Corrections Corporation of America (CXW)

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Corrections Corporation of America (CXW)

Q3 FY08 Earnings Call

November 6, 2008, 11:00 AM ET


John D. Ferguson - Chairman and CEO

Todd Mullenger - EVP and CFO

Damon Hininger - President and COO


Thomas Robillard - Banc of America Securities

Kevin Campbell - Avondale Partners

Todd Van Fleet - First Analysis

Bill Gilchrist - Westfield Capital



Good morning, everyone, and welcome to the Corrections Corporation of America Third Quarter 2008 Earnings Conference Call. If you need a copy of our press release or supplemental financial data, both documents are available on the Investor page of our website at

Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made today. Factors that could cause operating and financial results to differ are described in the press release, as well as our Form 10-K and other documents filed with the SEC.

This call may include discussions of non-GAAP measures. The reconciliation of the most comparable GAAP measures is provided in our corresponding earnings release or posted on our website. We are under no obligation to update or revise any forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

Participating on today's call will be our Chairman of the Board and CEO, John Ferguson; Chief Financial Officer, Mr. Todd Mullenger and Damon Hininger President and Chief Operating Officer.

I'd now like to turn the call over to Mr. Ferguson. Please go ahead, sir.

John D. Ferguson - Chairman and Chief Executive Officer

Thank you, Steve and welcome everyone to our third quarter conference call. In addition to the individuals that Steve mentioned we also have Dave Garfinkle, our Vice President of Finance. We begin today with some comments by Todd Mullenger, our CFO.

Todd Mullenger - Executive Vice President and Chief Financial Officer

Thank you, John. Good morning everyone. Moving straight to the summary of our results for Q3, in the third quarter of 2008 we generated $0.30 of EPS compared to EPS of last year's Q3 of $0.26 representing an increase in EPS of over 15%. EBITDA increase 14% nearly $99 million for the quarter and adjusted free cash flow for the quarter increased over 12% to $62 million. This brings adjusted free cash flow for the ninth months year-to-date to $191 million, an increase of 20% over the same period last year.

Total revenue for this year's third quarter was up 8.9% over last year, an increase of $33.6 million. Total compensated man-days in Q3 increased 5.4% compared to the previous year. Revenue per compensated man-day increased in Q3 4.2% to $57.23 from $54.94.

While compensated man-days increased 5.4% you may have noticed that average compensated occupancy for the third quarter declined from 97.9% to 95.3%, as a result of placing nearly 9000 new beds into service during 2007, 2008. 4000 of these beds were placed into service during the first half of 2008 alone.

With regards to the 4.2% increase in revenue per compensated man-day, results in Q3 2008 reflect the impact of certain pricing leverage we enjoyed from renegotiating several contracts, the increase in populations under our state of California contract as well as routine per diem increase.

Moving next to a discussion of operating costs, operating costs per man-day for Q3 2008 were $40.33, a 2.8% increase over Q3 2007. Our Q3 2008 operating costs per man-day reflect normal wage and other general inflationary increases, as well as operating inefficiencies associated with the ramp up of new bed activations at facilities such as La Palma, Tallahatchie, Davis, and Leavenworth.

As we have discussed previously, the operating costs per man-day on newly activated beds start off higher, as we are ramping up fixed costs, particularly staffing costs, and then declined as we increased occupancy which allows us to leverage those fixed costs lower on a per compensated man-day basis.

Operating margins per man-day in Q3 2008 increased 7.6% or $16.90, with an operating margin percentage of 29.5%. As a result of the operating cost inefficiencies we just discussed, margins on inmates placed in newly-developed beds will be depressed during the facility ramp-up period. However, the margins per compensated man-day on new beds will improve over time as we approach full occupancy on those new beds.

General and administrative expenses for the quarter were 5% of revenues. The increase in G&A compared to Q3 2007 was due primarily to the expansion of our real estate department as we added resources to assist in the development of new beds, increased focused at the corporate level on quality and efficiency of facility operations and an increase in non-cash stock based compensation expense related to the change in accounting rules. GAAP income tax expense for the quarter was computed based upon the rate of approximately 37%. We currently anticipate a rate of 38% for full year 2008.

I will finish with a discussion of our guidance for 2008. As indicated in the press release, we have updated full year guidance to a range of $1.18 to $1.20 compared to previous guidance of $1.21 to $1.24. Guidance for Q4 is in the range of $0.30 to $0.32.

We have revised guidance primarily as a result of longer than anticipated delays in the State of California to make transfers to Tallahatchie county facility, slower than anticipated ramp up of State of California inmate populations at our other facilities, delays in negotiating the new U.S. Marshall contract at our DC Correctional Treatment Facility and recent and projected reductions in inmate populations from the states of Washington and Minnesota resulting from earlier than anticipated utilization of new stated-owned bed capacity.

The delays in inmate transfers to our Tallahatchie facility was a result of negotiations and implementation of the corrective action plan with the CDCR and Federal Medical Receiver requiring more time than anticipated.

In addition, the processing of inmates by CDCR for other state placement has experienced delays resulting in a slower than anticipated ramp up at other facilities.

Unfortunately, these delays have caused us to revise our occupancy and revenue forecast related to the State of California for the balance of 2008.

However it's important to note that our relationship with the customer remains strong, and the State of California continues to express its intentions to fully utilize all of the 8,132 beds available to it under our contract.

As noted in the press release, we have finalized negotiations with the U.S. Marshal for a new contract at our DC Correctional Treatment Facility. Although negotiations required more time than anticipated, we're excited about the growth opportunities provided by this new contract.

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