CoreCivic Inc (CXW) 2008 Q3 法說會逐字稿

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

Before we begin, let me remind today's listeners today's call contains forward-looking statements pursuant to the Safe Harbor Provisions of the Securities & Litigations Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made today.

Factors that could cause operating and financial results to differ are described in the press release, as well as on our Form 10-K and other documents filed with the SEC. This call may include discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measures is provided in our corresponding earnings release or posted on our website.

We are under no obligation to update or revise any forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of anticipated events.

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

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

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

Thank you, John. Good morning, everyone. Moving straight to a summary of our results for Q3. In the third quarter of 2008, we generated $0.30 of EPS compared to EPS for last year's Q3 of $0.26, representing an increase in EPS of over 15%.

EBITDA increased 14% to nearly $99 million for the quarter. Adjusted free cash flow for the quarter increased over 12% to $62 million. This brings adjusted free cash flow for the nine months year-to-date to $191 million, an increase of 20% over the same period last year.

Total revenue for this year's third quarter was up 8.9% over last year, an increase of $33.6 million. Total compensated man-days in Q3 increased 5.4% compared to the previous year. Revenue per compensated man-day increased in Q3 4.2% to $57.23 from $54.94. While compensated man-days increased 5.4%, you may have noticed that average compensated occupancy for the third quarter declined from 97.9% to 95.3% as a result of placing nearly 9,000 new beds into service during 2007 and 2008. 4,000 of these beds were placed into service during 2008 alone.

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

Moving next to a discussion of operating costs, operating costs per man-day for Q3 2008 were $40.33, a 2.8% increase over Q3 2007. Our Q3 2008 operating costs per man-day reflect normal wage and other general inflationary increases, as well as operating inefficiencies associated with the ramp up of new bed activations at facilities such as La Palma, Tallahatchie, Davis, and Leavenworth. As we've discussed previously, the operating costs per man-day on newly activated beds start off higher as we are ramping up costs -- up fixed costs, particularly staffing costs. And then decline as we increase occupancy, which allows us to leverage those fixed costs lower on a per compensated man-day basis.

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

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

I will finish with a discussion of our guidance for 2008. As indicated in the press release, we have updated full-year guidance to a range of $1.18 to $1.20 compared to previous guidance of $1.21 to $1.24. Guidance for Q4 is in a range of $0.30 to $0.32. We have revised guidance primarily as a result of longer than anticipated delays as the State of California made transfers to our Tallahatchie County facility, slower than anticipated ramp up of State of California inmate populations at our other facilities. Delays in negotiating the new US Marshal contract at our DC correctional treatment facility, and recent and projected reductions in inmate populations from the states of Washington and Minnesota resulting from earlier than anticipated utilization of new state-owned bed capacity.

The delay of inmate transfers to our Tallahatchie facility was the result of negotiations and implementation of the corrective action plan with the CDCR and federal medical receiver requiring more time than anticipated. In addition, the processing of inmates by CDCR for out of state placement has experienced delays resulting in a slower than anticipated ramp up at our other facilities.

Unfortunately these delays have caused us to revise our occupancy and revenue forecast related to the State of California for the balance of 2008. However, it's important to note that our relationship with the customer remains strong, and the State of California continues to express its intention to fully utilize all of the 8,132 beds available to it under our contract.

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

Finally, with regards to the clients and our populations from the states of Washington and Minnesota, both have begun utilizing new state owned bed capacity earlier than anticipated. As a result, Minnesota has removed 228 inmates with plans to remove another 200 to 250 by Q2 2009. And Washington has removed approximately 220 inmates.

One of the primary risks to our guidance continues to be timing around the receipt of inmates. This continues to be a risk with the State of California contract. However, should there be a shortfall in our expectations, we are still optimistic that demand from customers will ultimately fill our beds, albeit over a longer period of time.

Turning next to a discussion of our liquidity. As of September 30, 2008, we had cash on hand of $29 million and $237 million of availability on our $450 million revolver. For the nine months ended September 30, 2008 as I mentioned earlier, we generated $190 million of adjusted free cash flow, excluding the cash out flows associated with new construction projects. At the end of September we had $236 million left to spend to complete all of the new development projects announced today.

We believe that cash on hand, free cash from operations, and capacity available under our revolver will allow us to fund all development projects announced today without the need to access the capital markets. We believe our strong liquidity position, balance sheet, and free cash flow provides us a competitive advantage, especially given the uncertainty in the financial markets.

Overall the outlook for our business remains quite favorable. The projected demand for additional prison beds, combined with our new beds under development and our ability to fund further development, provides CCA with significant opportunities for growth.

I'll now turn it over to John for specifics on our new business prospects and bed development.

Okay, as I typically do, I'll briefly touch on the two measure customer segments that we have. Starting out with the federal segment. Year to date we've added about net 2,000 net new inmates and detainees. Overview of the -- where the BOP is, we -- the BOP's population currently is a little over 200 in 2,000 beds, which is 37% over their rate of capacity, which is pretty consistent with what it was last quarter. Their most recent projections, although they're down a tad, they're still expecting a growth of between 13,000 and 14,000 net new inmates between now and September 30, 2011. And we can identify only about 7,500 new beds available to them.

Obviously one of the ways that they are dealing with their bed needs is they issued a solicitation referred to as CAR-8 and CAR-9 for approximately 4,000 contract beds. The president's fiscal year 2009 budget had in there $50 million for these 4,000 additional contract beds for six months of that fiscal year and with that in turn, that would have been starting around the first of April through the end of the fiscal year of September 30.

We do know that at the moment, the Department of Justice and therefore the Federal Bureau of Prisons is operating under a continuing resolution and that the Bureau has expressed reluctance to award a long-term contract until they get a firm budget. And so, the uncertainty there would lead us to believe that the activation that had recently been planned will probably be delayed. Obviously with a democratic president, that might in fact allow the passing of a budget sooner than it may of otherwise.

And of course they have now out the solicitation that's referred to as CAR-10 and CAR-11, and these are actually re-bids of the two contracts we currently have under what was referred to as CAR-1. For these contracts expire in the fourth quarter of 2010, and this is preparing for the anticipation of the expiration of those contracts.

We continue to see needs for the US Marshal service. As we've said many times that they've been averaging about a 7% growth here in the last four or five years, and don't know of anything that would change that growth. And as we look at the BOP and the shortfall that they have in their bed needs, that in fact influences the need for additional marshal's beds, as many of the marshal's inmates are transferred to BOP facilities once a detainee is convicted of a crime.

One business note in the third quarter. We've had a long-term contract with the Marshal Service at our Central Arizona facility in Florence, Arizona that actually expired in May. They put out a solicitation for those beds. We were identified as the organization for them to negotiate. And in September we signed a new 20-year contract for the continuation of that relationship. Not only does it include the beds that are in our Central Arizona facility, but also includes additional beds that is in our Florence facility, which is right next door. And also includes the availability of some of those beds for immigration custom enforcement.

As we denoted in our press release, the planned completion of our facility for the Las Vegas district, our Nevada southern, now is -- looks like the completion would be in the second quarter of 2010 as opposed to the fourth quarter of 2009. And this delay is based upon the request by the customer.

As we look at the activity in immigration and custom enforcement, the one budget that was put in place for the full year was immigration and custom enforcement, or one of three that we're putting together. And the funding for that is for 33,400 beds. That's an increase from 32,000 in the prior fiscal year and also that compares to a little over 31,000 detainees in their -- been -- as of June 30th.

Also in the budget that was approved for '09, we saw an increased funding to identify criminal aliens that are in local and state facilities. And I take that just to remind everyone that as we went out on numerous occasions that detainee beds that would be sourced from us are for several places that the immigration custom boys need. That's border apprehensions, people that overstay their visas, that -- people that are identified as criminal in the jails and prisons by people that -- who have completed their time in jail and prisons and will be deported.

Obviously additional illegal aliens residing in the United States and of course those who get caught who are engaged in criminal activities. So, even though we've seen the border crossings and apprehensions decline in the last couple of years, we're really talking about dealing with a population well north of 12 million -- estimated north of 12 million illegal immigrants residing in the United States.

One quick observation on now the results of our national election and a more democratically controlled congress as well as democrat leadership in the presidency. I think as -- I don't see anything that would dramatically change what we've said previously. Obviously we can't be sure of all of the public policy changes that might come about, but as we've said previously the Federal Bureau of Prisons, US Marshal Service, and immigration and custom enforcement are carrying out the statutory obligations for their area of responsibility.

We have now experienced a democratic controlled congress for the last couple of years and not seen anything dramatic as it relates to funding of these responsibilities. In fact, we've seen increased funding for these areas, recognizing that the need is there and will continue to exist.

We do know that the immigration reform that was debated and discussed in April 2007, the grand compromise, will probably be revisted. But I think the attitude of the current president and the attitude of the future president were pretty aligned as to wanting some comprehensive immigration reform. And I think we evaluated that at some distance and I think reported on that. So, obviously can't make sure, but right now we think that our relationships with the three federal agencies should continue and we should continue to see their utilization of the private sector to meet their statutory obligations and requirements.

We've seen our state populations grow at -- right at 2,500 since the beginning of the year. Todd mentioned the -- that we continue to move toward the 8,000 plus to be in our system by the end of the first quarter of 2009 or very closely thereafter. Of course we did respond to the new request for information that California issued a few months back for additional beds. And our response included numerous beds that are available right away as well as some new beds that could be available or we could make available.

And so we have not heard when they might deal with making a decision there, but we -- as we've said previously, we think that one of the silver linings of what we dealt with at Tallahatchie is that I think we demonstrated our ability to deliver the level of care that now the receiver expects. And we think that should be beneficial as California looks at future beds.

The Arizona, 1,200-bed solicitation is still in place. Have not heard when they might award that. We also received a new contract, but it was actually a renewal of the females from Hawaii that we provide in a bed space at our Otter Creek, Kentucky facility, so we're pleased at that. Plus we went out in a press release that Texas put out some of their facilities for a new contract. Two of them are ours. Contract expires on January the 16th, and we were not able to receive a reward.

That award came -- became all about price, and I think we've tried to express that we believe we had some discipline as to what price we think -- and margin we would need -- for any housing of any inmates regardless of whether we own the facility or not.

Georgia has an RFP for 1,500 expansion beds currently active. And of course, Idaho has an RFP for the management of their facility, which is a facility that we've managed for close to ten years. So, it is both an opportunity and a threat. That contract expires on June 30, 2009, and we believe that somewhere in the March timeframe is when they will make an award. So, we are competing to continue to maintain that business.

And then we are -- have discussions going on with several prospective states that we feel that based on the current environment that many states are experiencing gives us the opportunity to help them deal with some of their budget problems in looking at the private sector where maybe they didn't previously.

So, just to reinforce what Todd said in his comments, and what we've said in the press release that we're in unprecedented times. That we're continuing to monitor the challenges faced by our customers. They're going to receive less revenue than they had previously anticipated. We -- it's unusual financial for them seeing some states even having a hard time borrowing at -- even at some decent rates.

We will expect most legislators to go back into session in the beginning of the new calendar year. And that will bring on all kinds of actions to deal with budget shortfalls, some of which may affect us. Of course we've been through this previously back in 2000 and 2001, so it's hard to know the uncertainty and what -- or at least we know there will be uncertainty, but what consequences of that will be. But as Todd said, we really believe that long-term this will benefit the private prison industry and specifically CCA.

So, all those areas, some uncertainty, we believe CCA continues to be in a very good place to benefit from our customers' and prospective customers' continued demand for prison beds, because we believe that as we've said, regardless of the economic cycle, there continues to be a growth in inmate populations and that growth continues at a time when the supply is not being developed by our customers.

So, let me finish up with the opportunities for growth that we see and where we are. If you look at our press release, we have a pipeline of nearly 13,000 beds. About half of them are beds that we currently have finished developing or are part of a facility that we manage for a customer. But those are in our inventory and then another 6,500 of them under development, primarily in the four major facilities that we have under development.

If we kind of take a look at those 13,000 and counting the soon-to-be-completed Adams County, we have over 5,000 beds that we can make available to meet some of the outstanding requests that are out there. And that's specifically California, Arizona, and the Bureau of Prisons, which collectively -- and we've just got to guess what California's numbers might be, but we would believe that those three government entities are looking at probably somewhere around 10,000 beds.

So, we feel pretty good that if their decisions are made that we have the opportunity to help meet some of their demand. Once again, it's all about timing even though we have a large solicitation collectively, the timing in which they may make the decision, the timing in which they may use the beds are something that we have very little control over.

In addition to that, if you look at the 13,000 beds, we have nearly 6,000 of them -- or beds, that are available with an active customer contract. Some of the beds overlap in the ones I just mentioned. But those 6,000 beds, obviously we don't have any guarantees against those -- the utilization by our customers. And in some cases, we're not guaranteed to deliver those beds. But I think it is noteworthy that about half of the 13,000 are in situations that we believe over some period of time could be absorbed by our current customers under their current contract.

So, again we feel that we've got fairly good visibility for ultimate utilization. Obviously we're -- as we said, we're in some unprecedented times. Even though we know that inmate populations will continue to grow at our state customers and our federal customers. We know that they're going through an unprecedented budgetary time, which may mean that some of their actions in the short-term might affect the utilization of beds that they need right away, but maybe postponed to try to balance their budget.

But if we just take a look at the 13,000 beds that we have available, both under development and inventory, and as we usually do, just apply what our margin for owned and managed only business for that, we're looking at a potential of an additional $108 million of facility EBITDA, which is approaching 40% of what our nine month's EBITDA for the Company has been.

And then to talk about the continued opportunity for us to meet demand that we believe we will continue to see develop in the marketplace. I think our liquidity and balance sheet are in great shape for future opportunities. In fact right now, two stories. One is that if we didn't announce another product, another development with our cash on hand, the cash we expect to generate for this -- the second half of this last quarter of the year. Looking back over the last 12 months and looking at we just generated in 2009 the last 12 months of free cash flow that we could fund the completion of all those projects and have excess cash available.

But if we were to see the need to develop numerous beds, which we believe long-term is going to be needed, and we were to see the market settle down, be able to utilize the capital markets, take our leverage ratio of -- from less than three up to four, I think we're comfortably looking at the ability to fund some 13,000 additional beds over the 13,000 we have in our pipeline between now and the end of 2011.

So, we're going to be in some uncertain times. Uncertain times that probably not anybody alive today that remembers a time that's comparable to what the market's going through, what the financial marketplace is going through. And so, although we feel that we will continue to see our customers' needs for inmate beds to grow even during this period of time, there is uncertainty as to the timing of when they might use these beds. And uncertainty as to how they may approach their next budget that they will start to put together starting after the first of the year.

But we think we're well positioned to benefit long-term with what is happening now. It just may unfold over a longer period of time than it normally would have if we were not all experiencing what we're currently experiencing.

But I will say it is very comforting to see our liquidity and balance sheet positions. And that that is one of the things that we don't have to worry about. And we believe that somewhere along the way that will benefit us in maybe some unknown even that could unfold because of the -- so much -- so many things happening that haven't happened previously.

So, with that I will -- Operator, we are ready to entertain any questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from T. C. Robillard from Banc of America Securities.

Thank you, good morning, everyone. Todd, can you give us a sense, because obviously California seems to be the area that's tripped you guys up now two quarters in a row as it relates to forward guidance. Can you give us what your assumptions were for California's ramp rate for the third quarter and for the fourth quarter prior to your revised guides? I'm just trying to get a sense as to -- per your comments that the inmate transfers didn't come in as expected. Can you just give us a sense as to what you were expecting?

Yeah, I don't have the exact numbers in front of us and we probably wouldn't disclose the exact numbers, but we were hopeful that in kind of a best case scenario we'd be in a position to start that ramp up in September. And we thought maybe the worst case was calling it an early October ramp. And unfortunately we were disappointed. Those negotiations took longer than we anticipated. And now it's a November timeframe.

And as a reminder, all of the -- the majority of the fixed costs were in play, so receiving those inmates starting in September and October would have had a significant impact. A little bit of a favorable impact in Q3 and a significant impact on Q4.

But what about -- I guess just California as a whole, you made some comments that even to some of your other facilities, the transfer rates were slower than you were expecting. And I mean if you look at the quarter, California was transferring roughly 300 inmates a month, kind of on average, which degraded lower than what it was in the first half. But key relative to what was happening on your call back in August, didn't seem to me to be a bad number. So, I'm just trying to get a sense, what were you guys looking for in the second half? If you go back to your August call, what were your expectations for California as a whole into Corrections Corp systems for the back half of '08?

When California started to have concerns around their ability to fill beds at Tallahatchie, we had additional capacity at La Palma and North Fork that they could have accelerated a ramp up on. And they expressed a desire to do that. And actually provided us a schedule that showed a more aggressive ramp on both those facilities. And at the end of the day, they didn't meet those ramp up schedules.

So, T. C., it was not only just Tallahatchie, it -- when we were providing guidance back in August, we were also thinking that we were going to see utilization, we'll say La Palma a little quicker. And La Palma and Tallahatchie are really the same in that we've been staffing well ahead of receiving the inmates. So, we've been carrying a lot of staff in both locations.

And North Fork was in a position to accept inmates -- a larger number of inmates sooner. And again, California had expressed a desire to do so because remember they're under tremendous pressure to be able to continue to show progress in relieving their overcrowding to keep the federal courts off their backs. So they had desired to increase the ramp up to both those facilities and at the end of the day they didn't get it done.

So, were they looking to do 400 inmates a month then?

I don't want to get into specific numbers, but it was higher than the numbers that the ultimately delivered, yes.

Well, I guess -- and this is kind of where I'm a little confused. So, they didn't hit their targeted transfers, but you guys hit your third quarter numbers. October, it looks like they transferred over 400 inmates for the month and yet your guidance has come down substantially. So, it seems to me that they're kind of in line with what they're expecting as we're entering the fourth quarter. You hit your third quarter number, but fourth quarter's coming down. Can you help me kind of connect the dots here? I must be missing something obvious, but I can't see it.

Yeah, again I think as we just outlined, they had provided us a revised schedule of both La Palma and North Fork, which would have given us higher inmate populations that we ultimately ended up with. And that was built into our guidance, impacted Q3 a little bit, but more importantly on Q4.

Okay, and so basically you guys had in your original fourth quarter guidance, you guys were looking to start off with a higher California inmate population.

That's right.

And so, then as we look at the new guidance, I mean obviously one of the concerns and the questions that's out there that we're getting. I'm sure you guys have already started to get is, we want to make sure that this isn't going to be an ongoing issue each quarter with a couple pennies coming out of each quarter's guidance. Can you give us a sense as to some of the parameters of your assumptions to the low end and the high end of your guidance?

I mean I know there were some other things that you discussed, which changed your guidance, but it sounds like California is kind of the bulk of it. Can you just give us some sensitivities here so we can really kind of gauge to kind of whether it's conservative, overly aggressive, what have you? Just so people can really get a sense as to what's baked into your current forecast.

I think the biggest exposure we have to our fourth quarter guidance is the State of California. And again, they appear to be very motivated and desire to meet the ramp up schedule they provided us. We tried to discount that a little bit, given their -- our past experience with their ability to meet those schedules. But they are motivated; they're under a lot of pressure from the federal courts. But we're dealing with a large bureaucracy out there.

There's multiple levels of bureaucracy within the State of California. Don't have a lot of control over their decision-making and their processing of those inmates. Is it possible we're disappointed again? It's possible we're disappointed again. Again, they're motivated, they have a desire to send those inmates out of state because it's the only component of their comprehensive plan that's working to reduce their overcrowding, but it is a large bureaucracy.

It's still a relatively new process and now that the medical receiver -- the federal medical receiver has inserted himself into that process more aggressively, there is a risk around the timing of the receipt of the inmates. And we could be disappointed again. We've tried to factor in some conservatism against that, but is it possible we're disappointed again? Yes, it's possible.

Well, yes. I'm sorry, I don't mean to belabor this here, but I'm just trying to get really crystal clear. I don't know, maybe it's just being at the end of the earnings season, so I need things to be very simple for my understanding. But can -- what I their goal for transfers? And then what have you -- what is your assumption on guidance? Because you said you're trying to be conservative.

I'm just trying to get a sense as to are they expecting -- are they telling you they're going to transfer 400 a month and you guys are baking in 350 in your guidance? Or are you baking in 250? I'm just trying to get a sense as to where the risk can come in during -- we all understand that it is out of your control. But what I think shareholders are going to really want to get their arms around is to what is that risk as you're going into this call come early February?

Yeah, like we're sitting at around, call it 5,500 State of California inmates currently as we sit here today. And the forecast would assume that we're around 6,300 to 6,500 by the end of the year. And California's stated goal, their desire, is to have all 8,100 beds filled by the end of the first quarter 2009.

Now based on their most recent performance in meeting their proposed schedules, you've got to question their ability to do that. They are motivated, they have a strong desire because they are under tremendous pressure from the federal courts to continue to show progress against relieving their overcrowding, and that is a powerful motivator. But it is a large bureaucracy that sometimes doesn't meet its own expectations.

And so, that 6,300 to 6,500, that's what you're basing your guidance off of.

That's a rough estimate, yes. (Inaudible)

Okay, I just wanted to make sure that was your number and not California's number.

Yeah.

Okay, I'll jump back into the queue and let somebody else have a crack. Thanks, guys.

Sure.

Our next question will come from Kevin Campbell from Avondale Partners.

Thanks. Just some more questions on Tallahatchie here. You guys had talked last quarter obviously about the medical receiver. You have the corrective action plan in place. What are the costs associated with that plan? And you had thought that they may potentially roll over into some of the other facilities, so are there any incremental costs we might be expecting to occur?

Well, I think we're still in negotiations with the State of California. We've come up with an estimate of what those costs are going to be going forward. And they are evaluating that laundry list of items and the costs associated with those items to make sure they want to -- want us to invest in all those services. So, we've provided a list, we've provided an estimate of those costs. And they're going to get back to us in terms of whether they want us to proceed with implementing all of those new standards and services at Tallahatchie and all of our facilities going forward. So, they're evaluating the costs going forward to determine whether or not they want us to implement all of those things they've asked for.

And so, they would be willing -- I mean these costs, they're looking at what they're going to have to pay you. It's not as if they're demanding these services and you're going to have to eat the incremental costs. It's they asked for specific sets of services, you're telling them what they're going to have to pay for those services?

Right, and then keep in mind you've got the third party involved, the federal medical receiver, who has their own perspective on what the level of service should be. And it's -- and the federal receiver doesn't have to pay for it, it's the State of California. And so that's where some of the pushback comes from and some -- or some of the discussions in the bid comes from. You've got three parties involved -- CCA, the CDCR who's our customer, and the federal medical receiver.

And then just looking at some of the expenses at Tallahatchie and I guess La Palma, what were -- can you give us a sense for what those were? Specifically at Tallahatchie, so we have a better idea as to what that impact might have been in the quarter.

On Tallahatchie?

Yeah.

Yeah, the expenses on Tallahatchie are going to be primarily staffing. I'm not sure we want to get to the point where we're parsing out that level of detail, what the exact expenses were.

Well, can -- maybe not the exact number, but can you at least maybe give us a range? Was it $1 million? $3 million? Or $1 million to $2 million or --?

Yeah, it's in range of $1 million to $2 million. But the bigger impact is the lost EBITDA. Right? Since we have most of the staff in place, the failure to deliver those inmates and our inability to fill those beds, the incremental margins lost were pretty significant. Especially in the fourth quarter.

Okay, and looking at some of the other issues you outlined in the release, Washington and Minnesota. What are -- who are you expecting to replace those inmates with at this point? And do you have multiple potential customers for those beds?

We're not in a position to give some identity now. We do have multiple customers could use it. We also believe that eventually both of those customers will have a chance of using those beds again. One of the things that we had believed was that as this new capacity was being brought online that that was going to be their growth capacity. And what they've done is reverse that. They have now decided to go ahead and utilize their capacity and use the vacant beds at CCA, which is primarily at our Prairie facility, for their growth.

What would drive that decision? I mean you guys typically offer a discount to what the states can do it for themselves. So, why would they decide to pull from your facilities where presumably they're paying a lower per diem and put them back in their own?

Political reasons. Having a facility in somebody's area that if the inmates go there then that creates jobs.

Okay, and are there other states that have -- that are current customers of yours that have beds opening either this year or next?

Yeah, but I couldn't tell you who it is. I mean that goes to what we're saying that as we on a continuing basis try to identify what we expect is the total growth and I think we can somewhere between 9,000 and 10,000 beds is what we see that our customers total have bringing online between now and 2011. And we've used and never disclosed that. Obviously you could go out and find it, but --

Sure, okay. A couple of quick questions. Looking at the various reasons, the four different issues you cited for the fourth quarter guidance, I mean what would you say -- were they equally contributing to the results? Was it primarily Tallahatchie? Was it primarily the other facilities? I mean can you give us a sense at least in the order of magnitude of those four issues? How they played out?

It's primarily California.

Okay, at both of those -- those two combined?

Yes.

Okay, and looking at the G&A, it was up about $1 million sequentially. What was the big driver there?

It's a combination of adding additional staff from early in the real estate department and some other areas to support above new development and continue to focus on trying to take costs out of the facility operating expenses. And then also an increase in the stock based -- non-cash stock based compensation expense due to a change in the accounting rules that took place a couple of years ago.

Okay, so that change from a couple of years ago didn't -- wasn't reflected in the second quarter but was --?

Well, it's been growing because it's -- with each year of stock option grant, you've got a three to four year vesting. And so until you get past the fourth year, it doesn't normalize.

Okay. What -- I'm sorry. You might have said this in the -- your early results. What was the impact -- maybe the dollar impact of those stock options? The stock based comp?

The stock based compensation increase was about $600,000 or $700,000.

And is that sequential or year-over-year?

Year-over-year.

Okay, and then the last question as it relates to your free cash flow and your cash tax payments, can you give us a sense as to -- obviously they've been -- the cash backed savings have been below what you have on the income statement. Can you give us a sense as to how long it will take before they get up to those -- a normalized level where you're actually paying the amount that you're booking? And what should we maybe expect for this year or next? Is it going to be 60%, 70%?

Well, this year our cash tax is going to be around in total for the full year about $55 million. We continue to look for ways to minimize that tax bite obviously. There will be a -- the cash tax rate will be lower than the GAAP tax rate for several years until depreciation -- the tax based depreciation turns in relation to book based. So, next year's cash tax rate right now would be estimated at around, call it maybe 35% absent some additional tax planning that lowers that tax bite. Versus a GAAP tax rate of 38%.

Okay, thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS) We'll take our next question from Todd Van Fleet from First Analysis.

Good morning, guys. I have a bit of a cold. I'm hoping you'll bear with me for a moment. But I just -- I wanted to get a couple of questions into my coming -- am I coming through okay?

We can understand you; it doesn't sound like Todd Van Fleet though.

It doesn't. Yeah, I know it doesn't. I wanted to ask you about Nevada if I could. You had said that the customer had requested that you kind of delay that facility coming online by maybe it sounds like a couple of quarters. I'm wondering if that is related to the -- their ability as they see it to fund that facility? Or is it related to issues specific to the site?

I think I'll let Damon answer that, if --

Absolutely, good morning, Todd. Trustee's office, who was the one that awarded that contract to us, as part of that procurement and as part of that construction, they had to get approval of a mitigation plan on that site, the site that we submitted, from Fish and Wildlife, because they had some pretty complex environmental issues as it relates to that site and us constructing something on the property.

They were hopeful that that sign off would have been as early as June of this year. And that did not take place. And in fact, we just got the report from the trustee's office in the last couple of weeks. So, it's about a five to six-month delay.

So, we're going to sit down with them during the month of November, kind of finalize the mitigation plan and executing gets that plan here in the next couple of weeks. And so, that's what pushed us off into late -- or excuse me -- middle of 2010.

Okay, so it's really site specific then.

Correct.

Okay, I want to circle back. Again, please bear with me. With respect to Minnesota and Washington. You guys have talked in the past about there being visibility on your state customers developing new capacity. I think you talked about there being 9,000 to 10,000 beds that they're bringing online through 2011. I'm wondering if kind of taking -- tackling this issue or at least the question a little bit differently.

Of those 9,000 to 10,000 beds, have you perhaps quantified the amount of beds that you currently service for those state customers? So the 77,000 and some odd average bed count that was occupied -- see if I can -- I think it was 77,600 was the average daily-compensated population. I was just wondering how many of those beds are at risk to the same type of activity that we saw here with Minnesota and Washington? So, to the extent that state budgets are thin, new capacity has been funded and is coming online.

And states that were previously thought to perhaps use these -- this new capacity coming online for growth. All of a sudden say look, well maybe we're going to use it as core capacity. And then our outsource vendor, like CCA will be the vendor -- be the beds that we use for growth? So, kind of this -- similar to what happened with you guys in Wisconsin whereby several years ago where they utilized some existing capacity that they had and you lost that count or head count related to those openings. How do you -- have you been able to kind of quantify in your own mind what you think the risk is in that regard?

Well, we're constantly assessing that. Sometimes plans don't come to fruition, even though we've seen them and we -- but as to be able to answer you specifically, Todd, we're really not in a position to give you a thorough answer as to the risk and in each case what is the risk. Short-term obviously as we continue to develop our forecast in the future. We plug that in and that'll probably be definitely be included in any 2009 numbers that we put together as to what we think the risk is there. But I don't have -- I'm not in a position to be able to give you a thorough answer on that.

Let me ask you on California then. I think if we go back to the beginning of this year, it was widely viewed that California was going to, or intended to, fund and send out of state I think about 6,000 inmates by the end of this year. It sounds like factored into your forecast, maybe going back three months, was the expectation that maybe California would send out of state perhaps as many as 6,300 or 6,400? At what point -- I guess I'm wondering at what point did you revise your expectations in terms of your planning and budgeting up from the 6,000 to the 6,300 or 6,400?

Last quarter.

Yeah, it's been since we last provided guidance as we've obviously continued in the negotiations and implementation of the cap agreement become apparent -- that became apparent that we weren't going to hit our expectations in terms of the time line for completing that. And that just has played out over time.

Okay, thank you, guys.

Get well.

And we'll move on to our next question from (inaudible) from Marketplace Capital.

Thank you. Hi, guys. First question is could you just remind us again what exactly was the medical requirement that you have to do at Tallahatchie? What I'm trying to get at is does this -- what you've just sort of negotiated with the CDCR and the federal person in charge of the medical. Does that give you sort of a competitive advantage or a step ahead in terms of any of the potential new beds that they might decide to outsource?

We think so, because we believe that we have learned some things through experience that any expectations that are a little bit beyond what we would have originally expected. The RFI that went out did have a medical section that was quite thorough because I think the Department of Corrections and Rehabilitation also I think has learned some things that would be expected in the -- providing the care for that inmate population. So, we believe that we now have demonstrated our responsiveness to issues that have now come up and have put in place I think some things that would hopefully give comfort to this customer. Will it carry the day all the way? I don't know. But I would say that we do have some expertise now that I don't believe any of our competitors would have.

And could you characterize maybe how the requirements that California is asking for you at Tallahatchie differ from what your other facilities provide or what your other facilities that you've given to California provide? Like why was Tallahatchie the exception? And why is it that much different than your entire facility?

Well, there were several things. One was the structure of the medical staff. We mentioned, I think, in the last call there was -- there is expectations to have I guess you'd say a little bit more experience in higher-level staff than we typically have. And that's one of the adjustments we're making. And I think to use the example of having more RNs than LPNs. Having nurse practitioners. Also, the ratio of maybe doctors to inmates.

Also, there's a fairly complex and thorough reporting expectation so that the customer and the receiver are kept informed in a certain way. There's certain protocol on review of inmates that maybe continue to need care but would be in their housing unit. Some other things. So, it's just a laundry list of some expectations and -- that the customer had that we filled that hopefully the customer would recognize they wouldn't have to go through trial and error again with another vendor.

Okay, and then excluding the California ramp up expectations, what is sort of a reasonable -- given the demand to find balance out there, the customer discussions that you have ongoing. What is sort of a reasonable number X California gives you in terms of a ramp up? Like a really base case number. Like what -- is it 200, 300 inmates month? Is it -- what sort of number is something that you guys would be comfortable with using?

In terms of the ramp up?

Yeah.

I think we tried to build that into our earnings guidance. I don't have the schedule in front of me. But -- so we're sitting here at 5,550, they'll hopefully get to 6,000 and 6,300 by the end of the year. Right? So, that's up to 800 additional inmates between now and the end of the year.

Great, that's for California. What I'm trying to get at is just what -- excluding the California ramp up, everything else. Like is there a number that you feel comfortable would be sort of a base rate that can achieve?

Yeah, we typically haven't parsed guidance at that level.

Okay, fair enough. And then finally I guess it still appears that the industry fundamentals are strong and in favor of you guys. And this sort of lumpiness with the ramp ups is just one of the things you just have to deal with when your customer is the government. But just given I guess the financing situations, and I'm referring more to on the budget constraints. I know as of now there aren't any real data points or signs that you're going to see any pricing pressure.

But can you give us an idea of if you have any (inaudible) discussions with your customers? And if not now, at what point in time? Like is it (inaudible)? Is it closer to the July next fiscal year that they come approach you and historically how have you maybe dealt with that?

We have a few customers who have come to us to begin discussions on how we might be able to reduce our costs so in turn provide that value to them. We've not had a specific and formal request to do anything, but we have had those discussions. So -- which is what they're doing in their own system is are there programs that we can eliminate and eliminate the staffing that goes with those programs? They're doing that within their core system and then so, they're asking us to look at that.

The timing would probably be closer to the end of the first quarter but then the end of the fiscal year, because governors will submit their budgets typically before the end of January maybe first of February, then you'll start all your budgetary hearings. And it's during that period of time that some agencies will begin to see what is being expected of them, in addition to what the governor expects of them, the legislature, what they're expecting.

And it -- so it's a -- it's in that time frame that we would probably get into some serious discussions with folks. Budgets are ultimately passed by June 30th, but it'll be usually several months prior to that. So, I'd say the end of the first quarter is when we'll start to maybe experience some meaningful discussions.

Okay, fair enough. Thank you, guys.

We'll move onto our next question. A follow-up question from T. C. Robillard from Banc of America Securities.

Great, thanks. Todd, just to go back to your expectations around California. Another 400 plus inmates a month coming into your system, just given what's happened the last two quarters here with California, it just seems a little aggressive to me. Or a little optimistic I guess is probably a better way to say it. I mean I guess from that standpoint, I'm just wondering why you guys weren't a little more conservative at least this go around with your guidance given -- just given all the moving parts. It is a new customer; they've kind of had some adjustments around their ramp schedules very recently. So, I'm just trying to get a sense as to why you guys weren't more conservative.

I mean that's a fair question. And I think up until the time that the federal medical receiver inserted himself into the process, California by and large met their ramp up schedules. There might have been one month they were off, but they made it up the next month. So, up until the (inaudible) the June time frame, they were meeting their schedules. And we felt like we were making progress in our discussions with the medical receiver.

But unfortunately those conversations and negotiations ultimately took a little longer than we thought they would. We knew CDCR was chomping at the bit. They were very motivated to try and bring resolution to the negotiations because again, they were focused on being able to show continued progress in relieving their over crowding. So, at the end of the day in retrospect maybe we were a little optimistic, but we took the best information we had at the time and made our best estimate possible.

So, did the medical receiver have control over your -- over the California transfers to your other facilities aside from Tallahatchie?

Yes, they have to sign off on all transfers.

Okay, so now as of yesterday is the medical receiver out of the picture as far as the transfer rate?

No, they still have to sign off on all transfers.

Okay, so I guess that kind of brings me to the fourth quarter guidance seems to be on the aggressive side, or the optimistic side, just given the court receiver's still kind of involved in the process. It just -- if they were running 300 a month through the third quarter, it'd be great if they did 400 in October per your press release. But to maintain that rate, doesn't that seem to be I guess optimistic given that this receiver is still involved in the process?

Well, keep in mind the Tallahatchie beds were not an option for transfers up until just recently. So, they had less capacity available to them until Tallahatchie became available here in November.

But this receiver did impact the transfer rates at the other facilities relative to your original expectations, correct?

No, I think there it was more of a CDCR not being able to process as many inmates and make them available for transfers as they had originally hoped. And I (inaudible) -- at the other facilities I don't think it was much the medical receiver there as it was just delays in processing by the CDCR.

And so, what has the CDCR done to improve that process?

Well, I think part of the challenge for CDCR was they were expending a lot of time and effort focused on resolving these issues at Tallahatchie with the medical receiver. And now that hopefully we've gotten that behind us, it frees up resources to focus on the primary objective, which is processing inmates for transfer out of state.

Okay, and then just real quick, John. You had mentioned in your prepared remarks about some prospect stake -- prospect states, excuse me. Are these new states to using the private sector?

Yes.

And is it more than one?

Yes.

Okay, and any thoughts on kind of timing where these -- when these states may or may not make a decision?

No, it's hard to forecast that. And so, we'll be very conservative and not forecast it. (Inaudible)

No, understood.

The activities out there and these the times that each of the states are going to go through, I think put us in an opportunity -- a better opportunity than we probably would have had otherwise.

Okay.

Because these folks will be in a situation where we can provide a very affordable alternative to their choices.

Okay, and then just, Todd, just real quick. Can you give me cash from ops and your total CapEx for the quarter?

I've got nine months ended cash from ops $223 million.

That's fine.

And expenditures for new construction $423 million.

$423 million year-to-date? That's new construction CapEx.

That's new construction and then $23 million for maintenance CapEx.

Okay, great. Thank you.

You're welcome.

Next we'll a question from Bill Gilchrist from Westfield Capital.

Hey, guys. Thanks for the question. I was wondering, could you talk about on the real estate team, Todd, when you guys will be I guess through adding personnel to that? I mean how many more people do you really need to add there to build out the pipeline and continue to grow the business?

I think as far as an organization and a structure, we're pretty much there. I don't think that they are any additional -- the dilemma -- what's happened is that we brought on board last September the new Vice President and that individual began to build the organization that he thought was needed to do the job that we were expecting of him. And so there was additional recruitment and that recruitment took place over the year. So, I'd say it's probably normalized beginning first quarter of 2009.

And then the other thing that we throw into the real estate bucket is expenses we incur in trying to site new facilities. So, given the difficulty of trying to site a facility, if we're looking to site a single facility, we'll go out and prospect three to five locations. And we'll incur expenses at those other three to five facilities. Maybe only one crosses the finish line, but there's expenses we've incurred at those other three or four facilities that we have to write off.

And so, in the third quarter of 2008, we had about $400,000 of call it development expenses associated with putting options on land to try and tie up the land for a period of time for us to evaluate it, community relations activities, preliminary consulting and design work on some of those sites. And then so when you pick any site, if you've been looking at four sites and only one crosses the finish line, you've got to write off those expenses on those other three sites.

Great, that's helpful. Can you talk about -- I mean I guess looking historically, and I know it's clear from your commentary that we're in uncharted times. And I think anybody out there understands that. But what do you fundamentally think is much different than the 2002 to 2004 state budget issues? If you look back and -- for the industry populations kept growing and per diems were generally still growing during that period as well. So, I'm just trying to get an understanding of how the states might act differently this time around than last time.

Well, I think there will be some similarities this time around and the last time. And that is they will be doing things to try to reduce their budget as much as they can. You might see a little more aggressiveness on paroles. You might see a little more aggressiveness in letting an overcrowding situation creep into their system that they might not otherwise. Or they may take a delay in moving somebody who typically would be assigned to a prison, leave them in the local jail.

So, there will be kind of -- there will things that'll go on to try to reduce their inmate population during that period of time. I think we experienced some of that. So, we anticipate that we might -- I might see that.

Now the one thing that is unique from where we had before is the decent demand that's (inaudible) by the three customers that I just identified. I don't remember seeing the demand out there at that point in time like we do now. But I'm confident that some of our customers will try to do things to reduce their inmate population any way they can because that -- if they can reduce their inmate population, that is a greater benefit to their operating budget than trying to cut out maybe some programming here and doing some other stuff.

And our concern this time around is, there's a couple of dynamics that are different. One, they talk about a much longer, maybe deeper recession than we've seen for a while. And then two, when you've got states who appear to have difficulty borrowing in the short-term to fund their day-to-day operating activities because of the difficulty in the credit markets, that could change the decision making towards more conservatism. Right?

So, if states have concerns about their ability to borrow in the short-term markets until sales tax revenues and income tax revenues come in. And those revenue receipts are lumpy, so many of the states have to borrow in the short-term capital markets to fund their day-to-day activities until those revenues come in. That could change their psychology a little bit, versus the last recession when they didn't have that problem.

I guess the follow-up on that is, so if these fiscally strapped states are looking for nine to -- to bring on 9,000 to 10,000 beds, excluding whatever California wants to. Do any of those projects now become delayed because of -- if they can't get short-term financing, are they going to pull back on the build out of these 9,000 to 10,000 beds over the next three years?

I think as we mentioned in our press release, we think there's a significant possibility that some of these states may choose to defer or outright cancel plans for constructing new state owned prison bed capacities as a result of those difficult financial markets. (Inaudible)

And the other thing that could be on the positive side, we could see some new states or existing states come to us with a more aggressive push towards privatization to help them reduce their budget shortfall. They might be willing to shutter some old inefficient facilities this time around, whereas during the last recession maybe they weren't willing to do, and outsource those inmates as a cost cutting mechanism.

Okay, and so, just to make sure I understand this in terms of the Tallahatchie thing. Basically the medical -- the federal receiver had a direct impact on the Tallahatchie uptake, but not a direct impact on CDCR's processing of California inmates for other facilities. Although you would say that maybe the CDCR because they were so focused on correcting the Tallahatchie issues and getting that approved. That has something to do with the uptake at La Palma and other facilities?

Yes.

Okay, all right. Thanks a lot.

And we'll take our final question from Cris Blackman from Empirical Capital.

Yeah, I appreciate that. Would you all speak a little bit about labor cost and any concerns you may have on the new administration's policy towards unions?

Well, on the -- on specifically as it relates to labor costs, I think we don't see anything dramatic taking place overall. And in fact probably will help with our turnover because the unemployment will make it a little easier. As it relates to national public policy dealing with the card check and other things, I think we like probably a lot of businesses in America would be concerned if the legislation was to be implemented as has been discussed. And that -- because it would make it very easy for many industries to be unionized that might not otherwise. So, long-term I guess that's something we're going to monitor and hopefully be able to share with our legislators that in the long-term is not in the best interests.

Okay, and then also if you would, speak of the competitive landscape a little bit. And any primary customer relationships you may have with your competitors. Is there -- well, I'll leave it at that. Can you comment on that, please?

I'm not sure what you mean by the question.

Well, I know the industry's under pressure right now and how may primary customer relation like with your competitors do you have? Do you share certain --?

We have -- okay, I think I understand. We do business with three federal agencies, each of our major competitors do business with each of those three in different magnitudes. We have relationships with 20 state customers and I think our competitors state customer relationships are substantially less. It would -- I could come up with what it is, but I think each of our major competitors -- publicly traded major competitors I think are in the range of five or six each. That would be -- it's kind of a guess, so. And so there's three or four states that we probably overlap in doing business with.

Do you see opportunity there?

To --?

In the states where you overlap? Any synergies?

No.

Thank you very much. And thanks for the disclosure today. It was very helpful.

Thank you.

You're welcome.

And that concludes the question and answer session for today. At this time I would like to turn the call back over to our speakers for any additional or closing remarks.

Okay, we thank everyone for participating. Thanks for some really good questions. And hopefully we were able to help. I wish the clarity of going forward was good. As Todd mentioned, we think that one thing that may be unique this downturn, these issues may stretch on a lot longer.

One thing to point out is we learned from the last downturn is that once the states get back with decent revenues, they take a while to really get back to where they would like to be and typically their capital expenditures are lots of other things other than prison beds. So, not only will we get to see some direct benefits in just the immediate term, that long-term I think that's where we begin to see the benefits of what we do. So, thank you all for participating and we'll chat with you all next quarter. Thanks.

And that concludes today's teleconference. We thank you for your participation. Have a wonderful day.