CoreCivic Inc (CXW) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Corrections Corporation of America 2005 fourth quarter and year end conference call. Before we begin, 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 can 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 the other documents filed with the Securities and Exchange Commission and these factors include, but are not limited to, changes in 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 the forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect occurences of unanticipated events.

Participating on 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'd now like to turn the conference over to Mr. Andrews. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for our 2005 fourth quarter and year end financial results. I'm actually in Washington, D.C. today, but John Ferguson, Irv Lingo, and David Garfinkle are at the Corrections Corporation's offices in Nashville, and we'll start out with Irv with our financial results then to John with operations and then your question and answer period. So, Irv, you want to take over?

Thank you, Bill. I want to thank everybody for joining us today. Obviously we feel we've registered a pretty good quarter here, and I will start by getting right to the numbers. Fourth quarter results for 2005, excluding a $0.02 per share adjustment for accelerated investing of employee stock options, which we announced at the end of last year, amounted to $0.60 a share. EPS for the fourth quarter of 2004, excluding its recent charge related to income taxes as discussed in the press release amounted to $0.41 per share. We obviously registered a pretty strong gain over the comp. quarter last year. Earnings for the quarter were positively impacted by an income tax rate of 31.9% and that's compared to the 36% we'd anticipated when we issued our fourth quarter earnings guidance.

Over the course of 2005, we indicated that a number of items were going to affect our tax rate for the year. These items included deductions--excuse me---associated with the refinancing that took place in March, the outcome of certain tax planning strategies, which we completed at the end of 2004, and the claiming of certain investment tax credits during 2005. As we completed our state tax returns in September and October, we found that some of the benefits were greater than we had anticipated and therefore had to true up our whole year 2005 tax provision during the fourth quarter and that resulted in a 31.9% tax rate. Looking forward based on the actual state return filings for 2005, we're anticipating a combined federal state tax rate for 2006 of 38%.

Operating income for Q4 was 50.4 million, that included the $1 million charge for the accelerated investing of stock options. That's compared with 44.9 million for the fourth quarter of 2004. EBITDA adjusted for special items for the three months ended December 31, 2005, increased 14% to 67.1 million, that's compared to $58.9 million for the same period last year. Adjusted free cash flow also was up; it increased 37.6% to 41.5 million, that's compared with 30.1 million during the same period last year. The increase was primarily due to our increase in net income, but it should also be noted that maintenance CapEx for the quarter was roughly 1.4 million less than our last year's fourth quarter.

Same store EBITDA for Q4 was up over 15% from the prior year as we saw same store performance increase from a number of facilities such as northeast Ohio, where we secured the large new contract with the Federal Bureau of Prisons, Houston and Lake City, where expansions were completed, and we've substantially filled those beds, our Prairie and Diamondback facilities, where we are the beneficiaries of new populations from Washington, Minnesota, and Arizona, and finally in our four Colorado facilities, where we're seeing our occupancy increase as a result of the overall growth of the Colorado inmate populations. For the full year after accounting for adjustments described in press release, we generated earnings per share of $1.84 compared to $1.55 in 2005, and that's an increase of about 19%. Also as detailed in the press release, the fully year---for the full year we experienced increases in operating income, adjusted EBITDA and adjusted free cash flow for the previous year.

We discussed throughout 2005 that we had expected our earnings for the year to be substantially back-end loaded for a variety of reasons. You may recall from our first two quarters, we were negatively affected not only by seasonality but, more importantly, by the decline in Federal inmate populations at several of our facilities. Over the last half of the year we've seen a rebound in our Federal populations and for that matter, populations in general. The increase has continued in 2006 whereas of last night we continued to remain at about 93% occupancy.

Also favorably impacting the second half out of 2005 was the ramp-up of our northeast Ohio contract, which went to a 90% guarantee on September 1st, as well as the population increases that I mentioned before: Houston, Leavenworth and Lake City. We do expect to benefit from the full year impact at many of these facilities as I will touch on shortly, when we talk about our 2006 outlook.

Moving to operations---excuse me--total revenue for the fourth quarter of 2005 increased almost 10% to 317.2 million compared to 288 million during the fourth quarter of last year. [inaudible] total compensation [manday] increased to 6.1 million from 5.7 million compensated [manday] in Q4 of last year. Revenue per compensated [manday] increased to$51.66 from $49.76, and that's an annual increase quarter-over-quarter of 3.8%. Average compensated occupancy for Q4 increased to 93.1% from 92.9% in the fourth quarter of last year. As we've discussed throughout the year, our occupancy percentages has been affected by a number of facility reconfigurations, which are typically completed with minimal capital outlays, and when you exclude those reconfigurations and measure occupancy on an apples to apples basis for the three months ended December 31, 2005, we would have been at 95.2%. Again, it's important to look at increases in compensated [mandays] as the Company's denominator of beds will change from time to time.

Operating costs increased to $37.92 from $37.09 in last year's fourth quarter. That's an increase of just 2.2%. Fixed expenses increased to $28.05 compared with $27.57 per [manday] in the same period last year ;that's a $0.48 increase per compensated [manday]. The increases in fixed expenses were primarily the result of increases in salaries and benefits expense of $0.39 per compensated [manday] as well as an increase in utilities of $0.24 per compensated [manday] resulting from increasing energy costs. The increase in salary and benefits was driven by annual pay increases and also overtime we incurred at [Starwall] facilities in order to handle increasing populations.

Variable expenses for the quarter increased to $9.87 per [manday], and that's compared to $9.52. That's an increase of $0.35. The increase in variable expenses resulted primarily from an increase and expense-related to a number of legal proceedings in which the Company is involved, partially offset by reduction in our inmate medical costs. We've done a very good job this year in managing inmate medical. The end result was that operating margins per [manday] increased $1.07 to $13.74 from $12.67 last year and our margin increased to 26.6% from 25.5% last year.

G&A expense for Q4 was roughly $3.7 million higher than in the previous year Included in G&A was the aforementioned $1 million charge for the early vestment of stock options and also about $500,000 of restricted stock costs, which were not included in last year's numbers. Also affecting the increase in G&A was additional headquarter staff in a variety of areas, including information security, compliance, and human resources. Excluding the $1 million charge for the vesting of options, G&A amounted to 4.9% of revenues, that's slightly higher than the roughly 4.7% of revenues we've been experiences in recent quarters.

So in summary, Q4 was a strong quarter. Revenues were up 3.8%, costs per [manday] were only up 2.2%, resulting in year-over-year improvement in operating margins of over 8%. Occupancy has improved at a number of our facilities resulting in same store---strong same store EBITDA growth. Margins improved not only because of increased populations, but also because cost increases in almost all categories were moderate. As a result of this performance, the Company is generating significant adjusted free cash flow, which amounted to over $1 per share in both Q3 and Q4 of 2005.

We continue to position ourselves for future growth by adding additional prison capacity. Our red Rock facility is on track for a late second or early third quarter opening this year and based on demand from the state of Hawaii we announced in the press release, the start of our new Saguaro facility, an 1896 bed, $102 million project to be located adjacent to our Eloy and Red Rock facilities outside of Phoenix. Upon completion, tentatively planned for 2007, we will relocate and consolidate Hawaiian inmates from our Tallahatchie, Diamondback, Florence and Otter Creek facilities, freeing up space in those facilities for future customer needs. John will provide a complete overview of new business prospects in just a moment.

Turning to our outlook, 2006 got off to a good start with the recent announcement of a new contract with ICE for up to 600 beds at our T. Don Hutto facility, kicking off what we believe will ultimately be a requirement for several thousands beds under its secure border initiative. Our January 11, we announced that the Federal Bureau of Prisons made us aware of its intention not to renew its contract at our Eloy detention center, which will ultimately result in a loss of approximately 500 inmates by February 28. As indicated in that press release, ICE was occupying roughly 800 beds in the facility, and as John will mention in just a few minutes, in the near term we expect to enter into an agreement with ICE that should result in ICE ultimately absorbing the entire facility. Our guidance incorporates these events and a number of additional new business opportunities, as well as the startup costs associated with the opening of a number of facilities including Red Rock and North Fork.

Specific guidance is as follows: We expect diluted earnings per share for Q1 in the amount of $0.47---in the range of $0.47 to $0.50 and full year EPS guidance is in the range of $2.10 to $2.17. The guidance incorporates an estimated effective tax rate for the year of 38% and includes an additional $0.06---$0.06 per share related to equity compensation under statement of Financial Accounting Standards 123R that was not included in G&A costs for 2005. During 2006, the Company expects to invest approximately 154.6 million in CapEx, consisting of approximately 111 million in prison construction on expansions, 28.1 million in maintenance capital expenditures and approximately 15.5 million in information technology.

At this point, I'll turn it over to John to review the new business opportunity.

Thank you, Irv. I've got to tell you, the leader of a bunch of hard-working, dedicated individuals it's really rewarding to see what we've been able to accomplish in 2005, and we feel a very good about it. But I can also tell you that I have a great deal of excitement of where all these folks have led us to as we embark on 2006 and beyond. I want to talk about three areas that---in which there are, I think, significant opportunities. I'll try to be as clear as I can, but we will actually -- in each of the three areas, we'll find that we have facilities which have opportunities to meet some demand in each of the three areas.

Those three areas that I want to talk about are the Secured Border Initiative, which will obviously affect the needs of immigration custom enforcement as well as the U.S. Marshal service. I want to talk about our current and future opportunities within the Federal Bureau of Prisons and then finish up talking about the numerous state activities that we have. As we pointed out in the last conference call, Homeland Security Secretary Michael Chertoff announced a comprehensive multi-year plan to secure American's borders and reduce illegal migration, which he entitled the Secure Border Initiative. He specifically -- Homeland Security plans to eliminate completely the catch and release enforcement problem. The detention removal process will be re-engineered to create an effective system that will always have a viable detention capacity.

As we pointed out, this is obviously brought on by the stuff that everybody is completely aware, but we've seen double digit increase in border arrests over the last couple of years, but most concerning is that over a three-year period, we saw the population of, other than Mexicans, that were apprehended to grow from 37,000 to 155,000 and yet the United States was only able to remove 30,000 of those due to lack of detention bed space. The balance of them were released into the country and asked to appear at an immigration hearing; only 13% did. So with that, the Bush Administration, the Department of Homeland Security, has been very clear that they're going to deal with that problem. They really began discussing this prior to our [wrath] of hurricanes and now I think they--they are really focused on it. And, I believe we're seeing the beginning of the Secure Border Initiatives.

Obviously, our personal experience has been the contract we announced in December with the utilization of our T. Don Hutto facility for up to 600 detainees, and then the current discussion is that we have with ICE for the continued utilization and increased utilization of our Eloy facility and I'll talk a little bit about the contract--with the B.O.P. around that. But right now we're in discussions with ICE and are fairly confident that shortly we will reach an agreement with them that will allow us to continue to operate the facility uninterrupted. Obviously, we cannot provide assurances that would happen, but we're reasonably confident.

And then, within the last few days we've seen the President's fiscal year 2007 budget, which he is proposing significant personnel resources and of course significant new detention beds growing from some 21,000 currently to over 27,000. The Secure Border Initiative is a new initiative for Homeland Security. They just recently, after many months of not having a full-time Director announced a new Director, Julie Myers. New infrastructure is being put in place and we---I believe, as the requirements develop, we'll see an escalation in their apprehensions and need for additional bed space. When we open Red Rock correctional center later this year, which allow us to transfer some of our state inmates out of our Florence facility, most specifically the Alaskan inmates, and with the available beds that are being vacated by the transfer of the Federal Bureau of Prisons, we will have a minimum of 1400 beds in southern Arizona---which could meet the demand of---the anticipated demand created by the Secure Border Facility. As I said earlier, this not only will affect immigration custom enforcement, but as well, the U.S. Marshal services needs.

We also believe that this Secure Border Initiative will create a need for additional interior beds, and therefore we believe North Fork and Stewart have the potentially---the potential to be considered in the requirements for ICE as this initiative gains momentum. I'm going to talk about North Fork again and---when I talk about the bureau and I'm going to talk about North Fork again when I talk about our some of our state requirements. Also the President's budget increased funding for the office of the federal detention trustee by some $110 million and states that the trustee will continue to work with private sector providers.

Also, I'd like to point out that some of the U.S. Marshal growth that we have recently experienced, and I think expect to see in the future, is coming from what's called short term sentenced inmates who the Federal Bureau of Prison elects to leave in our facilities with the Marshals as opposed to relocating them in the B.O.P. and we're starting to see more and more of that.

So, now let me switch to the Federal Bureau of Prisons and some of the activity around there. I'd like to start out by talking about Eloy. I think we mentioned most of what I'm going to say in our press release, but just to reinforce it. In November we were notified by the Bureau that they would not be renewing their contract with us for their correctional services at our correctional services at Eloy. This contract was a little unique because it was for both the housing of bureau prisoners as well as immigration custom enforcement inmates. It was a holdover from when the immigration naturalization service, the old I.N.S. and the B.O.P. were part of the same department, which meant a contract with one of those agencies made it easier to administer. Once the Department of Homeland Security was split, it created some accounting issues.

Soon after getting that notice, we did go meet with the B.O.P. to get a better appreciation for the reason for the notice. B.O.P. explained that near the end of 2005, the Department of Defense budget was passed and based on its size that all federal agencies within the government were asked to rescind 1% of their previously approved budget. This amounted to about $50 million for the Bureau, and as they looked around at opportunities because of the inter-governmental inter-agency issues and because the Bureau was actually housing under 500 inmates, they thought that this contract was one they could manage differently, and it was an attractive opportunity to reduce the B.O.P. 's budget. They also made clear to us it had nothing to do with the quality of service that was being delivered there, but it was strictly budget. They also informed us that the rescission was going to require them to postpone the award of C.A.R. 5 until the spring and they have since asked each of the proposers to extend their offer until July.

I would like to point out that during the American Correctional Association convention here in Nashville that has become as custom, [Harley Lack] and the Bureau of prison Director met with all of the private sector providers collectively and indicated that he was going to utilize C.A.R. 5, although he did expect it to be delayed and that he expected another C.A.R. solicitation to be released in 2007. We have pulled our T. Don Hutto facility from the C.A.R. 5 solicitation, but we continue to offer North Fork and Stewart in that.

We'll point out again as we have on several conference calls that the shortfall that the Bureau is facing between their bed needs, expected bed needs, between now and 2010 and their current beds that they have and are bringing online is a shortfall of some 25,000 to 30,000 and they continue to operate at capacity of something under 40%--- over capacity. I would like to point out that when we do open additional capacity in Arizona that that would allow us to consolidate our Hawaiian inmate population that we'll be freeing up our facility in Tallahatchie county, Mississippi which we believe would be an excellent C.A.R. 6 location.

Now I'd like to move to the state activity and what's going on there. We continue to experience strong state demand for out of state beds. We currently provide quality correctional management service to seven states on an out of state basis. All of which have growing needs. We have visibility in these seven states for over 1,000 additional beds over and above what they currently ask us to take care of. In addition, we have additional states that we do not currently do business with that are talking to us about how we can help them with their overcrowding.

We've expressed over the last two conference calls or more that the state of Minnesota feels that they will need to completely utilize our Appleton, Minnesota, facility over the course of this year and into next year. That facility is currently full. It does have out of state inmates in it and to accommodate the growing Minnesota needs, we are considering using all part of North Fork to provide beds for some of these state---other state customers currently in the Minnesota facility.

In the state of Florida, we recently awarded expansion at our [Gas and Embay] county facilities which we currently manage for the state of Florida and we're in the process of finishing negotiations to begin that. And of course, we're presently responding to an RFP at the Lake City facility, which is up for renewal beginning July 1,2006, and this is obviously a threat should the state of Florida choose another vendor.

The state of Colorado recently released two RFPs. One for 2,250 male beds, and one for 750 female beds. And we're currently assessing---if we will, how to respond. We, of course, recognize that we still have ability to offer expansions at our existing facilities and our available beds in all of our four facilities in Colorado are down to under 600.

And one that we're keeping our eye very closely on and one that I think investors in CCA should as well is the gathering crisis in the California system. They continue to have over two inmates for every bed; they're utilizing double capacity, they're utilizing gyms, dayrooms, program space, and that Governor Schwarzenegger did submit a budget which was proposing funding to double the number of private beds they currently use, and we do know that they're considering out of state as a way to solve that. So it's hard to forecast that as being less than 1% or being above 50%, but it is something I think----that should be monitored.

As I describe to you, we have significant opportunities in our three federal agencies, as well as our state customers. We've, of course, done our best we can in timing some of this activity when -- in delivering our guidance. Obviously, a change in some of that would affect the timing of some of our startup costs and we'll keep you apprised as we see that that may change.

And in addition to the things I've talked about, there are still two active procurements that we're participating in, one is the very old 2800 bed solicitation for the U.S. Marshal service in southern Texas. It was recently -- all vendors were recently approached and asked would they extend their offer to the summertime, of course, which we responded. And then, we are in discussions with a contract extension at Bay county jail, a contract we've had for 20 years. The opportunities, the position that CCA has managed to put itself in to be able to deliver solutions for our federal customers and our state customers is quite rewarding.

So with that, we will entertain any questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from Patrick Swindle. Please go ahead.

Good afternoon. First question is on the implication of what a contract might mean at the Eloy facility with ICE. I guess, in terms of the guidance that you have given, have you assumed a steady state population at ICE, or have you assumed you'll sign a contract to fill all of that facility?

Patrick, it's Irv. Let me -- the next question will be did we assume that the Bureau was going to land at Stuart and the next question will be -- and we just can't go there. What I did say in the call is that we are in negotiations with ICE for a contract. That contract would be such -- we hope it is completed. I'll go as far as saying we expect to get it completed and that would enable us, over time, we believe, to have ICE absorb the entire facility, but I really can't go into timing as to how that affects the guidance.

Okay. How many beds do you guys have available today?

Roughly 5800 beds in -- 5800, 5900 beds in inventory today, not counting Red Rock which will be another 1500 beds when it comes on at the---second or third quarter. I would also say in the number I'm giving you is [hutto'd], because they are empty right now, and they are targeted to be used. There are some beds for Prairie in there, they're probably targeted to be used. We're going to be posting an investor presentation, I'll actually be speaking at a conference next week; that investor presentation will have our most recent slide showing what is available and who the targeting customers are. That should be up any day now.

Last question, when you look at each of the pockets of bed space that we're already aware available and look at customer demand, it would appear that line-of-sight exists on virtually all those beds. You announced today the Saguaro facility, what would be the trigger for another incremental build, or is there a trigger and are you all looking at both---additional facility builds or expansions beyond Saguaro?

All of the above. Saguaro is to consolidate Hawaii, and that will free up space in a number of facilities. Many of those facilities have existing customers. For example, if they come out of Otter Creek, through the Kentucky female populations would be expected to absorb whatever Hawaii beds free up. There are a number of customers, potentially, for Diamondback; when those inmates leave, and so we think we have a line-of-sight on filling any vacancies that result from this consolidation of Hawaii, and that certainly we would hope to solidify our ability to serve the state of Hawaii.

With respect to additional facilities, I don't know right now -- again I can't speak--I always caveat this---I can't speak for the board of directors, but we have said that we would like to have 3,000 to 5,000 empty beds in inventory at any point in time. Given the inventory we have and the line-of-sight that we have on multiple customers as John has stated, our investors should not be surprised if we were to announce something like a speculative build located in the right place.

So I think the answer is, we're not alarmed at where we were with respect to inventory, but we do see a lot of demand, and we are very, very cognizant of our need to try to stay ahead of that with inventory, so it's going to be a balancing act. And--but it's a good problem to have.

Thank you, Irv.

Thank you, your next question is coming from Jim Macdonald with First Analysis. Please go ahead.

I hate to go down the road, Irv, that you didn't want me to go down, but---sounds like North Fork is in your budget, so I have to ask; is that opening in your budget?

I did say we would expect to incur startup costs on North Fork, Jim, but it could be for any number of combinations of customers.

Okay.

I think what John was saying, and I liked how John said it actually. We didn't rehearse that, but he was going to bring it up with state, federal, I.C.E., B.O.P., and I think -- we do expect it to open, and I can't really tell you which way it would go right now.

Okay and for Red Rock, is it a Q3 event or is it an end of Q2 event or is it kind of full quarter Q3?

I would tell you it's probably ended somewhere between late June and August 1 is kind of where I'd see it right now.

Pretty much full quarter?

Yes.

And then you talked a little bit about operating expenses, maybe you can go into a little more detail. Are you getting any big benefits right now? It sounded like health care was a big benefit, maybe you can talk about that. And what about other litigation, is that a positive event, other workers' comp., those kind of things.

Medical, I would say that there have been a number of things we have done from a national pharmacy contract to trying to reduce the number of registry nurses we have. What we've found is it's cheaper to raise nursing salaries a little bit, reduce the turnover, and not have to go to an outside agency, which is charging you a lot more. We have tried in as many cases as possible to review our contract in contract terms as to what would be responsible with a customer and have tried to negotiate those in a more favorable manner and just looking at medical staffing and as some of it relates to I believe the IMS2 as we roll that out and create some efficiencies there.

There's a whole variety of things we're doing on the medical side. I can't tell you which one has the most traction. We entered into a national food contract last year and outsourced our food management; that's been very successful. Since I got here, about a year after I got here, I was alarmed about workers' compensation and we've aggressively attacked our workers' compensation, and our workers' compensation costs have been dropping and our reserves related to workers' compensation have been dropping.

And, there was one more--legal. Last year our legal folks did---just a great job. Obviously when an event occurs, we have to establish a reserve as to what we think that event might ultimately -- the cost that might ultimately result. And our guys have just done a terrific job of settling those cases for a little bit less. Operations is responsive -- so legal is responsible for that part. Operations clearly is responsible for getting a handle on medical and other costs. And I just think across the board, if you look at everybody who contributed here, medical is part of operations, but our operations people, our medical people, legal and our guys who are working hard at workers' comp and our wardens---we just look at it, as John said, we want to thank everybody in the Company. It was just a great---it was a great finish to the year.

Okay. Just one quick follow up, and I'll come back in queue. You said the reserves were dropping for workers' comp., is that---how significant is that then?

It's just a contributing factor. I don't have the specific numbers in front of me, Jim. They've been coming down recently. What happens is you have a long lag time when you're dealing with workers' comp. and you're dealing with actual real estimates. It takes a while for these things to come down. I think before John and I got here, workers' compensation was not a focus. Jim, you're as good a historian as anybody and we have focused on that more and it does take a while to bring it down, but we are having success in that area.

Thanks.

Thank you, your next question is coming from Mr. Scott Schneeberger with Lehman Brother. Please go ahead.

Hey, good afternoon and nice work. First place I want to start off is, everything seems to be going smoothly, so I'm going to try and find any holes. Tallahatchie---I mean, you guys are consolidating Hawaii. You mentioned Kentucky females filling Otter Creek, that Diamondback should be okay. Tallahatchie---any ideas there or is that going to [last out] for a while?

Well, I think it---we -- a couple responses to that. The Governor of Mississippi has stated from the day he arrived a little over a year ago that he was committed to trying to use the private sector to help him bring competition into his system as well as deal with his cost. So we feel Mississippi would have an interest in the facility, but we really think that based on the location of this facility as it relates to wages and other things that it would be an excellent facility for us to respond to C.A.R. 6 with.

Thanks. I guess, again, trying to look on a few more angle of the guidance going ahead. It sounds like a lot of Federal opportunities, sounds like a lot of State opportunities. Can you speak at all about State or Federal you see coming up that may be of risk of departure, anything you see on the horizon there?

We mentioned a couple things that we're currently -- think about that, I don't --

I think it's mostly local stuff that would be anything at risk which John talked about. I think---can't think of anything right now.

John, you mentioned the RFP for Lake City.

Yes, Lake City was---- we're in active discussion negotiations there. That will be taking place next week. We feel that we can be able to demonstrate an experienced level with unique population so that we can maintain that, but it's not a certainty. And then the Bay county, I think that's the only things right now that --

Again, Scott, if you go through -- we post a supplemental report that's up there now, I'm sure, on the web. It shows all of our contracts that are set for renewal. As you go through it almost every year, you'll see a large number of our contracts are up for renewal every year. I guess what we're saying is we don't believe any other than the two we mentioned here have a significant chance of risk right now, or are significantly at risk right now. There's no guarantee in life, but those are the two that jump out. And they're both local.

That's great. Thanks. That's what I was looking to hear. Just a couple more quick ones. First off, legal issues in '05, you cited that as being head wind. A lot of the events that that was associated with sound like that's water under the bridge now, is that still the case or are we going to see -- is there still a tail on some legal issues into '06?

We always have legal issues. As I recall, our last 10-Q nothing rose to the level of disclosure in our lost 10-Q, I don't believe that when we do the 10-Q for this quarter that anything will rise to the level of disclosure there. So again, lots of cases, they're all shapes and sizes and fortunately for us sometimes we settle them for more, sometimes we settle them for less, but really no big problem jumping out right now.

Great. Finally, turn it more on a positive note, the California opportunity, it sounds good, you guys sound reserved, but excited about that. Can you just elaborate a little bit more, and is there an Arizona tie-in opportunity there would you think?

Well, let me say we're very reserved, because California is one that we would be pleasantly surprised if we do see something, but there is activity, there is -- their health care system has been taken over by a federal judge, their regular security part is in chaos and crisis mode. Even to the point that the very powerful union is saying, something's got to happen to get relief. Of course their solution is to build thousands and thousands of very expensive new beds in this system.

I think we start to point out that we have a real affordable opportunity and alternative for the state that needs affordable alternatives. And as far as the beds that are available in Arizona or could be made available, yes, if all of a sudden California decided that they wanted to find 8,000 beds out of state, that would put us in a position to probably make some choices. Just bringing it up, I don't think anybody should get real excited, but it's something that if they're investor in this stock, you probably want to watch it as closely as we're watching.

Great. Thanks a lot, nice work.

Your next question is coming from Anton Hie with Jefferies. Please go ahead.

Good afternoon. The revenue per [manday] was a little surprising the way it jumped sequentially, can you talk about what was in there? Was there anything out of the ordinary?

The thing I guess I would say is northeast Ohio -- we don't disclose per diems, but we do---we have said that Federal customers do pay a bit more than State. We did expand Leavenworth, we did expand Houston, we did have the northeast Ohio contract. We did have a balance of federal customers, but I would also tell you that, we do, across the board, in almost all of our contracts have built-in increases.

With the state budgets struggling as they were the past several years, there were one or two cases where we had issues trying to get the increases. I always said, I'd rather fight that battle than to see a lot of beds coming online. State budgets have clearly improved and we are starting to -- and we are starting to -- it's getting a little bit easier to get these rate increases passed through. So, I would just say we just had a better year this year.

One of the other things that is playing out is that 2.5 years ago, we were awarded substantial contract from the state of Texas which was less than what our average per diem is; that was absorbed into our numbers and almost every contract since then has been above that. So it helps us improve the average.

Are you at liberty to say if there's annual updates in that Texas contract?

There are biannual updates.

Okay.

Every two years.

One other quick question. Is the SG&A popped in the fourth quarter for a number of reasons that you outlined and as you've done some additional spending there---can you give us a handle on where that might go in '06 with FAS123 in there as well?

What I would---specifically we said that there was going to be $0.06 more in costs. So, last year we had $0.03 in stock related costs, this year we're going to have $0.09 in equity compensation [inaudible] costs. I do hope people keep that in mind, apples to apples when we do compare it to 2005. Other than that, what I would tell you is our target is----still is to try to stay something below 5% of total revenues. I think we can do that in 2006, and I would leave it at that right now.

Again, we've been up front about the fact that we're making some commitments here at the home office in HR, information technology, we also wanted to put in what I call a compliance quality assurance area where we spend a little bit more time auditing prison operations to -- to continue to control quality. Again, we're going to try to target to stay under 5%. It's something that we watch; you wouldn't believe the amount of discussion that goes on about it here, trust me. And we'll talk about it, we'll disclose as much as we can to help the investors with it.

Thanks, Irv.

[OPERATOR INSTRUCTIONS] Your next question is coming from Dana Walker with Kalmar Investments. Please go ahead.

Good afternoon.

Hi, Dana.

Happy to be a shareholder finally.

Happy to have you.

Thank you. Can you talk about your plans for Red Rock? You mentioned in the press release that you would hope to place Alaskan inmates there. What is the advantage in taking them from one Arizona facility to put them in another, and what would you hope to do with the freed up space at Florence and the incremental space at Red Rock?

Well, one of the issues that we deal with is that the contracts we have at central Arizona and Florence, which are really just one big complex are predominantly Federal contracts which dictate the wages that we have to pay, which are Federal wages, which are significantly above what the prevailing market is. This lets us move Alaskan inmates over to another facility which will mean that---more along with what the state of would be for those. We also have in the 5,000 inmates, we have about 1,000 are State and this would let us run those facilities exclusively as Federal facilities. And we know Alaska has the need for additional beds, which we cannot provide them in Florence.

We have Federal---we have down there also---tend to be detention customers not requiring as many services so --

So the plan at Red Rock is to place additional State?

State inmates. It will be exclusively for State inmates.

Okay. Second question is this: You referenced new states without necessarily attributing which new states you're in conversation with, possibly California was in that list. But can you talk about which new states or---

I would prefer not. We have an advantage in that when cust---when a state has overcrowding and has a need for just-in-time beds, we are in kind of a unique position, and we prefer not to disclose. I'm sure our competitors are listening to this conference call---that we did not talk about some of the activity that prior to being publicly required to be announced.

If we were allow that anonymity to follow on, but talk about how unusual the nature of these conversations happens to be now versus some prior time, would you say it is different this time, or it is not different?

What do you mean?

In the sense, these conversations, are they more heated, more focused than may once have been the case, or are they the sort of thing you deal with all the time?

It is---we probably---at any point in time will have at least a couple of states in which we currently don't do business with who's looking at a solution for their overcrowding.

A couple last questions. When you mentioned that State budgets are somewhat more flush than they have been, to what degree, aside from being able to pay more to house inmates, does that perhaps invite them to consider adding space that would be public-funded rather than private-funded?

That is a possibility. They do have alternatives that in tougher budget times they did not. We'd say those states that have gained some confidence in the---our ability to deliver the service, those states in which we actually currently still own the facility and we have some expansion opportunities, they -- we give them alternatives. Having had some experience in putting together a state budget. Prison expansion is kind of one of the last things you want to deal with. And you'd rather fund the other things that appear to have a little bit different kind of return, education, health care and so forth. So as long as we're there and we can offer an alternative, we give them the opportunity to not have to make that choice. But some states will, with additional funding, may decide that they want to build a public facility.

Right now, Dana, and again you'll see this when we put up this presentation that I'm going to make next week, we get a lot of -- we try to get research from the national -- I believe it's the national conference of state legislators. What we're seeing is that despite the fact that money is coming in, that receipts are up in 40-some states, there is a great deal of concern still with respect to spending needs, particularly around medicaid, what the federal government might do as far as aid to the states for medicaid, plus baby boomers getting older. There's still still a number of competing spending requirements just as John is saying-- we're not seeing anything---again I would say anything meaningful with respect to prison construction. It it will take some period of time, even if they started to bring the beds online.

Final question is this, with what appears to be an increasing balance of power shift to those that have space versus those that have inmates, I'm curious whether that changes the nature of the terms in any of the contracts that you might pursue more in favor of yourself?

I wish it was that easy, but we are always competing against our customer. And so there is always----some price activity to what -- so it is an advantage to be able to deliver bed space when a customer needs it. We've never found where that's allowed us---we would actually take advantage from pricing standpoint. It will always get to what's, I'd say, is a reasonable, win-win negotiation.

Well, I'm more focused on your Ohio contract where you have a take or pay, where the price might not be greatly different than what you're doing in other federal circumstances,at least it provides some protection against the vagaries of any-day need. Is that type of contract language more available than it once was?

It's really unique to the C.A.R. pipe----criminal alien requirement act under the B.O.P.; I don't think we see that in any other places, really.

The closest you might get is where somebody really gives you a minimum guarantee, and therefore you might give them a price break above that guarantee. That's kind of the same contract, left-handed, that doesn't have---it's----

We call it tiered pricing.

Thank you very much.

Thank you. Your next question is coming from Jim Macdonald with a follow up from first analysis. Please go ahead.

A couple little areas. First, can you talk about what kind of price increase you have built into your budget,

Jim, I would say that we kind of look at it contract by contract, but what I tell people is as a general rule you should look for something like CPI.

Okay. And on the I.T. CapEx, it's still a pretty big number. Give us a kind of overview of where that's going.

I.T. CapEx is not all related to this rollout that we're involved in. It's PC recycling, it's -- we continue having to have redundant systems and maintenance contracts for what we're putting in. We are probably still two years away from having a complete rollout of IMS2. And I've said to people all along that I expect our I.T. budget will start to move down from a 20 closer to 15. I don't see in any year an organization this size----we're going on 16,000 employees, we'll be going over 65 facilities hopefully this year or next year, and I just don't see us getting down below 15 million. We've been very pleased thus far with the IMS2 rollout. But, we've also put in new general ledger systems; we're trying to put in e-learning and delivery systems like that to some of our folks out in the field and I think that this 15 to 17 kind of million or $18 million number is what it's going to be.

Okay. And I was wondering if you could comment in general to give us some flavor on two areas, number one the new 6700 beds they're talking about with the detention strategy and how much of that is likely to be private, maybe or just your thoughts on that. And then also on Colorado. Whether those are likely to be new facilities or new contracts to fill old beds or expansions or whatever.

Well the ICE facil---ICE bed needs under the Secured Border Initiative potentially could be all private. ICE does not build their own facilities. So, it wouldn't be theirs. It could be some local jails. The dilemma that ICE has with the kind of activity that they're going to be dealing with is that we bring some really superior logistics benefits to the customer, because it is a significant revolving door in these facilities. Average stay is under a month and with the rapid removal, it will probably even be faster than that. To go to local jails to get this would add some real burden to a jail that they're not prepared for. So the private sector and hopefully CCA can come up with all 6700 beds and they, in fact, acquire 6700 beds then the private sector should be able to deliver that service to ICE.

On Colorado, we're trying to assess what to do there. We have four facilities; we expanded one of them two years ago and actually, we're really down to the last beds, or happen to be those expansion beds and numbers, I don't know f it's exact beds. So the growth in Colorado was, I guess, around 500 inmates in the last year, something like that. So if we respond, we'll probably look at an expansion because we can be very competitive on that. That doesn't mean we won't consider a greenfield, but right now, we feel that we might be able to satisfy a fair amount of that with a pretty good -- being fairly competitive by expansions.

Is there any size, minimum size that you have to bid on of the 2250, say?

No, not that I understand, I think you can probably bid any combination you want. If you want to bid one stand along, 22 and 50 bed, you can do that. I would say that from what we know in Colorado finding a suitable and acceptable site is not not an easy thing right now.

Okay. Thanks very much.

Sure.

Thank you. Your next question is coming from Mr. Andrew Berg with Host Advisory Group. Please go ahead.

Hi. I apologize if I missed this. You had mentioned increased legal costs is one of the reasons why your SG&A was where it was in the fourth quarter this year. How much of that increased legal cost is just sort of ongoing, what we should expect and how much of it was sort of nonrecurring?

Fourth quarter, I believe it was up a little bit, but for the year, and I don't have it in front of me for the year right now, I believe it was actually down. So it's really difficult to predict because every case is unique, what will happen. Again I would commend our legal people. Fourth quarter was a little bit higher due to a variety of reasons, again a number of cases. I just don't know how I could give you a general answers as to what we expect. We try to budget as best as we can.

That's not SG&A --

No, it's an operating cost. Did he say G&A? I'm sorry. If you said G&A, I'm sorry. It was in operating costs.

[Overlapping speakers] I'm just curious how much was sort of above what you expected in the fourth quarter, if you can put a number to that or not?

I can't tell you that it was significantly higher than we expected in the fourth quarter. It was somewhat higher than we expected in the fourth quarter and I think we got a little spoiled during the year because actually, for most of the year it'd been lower. So as we look forward, as we look forward---as we look forward, again, all I can tell you is we try to do the best we can on budgeting, every case is a unique case and we'll just have to see how it plays out.

Okay. Thank you very much.

Gentleman, there appear to be no further questions. I would like to turn the floor back over to Mr. Bill Andrews for his closing comments.

Well, thank you all for your attention and for your comments. As usual, I'll just try to summarize this briefly, the high points. Fourth quarter, $0.60 earnings per share excluding the $0.02 charge for accelerated vesting, which we thought would help us going forward. $0.41 in the fourth quarter of 2004, also excluding certain tax adjustments--a nice increase. We had favorable income tax rates. John mentioned that --- the things that are causing this nice fourth quarter in northeast Ohio, Prairie, Lake City, Diamondback, and Crowley. Our free cash flow increased 37.6% to 41.5 million in the fourth quarter. For the full year we had $1.84 earnings per share excluding special items, compared to $1.55 in 2004, up19% and for the full year, our free cash flow increased 13.8% to $128.2 million. Our year started out slowly, but as you can see we improved throughout the year with an excellent fourth quarter. The fourth quarter occupancy was 93.1, up from 92.9 in the fourth quarter of 2004. And our operating margins increased to 26.6% from 25.5% in '04.

Irv gave you guidance for 2006 for the first quarter of $0.47 to $0.50 a share, and for the year $2.10 to $2.17, which excludes a $0.02 charge for debt refinancing, which we've already done. John talked about the future and he broke it down into the three different businesses. The Secure Border Initiative with ICE and the Marshal services looks very favorable for us. The policy in this country has changed from catch and release to more detention, and that means we'll be incarcerating more illegal aliens. We've already received a contract at Don Hutto, and it looks like we're in discussions to fill out the remainder of Eloy where we already have ICE inmates.

At the Federal Bureau of Prisons, we did lose about 300 beds at Eloy. They had a budget cut and they preferred not to mix in the prisons, so they moved out. And as a result of the budget cut, the C.A.R. 5 contract, which we thought was going to be coming up in February is now extended to July. And we're now offering North Fork and Stewart as possibilities for the Bureau prisons.

John said we have strong out of state demand,there are currently seven states where they're shipping prisoners out of their home states, and all of these seem to be increasing their demands. North Fork looks like we have a possibility as well with the Bureau of Prisons with state prisoners because with Minnesota filling up, we'll probably move prisoners there. And some other possibilities.

In Florida, Gatson and Bay county, our expansions, we do have an RFP coming up that could be at risk, but you never know until the cards are played at Lake City. Colorado has been filling up all year, they now have two new RFPs, one for a large male facility and one for female facility. And there still is this outstanding RFP in Texas for the Marshal services for a large 2800-bed facility.

People talked about our expenses during the year and I want you all to know, we are always working on our expenses and we will continue to do so.

So finally, we had a great quarter, a good year, and we have further opportunities for 2007. So with that, thank you all for attending and thank you for being our shareholders. Good-bye.

Thank you, this does concluded today's Corrections Corporation of America conference call. You may now disconnect your lines at this time, and have a wonderful afternoon.