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CXW > SEC Filings for CXW > Form 10-Q on 4-Nov-2011All Recent SEC Filings

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Form 10-Q for CORRECTIONS CORP OF AMERICA


4-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This quarterly report on Form 10-Q contains statements as to our beliefs and expectations of the outcome of future events that are forward-looking statements as defined within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of current or historical fact contained herein, including statements regarding our future financial position, business strategy, budgets, projected costs and plans, and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "projects," "will," and similar expressions, as they relate to us, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These include, but are not limited to, the risks and uncertainties associated with:

general economic and market conditions, including the impact governmental budgets can have on our per diem rates and occupancy;

fluctuations in operating results because of, among other things, changes in occupancy levels, competition, increases in cost of operations, fluctuations in interest rates, and risks of operations;

changes in the privatization of the corrections and detention industry and the public acceptance of our services;

our ability to obtain and maintain correctional facility management contracts, including as the result of sufficient governmental appropriations, inmate disturbances, and the timing of the opening of new facilities and the commencement of new management contracts as well as our ability to utilize current available beds and new capacity as development and expansion projects are completed;

increases in costs to develop or expand correctional facilities that exceed original estimates, or the inability to complete such projects on schedule as a result of various factors, many of which are beyond our control, such as weather, labor conditions, and material shortages, resulting in increased construction costs;

changes in governmental policy and in legislation and regulation of the corrections and detention industry that adversely affect our business, including, but not limited to, the outcome of California's realignment program and its utilization of out-of-state private correctional capacity; and

the availability of debt and equity financing on terms that are favorable to us.

Any or all of our forward-looking statements in this quarterly report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. Our statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties, and assumptions described in "Risk Factors" disclosed in detail in the 2010 Form 10-K and in other reports we file with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.


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We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report and in the 2010 Form 10-K.

OVERVIEW

The Company

As of September 30, 2011, we owned 47 correctional and detention facilities, two of which we leased to other operators. As of September 30, 2011, we operated 66 facilities, including 45 facilities that we owned, with a total design capacity of approximately 90,000 beds in 20 states and the District of Columbia. We also have a contract to purchase a 1,798-bed correctional facility from the state of Ohio, which we currently expect to acquire on or about December 31, 2011. We are also constructing an additional correctional facility in Millen, Georgia, under a contract awarded by the Georgia Department of Corrections. The facility, which we will own, is expected to house approximately 1,150 inmates and be completed during the first quarter of 2012.

We specialize in owning, operating, and managing prisons and other correctional facilities and providing inmate residential and prisoner transportation services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, our facilities offer a variety of rehabilitation and educational programs, including basic education, religious services, life skills and employment training and substance abuse treatment. These services are intended to reduce recidivism and to prepare inmates for their successful re-entry into society upon their release. We also provide health care (including medical, dental and psychiatric services), food services and work and recreational programs.

Our website address is www.cca.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), available on our website, free of charge, as soon as reasonably practicable after these reports are filed with or furnished to the SEC. Information on our website is not part of this report.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements in this report are prepared in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. A summary of our significant accounting policies is described in our 2010 Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Asset impairments. As of September 30, 2011, we had $2.5 billion in property and equipment, including $104.7 million in long-lived assets, excluding equipment, at five


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currently idled facilities. We evaluate the recoverability of the carrying values of our long-lived assets, other than goodwill, when events suggest that an impairment may have occurred. Such events primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a correctional facility we own or manage. In these circumstances, we utilize estimates of undiscounted cash flows to determine if an impairment exists. If an impairment exists, it is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Goodwill impairments. As of September 30, 2011, we had $12.0 million of goodwill. We evaluate the carrying value of goodwill during the fourth quarter of each year, in connection with our annual budgeting process, and whenever circumstances indicate the carrying value of goodwill may not be recoverable. Such circumstances primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a reporting unit.

In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2011-08 that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step impairment test. Under the amendments in ASU 2011-08, a company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the two-step impairment test is required, we determine the fair value of a reporting unit using a collaboration of various common valuation techniques, including market multiples and discounted cash flows. Each of these techniques requires considerable judgment and estimations which could change in the future.

Income taxes. Deferred income taxes reflect the available net operating losses and tax credit carryforwards and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of our deferred tax assets, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

We have approximately $4.2 million in net operating losses applicable to various states that we expect to carry forward in future years to offset taxable income in such states. We have a valuation allowance of $0.5 million for the estimated amount of the net operating losses that will expire unused. In addition, we have $5.8 million of state tax credits applicable to various states that we expect to carry forward in future years to offset taxable income in such states. We have a $2.7 million valuation allowance related to state tax credits that are expected to expire unused. Although our estimate of future taxable income is based on current assumptions that we believe to be reasonable, our assumptions may prove inaccurate and could change in the future, which could result in the expiration of additional net operating losses or credits. We would be required to establish a valuation allowance at such time that we no longer expected to utilize these net operating losses or credits, which could result in a material impact on our results of operations in the future.


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Self-funded insurance reserves. As of September 30, 2011, we had $32.6 million in accrued liabilities for employee health, workers' compensation, and automobile insurance claims. We are significantly self-insured for employee health, workers' compensation, and automobile liability insurance claims. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance claims based on our history of claims experience and the time lag between the incident date and the date we pay the claims. We have accrued the estimated liability for workers' compensation and automobile insurance claims based on an actuarial valuation of the outstanding liabilities, discounted to the net present value of the outstanding liabilities, using a combination of actuarial methods used to project ultimate losses. The liability for employee health, workers' compensation, and automobile insurance includes estimates for both claims incurred and for claims incurred but not reported. These estimates could change in the future. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.

Legal reserves. As of September 30, 2011, we had $10.9 million in accrued liabilities related to certain legal proceedings in which we are involved. We have accrued our best estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General Counsel's office and, as appropriate, outside counsel handling these matters, and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.


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RESULTS OF OPERATIONS

Our results of operations are impacted by the number of facilities we owned and
managed, the number of facilities we managed but did not own, the number of
facilities we leased to other operators, and the facilities we owned that were
not in operation. The following table sets forth the changes in the number of
facilities operated for the periods presented:



                                                                Owned
                                              Effective          and          Managed
                                                 Date          Managed         Only          Leased        Total
Facilities as of December 31, 2009                                   44             21             2           67
Expiration of the management contract
for the Gadsden Correctional Institution      July 2010              -              (1 )          -            (1 )
Commencement of the management contract
for the Moore Haven Correctional
Facility                                      July 2010              -               1            -             1
Termination of the management contract
for the Hernando County Jail                 August 2010             -              (1 )          -            (1 )
Activation of the Nevada Southern
Detention Center                            September 2010            1             -             -             1
Commencement of the management contract
for the Graceville Correctional Facility    September 2010           -               1            -             1

Facilities as of December 31, 2010                                   45             21             2           68

Facilities as of September 30, 2011                                  45             21             2           68

Three and Nine Months Ended September 30, 2011 Compared to the Three and Nine Months Ended September 30, 2010

Net income was $39.2 million, or $0.37 per diluted share, for the three months ended September 30, 2011, compared with net income of $42.0 million, or $0.38 per diluted share, for the three months ended September 30, 2010. During the nine months ended September 30, 2011, we generated net income of $122.0 million, or $1.14 per diluted share, compared with net income of $113.5 million, or $1.00 per diluted share, for the nine months ended September 30, 2010. Net income per diluted share during 2011 compared with 2010 was favorably impacted by our stock repurchase programs as further described hereafter.

Financial results were negatively impacted during the third quarter of 2011 when compared with the third quarter of 2010 by the expiration of the management contract with the Bureau of Prisons, or BOP, at the California City Correctional Center on September 30, 2010. During the third quarter of 2010 inmate populations were ramping down while the contract provided for us to be compensated based on a 95% occupancy guarantee through its expiration date. As a result, operating income decreased $6.4 million at this facility during the third quarter of 2011 compared with the third quarter of 2010.

Net income during the nine months ended September 30, 2010 was negatively impacted by approximately $3.2 million of non-cash charges for the write-off of goodwill and other costs associated with the termination of the management contracts at the Gadsden and Hernando County facilities reflected in "loss from discontinued operations" in the accompanying consolidated statement of operations, and as further described hereafter. Net income during the nine months ended September 30, 2010 also included $4.1 million of bonuses paid to non-management level staff in-lieu of wage increases. For the nine months ended September 30, 2010, these charges amounted to $0.05 per diluted share, after taxes.


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Facility Operations

A key performance indicator we use to measure the revenue and expenses associated with the operation of the facilities we own or manage is expressed in terms of a compensated man-day, which represents the revenue we generate and expenses we incur for one inmate for one calendar day. Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses by the total number of compensated man-days during the period. A compensated man-day represents a calendar day for which we are paid for the occupancy of an inmate. We believe the measurement is useful because we are compensated for operating and managing facilities at an inmate per-diem rate based upon actual or minimum guaranteed occupancy levels. We also measure our ability to contain costs on a per-compensated man-day basis, which is largely dependent upon the number of inmates we accommodate. Further, per compensated man-day measurements are also used to estimate our potential profitability based on certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day for all of the facilities placed into service that we owned or managed, exclusive of those discontinued (see further discussion below regarding discontinued operations), were as follows for the three and nine months ended September 30, 2011 and 2010:

                                                  For the Three Months             For the Nine Months
                                                  Ended September 30,              Ended September 30,
                                                  2011             2010            2011            2010
Revenue per compensated man-day                $     58.28       $  58.48       $    58.41       $  58.49
Operating expenses per compensated man-day:
Fixed expense                                        30.75          30.14            30.54          30.81
Variable expense                                      9.65           9.53             9.56           9.68

Total                                                40.40          39.67            40.10          40.49

Operating margin per compensated man-day       $     17.88       $  18.81       $    18.31       $  18.00

Operating margin                                      30.7 %         32.2 %           31.4 %         30.8 %

Average compensated occupancy                         89.5 %         90.7 %           89.8 %         90.4 %

Average available beds                              90,293         87,201           90,151         85,713

Average compensated population                      80,851         79,053           80,946         77,491

Revenue

Average compensated population for the quarter ended September 30, 2011 increased 1,798 from 79,053 in the third quarter of 2010 to 80,851 in the third quarter of 2011. The increase in average compensated population resulted primarily from increases in average compensated population from the state of Florida resulting from the commencement of operations at the 1,884-bed Graceville Correctional Facility and the 985-bed Moore Haven Correctional Facility, as further described in our Managed-Only Facilities section. Further, we experienced increases in average compensated populations from the state of Georgia at two facilities we expanded in May 2010. We also experienced an increase in inmate populations from the U.S. Marshals Service, or the USMS, at our newly constructed 1,072-bed Nevada Southern Detention Center, which was completed during the third quarter of 2010. These increases in average compensated populations were partially offset by a decline in the average compensated population at the California City facility after transitioning from housing BOP inmates during the third quarter of 2010 to housing lower populations from the


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USMS, and the U.S. Immigration and Customs Enforcement, or ICE, at this facility during the third quarter of 2011. The management contract with the BOP contained terms requiring us to be compensated at a 95% guaranteed occupancy.

Our total facility management revenue increased by $8.2 million, or 1.9%, during the third quarter of 2011 compared with the same period in the prior year resulting primarily from an increase in revenue of approximately $9.7 million generated by an increase in the average daily compensated population during the third quarter of 2011. Partially offsetting the increase in facility management revenue, a slight decrease of 0.3% in the average revenue per compensated man-day resulted in a reduction of $1.5 million in facility management revenue.

Business from our federal customers, including primarily the BOP, the USMS, and ICE, continues to be a significant component of our business. Our federal customers generated approximately 43% of our total revenue for both the nine months ended September 30, 2011 and 2010, increasing 3.9%, from $536.0 million during the nine months ended September 30, 2010 to $556.8 million during the nine months ended September 30, 2011. Federal revenues increased $2.1 million, or 1.1%, from $186.3 million for the three months ended September 30, 2010 to $188.4 million for the three months ended September 30, 2011.

State revenues increased $5.1 million, or 2.4%, from $210.7 million for the three months ended September 30, 2010 to $215.8 million for the three months ended September 30, 2011, and $30.6 million, or 5.0%, from $617.9 million for the nine months ended September 30, 2010 to $648.5 million for the nine months ended September 30, 2011.

Despite these increases in management revenue, economic conditions remain challenging, putting continued pressure on our government partners' budgets. Some states may be forced to further reduce their expenses if their tax revenues, which typically lag the overall economy, do not meet their expectations. Actions to control their expenses could include reductions in inmate populations through early release programs, alternative sentencing, or inmate transfers from facilities managed by private operators to facilities operated by the state or other local jurisdictions. Further, certain states have requested, and additional state customers could request, reductions in per diem rates or request that we forego prospective rate increases in the future as methods of addressing the budget shortfalls they may be experiencing. We believe we have been successful in working with our government partners to help them manage their correctional costs while minimizing the financial impact to us, and will continue to provide unique solutions to their correctional needs. We believe the long-term growth opportunities of our business remain very attractive as certain states consider efficiency and savings opportunities we can provide. Further, we expect insufficient bed development by our partners to result in a return to the supply and demand imbalance that has benefited the private corrections industry.

As of September 30, 2011, we had approximately 11,200 unoccupied beds at facilities that had availability of 100 or more beds, and an additional 1,124 beds under development committed to the state of Georgia. We have staff throughout the organization actively engaged in marketing this available capacity to existing and prospective customers. Historically, we have been successful in substantially filling our inventory of available beds and the beds that we have constructed. Filling these beds would provide substantial growth in revenues, cash flow, and earnings per share. However, we can provide no assurance that we will be able to obtain new or existing customers to fill our available beds.


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Operating Expenses

Operating expenses totaled $304.7 million and $292.2 million for the three months ended September 30, 2011 and 2010, respectively, while operating expenses for the nine months ended September 30, 2011 and 2010 totaled $897.8 million and $868.1 million, respectively.

Fixed expenses per compensated man-day increased to $30.75 during the three months ended September 30, 2011 from $30.14 during the three months ended September 30, 2010 primarily as a result of an increase in salaries and benefits per compensated man-day of $0.51. We provided wage increases in the third quarter of 2011 to the majority of our employees, which has resulted in an increase in operating expenses during the second half of 2011. These wage increases have negatively impacted operating margins, as per diem increases and other expense controls did not exceed the level of wage increases. However, we will continue to monitor compensation levels very closely along with overall economic conditions and will set wage levels necessary to help ensure the long-term success of our business. Salaries and benefits represent the most significant component of fixed operating expenses and represented approximately 65% of total operating expenses during 2010 and 64% of total operating expenses for the first nine months of 2011.

Fixed expenses per compensated man-day decreased to $30.54 during the nine months ended September 30, 2011 from $30.81 during the nine months ended September 30, 2010 as a result of a decrease in salaries and benefits per compensated man-day of $0.32. Although we did not provide annual wage increases during 2010 to the majority of our employees, our salaries expense during the first quarter of 2010 included $4.1 million, or $0.19 per compensated man-day for the nine-month period ended September 30, 2010, of bonuses paid to non-management level staff in-lieu of wage increases. Salaries expense in the prior year was also negatively impacted by the necessary retention of staff during the ramp-down period of inmate populations at our Diamondback, Huerfano, and Prairie facilities.

Notwithstanding the bonus payments reflected during the first half of 2010, salaries and benefits increased during 2011 periods compared with 2010 most notably as a result of the activation during the third quarter of 2010 of our new Nevada Southern Detention Center and the commencement of two new management contracts at the Graceville Correctional Facility and the Moore Haven Correctional Facility. These increases were partially offset by decreases in salaries and benefits at our Diamondback Correctional Facility and at our California City Correctional Center resulting from idling the Diamondback . . .

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