Corrections Corporation of America (CXW)

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Corrections Corp. of America. (CXW)

Q2 FY08 Earnings Call

August 7, 2008, 11:00 AM ET


John D. Ferguson - Chairman of the Board and CEO

Todd Mullenger - EVP and CFO

David Garfinkle - VP, Finance and Controller

Damon Hininger - President and COO


Todd Van Fleet - First Analysis Corporation

Kevin Campbell - Avondale Partners

Barry Stouffer - BB&T Capital Markets

William Bill Gilchrist - Westfield Capital



Good morning, everyone, and welcome to Corrections Corporation of America's Second 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 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 measurement is provided in our corresponding earnings release or are 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 and Chief Financial Officer, Mr. Todd Mullenger.

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

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Thank you. And also welcome everyone to CCA's 2008 second quarter conference call. In the room with Todd and me is Dave Garfinkle, our Vice President of Finance and then also attending is Damon Hininger, originally appointed President and Chief Operating Officer.

So we will begin with Todd in the opening comments about our second quarter results.

Todd Mullenger - Executive Vice President and Chief Financial Officer

Thank you, John, and good morning, everyone. We are very pleased with our second quarter operating results. So let's move straight to summary of those results.

In the second quarter 2008, we generated $0.30 per diluted share, compared to EPS for last year's Q2 of $0.26 per diluted share, representing an increase in EPS of over 15%. EBITDA increased 14% to $96.7 million for the quarter.

Adjusted free cash flow for the quarter increased 33% to $56.4 million. The growth in adjusted free cash flow is significantly higher than EPS growth, due primarily to changes in depreciation expense and maintenance CapEx.

Depreciation expense increased 17% over 2007, while maintenance CapEx decreased 34%. The increase in depreciation expense obviously has a negative impact on EPS. However, Depreciation expense is added back in arriving at adjusted free cash flow, while maintenance CapEx is deducted.

As we have discussed on prior occasions, unlike other industries, our depreciation expense is not reflective of the maintenance CapEx that we will incur to maintain our facilities. For example, depreciation and amortization expense totaled $22 million for Q2 2008, versus just $7 million of facility maintenance and IT CapEx in Q2.

So as we have commented before, we believe adjusted free cash flow is in many ways a better measure than EPS of the return we are delivering to our shareholders.

Total revenue for this year's second quarter was up 10.2% over the last year, an increase of $36.8 million. Total compensated man-days in Q2 increased 5.8%, compared to the previous year. Revenue per compensated man-day in Q2 increased 4.8% to $56.69. Now while compensated man-days increased 5.8%, average compensated occupancy for the second quarter actually declined from 99% to 97%, as a result of placing approximately 7200 new beds in the service since the first quarter of 2007, 2600 of these beds were placed into service during the first half of 2008.

With regards to the 5.8% increase in revenue per compensated man-day, results in Q2 2008 reflect the impact from certain pricing leverage we enjoyed from renegotiating several contracts. The increase in populations under our state of California contract which pays an above average per diem, as well as routine per diem increases.

Moving next to discussion of operating costs, operating costs per man-day for Q2 2008 were $39.46, a 2.9% increase over Q2 2007. Our Q2 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 Tallahatchie, North Fork, Kit Carson, Bent County and Leavenworth.

As we have discussed previously, the operating costs per man-day on newly activated beds starts off higher, as we are ramping up fixed costs, particularly staffing costs, and then decline 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 Q2 2008 increased 9.5% or $17.23, with an operating margin percentage of 30.4%. As a result of the operating costs inefficiencies we just discussed, margins on inmates placed a 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. And we experienced some improvement in Q2 as we filled additional beds at facilities such and North Fork.

General and administrative expenses for the quarter were 5% of revenues. An increase in G&A compared to Q2 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. Our goal is to keep G&A at approximately 5% of revenues going forward.

GAAP income tax expense for the quarter was computed based upon the rate of approximately 38%, and we currently anticipate a rate of 38% for full year 2008.

So, in summary, we're very pleased with our second quarter operating results and with the progress we've made developing and activating new capacity to meet the demand for prison beds.

I will finish with the discussion of our guidance for 2008. As indicated in the press release, we have updated full year guidance to a range of a $1.21 to a $1.24, compared to previous guidance of a $1.21 to a $1.28. Guidance for Q3 is in a range of $0.29 to $0.31 and Q4 in a range of $0.33 to $0.35. We have revised guidance primarily as a result of delays we have experienced in the intake of inmates under our contract with the state of California.

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