing transactions
Expenses associated with mergers and acquisitions
Gain on settlement of contingent consideration
Restructuring charges
Depreciation expense associated with STFRC lease (A)
Interest expense associated with STFRC lease (A)
Asset impairments
Adjusted EBITDA (A)
2016
$
For the Years Ended December 31,
2015
$
2014
$
219,919
67,755
166,746
8,253
462,673
221,854
49,696
151,514
8,361
431,425
195,022
39,535
113,925
6,943
355,425
$
$
$
-
1,586
(2,000)
4,010
(38,678)
(10,040)
-
417,551
$
701
3,643
-
-
(29,887)
(8,467)
955
398,370
$
-
-
-
-
-
-
30,082
385,507
$
(A)
Adjusted Net Income, EBITDA, Adjusted EBITDA, Funds From Operations (FFO), Normalized FFO, Adjusted FFO, and, where appropriate, their corresponding
per share metrics are non-GAAP financial measures. CoreCivic believes that these measures are important operating measures that supplement discussion and
analysis of the Company's results of operations and are used to review and assess operating performance of the Company and its correctional facilities and their
management teams. CoreCivic believes that it is useful to provide investors, lenders and security analysts disclosures of its results of operations on the same basis
that is used by management. FFO and AFFO, in particular, are widely accepted non-GAAP supplemental measures of REIT performance, each grounded in the
standards for FFO established by the National Association of Real Estate Investment Trusts (NAREIT). NAREIT defines FFO as net income computed in
accordance with generally accepted accounting principles, excluding gains (or losses) from sales of property and extraordinary items, plus depreciation and
amortization of real estate and impairment of depreciable real estate. EBITDA, Adjusted EBITDA, Normalized FFO and AFFO are useful as supplemental
measures of performance of the Company's corrections facilities because they don't take into account depreciation and amortization, or with respect to EBITDA,
the impact of the Company's tax provisions and financing strategies. Because the historical cost accounting convention used for real estate assets requires
depreciation (except on land), this accounting presentation assumes that the value of real estate assets diminishes at a level rate over time. Because of the unique
structure, design and use of the Company's properties, management believes that assessing performance of the Company's properties without the impact of
depreciation or amortization is useful. However, a portion of the rental payments for the South Texas Family Residential Center (STFRC) is classified as
depreciation and interest expense for financial reporting purposes. Adjusted EBITDA includes such depreciation and interest expense in order to more properly
reflect the cash flows associated with this lease. CoreCivic may make adjustments to FFO from time to time for certain other income and expenses that it
considers non-recurring, infrequent or unusual, even though such items may require cash settlement, because such items do not reflect a necessary component of
the ongoing operations of the Company. Normalized FFO excludes the effects of such items. CoreCivic calculates AFFO by adding to Normalized FFO non-cash
expenses such as the amortization of deferred financing costs and stock-based compensation, and by subtracting from Normalized FFO recurring real estate
expenditures that are capitalized and then amortized, but which are necessary to maintain a REIT's properties and its revenue stream. Some of these capital
expenditures contain a discretionary element with respect to when they are incurred, while others may be more urgent. Therefore, these capital expenditures may
fluctuate from quarter to quarter, depending on the nature of the expenditure required, seasonal factors such as weather, and budgetary conditions. CoreCivic
calculates Adjusted Net Income by adding to GAAP Net Income expenses associated with the Company’s debt refinancing, mergers and acquisitions (M&A)
activity, restructuring charges, and certain impairments that the Company believes are unusual or nonrecurring to provide an alternative measure of comparing
operating performance for the periods presented. Even though expenses associated with mergers and acquisitions may be recurring, the magnitude and timing
fluctuate based on the timing and scope of M&A activity, and therefore, such expenses, which are not a necessary component of the ongoing operations of the
Company, may not be comparable from period to period. Other companies may calculate Adjusted Net Income, EBITDA, Adjusted EBITDA, FFO, Normalized
FFO and AFFO differently than the Company does, or adjust for other items, and therefore comparability may be limited. Adjusted Net Income, EBITDA,
Adjusted EBITDA, FFO, Normalized FFO and AFFO and their corresponding per share measures are not measures of performance under GAAP, and should not
be considered as an alternative to cash flows from operating activities, a measure of liquidity or an alternative to net income as indicators of the Company's
operating performance or any other measure of performance derived in accordance with GAAP. This data should be read in conjunction with the Company's
consolidated financial statements and related notes included in its filings with the Securities and Exchange Commission.
A-2
10 Burton Hills Boulevard
Nashville, TN 37215
(615) 263-3000
Website: www.CoreCivic.com
NYSE: CXW