CoreCivic Inc (CXW) 2003 Q1 法說會逐字稿

Good day and welcome to this Corrections Corporation of America conference call. Today's call is being recorded. Let me remind today's listeners that this conference call contains statements as to the company's beliefs and expectations of the outcome of future events that are forward-looking as defined within the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Factors that could cause operating and financial results to differ are described in the company's Form 10(K) as well as in other documents filed with the Securities and Exchange Commission. And these factors include but are not limited to, changes in occupancy levels, competition, increases in cost of operations, fluctuations in interest rates and risks of operation, changes in the privatization of the correction and detention industry, and public acceptance of the company's services and the timing of the opening of new prison facilities and the renewal of existing contracts and general economic and market conditions. The company does not undertake any obligation to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Participating in today's call will be the company's Chairman of the Board, William Andrews, President and Chief Executive Officer, John Ferguson, and its Chief Financial Officer, Irv Lingo. I'd now like to turn the call over to Mr. Andrews.

Good afternoon, everyone, and thank you for joining our first quarter earnings release and conference call. I am going to turn the discussion over to Irv who will brief us on the results and then John will give us more detailed information about operations. I would point out, also, that David Garfinkle, our VP and comptroller, is also in the room. I am not in the conference room. I am in an annual meeting in Winchester, Virginia, so I am on the telephone as well. I hope that won't cause any problems. At the end of the discussion, all of you will have an opportunity to ask any questions you may like. And with that, Irv, why don't you lead us in the discussion.

Bill, Winchester is home of a famous apple festival every year so I hope you're enjoying it there.

It's beautiful.

Let me start by saying I think we’ve had a pretty good quarter both operationally and financially and I'd like to begin with a quick financial overview. For the three months ended March 31, 2003, the company reported net income available to common shareholders of 17.4 million, or 56 cents per diluted share, and that's compared to a loss of 46.3 million, or $1.23 per share in the prior year. There were several special items affecting the first quarter of last year and our press release does a pretty good job of breaking those out so I won't go over them here. But excluding the effects of those items, the net loss per diluted share for the first quarter of last year would have been six cents per share, that's a loss of six cents per share, again versus net income per share this year of 56 cents in the current quarter.

EBITDA for the quarter increased to 55.1 million, compared with 45.3 million for the first quarter of 2001. Same store facility EBITDA amounted to 58.9m, and that's versus 47.7m for the first quarter of last year, and that's an increase of over 23%. Adjusted free cash flow, which is net income plus depreciation and amortization and less cash dividends and less maintenance CAPEX, amounted to $30.5m, or 93 cents a share on a diluted basis, and that's versus 16.4 million or 53 cents per share for the first quarter of 2002, and that represents a 75% increase in adjusted free cash flow per share.

The increase in adjusted free cash flow is primarily driven by a significant increase in operating income from 29.7m in the first quarter of last year to 42.3m in the current quarter, as well as a substantial reduction in interest expense to 17.7m from 28.9m last year. The reduction in interest expense was brought about by lower debt balances, the lower spreads we achieved on last year's refinancing and overall lower LIBOR rates than one year ago. I will speak more to our capital structure and our recent capital markets transaction a bit later in the call.

Turning to operations, consolidated revenues for the quarter totaled 250.3m, that's up from 224.4m last year. That represents an 11.5% increase over last year's first quarter. There were 4.82 million compensated man days in Q1 of 2003 versus 4.47 million compensated man days in the first quarter of 2002. Our average portfolio occupancy increased from 86.9% to 91.6% this quarter. Revenue per man day increased to $50.78 a day and that's versus $49.17 a day in the prior year. This represents our eighth consecutive quarter of increases in revenue per man day.

Revenues were up across the board as we registered increases with each class of customer, Federal, state, and local. I'd like to add here that although we did benefit from the effects of some of our larger contract awards and from the purchase of the Crowley facility in January it should also be noted that populations were up from last year at a number of our facilities, particularly those with detainee populations and these, too, contributed significantly to our revenue growth.

Operating costs per man day actually declined to $37.50 from $38.24 in the prior year comp quarter. Fixed costs were down to $27.91 per day versus $28.58 per man day last year, and that's a decline of 67 cents per compensated man day. Measured on a per man day basis costs were down in almost every major category. Salaries and benefits which make up about 86% of our fixed costs were down 34 cents per man day, or approximately 1%. We also registered declines in utilities and repairs and maintenance.

Variable costs declined to $9.59 a day from $9.66 per day last year. The primary factor driving the decline in variable costs during the first quarter was a decline in food cost per day to $2.79 per day from $3.13 in the comp quarter from last year. That's a decline of 34 cents per man day. This is substantially the result of our decision earlier in the year to outsource food service at 100% of our facilities. The decline in food was offset by increases in legal reserves as well as facilities supplies expense. Let me say with respect to the legal, there was no one substantial case causing the increase here but it was the overall valuation around a basket of smaller cases.

The end result here was that margins increased $2.35 per day to $13.28 versus $10.93 last year. And that our margin percentage was up to 26.1% versus 22.2% last year. As mentioned in the press release, margins did benefit from the fact that the McRay facility is under a take-or-pay contract at 95% of occupancy, yet at March 31 the facility was 53% occupied. Now, despite the fact our first quarter margins received some benefit from McRay that will diminish as the facility fills we nevertheless believe that operating margins of 25% are sustainable for 2003.

General and administrative expense was up to $9.5 million from $7.2 million last year. The primary reason underlying this increase are additional headquarters person we've added in the area of operations, business development and information technology. We expect that our run rate for this year of $38 million is a reasonable target and that would amount to between 3.5 and 3.8% of anticipated revenues. We further believe that the financial and operational results that we registered this quarter justify our belief that these increased G&A expenditures are an investment from which we are beginning to see solid returns.

The end result is that we had a pretty strong quarter operationally and otherwise. Our occupancies are higher. Revenue per man day was higher, operating cost per man day actually declined and our operating margins were higher.

I want to turn now to what has been the primary focus of John and I for the last few weeks, and that was the recent financing transaction we just completed. We obviously are pleased with the outcome of the transaction which consisted of a share offering of about 8.7 million shares, and a $250 million offering of senior notes. Again, pleased with the transaction our stock price is $19.50 per share. That was about $2 above where it was when we initially announced the deal. The senior subordinated notes priced at 7.5%. We were able to achieve this pricing while upsizing the deal from 200 to 250 million. At this point approximately 80% of the preferred B shares have been tendered which has exceeded our estimates. And finally we raised over $75 million to pay down a short-term bank debt.

As a result of this transaction, our capital structure is significantly improved as our leverage ratio, adjusted for preferred stock is reduced as is our coverage ratio of debt to preferred dividends. We expect the transaction will be accretive to our earnings on a tax adjusted basis since we have replaced very expensive preferred stock with lower coupon debt, the interest on which is deductible. We've eliminated share overhang by allowing two large shareholders to exit their positions and spreading these shares essentially over a number of primarily institutional investors. We achieved certain covenant flexibility we were seeking under our senior secured credit facilities. The transaction resulted in improved credit rating from Standard and Poors and we believe will shortly result in improved credit ratings from Moody's.

And finally and perhaps most importantly, we demonstrated that the company has access to reasonably priced capital which we believe provides the company with a significant advantage with respect to our ability to expand our business in what we believe is a very opportune environment.

One last comment regarding our capital structure, we recently restructured our $30m 8% convertible note with Pacific Mezzanine Fund, in a situation where we agreed to defer our ability to force conversion of this note from 2/28 of '04 to 2/28 of '05 and in consideration of this PMI agreed to a reduction of the rate on that note from 8% to 4% effective May 1 of this year and that's a $30 million note.

So with that I’ll turn to our outlook. And to begin with I want to repeat what I said in past calls want John and I emphasized a good bit during the marketing of the recent financing transaction and that is that we are optimistic about the macro environment for our business. We continue to see prison overcrowding at the Federal and state levels. We see a large number of states in very difficult positions with respect to their budgets making new prison construction difficult at best. Finally, we believe that demographic trends would be indicate that prison population should increase in the future and we believe we are poised to take advantage of these conditions, filling our remaining empty inventory and judiciously adding new capacity. I believe the results for the first quarter and our guidance reflect the impact of this environment. On April 2, we revised our EBITDA guidance for the full year to a level of 215 to $220 million, again, on EBITDA. We reiterate that guidance at this time.

Looking forward to the second quarter, this has traditionally been a seasonally weak quarter and in that raises for our employees are effective on April 1 while contract increases are typically triggered during the second and third quarters of the year. So with that said, we would expect EBITDA for Q2 to be in the range of 53 to 55 million and, again, we reiterate our guidance to the 215 to 220 for the full year.

And with that I would turn call over to John.

Okay. I think Irv's presentation today is the story for first quarter. I think operationally we made improvements in every one of the operational areas from revenue to cost, and therefore impacting margins. And, of course, we think that the transaction that was just completed this week, the financing transaction, is a significant story as well.

To just address the macro environment because we do believe that CCA is positioned in a most unique way as it relates to the demands that we see that have developed and are continuing to evolve and develop at both the Federal and state levels. As we have in the past talked about the available inventory of beds that we think will match very well with this demand, we currently have 8,000 beds throughout the country. Of that we forecast some 1500 of them to be absorbed in the balance of this calendar year and somewhat tied to the guidance that Irv just gave.

In addition to that, we have some 4500 beds tied up in three facilities that we have talked about in the past, one in Georgia, one in Ohio and one in Mississippi. Of the remaining 6500 beds, we have pretty good activity on each of the locations and beds that are available and feel that over the next couple of years that we should see significant absorption of those available beds. I think of note is northeast Ohio which we have previously made comment, that we were in some discussions with Federal Bureau of Prisons. That appears to be taking longer than we think it should and, therefore, based on some interest from numerous customers, we are deciding that we think that the likelihood of management contracts at that facility are now becoming very realistic.

In addition to the 8,000 beds that we have in inventory, we think we have an unmatched national platform with roughly 70% of CCA's beds being owned by CCA. We believe that it puts us in a unique position to help or work with our customer base in meeting their current and future bed needs. We currently have discussions with some 18 states throughout the country that either currently have or are developing a bed need, and ten of those states are current customers who we are either the sole provider or the dominant provider. In addition to that, we have some 12 facilities in which the INS and U.S. Marshals are the dominant customer in those facilities. We continue to see growth there. We also see the opportunity to expand bed capacity at some of these selected customers to meet their future demand, and we see some 2,000 to 4,000 opportunities there over the next 18 months.

So all in all we think with our current level of inventory, with our national platform, that CCA is uniquely positioned to deal with the current overcrowding environment at both the State and Federal level.

So with that, I will open it up for questions and answers.

Thank you. Today's Q&A session will be conducted electronically. If you would like to ask a question please press the star key followed by the digit one on your touch tone telephone. Once again, it is star one if you would like to ask a question.

We'll take our first question from Jeffrey Kessler with Lehman Brothers.

Thank you. First, congratulations on a really good quarter. It was an upside surprise and given the fact that you had just made this guidance, beating the guidance in such short term notice is obviously good. The first question is with regard to discontinued operations that you had in this quarter. Can you go through that a bit and how long are you going to be keeping that on the P&L?

We had I guess two facilities this quarter that constituted discontinued operations, which would be the Okeechobee facility in Florida and the Lawrenceville facility in Virginia, and we reflect those for the quarter. They would not be reflected in the second quarter as a second quarter item but on a YTD perspective.

They would be in the current quarter as well as the operations for those facilities in the prior year are reclassified.

So, Jeff, as far as the quarter results you are seeing in this quarter they will be in the full year results and then we have to go back and restate the prior year.

This is is somewhat similar to Puerto Rico from last year?

It is but on a much smaller scale.

My question to you is that these essentially were money losers for you in the first quarter?

That's correct.

My assumption is, I'm trying to get this right, I think I have half a brain here, that you take these out of the equation and your continuing operation earnings would have been 61 cents on an untaxed basis in the first quarter. We have to consider that in our assessment of what our second quarter model is going to be.

I have not computed the actual per share effect of those but, again, that would not be in the second quarter. The losses from those facilities, in other words, would not be in the second quarter.

Yes, I understand that. Okay. Can you elucidate a little bit on what is going on with Youngstown? I mean, you obviously alluded to the effect of likelihood of management contracts since through there are a number of empty beds there and the contracts are lying fallow, could you describe what these management contracts could entail?

Let me just limit it to the fact that it would include the opportunities with current customers as well as some new state customers. When I say current customers, I am referring both to Federal and state.

Okay. And that you would retain the ownership of the facility or you would, or would there be some other financial arrangement?

No, we would retain ownership of the facility.

Finally with regard to, with regard to McRay, you say you are at 53% at the end of the first quarter?

Right.

What type of schedule have you seen with regard to prisoner entry since the end of the first quarter? Where are you with McRay now and could you describe the effect on margin that this is going to have as you begin to have operating cost against prisoners that you now have to deal with even though you've already been paid 95%.

I don't have the schedule in front of me as to the delivery but we did play around with the computation on this and I guess what I'm trying to say here on the call is that -- let me answer it this way. There are a couple of dynamics here. There is the positive impact from McRay and then there is -- that we are getting that will go away, and there is the positive impact that we are getting from ongoing cost savings initiatives. That's a future thing. We are not exactly, I mean we are optimistic, we are not sure where that goes.

It takes into consideration what's going to happen this quarter at McRay?

It does and the year end guidance takes that into account, too. So I guess Jeff what I was trying to say in the call we I backed off a little bit. It wasn't a full percentage point of effect from McRay from the 26 to the 25. But when I look at the raises going into effect and everything again, I think that the 25% is sustainable. And, again, I'm sorry, I don't have the anticipated fill on that but all the guidance that we've given takes into account the effects we've had to date on McRay and what might happen in the future.

Right. One final question and that is, cost per man day was certainly way lower than we expected. Your margin was way higher than we expected. Either [Seton] has done an incredible job in such a short period of time or there's still more to go. What do you still have left to do on the cost side that you just haven't done in the first quarter?

I think two things are going on in the first quarter. I think that we are clearly registering some cost savings. From a gross dollar basis the cost didn't go up that much. I think the other thing that is happening is that we are filling beds and that is would improve the margins just by virtue of that. I think, first of all, we have not seen the full benefits of our food implementation that was put into effect during the first quarter and we expect to get additional benefits there. I know they are continuing to work on the medical side.

Again, I don't personally target, if we can achieve cost savings on medical that's great. I think what we really try to do there contain cost increases. We are pleased on the utilities and the repairs and maintenance. Jim has refocused the areas of our construction area. We are not doing a lot of construction but they are really giving into working on things like energy savings and preventative maintenance and things of that nature. So I think there's more to come. I really do think there's more to come. How do you separate that out from filling beds and the margins? The way I do that is kind of looking at the gross costs and they are not going up that fast in light of occupancy increases. So again it’s a long answer to your question I think it’s both and we are optimistic about additional cost savings.

Great. Thank you and, again, a great quarter.

And, Jeff, one more, flipping pages here, it was about a 5% effect on that discontinued operation.

It was?

Five cents.

Five cents per share for the quarter?

Yes.

And it will not be in the second quarter?

That's right.

Okay.

We'll take our next question from Jim MacDonald with First Analysis.

Good quarter, guys. Hello.

Thank you.

Thank you. Can you talk about occupancy a little bit? For the quarter it looked like it was down a little bit compared to where you were in the middle of the quarter and where you are now in occupancy?

Let me, if you will ask the question again, Jim, you are saying down from where it was in the middle of the quarter?

Right. On the last conference call I guess it was 92%?

Oh, okay, okay. That would have been in the September -- yes. Let's see, the Lawrenceville facility which was running in excess of 100% and represented only I guess 75 days and 90 days, had some effect on that. I'm trying to think. And we have, I think we've mentioned that there was capacity being opened in Wisconsin in which we were going to lose some of our Wisconsin inmates while the Stanley facility was filled which we think is getting pretty close to doing that. I think we are within maybe a couple hundred more inmates from doing that. And so that was probably the biggest effect there.

Maybe on that note could you make some quick comments on Colorado, Oklahoma and Kentucky which seem to be your low occupancy states?

Colorado just passed their budget last week in which they for the first time fully funded utilizing all the private beds, that's been somewhat of the limitation up until now, and their budget shows that if they meet the forecasts that are in their budget that they would utilize all of the beds by March of next year and our history says it will probably go a little bit longer in utilizing all the beds. Oklahoma has been pretty much flat from the end of last year to now. I say flat, 150 or so down. Oklahoma is, from what we are observing has got an unusually large number of inmates in local jails. Again, that's one of the things we observed in looking at what the real demand is. I think I mentioned previously that the states are allowing inmates to stay and live in places they typically don't, that meaning a little bit over-capacity inside the facility as well as staying in the jails. And then Kentucky, I don't have it detailed but I think Kentucky has pretty much been flat as to the utilization that we've had over the last year plus.

Any prospects to start filling Kentucky or Oklahoma?

Yes.

And one quick one and I'll come back later. On Colorado -- Crowley, I think that occupancy was down a little bit from when you bought it? And maybe I'm looking at averages versus --

It was, but one of the things that is, has happened, when there was another owner of the facility, they were very, since they were kind of sensitive, doing everything in proportion, since CCA owns all four facilities they are now doing things a little disproportionate and what we of course observed is all four facilities and we've seen the population pretty much flat which has been budget driven and which will change as of July 1.

Okay. Thanks very much.

We'll go next to Barry Stouffer with BB&T Capital Markets.

Good afternoon. Two questions, first with respect to the discontinued operations accounting, last year revenues in the first quarter were originally reported as 240 million for management, this year is 223 million. Is the different the difference the Lawrenceville contract plus the Florida contract plus Puerto Rico?

Yes.

Second, could you talk a little bit about this Lawrenceville contract it seems unusual that you would be running in excess of 100% capacity and lose quite a bit of money in the first quarter and yet lose that contract to another manager. Can you talk about that a little bit and also discuss what that contract did for you last year in terms of EBITDA contribution?

Well, the big problem with the Lawrenceville contract had to do with medical; in which the terms of the medical in that contract really were unlimited almost. And so most of the exposure that we had in the first quarter had to do with a couple of catastrophic medical which we from time to time had there. And I don't recall.

If I recall last year it was a little over million dollars.

1.5 is what we made offer the contract last year in EBITDA, contribution.

It was less than that obviously in the first quarter.

And you lost that contract based on price?

Yes.

Thank you.

I will leave that to you to determine if that's a loss or not, okay?

Okay. Thank you.

All right.

We'll take our next question from Susan Jansen with Lehman Brothers.

Good morning. A lot of my questions have been answered but let me also congratulate you on just a fabulous quarter and nice transactions for achieving a lot of your balance sheet goals. A couple of questions, if I might. First of all, I've asked you this in the past but has there been any developments in Texas around the bidding out procedures for the 11 facilities?

No. They have not completed, I would say the discussion as to whether they were going to change the number of facilities that they were going to put out for bid. My best guess today is that it won't be, shortly they probably will just go back to the original number before the legislation was introduced. But there still is a chance they could expand it and then there's also a chance they may just renew all the contracts until they figure out how to make a more long term plan as relates to trying to expand the use of the private sector for some of their population, specifically their jail population.

Okay. But at this point in time there's no sort of timing that we can look forward to?

No, as of last Friday which was the last time I got a report on it.

Okay. The only other question right now and this comes back to the contract you lost, how many of your facilities do you have unlimited medical – a situation at?

I think now that this one is behind us, I think we've got the three bureaus [inaudible] and I think we've got some wide exposure on one other but not unlimited. But that's always a goal, is trying to put the company so that it doesn't.

It's a very limited number, Susan, essentially it's the Bureau of Prison contracts which have, in the pricing of those contracts that's kind of built in. So in all other cases it's a negotiation to set the caps and limits.

Perfect. Thank you very much.

Okay.

Now we will go next to Jim MacDonald with First Analysis.

A couple of technical things. On the tax rate, will doing this transaction change a time in which you might start reporting a tax provision?

I don't know if the transaction will per se. Jim, my best case is when we would start putting a taxes provision in the first quarter, I would say it's almost an absolute unless something I don't foresee happening -- it would be the first quarter of next year. And again we continue to have a dialogue with the accounting firm about that. So for right now, again, and I know it's confusing to everybody and again I apologize, we can only report untaxed numbers clearly as were we are moving very closed to being taxed. People hear about that from a valuation perspective on the stock. So, again, fourth quarter is probably best case, first quarter is probably what's going to happen.

And in terms of share count. You gave a 34.6 million in the press release but for our modeling purposes what would you recommend, say, for the third quarter?

We haven't put anything out there but I would say this, that the 6.4 million primary shares represented some shares that were already in the fully diluted share count so I believe I would say is we are talking about an additional 3 million shares over and above what the fully diluted count was running. We had roughly, 27 to 28 million shares outstanding we had two converts that were about 7 million. One of those converts has now been replaced with an equal number of shares. So the Delta is the 3 million shares.

Okay. Just two quick questions on the accounting for the Series A preferred, you are not redeeming that until June. Why is it taking so long there?

We could not institute the redemption without having closed the transaction so then we had to close the transaction and then give 30 day's notice. Would that I could do it differently but I can't.

Okay. And the Series B, you are paying a flat rate, are you going to report that for P&L purposes as interest plus principal? You are going to have to still report interest until it's taken out?

We are going to have interest expense until it's taken out yet -- I'm sorry, we are going to pay $26 to take it back in. I don't believe after this last dividend that any other dividend will be required, there will be no dividend accrual. So we’ll just pay the $26 and I don't have the date that that takes place in front of me right now.

The premium itself would be a preferred stock distribution that would be recorded as a preferred stock distribution in the third quarter.

You won't say that 25.50 was principal and 50 cents was an effective dividend?

No, no.

No, preferred dividend on the P&L in the second quarter?

No.

We'll have a preferred dividend in the second quarter through the date of the transaction and it will also include the tender premium, the $26 over the $24.46.

In other words, the tender premium is the dividend?

It will be recorded as the dividend, yes.

Which is 26 plus $24.46.

It will all be reported as a dividend?

The difference between the 24.46 and the 26 will be.

That's even more than the dividend would have been?

Yes, and that's going to the preferred stockholders.

I would have thought some of that would be treated just as a capital loss. Anyway. Maybe I'll talk off-line.

We'll go next to Rick Nelson with Morgan Joseph.

Good afternoon. Actually all my questions have been answered. So thank you very much.

Thank you.

We will continue with Jeff Kessler with Lehman Brothers.

Yeah, could you break down for me the components of your estimates guidance on capital expenditure between maintenance and what you would term discretionary for the remainder of this year?

We have not giving any guidance on discretionary other than the fact that we basically said that we expect CAPEX to be about $20 million of which five to 5.5 would be IT, 13.5 to 15 would be maintenance CAPEX. We've not made any disclosure with regard to discretionary CAPEX. I think what we have said is we believe there are a number of opportunities out there and as soon as we are zeroing in on something I guess we would disclose you at that time.

Okay. Now with your statement that you believe that you will become a taxpayer next year, CAPEX does become a consideration in obviously our free cash flow computation. I'm wondering if you have any idea of where you’re headed for in terms of CAPEX for next year? I realize it's a little early.

Let me clarify one thing. I said that we would have a GAAP tax provision beginning next year.

But you won't be an actual cash tax payer?

It's possible that we would but we are still working on those projections. What I've said to people before is that the NOLs that we have in place which at 12/31 were $101 million would substantially cover any tax requirements for the next two years. I carefully chose the word substantially. And what I've also said is that if we do end up paying taxes next year it's probably good news, I suppose. As far as maintenance CAPEX would go for next year, again, I think that you'll see that we'll have some corporate IT expenditures of between 5 and 10 million right now and again I would say the facilities would be 13 to 15, again, they might be up a little bit. So somewhere in the 20, at the high end 25 million I would say would be the CAPEX from a maintenance and, again, corporate, if you will, perspective next year. And, again, we are pursuing projects and that would be, whatever happens there that would be revenue, I would call that revenue generating CAPEX would be over and above that.

And finally, again, the difference between the timing difference between actually being a GAAP payer and actually being a cash payer would be something along the lines of three or four quarters?

It could be, yeah. That's probably not far off.

Okay. Great. Thank you.

Sure.

Once again, it is star one for questions, and we'll go next to Brady Enright with Capital Research.

Just a quick question. If, it looks like cash and restricted cash was up a little over 10 million. Debt was up a little over 24 million. So it looks like you used about 14 million of cash in the quarter. I was just trying to reconcile that with your 30 million of free cash and understand what the differential is.

Let me go into that a little bit. What we, we are typically working capital neutral. And what we have tried to do with that cash flow that we put out is come up with an operating metric for cash from operations. One of the things that I've tried to point out is that our facilities are very long lived, about 50 to 75 years or whatever, and we have this $52 million in depreciation that we don't believe will be replaced in any time horizon. So what we try to do is say if you took the net income and added back the depreciation and amortization, and deducted out maintenance CAPEX, then that gives you some notion of what kind of cash flow the company is generating for purposes such as de-levering or additional investments. The restricted cash went up just because we were required to put a maintenance deposit up on a contract on one of our facilities in California. And so that's just there in case there are CAPEX requirements for that facility.

Okay. But what would be some of the other items that account for the big discrepancy?

Part of the reason the debt went up is we took on a bit of additional bank debt when we purchased Crowley in January. As I recall that number is about 30 million.

Where would the cash have gone to?

To the seller. It would have been gone into fixed assets as it were, property, plant, and equipment.

Okay. So what was the non-maintenance CAPEX in the quarter?

There was, again, if you are getting away from maintenance CAPEX, we call that facility maintenance and it would probably, I don't have it in front of me but I would say 1 million, very small, about, not more than $1 million and it would have been IT. There was -- again, we purchased Crowley for $47.5 million, so that took 18 million in cash and about 30 million, I am just giving you round numbers, say Crowley was 48, it would have been 18 million in cash, $30 million in additional debt. So that to that extent I guess that would have been some expenditure on, it would have been a capital expenditure for a revenue generating asset. So to that extent, and that was very different for us. We don't typically have that but hopefully we'll have a lot more in the future if the deals are as good as we think Crowley will be.

Was there kind of a swing in working capital which you think will swing back over the course of the year? Or is there anything unusually going on in the working capital area?

I don't think there is anything unusual going on in the working capital area. The receivables are about where they were. The cash balance, if you kind of go across the trend there we had a high of about 100 million last September. But we typically, we are going to run a little bit lower cash balance than you've seen us running which was about 65 million. I think that's going to come down. And then from a debt perspective I really don't think there are any big changes there when I look at the current liabilities. So the payables have been trending at around 140 to 150. The receivables have been trending at around 130 to 140. The cash has been trending in the 60s. So I don't see from a working capital perspective, I don't anticipate a lot of changes.

Thank you.

Sure.

We'll go next to Jim McDonald with First Analysis.

Two quick ones. The tax refunds, the $30 million, do you still expect to get that back this quarter?

We expect to get that in the second quarter which is this quarter, yes.

And you haven't gotten it yet?

No, we haven't.

The $3 million write-off second quarter's that you talk about in the press release, relating to the transactions, what was it that you couldn't capitalize and does that relate to the Series B dividend at all?

No, Jim, the way that it works is that back in the old days you could capitalize a lot of these costs for these types of transactions. We had some fees on the A redemption that we paid, there were some tender fees on the B. If you were to go through -- again I would have to do it off-line with you. But as you were to go through and look at the transaction, GAAP now breaks out certain items that are expensed and certain items that are capitalized.

Okay.

We'll take our next question from Robert Shy with Morgan Keegan.

Hello?

Mr. Shy, your line is open.

Hello, this is Robert Shy. I was wondering on the growth aspect of the company, or the industry, do you all see contracts coming up through buying existing facilities from government facilities, buying the government facilities, or do you all see the industry going to more new building, or is it just all the contracts up for bid for management of existing facilities? Where do you see the trend?

I think you'll see the growth in this industry come from expanding the correctional systems that use the private sector. It will be, I think, very limited on acquisition of existing government facilities by this industry. There might be some real estate investors who will buy a facility from the state and lease it back. But as far as this industry assuming responsibility for a currently publicly-run facility I think will be very limited. So where we fit in growth in the industry is where states and Federal governments need additional bed capacity and this industry can deliver it so they don't have to build capacity.

Thanks.

Gentlemen, there appear to be no further questions at this time.

All right. This is Bill Andrews again. Let me try to summarize what I believe took place in this call. You compare the first quarter of '03 with the first quarter of '02 without unusual items that I hope at some point we can get rid of but we still haven't gotten rid of them. You have a loss of six cents in '02 and 56 cents per share in '03. Our EBITDA is up 23% for this quarter versus the previous first quarter. This is due to everything. Revenues are up 11.5% with higher occupancies, operations improvements, and lower interest cost as a result of the things we did in the past in previous two refinancings.

The most recent restructuring that we did is we sold some equity which was really taking out some of the previous equity holders who had large positions on notes or who really wanted to roll over their equity and get out. And we issued 3 million new shares in order to keep our debt equity reasonably in line. We did issue $250 million of new senior notes and we called our A preferred and there's just a very small amount left out there for technical reasons, and we got 80% of the B preferred back in, which means that the result of this new restructuring is accretive to earnings going forward and we have got an improved rating from Standard & Poor's and we hope to get one from Moody's in the near future.

Going forward, we have 8,000 available beds which you can look at as plus and minus. We are the only person out there with this kind of inventory on hand that we can use without more investment except a small amount for Georgia for Stuart. We expect to absorb about 1500 of those beds in '03. I think the big news on the three empty facilities is we made the decision not to continue to try to sell Youngstown or northeast Ohio. We are going to try to fill it with what we see as demand out there from other customers.

John indicated that we are in discussions with 18 states at the present time regarding some form of new business and with the Marshal Service and the INS and we continue to see further opportunities for improvements in our operations. And, therefore, our outlook, Irv has indicated, is going to be between 215 and 220 million EBITDA for this year. And I hope that is all good news for all of you and we appreciate your attention today and we look forward to talking to you at the end of the second quarter. And that's it. That's the wrap up. Thank you very much.

This does conclude today's conference. Thank you for your participation. You may now disconnect.