CoreCivic Inc (CXW) 2003 Q3 法說會逐字稿

Welcome to Corrections Corp. of America 2003 third quarter conference call. Let me remind today's listeners that this conference call contains statements 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 the growth of the private corrections and detention industry, the company's ability to obtain and maintain facility management contracts and general economic 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, Irving Lingo. I would now like to turn the conference over to Mr. Andrews. Sir, go ahead.

Good afternoon. This is Bill Andrews. Welcome to our third quarter 2003 results and our nine months results. We apologize for starting five minutes late. We were all here, but there were over 20 people calling in, and we thought we should wait until those people were connected. So, with that, with my apologies, I turn it over to John Ferguson.

And I'm going to turn it over to Irving Lingo.

Thanks, John. I hope those of you who have been trying to get on have gotten on. But clearly I think it's fair to say that we had a pretty good quarter. EPS after special items was up 42%, revenues are up 10%, operating income was up about 18% and adjusted EBITDA increased almost 13%. In addition, the company continued to register improvement in a number of other areas such as occupancy, margin and debt ratios. Going right to the earnings for the three months ended September 30th, 2003 the company reported net income available to common shareholders of 18.2 million. That's 47 cents a diluted share. And that's compared to a net income of 11 million or 36 cents a diluted share in the prior year. There were several special items affecting both quarters. They are reflected also in our press release. And excluding the effects of these special items, net income for the third quarter of 2003 amounted to 20.8 million, that's 54 scents a diluted share, compared to net income of 11.6 million or 38 cents per diluted share for the same period last year. And again, that is a 42% increase. Operating income for the third quarter increased to 40.8 million. That's compared with 34.7 million for the third quarter of 2002. Excluding special items, EBITDA for the third quarter of 2003 increased to 54.1 million, and that's compared with 48 million for the third quarter of 2002. Same story, EBITDA for this quarter increased approximately 6.2% over the prior year. Adjusted free cash flow, which is essentially net income plus depreciation and minus cash dividends and minus maintenance capex amounted to 27.3 million, and that's compared with pretty much the same amount last year, 27.3 million. Although operating income for the quarter was up over 6 million from the previous year, which would indicate higher cash flow, that increase was substantially offset by higher capex charges for the quarter. Maintenance capex for the third quarter amounted to 9.4 million versus 2.1 million the previous year. These capex charges incurred in the third quarter were primarily related to several major IT initiatives that the company is undertaking. These IT initiatives are quite comprehensive and will ultimately encompass our inmate management and inmate medical systems, human resources, including payroll, training and benefits, and a complete revamping of our GL systems. Looking forward to next year, we expect to incur an additional $23 million in IT capex. Upon completion and implementation of these systems, CCA will be truly unique within the prison industry, completely automating what have traditionally been manual processes. We are expecting significant productivity gains from these investments, and thus, very acceptable ROIs. With respect to our prison facilities, we've maintained for some time the maintenance capex related to the facilities should run around $15 million annually. And we still believe that's a pretty good number going forward. Before turning to the operations review, I want to take a moment to address the announcement in our press release regarding a settlement with the I.R.S.. Many of you will recall that the I.R.S. had proposed a significant adjustment to our 2000 tax return that would have required us to pay 56 million in cash plus penalties and interest. We all along had believed that that adjustment was totally without merit, so much so that the company did not establish a reserve for this matter. Last week the I.R.S. withdrew its proposed adjustment and closed the audit with no material impact to the company. So, we think that's very good news. Turning to operations, consolidated revenues for the quarter totalled 263.4 million, that's up from 239.4 million last year, and that represents a 10% increase over last year's third quarter. There were 5.1 million compensated man days in the third quarter versus 4.7 million compensated man days in last year's quarter. Average portfolio occupancy increased from 90.2% to 93.7%. Revenue per man day increased to $50.82 versus $49.60 in the prior year. Prior to this quarter the company had experienced non-consecutive quarters of revenue per man day increases. This string was broken due to the lower than average per diem we are receiving on our Alabama contract in our Tallahatchie facility where we filled a formerly empty prison with Alabama inmates under an emergency contract, and for which I might add we are generating an acceptable operating margin given the level of service that we are providing there. Although the difficult budget environment on the part of governmental agencies has resulted in pressure from some of our customers concerning per diems, we continue to see these as being isolated events. Operating costs increased only 21 cents per man day from last year or less than 1%. It was $38.12 this quarter versus $37.91 last year. Fixed costs increased to $28 per man day versus 27.41 per man day last year, an increase of 59 cents. Salaries and benefits, which make up 87% of fixed costs, were up $1.12 per man day. The increase was largely due to wage increases over the last year as well as higher benefit costs. The increases in salaries was partially offset by decreases in property taxes and decreases in repairs and maintenance. Like many companies, we continue to experience wage and benefit pressure, and we believe that the investments that I mentioned earlier in information technology will provide the types of productivity enhancements that will enable us to control these costs going forward. Variable costs for the quarter actually declined to $10.12 a day from $10.50 a day last year. As in previous quarters, we continue to show significant improvement in the inmate food and medical areas, primarily from outsourcing our food service and renegotiating certain medical contracts we reduced or eliminated our responsibilities for medical. In addition, we negotiated a more favorable pharmaceutical contract and continued to reduce our reliance on outsourced nursing. The declines in food and medical were partially offset by an increase in our reserves for legal expense as a result of an overall evaluation of our basket of outstanding cases. The end result here was that margins increased $1.01 per day to 12.70 versus 11.69 last year. And our margin percentage was up 25% from 23.6% last year. General and administrative expense increased to $9.8 million from $8.1 million last year. And as I've pointed out in the last several calls the increases are the result of additional headquarters personnel we've added in the area of operations, business development and IT. As I said last quarter, given the improvements we are seeing in occupancy and operating margins, we consider these G&A expenditures to be an investment, and for the year we anticipate a G&A run rate of approximately $40 million. The end result here is that we had a pretty strong quarter operationally and otherwise. Our occupancies are higher, revenue per man day is higher, operating costs per man day were essentially static, and our margins were higher. Turning to capital markets activities, I believe our earnings release was sufficiently extensive regarding what we did during the quarter. We completed a $200 million financing, and now over 70% of our capital structure consists of fixed rate obligations. Our floating rate exposure is limited to the $274 million and our senior secured credit facility. In conjunction with this offering, we amended our senior credit facility, increasing the commitment from 75 million to $125 million, and we reduced the rate on the term portion of the facility to 2.75 over Libor from 3.5% over Libor. We also modified certain covenants. The primary change was increasing the amount of capex the company could deploy in a given year. As a result of this transaction, we're not only experiencing a low overall rate on the senior credit facility, but we were in a position to take advantage of recently announced opportunities to expand Crowley in Houston and complete the construction of the 1500-bed Stuart facility. Our goal from the beginning was to create a capital structure with extended and well tranched maturities, to reduce our exposure to floating rates and to create the type of flexibility necessary to expand our business. I believe that we have accomplished these objectives over the last two years. And with that, I will turn to our outlook and start by saying in each of the last few conference calls and in a number of analyst presentations I've made during the past year I continue to emphasize the positive dynamics of our business, including growing prison populations with little additional prison infrastructure being added. In other words, there's a growing scarcity of beds. I believe the results for the third quarter reflect the impact of this environment. With respect to our outlook, last quarter we gave guidance for Q3 operating income in the range of 40 to 42 million and we were clearly in that range at 40.8 million for the quarter. Looking ahead to Q4 of this year, we expect operating income to fall in the range of 39 to 42 million, which if achieved would bring our year to date operating income to the range of 163 million to 166 million. You may recall that we've previously discussed the company's tax situation where we have fully reserved the net deferred tax assets on our balance sheet in accordance with GAAP. On otherwards, because until recently the company had a history of generating taxable losses we were required to fully reserve the deferred tax assets that arose substantially from net operating losses. We had to keep that reserve there until such time as we began generating taxable income. We estimated that we'd be able to eliminate that reserve and begin recognizing taxes sometime late this year or early 2004. As it now stands, we will reverse the reserve on our deferred tax assets as of December 31st of this year, which will result in a non-cash income tax benefit amounting to approximately $70 million. Because we will be doing this as of December 31, there will be no significant GAAP income taxes recognized in Q4. We estimate that at year-end our NOL carry forward will be $68 million. Beginning in the first quarter of next year we will begin accruing a GAAP tax provision, which we currently estimate will be at a rate of approximately 40%. Our 2004 numbers, therefore, will be fully taxed. I know there's probably interest on the part of our listeners on getting some insight into our expectations regarding 2004 operations. Let me begin by saying that like many companies, we are actively involved in preparing our 2004 budget, which includes a review of all of our properties and an assessment of the likelihood and timing of a significant number of opportunities and also certain challenges. We believe that the opportunities clearly outweigh the challenges. And John will add further color to this in just a few moments. With respect to 2004, it's simply not possible at this time to be terribly specific with regard to the timing of a number of events. We do believe for those investors with a long-term horizon, say 18 to 30 months, bed growth will be positive, that we will be announcing additional expansion opportunities and that there will be a number of opportunities to bid on new facilities. As I said earlier, the environment is very good for our business, and we expect this to continue. Clearly, as we finalize our budget, complete this quarter and start 2004, our visibility regarding the opportunities and challenges will improve and we expect to be in a position to give more specific guidance on 2004 during our fourth quarter earnings call in early February. And with that, I will turn it over to John.

Okay. It has been my style in the past to try to give an update on business development activity since the last conference call. We announced a couple months ago that we had made the decision that due to the continued demand for beds in the state of Colorado that we were going to expand our Crowley County facility by 624 beds. And I might point out that as of October 31st there were currently 311 beds in our four facilities available for the state of Colorado. So, we feel fairly confident that by the spring of next year when the first beds will come on-line that Colorado will need those beds. We announced the completion of our Stewart County, Georgia facility, which will bring on-line 1,524 beds. Although we don't currently have a contract for this facility, we feel that based on the current level of activity and developing demand with several different customers that this facility will be much more attractive to be in a completed position. We announced that we were awarded a new five-year contract with the immigration and custom enforcement agency at our Houston, Texas facility, which we will expand to 905 beds from its current 411. We completed negotiations on a new contract with the State of Indiana, increasing that contract to 1,000 inmates. We currently house 650 Indiana inmates in our Otter Creek facility in Beattyville, Kentucky. And we completed the transfer of the Alabama inmates into our Tallahatchie facility at the guaranteed level. Since June 30 of 2003 we have seen a growth in our inmate population of approximately 2400 inmates. Of course, 1400 of those were Alabama inmates, leaving approximately 1,000 inmate growth to no major contract or new contract, but just the continued demand needs of our existing customer base at the various locations. In fact, we had growth of in excess of 50 inmates at 13 different facilities that we currently have contracts. We have continually disclosed what we see as the available beds that we have in those facilities that have in excess of 100 beds available to customers. We continue to have the complete facility at northeast Ohio, North Fork in Sayre, Oklahoma, which we announced last time that we idled based on some shifting around of some of our Wisconsin inmates, and of course we'll have the 1,524 beds in Stewart County, Georgia. With four other facilities, we have approximately 6,600 available beds. So, I think we've disclosed the number's about 6800 in the last conference call. In addition to the 1400 Alabama inmates, we've added 1,000 in our system and still have 6,600 available beds. In getting into the challenges and opportunities, as has been our style in the past, we do not forecast specific transactions and have only announced transactions when they are done deals. I do want to paint a picture of where we see the opportunities are. First let me address some of the challenges. Foremost is Wisconsin. We disclosed in the last conference call that Wisconsin had announced that they were going to open capacity withinside the State of Wisconsin. That appears to still be the case. They're still looking at sometime in early spring of 2004. We also plan to respond to an invitation to negotiate with the State of Florida, which, of course, is a challenge, but there's also the opportunity to expand those facilities. So, that's an opportunity. And I think, as everyone in the industry is waiting, the State of Texas is going to be announcing some of their awards this Friday. And that, too, is a challenge that could also be an opportunity. As I look at the previously announced solicitations or presolicitations or even some of the bids that are out there with the federal agencies, the BOP, the U.S. Marshalls Service, the Detention Trustee and Immigration and Custom Enforcement. There are approximately 9,000-plus beds that either have been proposed for a bid or are in a presolicitation bid. And I think those have been discussed previously. As I look at our activity in the various states that we currently have customer relationships, as well as those that CCA does not have a customer relationship, I can point out that there are six states that we call new states to CCA in which we know that there is either current or developing bed need approaching 7,000 beds. A example of this would be the state of Connecticut, which we pointed out they passed their budget back in July with the authorization for the department and the administration to acquire up to 2,000 out of state beds. And so, in addition to Connecticut, there are five other states in similar situations. Ten of the 20 states that we currently have a customer relationship also have current or developing bed needs, and we're in some form of discussion on how to assist them in meeting that bed need. Last conference call we pointed out the dynamics in the correctional arena that was presented in the Bureau of Justice Statistics and simply said that we see demand is growing, especially growing in areas in which there is a predisposition for the use of the private sector and supply is not. So, what we see as a significant current bed need with a lot of this bed need being predisposed to using beds that are currently available or near available, which would mean an ability to expand an existing facility. As Irv said, the timing is tricky. We feel that with our current position of having 6,600 beds, a national platform, capital to expand, that this plethora of opportunities is going to bode well for CCA. We also mentioned in the last conference call that we're looking at numerous expansion opportunities, and that it would be somewhere between two and four thousand, as we've previously announced. We've announced the expansion of over 1,100 beds and of course the completion of 1,524 beds. So, we feel very bullish about where the prospects of the company and the industry over the next 18 to 24 months and feel like that we will have many opportunities. So, with that, I would open it up to questions and answers, and then Bill Andrews will close.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the 1 --

Operator?

Yes?

Operator, are you there?

Yes, I am. Can you hear me? Hello, sir? Ladies and gentlemen, if you do have a question, please press the star followed by the 1 on your push button phone. If you would like to decline from the polling process, please press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection, and your questions will be polled in the order they're received.

Operator?

Gentlemen, can you hear me?

Yes, we're glad to hear you.

Our first question comes from Andrew May with Jeffries & Company. Please go ahead.

A couple things. First, you were pretty elliptical about the details of the challenges in Texas and Florida specifically. Could you give us the specifics of what facilities you have in Texas and Florida that are up for rebid and the timing of the completion of those contracts and just give us --

Okay. In Texas there has been a fairly long and protracted bidding process going on that for most of the private facilities that we have, specifically the ones that will be announced on Friday are nine facilities. Five of them are what they call jails. Four of them are community corrections, although they're still a secure facilities. We have two in the mix of nine. We've bid on all nine. We assume that our competitors have bid on all nine. If we were to lose our two and not be awarded any, we would not adjust our forecast, although at the end of the year it is -- they are not what I call a substantial part of EBITDA. We think the opportunities actually are greater than the risk. In Florida we currently manage three facilities for the State of Florida. One's in Lake City, one's in Quincy, and one in Panama City. In addition to that, there are two other facilities that are managed by Wackenhut in South Florida. It is the intent of the correctional privatization commission which they have in Florida, which is a little unique, to put all five of these facilities out for bid. Three of them have been put out for bid and are in the process of the question and answers of trying to inform the vendors of some of the questions they have. They're currently due in December 11th. In addition to the three operational bids that are out there, there is two more bids for an expansion of two of the facilities. One of them is Lake City, which we manage. One of them is one of the facilities at Wackenhut. Those are for in excess of 500 beds. And then the other two that have not been put out there, we understand that sometime shortly they will be. So, we have at risk three managed-only facilities with the State of Florida. But we also have the opportunity to, if we retain these management contracts, to expand the inmate population.

Andy, one thing that I would at to that, too, is that 80% of our EBITDA comes from owned facilities, 20% from managed. And clearly it's a lot more difficult to -- you can't award -- someone is not going to come in and manage one of our facilities. So, again, 80% is owned, 20% is managed. These fall into that managed category. The fact that we own so many of our assets mitigates this type of risk.

Absolutely. I understand. One more quick one. On a sequential quarter basis your margin was down slightly. Revenues were terrific, better than what we'd modeled. Margin is down ever so slightly. And maybe that's just noise in the data, and you can just tell me to go focus on something more important. But I was wondering if there's anything seasonal or otherwise that should make third quarter margins slightly lower, or maybe this is just a Tallahatchie phenomenon.

I think it's more of a Tallahatchie phenomenon. It was a slight amount, so --

Okay. Thank you very much.

Our next question comes from Jim Macdonald with First Analysts.

Good quarter, guys. Just one quick follow-up. Could you talk about the loss in the transportation subsidiary in the quarter and whether that's going to repeat?

You're going to hear from us a lot of conversation over the next couple of years about investments we're making, whether it's the investment to complete Stewart, whether it's the investment in IT infrastructure or whether it's the investment in Transcor. Transcor's been a subsidiary of the company for some time, very much under utilized. It was not being run as a transportation company. We brought in a new President of Transcor. We think that there are opportunities to grow Transcor, and we're spending some money there, Jim, and trying a few things out. We're turning it into a transportation company in essence. We're implementing a hub and spoke network, we're putting in some technology and upgrading some of the abandoned buses. So, there are some expenses associated with that this year. We'll be close to breakeven, maybe a small loss on Transcor this year, but we expect Transcor will be profitable in the future.

So, we shouldn't expect another million dollar loss next --

No, no, absolutely not.

On some of the developmental opportunities, can you kind of give us your current thoughts on what's going to happen in the long-term in Alabama, when you think Connecticut might make a decision and kind of what you're hearing out of the Federal Bureau of Prisons? Thanks.

Alabama is a little bit of a struggle. They had a referendum that I think the vote was on September the 7th, which would have given the Alabama the ability to raise some significant taxes and let them deal with a variety of issues they have down there from education to a very overcrowded correctional system. The legislature and the executive branch I think both recognize the problems they have in their correctional system, but right now the ability for them to do a lot more in the short-term is difficult. But I would say everything that we know is that Alabama recognizes they've got to fix their problem, that even there's discussion of maybe early paroles on about 5,000 inmates. That would be almost a drop in the bucket based on what they need. So, we think that eventually Alabama is going to have to recognize that they've got some infrastructure they've got to deal with or they've got to deal with it in some other way and that the fact that their cost is about half what the rest of the southeastern states are is something that they're going to have to address. Connecticut, I think all I want to say right now is that the budget authorizes the funding for up to 2,000 inmates out of state and, of course, we do have a facility that we think would be attractive close to that state in dealing with that. And then the last thing you asked about was?

What you're hearing out of the Federal Bureau of Prisons.

The Federal Bureau of Prisons. Thank you. Well, recently the bureau's put out a solicitation notice. I think it was more a presolicitation notice saying that they were asking for companies to submit facilities that could house from 1,000 to 1,500 criminally sentenced inmates by the summer of 2004. That is due, I think, this Friday. And we will have some options for them to consider.

And no idea how many they're looking at?

The only thing that was said was 1,000 to 1,500.

Okay. Thanks very much.

Thank you. Our next question comes from Susan Jansen with Lehman Brothers. Please go ahead.

Hey, guys. It's Scott Living calling in for Susan. Just two questions this afternoon. Could you provide us with an update on any tax issues that are still outstanding?

All of our years are closed except for '01 and '02. And right now nothing really, I don't think there will be anything in the 10-Q, nothing to comment on. So we've been successful in getting a lot of years closed and we're real happy about that.

Okay, great. And finally, you guys have announced about 70 million of new capital expenditure projects to be completed, I guess, really late '04 and early '05. How high could you see this figure growing to?

I think again we've said that we see opportunities for 2,000 to 4,000 expansion beds. And I know it frustrates people sometimes, but the timing of these things is always difficult. And we've told people that on expansion beds typically that's about a $30,000 per bed kinds of a number. And so at the low end that would be another, say, thousand beds, another $30 million. And at the high end it would be considerably higher. It just depends on the needs of these customers and when they pull the trigger.

Okay. Thanks.

Sure.

Thank you. Our next question comes from Barry Stouffer with BB&T Capital Markets. Please go ahead.

Good afternoon. Anything you can share with us on Youngstown, Ohio with respect to an update?

Well, we continue to monitor what's going on in Connecticut. Of course, we're now going to monitor what the Bureau of Prisons is going to do. They did not designate a location, so we would have a great deal of interest in that. And then we do have a couple of other states as well as a couple of other federal customers that we're in some discussions which might turn into something. But I'd rather not go into more detail than that.

Okay. Thank you.

Thank you, sir. Our next question comes from Jason Stankowski with Clayton Capital Management. Please go ahead.

Hi, Irv. Congratulations on another great quarter. The 70 million, unless I've been missing something in the press releases, we had a lot of conversations about making investments in Greenfield type of projects, build it and they will come. I wasn't able to see that the capacity is sort of locked up or there's any type of, if you will, triple net lease type of arrangements in place for all of that capital as being allocated. Are you guys considering departing from that tact or is it just because these are additions to existing prisons? Maybe you can give us your philosophy on that.

Sure. We have said that we were going to proceed with something that was Greenfield and of any substantial size, we would have to have, and it's difficult to say, the agencies -- these things can come down in a variety of ways, but you would want to have some type of, quote, contractual backup for something of that magnitude.

Mm-hmm.

With respect to these, these are expansions. And what we are finding, and I think what John was saying a few minutes ago is that when you are competing on a contract, having available beds puts you at an enormous advantage. So, when you look at Colorado, for example, you see that the Governor of Colorado has said he's not going to add beds, with public financing in the state. We know that there are two potential customers for Colorado, Wyoming and Colorado, and our beds in Colorado are starting to become filled. That's not a big bet to make when you see the dynamics and how they're unfolding in Colorado. With respect to the Houston opportunity, we protect a contract that we have, we're able to expand it, and we get a guarantee for a substantial number of those beds. I think they're guaranteeing, John, 679 of those beds. And then with respect to Stewart, we're able to bring on 1,500 beds for an investment of about 19, $20 million, to build a 1500 bed prison could be a 60 to $75 million affair. So, we just think that we're doing this, we have substantial cash reserves on hand, we're generating a lot of cash flow, we're not having to tap outside capital sources. In every one of these situations we have multiple customers. So, we're taking advantage of what we think is one of our competitive strengths, and that's the cash flow that we're generating and our access to capital. So, if you want to say that these are speculative, I guess in the strictest sense of the word they are. But when you look at the environment and you look at each of the three of them, there are multiple customers and we think that that substantially mitigates the risk and again puts us at a competitive advantage.

What is the process for filling those? You go out for RFPs? Will these be, for instance, the 1500 beds that we're getting for 19 million, do you have four or five RFPs that you're looking to fill, I guess, just giving us a sense of your business decision-making? Obviously it's been good in the turn around, and we'd like to keep it that way. But speculation got us into a lot of problems for some of us that have been around for a while.

Well, let's take them again into pieces. On Crowley we currently have 3,507 beds there of which almost 3,200 of them are filled with either Colorado or Wyoming inmates. Colorado is forecasting the need of some 2,000 medium security beds between now and 2005. So, what we see is that the contract between the State of Colorado and Crowley County, which, of course, we manage the facility, they will just expand that for the additional 624. So, we really have a contract in place to meet Colorado's growing needs. In the case of the Immigration and Customs Enforcement contract in Houston, that is a firm contract.

Right.

It is only for five years. But we have already had a 20-year relationship with Houston in that location, and we're making substantial improvements and modifications to the existing facility. So, we're doing that for a contract. So the only thing that would be considered speculative in my mind would be the 18 million to $19 million on Stewart County. And the way that we could receive a contract there would probably be through a competitive bidding of some kind, or it could be a situation, for example, the Tallahatchie facility is under an emergency order by the State of Alabama because they are under a federal court order. Or it could be some other procurement process that is available to whoever the customer is.

great. Thanks for clarifying that. One other question. As the price has gotten up to a point where it seems like we have room to grow, but certainly different types of investors are coming in and out of the stock, have you guys considered issuing a dividend, even if it's a deminimus amount, to allow certain classes of investors to come in and take a look at the stock?

Right now, and I hope it's coming across in our message, we are at a point where, again I'll use that term about making investments. We are seeing demand for beds. We're not seeing bed supply being added. And we really feel that we are in an environment where the capital we have needs to be deployed to grow this business. I think there could come a day when a dividend makes sense. But right now, when you look at the cycle that we're in and the difficulty governments are having balancing budgets, adding prison beds, the growth in prison populations, this is the time for us to be making the types of investments you're seeing us make. If something changes later, we would consider.

Great. You're doing a great job. Thanks, guys.

Thank you, sir. Our next question comes from Chris Blackman with Imperial Capital. Please go ahead.

Yes, thank you. Congratulations. If you'd briefly discuss on Transcor the opportunities may be presented there beyond the potential income you could achieve from operating the business? Are there business opportunities, business leads that expanding that business may help occupancy in some other facilities for y'all?

Let me say this about Transcor. Transcor is a leader in what is a very fragmented mom and pop type of business. So, we see the opportunity, one of the opportunities we see is to consolidate, just because it's a very fragmented mom and pop and there's no clear leader. Beyond that there are things that are out there. We can't really talk about them right now for competitive reasons, but we do feel that there are opportunities where Transcor can make a meaningful contribution to the company. It's a classic business case of nobody does this very well and somebody can really become dominant. And we're hoping to do that. And that's really all I can say about Transcor right now.

I'd love to extend the conversation, but thank you.

Thank you, sir. Our next question comes from James Adams with Cobalt Capital. Please go ahead.

Hi. I was wondering if you could expand a little bit more on the margin dynamics. The variable costs went up pretty considerably on a sequential basis. I understand the revenue component of the margin decline, but what about the variable costs and what's driving that line?

I don't have the sequential number on the variable. Do you have that?

On the owned and managed facilities it went from 996 to 1068 per man day .

Bear with me. In any quarter there can be -- the answer is I don't know the answer right off the top of my head to that question. Let me start with that. In any quarter there can be things that will affect the expenses from time to time. And I would have to go back and just look at the components. I really did not review this sequentially. So, I can do that for you and try to get back later, but I just don't have that with me right now. There's nothing that I'm aware of in the variable expense category that I recall being alarming in any way. We have achieved a lot of success in the food and medical areas, and there are initiatives underway in other areas. So, again, I'm at a loss to answer that one. I'm sorry.

No problem. And then on the capex, did you say that the IT capex alone is expected to be 23 million next year?

That's what I said, yes.

Okay. And then should those projects be completed by 2004? I mean, is there another significant IT component in 2005?

There will be some IT in 2005. I don't have that right in front of me right now. There will always be IT.

Right.

I think in every company. The real money that we're spending right now, and it's in a number of areas, by the way, but I think the major focus is something we're calling our inmate management system, we're really automating the operations, the security and medical portion of our facility operations. That's going to be a three-year rollout, and those investments, there will be a significant front end investment, and then there will be investments in that over the next three years. I will say this, that the money that we are spending on that, we believe we will get a significantly greater return than we would get on any type of prison real estate type investment. We are really expecting some strong returns from these investments.

Okay. Thank you.

Our next question comes from Rick Nelson with Morgan Joseph. Please go ahead.

Good afternoon. I'd like to echo what everyone has said, very good quarter. A couple questions. As far as the expenses associated with your debt issuance, can we expect those to disappear for the most part, or will there be some lingering expenses?

No, these are specific to the financings that occur in any given quarter. I'm not planning any financings right now. For what it's worth, we're down to about 52, 53% levered on a debt to total market cap basis. So, we've substantially reduced our leverage. And again, about 70% of our debt now is fixed rate. So, we're in a pretty good place right now.

Just looking at my numbers, it looks as if in the fourth quarter your interest expense will come down a fair amount from the third quarter. Is that a fair comment? Maybe as much as $1 million pretax?

I'm not sure that's the case, Rick. I'll have to look at that.

Okay. It just looks like the progression will be --

Yeah. I'm just not sure that's going to happen. I'm trying to remember if the financing was in August. We locked in some higher rate debt, so I'd have to get a better understanding of what you're seeing there.

Okay. And finally, could you just clarify a little bit more the status of the tax loss carryforwards and where things fade in and out?

Yeah. We have about -- at the end of the year I think I said it was about a $68 million carry forward. And what we are expecting is that that will burn off sometime around the end of the third quarter next year. And that's in line-- we've always said that we should be substantially covered through 2004, and that appears as if it will turn out to be the case.

Right. Okay.

I guess good news and bad news is we'll become a cash taxpayer sometime late next year.

Okay. Well, thank you very much.

Sure.

Thank you. Our next question comes from Jeff Kessler with Lehman Brothers. Please go ahead.

Thank you. Firstly, I'm wondering, we've been talking about the man day margin. I'm wondering, you guys have done a lot of work on the food and medical side. The man day margin has actually improved a couple hundred basis points over the last couple years. Are you about at the limit of where you can take that margin? Obviously you can try to push the top line higher on a per man day and you're going get pushed back from the states. Where are you going to be able to save further? You've done so much. You can only save so much going further.

Roughly 80% of our fixed costs are in salaries and benefits, okay? And these IT investments that we are talking about are going to enable us to really look at the science of staffing prison facilities. We're making significant investments in HR, and we believe that those investments in HR are going to enable us to reduce turnover. And when you reduce turnover, you reduce training costs and workers' comp claims and what I call the pathologies that are associated with turnover. And at this point what we have done is we've attacked the easier things to attack, which is what we should do. We attacked the food and the medical, and we've made significant progress. These IT investments that we're talking about are truly major. I think they're revolutionary and are going to enable us to really take a hard look at the fixed cost element. I can't give you a number where we would go, but we are expecting to be able to continue to improve margins, yes.

Okay. Great. John, you've talked a little bit about the Federal Bureau of Prisons on the federal side. Can you elaborate a little bit more with regard to what is going on with the INS, or whatever the new acronym is for them as well as the Marshalls?

Just a second. I think the solicitations that have been discussed previously that are still kind of out there is some bed needs in the District of Columbia area, Maryland, D.C. area, Chicago, and then Laredo, Webb County for some substantial beds. The INS and the Marshalls tend to, or the ICE, tend to piggyback on each other. And we're seeing a much stronger need and requirement for the Marshalls. In addition to that, we see continued demand for Immigration and Custom Enforcement also in the Laredo area.

Okay. I think going on top of that the jail situation, particularly border jails, I mean, noticing that Bernalillo County built a whole new jail for itself, it's about the only new building I've seen on some public facility, are jails mainly affected by the ICE and Marshalls? Is that who you're generally dealing with, or are there state agencies that you're dealing with with jails, as well?

Yes, all the above. A local county facility will be able to or can in some cases house inmates for the Marshalls, house inmates for Immigration and Customs Enforcement, and then also can house some state felons that get convicted and sentenced, and the states will just leave them there for a period of time. I think if you remember last conference call I talked about that one of the things that we are seeing is the fact that the state sentenced felons at the local jails are creeping up in a lot of states, which means that that's how they're dealing with their bed need in the short-term is to leave them in an environment that they normally wouldn't do.

Are there limits to how much they can put into a jail, a certain type of criminal before somebody comes after them, whether it's the courts or whoever?

Well, there are jail standards in every state. They're just not enforced very well in every state. And so, you do have situations in which they exceed what they really should. The big opportunity, if that's the right term, is that once the states realize they can't do this forever, that it does have some impact on residism[ph] when you don't move an inmate into a time-serving facility and start to deal with preparing them to be released in two, three, four, five, six, seven years, and if they're in a local jail, although they'll try to say well these are folks that should be lighter sentences, but in reality it's the way that kind of dealing with their bed needs. And eventually they're going to have to deal with that. And that's where we think some of the opportunities at some of the states that we have relationships with will come.

Very good. One final question. And obviously I know what the answer's going to be, but I'll ask it, anyway. The analyst estimates that are out there for 2003-2004, are you comfortable with them right now?

Not going to comment. I think that if you take the guidance on the operating income that we are providing, that will result in a number for this year. And I'll leave that to everybody there. And then the only issue that I'll go back to again on '04 is we are continuing to wrestle down the timing of a number of opportunities. And clearly if the opportunities come to fruition sooner, the numbers are better, they come to fruition later, the numbers aren't. And I know we drive people crazy, but all I can tell you is the, John has said, too, that the opportunities far outweigh the challenges. And as soon as we can get comfortable that we've got something locked down, we'll talk about it. But things are good for the business. It's just hard to get real specific right now.

And finally, can you make sure that First Call sticks to a fully taxed number for next year so everybody can live with an apples to apples comparison given the fact that we've been suffering with these pretax numbers for this year and it's going to make it look like the number goes down next year?

We're going to -- yeah, it's tough. We'll get on First Call. Clearly we're going to be reporting next year on a tax basis so your comparative numbers will not look that good. What we're going to try to do, and you have SEC issues with this, we'll try to do something in our supplemental. I want to say one other thing about our supplemental. In our supplemental we will try to do what we can without violating any SEC regulations about showing illustratively what tax versus tax would be. And so, we're going to do everything we can to try to clarify this, because I know it's frustrating. In the advertisement I wanted to plug, Jeff, and I'll let you got back to questions, is we do have this supplemental. It did pull up on the website today. It's 14 or 15 pages of very good stuff. And one of the things that we're finding, and I just want to say this, and I just invite people to look at it again. It's in our investor section on the website. It goes through the share counts, people have a lot of time trying to get what is the diluted share count, how many converts do we have, which is now 1, not 2, where it used to be, and adding how much interest do you add back and all of that. It shows how that works, it shows the components of the debt, so that when we have questions about interest or debt outstanding, it shows a lot of information. And I just -- I forgot to plug that in my little speech. So, Jeff, thank you for the opportunity for that.

Well, in any event, thank you and keep up the good work.

Okay. Thanks.

Thank you. Our next question comes from Jim Macdonald with First Analysts. Please go ahead.

Three quick follow-ups. Could you give any comments on occupancy at the end of the quarter and now?

In the fourth quarter or --

The third quarter was 93 -- I'm sorry. You want the actual occupancy.

Yes.

The actual occupancy at October 31 was 55,878, which is 95.14%. And at September 30th it was 55,722, or 94.88%.

Thanks for that. On Florida just quickly, there were some new beds. Is that just expansions or is there going to be a new facility there?

It's just expansion on two of their facilities. One is the Lake City facilities, which is for youthful offenders. It's 524 beds, I believe, and the other is for the South Bay facility that Wackenhut manages. And I think that's 524 also.

Okay. And I think Irv mentioned in his talk something about a litigation reversal. Can you just expand on that?

Not a reversal. We've increased our reserves for litigation -- we're in a litigious business, and there are a number of suits that we're dealing with all the time. And I'll thank you for another intro, for the gentleman that asked about sequential increases a minute ago. This was part of it. We did increase our legal reserves. We don't get into specific amounts, but we did increase and I did mention that in my overview, legal reserves this quarter. And it just has to do every quarter we're evaluating a basket of cases, and we have to make judgments, like every company does. And that did serve to offset some of the improvements we were seeing in the food and medical area and did substantially result in that, I think, sequential increase in variable expenses that the gentleman asked earlier.

Okay. Thanks very much.

Sure.

Ladies and gentlemen, if you have an additional question, please press the star followed by the 1. Our next question comes from Barry Stouffer with BB&T Capital Markets.

Are you at the point yet where you can comment on depreciation lives for this additional IT spending? And the corollary to that would be any comments or guidance with respect to depreciation for all of '04?

There are going to be some interesting guidance issues that we'll deal with in the fourth quarter call in February. And we are still working with the accounting firm, this is interesting in that I think it's going to have -- I'll say this, I think it's going to have a longer useful life than you would typically see in IT investments because this is so unique and so incredibly different. This is a very manual business that we're in, both in the public and private sector, and this is going to automate it. This is going to have a longer life than I think you would typically see. And I think our accountants are comfortable with that, but we have not pinned down a precise number yet. But it's a very good question, Barry, and we'll have to address it later.

Thank you.

Mr. Andrews, we have no further questions at this time. I'd like to turn the conference back over to you for any concluding comments.

Thank you all for joining us today and for all of your interesting questions. I hope we've satisfied you with our answers. I usually summarize, and I'll do that very quickly. Revenue is up 10%, EBITDA up 13%, earnings per share up 42%, 93.7% occupancy, up from 90.7 in 2002, and even higher as of today. We're now operating with a 25% operating margin, up from 23.6 in 2002. People ask questions about where are our cost reductions going to come from. The reason we're spending money in our IT systems are to continue to get further cost reductions in manning and staffing. And we have significant free cash flow, and we're using that to invest in our business not only in IT, but in plant expansion, or prison expansion. In taxes we settled a very important case with the I.R.S. which was hanging over our head, which was 56 million. And our tax audit is now closed. And you heard Irv say that December 31st we'll reverse the 70 million which we'd reserved until we were sure we had continuity of taxable income. And I think it's important, because somebody mentioned this, I've been as concerned as you have about reading financial statements in which they compare no taxes in one year with taxes in another year, and it's an unfair comparison, obviously. So, we have to be able to show this in the best way we can based upon whatever rules we have to follow. But basically we will be showing taxable income in 2004. I think on the expansion side, John said we're expanding Crowley, restarting Stewart, Georgia and expanding Houston. I don't want people to be concerned that we're building facilities again that we don't have orders for. We see things in the future that are going to fill these facilities. Believe me, we have opportunities here to build other facilities which we don't do until we see a more firm order board. People talk about their concerns about rebidding Florida and Texas. That is a concern, but it could also be an upside because there are prisons being rebid that are not our prisons, as well. And Wisconsin, people continually talk about losing inmates, but we have a long-term contract with Wisconsin that temporarily we will lose some inmates, but longer term, as Wisconsin continues to grow with their inmate population we should regain those inmates. John mentioned we had six new states we were working with that there's a possibility we might get beds from. And there are 10 of 20 states where we do business that have current or future bed needs. Finally, somebody mentioned Transcor, which nobody ever seems to talk about. But this is integral to our business. And we do try to maximize it with our various prisons that are always transporting prisoners. But there's an even larger opportunity to transport prisoners that we don't keep. Obviously we only have a small percentage of the prison population. And there was a definite need to upgrade our systems and our operations, and that's what we're doing and that's what the expenses are about. And we do recognize it's taken us longer to address Transcor than our other business, but we've been busy trying to restructure the other business over the last three years, and we focused on Transcor in the last six months. So, with that, that's my wrap-up. And thank you all for being with us today and thank you for your interests in Corrections Corporation. Good-bye.

Thank you, sir. Ladies and gentlemen, this concludes the Corrections Corporation of America 2003 conference call. Thank you for participating. You may now disconnect.