May 6, 2008
Executives
William F. Andrews - Chairman of the Board Todd Mullenger - EVP and CFO John D.
Ferguson - President and CEO
Analysts
Manav Patnaik - Lehman Brothers Emily Shanks - Lehman Brothers Kevin Campbell - Avondale Partners Todd Van Fleet - First Analysis Corporation T.C. Robillard - Banc of America Securities Dana Walker - Kalmar Investments
Operator
Good morning, everyone, and welcome to the Corrections Corporation of America's First Quarter 2008 Earnings Conference Call. If you need a copy of our press release or supplemental financial data, both documents are available on the Investors page of our website at www.corporationscorp.com.
Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the safe harbor provisions of the Securities and Litigation 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 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 measurement is provided in our corresponding earnings release or are posted on our website. We are under no obligation to update or revise any forward-looking statements made that...
we made to reflect events or circumstances under the date hereof or to reflect the occurrences of unanticipated events. Participating on today's call will be our Chairman of the Board, William Andrews; President and Chief Executive Officer, John Ferguson; and Chief Financial Officer, Todd Mullenger.
I'd now like to turn the conference over to Mr. Andrews.
Please go ahead, sir.
William F. Andrews - Chairman of the Board
Good morning, everybody. We're in Nashville.
It's a beautiful spring day, and we're here to announce our first quarter 2008 financial results. In addition to John and Todd, we have Dave Garfinkle with us who is our Vice President, Finance and Controller.
And with that, I’d like to start the meeting and turn it over to Todd who will review of our press release and our results.
Todd Mullenger - Executive Vice President and Chief Financial Officer
Thank you, Bill, and good morning everyone. We're very pleased with our first quarter operating results.
So let's move straight to summary of those results. First quarter results for 2008, we generated $0.28 per diluted share compared to EPS for last year's Q1 of $0.26 per diluted share, representing an increase in EPS of approximately 8%.
Earnings for the quarter were positively impacted by increased compensated man-days from a number of customers, including ICE, US Marshals, California, Arizona and Florida. EBITDA increased nearly 9% to $91.4 million for the quarter.
Adjusted free cash flow for the quarter increased approximately 18% to $72.7 million. The growth in adjusted free cash flow is significantly higher than EPS growth due primarily to changes in depreciation expense and maintenance CapEx.
Depreciation expense increased 17.5% over 2007, while maintenance CapEx decreased 22% in the quarter. The increase in depreciation expense obviously has a negative impact on EPS.
However, it's added back in arriving at adjusted free cash flow, while maintenance CapEx is deductive. As we have discussed on prior occasions, unlike other industries our depreciation expense is not reflective of the ongoing maintenance CapEx that we will incur to maintain our facilities.
For example, depreciation and amortization expense totaled approximately $21 million for Q1 2008 versus approximately $9 million of facility maintenance and IT CapEx in Q1. So as we have commended before, we believe adjusted free cash flow is in many ways a better measure than EPS at the return we are delivering to our shareholders.
Turning to revenue, total revenue for this year's first quarter was up approximately 11% over last year, an increase of $37.8 million. Total compensated man-days in Q1 increased 7.3% compared to the previous year.
Revenue per compensated man-day in Q1 increased 3.6% to $55.98 from $54.01. While compensated man-days increased 7.3%, average compensated occupancy for the first quarter actually declined slightly from 98% to 97% as a result of placing nearly 5,000 new beds into service in the first quarter of 2007.
2,500 of those beds were placed into service during Q4 2007 and Q1 2008. With regards to the 3.6% increase in revenue per compensated man-day, a couple of comments.
Results in Q1 2008 reflect the impact of certain pricing leverage we enjoyed from renegotiating several contracts as well as routine per diem increases. As we have said previously, we believe we have the potential to benefit from additional pricing leverage on a case-by-case basis as the contracts come up for re-bid.
Finally, when you look at the per diem increases on just our own beds where 90% of our operating margin is generated, per diem has increased 3.8%. Moving next to discussion of operating costs, operating costs per man-day for Q1 2008 were $39.58.
Our Q1 2008 operating costs per man-day reflects facility ramp-up cost as well as normal wage and other general inflationary increases. We incurred significant ramp-up costs in Q1 2008 related to the activation of new beds.
Ramp-up costs totaled approximately $2 million in Q1 2008, which is an increase of approximately $1.8 million over Q1 2007. Excluding ramp-up costs, operating cost per man-day increased 3.5% over Q1 2007.
We will continue to incur ramp-up costs moving forward as we continue to bring new beds online and hire staff and incur expenses in advance of receiving inmates. Operating margins per man-day in Q1 2008 increased to $16.40, with a margin percentage of 29.3%.
As we have discussed previously, margins on inmates placed in newly developed beds will be depressed during the facility ramp-up period. However, those margins for 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 approximately 5% of revenues. The increase in G&A compared to Q1 2007 was due primarily to the expansion of our real estate department as we added resources to assist in the development of new beds, also 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 the change in accounting rules.
Our goal is to keep G&A at approximately 5% of revenues going forward. GAAP income tax expense for the quarter was [inaudible] rate of approximately 38%.
We currently anticipate a rate of 38% for full-year 2008. So in summary, we're very pleased with our first quarter operating results and with the progress we've made developing and activating new capacity to meet the demand for prison beds.
I will finish with the discussion of our guidance for 2008. As indicated in the press release, our guidance for Q2 2008 is in a range of $0.28 to $0.30, and guidance for the full year remains unchanged in a range of $1.21 to $1.28.
During the first quarter 2008, we activated 849 beds and expect to activate approximately 6900 beds during the remainder of 2008. The activation of these new beds in 2008 will cause short-term operating inefficiencies at the affected facilities.
In particular, we're planning to hire staff at our new La Palma, Arizona facility a little sooner than we typically do to ensure access to competent staff and ensure a smooth transition under a tight ramp-up schedule for inmate intake under our contract with California. As previously mentioned, margins on new inmates placed on new beds will be depressed during the facility ramp-up period, but will improve as the facility approaches full occupancy.
Given the anticipated timing of these new bed activations, we expect to see accelerating year-over-year growth in margins, EBITDA and EPS in Q3 and Q4 this year. As we’ve stated before, we believe those investors with a patient time horizon are more likely to be rewarded when investing with CCA.
One of the primary risks to our guidance is always… is timing around the receipt of inmates. This is particularly true with the State of California.
We are very pleased with our performance today under the new California contract, as is the customer. However, it is important that the ramp up of all new inmates occurs as smooth as possible.
As such, we may slowdown the ramp up of California for other inmates from what we currently expect, if we feel it is necessary to avoid any issues that could negatively impact our long-term relationship with the customer. However, should there be a shortfall in our expectations due to timing, we are still optimistic that demand from customers will ultimately fill our beds, albeit over a longer period of time.
As discussed on prior calls, now that we’ve begun developing a large number of beds through construction, this will obviously result in increased depreciation expense if the beds are bought online. A good rule of thumb used in estimating the annualized increase in GAAP depreciation expense is to take the total investment cost in the project and divide by 37 years.
As far as funding this new development, we believe the cash on hand, free cash flow from operations and capacity available under our revolving line of credit will allow us to fund all development projects announced today. 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.
John D. Ferguson - President and Chief Executive Officer
Okay. Let me reinforce what Todd said.
The outlook for our business remains quite favorable. Just to remind everyone of the dynamics of where we are, first of all, we continue to be the industry leader.
We're looking at a substantial supply/demand imbalance that really hadn't changed very much over the last couple of years. As always, we feel with our 20 state customers and three federal agencies… customers that we have a national platform, which gives us opportunity to grow.
As Todd just pointed out, we have a strong balance sheet, we have significant cash flow and we have increased acceptance of what we do. And then to support all that, we have a good inventory and pretty good visibility.
So let me talk about our two major customer focus areas and I had in the past. First of all, the Federal Bureau of Prisons, their inmate populations at April 17th was 200,054 inmates.
This is 37% over their rated bed capacity. And as we've talked previously, between the fiscal year 2008 and fiscal year 2011, they estimate to grow their inmate population about some 15,000 inmates and have less than 8,000 new beds planned for development.
In the President's fiscal year 2009 budget, he does propose an additional $50 million to fund up to 4,000 beds under what's called contract confinement, which of course led to in the last week the release two RFEs [ph] referred to as CAR 8 and CAR 9. It is the goal of the Federal Bureau of Prisons to acquire approximately 4,000 inmates, beds with both of these Criminal Alien Requirement solicitations with 3,000 as the max under either one of them.
And the particulars on that has to do with the availability of beds prior to award and the CAR 9 has to do with the availability of beds that can be expanded or constructed prior to the activation of the facility. We continue to see the US Marshal Service grow some 7.3% main… annual percentage growth between 2002 and 2007.
We see nothing that would change that. The President’s 2009 budget does propose some $1.3 billion of additional funding...
or funding, sorry, in states that the trustee will continue to work with the state and local governments and private service providers to maintain adequate detention capacities to have detained individuals charged with federal offences awaiting trial and sentence them. So let me be clear, the $1.3 billion is for the office of the Federal Detention Trustee.
And I think everyone is aware that I issued a solicitation several months back for a facility in… near Las Vegas and we are expecting... we the industry is expecting an award shortly on that.
There was an environmental impact statement released, which allowed folks to make comments that comment period ended April 28th. So that's one of the last hurdles, and of course the site...
one of the sites we proposed was listed as the agency preferred alternative. But as of yesterday, we do not have...
the Office of Detention Trustee has not made their announcement. We continue to monitor Immigration and Custom Enforcement.
As we have mentioned in the past, we continue to see growth in the amount of funding for beds. The President's budget for 2009 does fund for additional 1,000 beds, but also sticks very clearly to doing what it takes to secure the borders.
And as I mentioned in the last call, many of our inmates that we detained for Immigration and Custom Enforcement does not come from border apprehensions, but from the release of individuals who have been arrested and served time in a state or federal prison. So we continue to see the needs of our government customers grow and we continue to try to anticipate that and be prepared to respond to the services that they need.
As we look at our state customers and the activity there, as we’ve mentioned over the last year, the expected growth in state inmate populations in our 20 state customers will be nearly 80,000 for the period ending '07 to the period ending 2011 and… which represents about 60% of the… all of the expected growth of all the 50 states, and the best we can identify is some 9,400 beds of additional capacity that's been funded and expected to come online by year-end 2010. It does not include the activity that's going on in California, but everything we can assess, their construction projects or running behind schedule.
In fact, we would expect it to move on line between now and the end of 2010. As you look at the beds that...
update we gave in our press release, as you can see, the beds that we brought online in the fourth quarter 2007 and first quarter 2008 and the things that we have under development and expand, you can see a substantial amount of that is for anticipated growth of our state customers. Of course, a fair amount of that is the expected growth of another 3,500 or so inmates from the State of California between April the 1st and December the 31st.
But as Todd mentioned is that things seem to be going according to schedule, but we will be very sensitive to make sure that we do it in a safe and secure manner. So turning to the opportunity...
the investment opportunity for this company, as you… as we talk about our federal customers and our state customers, as we began the second quarter of 2008 we had some 3,000 beds in inventory, some of which are the beds that we finished and brought online in the fourth quarter of 2007 and the first quarter of 2008. And as we denoted in the press release, we have some approaching 11,000 additional beds coming online with pretty good visibility as to the utilization of those beds in that inventory.
As we have… on a continuing basis, if we were to utilize our... if the customers were to utilize all of the existing inventory and expansion beds and we just maintained the margin that we experienced in the first quarter of 2008 for owned and manage, we are looking at almost $107 million of new incremental facility EBITDA from those facilities and again compare that to some $90 plus million of inventory...
of EBITDA we had in the first quarter of 2008. We have continually said that we will monitor the supply/demand imbalance, we will monitor very closely our 20 state customers, our three federal agency customers as to their needs, any prospective customers out there, and if we see the demand justifies it we will make additional investments.
And we had indicated that we feel that the balance sheets of this company, which support four-to-one leverage ratio of EBITDA to our total debt. And if we just take the cash we had on hand at December 31, the expected cash flow if we just match what the last 12 months cash flow is for the balance of 2008 and 2009 and 2010, as well as maintaining no more than four-to-one debt-to-adjusted EBITDA taken into consideration, the commitments we've made and the money it’ll take to finish those, that we estimate at somewhere between 8,500 and 9,000 beds could be developed by the company if the beds were no more than $70,000 per bed in the future.
So we think in addition to having a good pipeline of inventories under development, good visibility on the usage of that, good visibility on the supply/demand imbalance, and having a strong balance sheet and significant cash flow to let us continue develop another 8,000 to 9,000 beds if we needed to. And again, we believe that the dynamics of the marketplace will lead us to future announcements.
So with that, we would be happy to open up for questions. Question and Answer
Operator
Thank you. [Operator Instructions].
We'll take our first question from Manav Patnaik from Lehman Brothers.
Manav Patnaik - Lehman Brothers
Hi, thank you. First, congrats on a good quarter, guys.
Just a little more granularity, if you could, in terms of kind of the owned facilities and the managed-only with respect to your man-day margins sequentially, let's start with the owned facilities first, would you expect to see that stay stable and rise through the next three or four quarters or can that fluctuate quarter-over-quarter?
William F. Andrews - Chairman of the Board
Are you talking about operating margins per man-day?
Manav Patnaik - Lehman Brothers
Correct, the compensated man-day margins, correct.
William F. Andrews - Chairman of the Board
Yes, we would expect those to accelerate.
Manav Patnaik - Lehman Brothers
And how about, I guess, with the managed-only... yes, correct… And then the managed-only, like would the margin sustain more pressure or would your per diems that you're seeing with some pricing leverage help those move up sequentially as well?
John D. Ferguson - President and Chief Executive Officer
Actually, the pricing leverage on managed-only is nowhere near what it is beyond our facility.
Manav Patnaik - Lehman Brothers
Correct.
John D. Ferguson - President and Chief Executive Officer
Because when the contracts are up for re-bid, many correctional service providers can compete for that business. So, we would not see the same acceleration in managed-only as we do at the owned facilities.
Manav Patnaik - Lehman Brothers
Okay. And then, with respect to your full-year guidance, it seems like I guess everything is on track.
What is holding you back from maybe narrowing that $1.21 to $1.28 guidance range? Is it just California that you discussed or is there maybe some more factors in there that you're being a bit cautious about?
William F. Andrews - Chairman of the Board
Yes, I think it's the uncertainty around the timing of the receipt of the inmates. The macro environment is still very strong, but as we've mentioned on numerous occasions in the past, there is always uncertainty around exact timing of the receipt of those inmates.
Manav Patnaik - Lehman Brothers
Okay. And finally, can you just give us an update on Colorado and what's happening with the negotiations there?
John D. Ferguson - President and Chief Executive Officer
The... their budget bill passed a few weeks back and it authorized a 4.25% per diem increase, effective July 1, and we are in discussions with Colorado and working around the availability of future beds because we will have some 1,400 plus beds available in Colorado, some of which we would like to maybe find an interim customer prior to Colorado growing into those beds.
But the net of it was that they authorized 4.25% per diem increase on July 1.
Manav Patnaik - Lehman Brothers
All right, great. All right.
Thanks, guys.
Operator
Next we will hear from Emily Shanks with Lehman Brothers.
Emily Shanks - Lehman Brothers
Hi, good morning. Just a couple of follow-up questions.
Todd, in terms of that rule of thumb in calculating additional D&A, that applies to both new and expansion beds, correct?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Yes.
Emily Shanks - Lehman Brothers
Okay. And then, can you guys just give us a little bit color on around the DC facility?
I now in the press release, and forgive me if I missed this in your opening comments, but it did mention that there are lower populations. Can you just give us a little color on that?
John D. Ferguson - President and Chief Executive Officer
Sure. Our facility is a overflow for the main District of Colombia jail.
And so they have a population in which they maintain that. And if their overall populations are down, we will be the positive and negative beneficiary of that, and they have been down lately.
We have been in discussions with the District of Colombia as well as the Office of the Federal Detention Trustee to utilize some of those beds for detention needs that they have in the Washington DC area. And so we're hopeful that we will be able to work something out, and the US Marshal Service will utilize the beds that DC government is not utilizing now.
Emily Shanks - Lehman Brothers
Great, that's very helpful. And then just my final question, Todd, can you just give us an update on any thoughts around refinancing your existing bonds?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Well, [inaudible] probably the ones that you're talking about in the current market, new high yield issuance to replace those funds would make it an attractive proposal at this point in time.
Emily Shanks - Lehman Brothers
Would not?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Would not.
Emily Shanks - Lehman Brothers
Okay, great. Thank you.
Operator
Next, you will hear from Kevin Campbell with Avondale Partners.
Kevin Campbell - Avondale Partners
Thanks. Todd, could you go over again your part, in your discussions about the G&A I missed some of the details about it, and specifically what you thought it is going to be going forward and maybe why it was down sequentially?
Todd Mullenger - Executive Vice President and Chief Financial Officer
In terms of why it’s down sequentially, it's not unusual to see that level of fluctuation from quarter-to-quarter. You’ve have got professional fees, travel and entertainment, and some other expenses that can cause those types of fluctuations.
In terms of what we expect going forward, we're targeting G&A at a 5% of revenue level plus or minus [inaudible].
Kevin Campbell - Avondale Partners
Okay. And could you also...
could you guys comment, we heard from one of your competitors last week about State of Texas having… putting some contracts out for re-bid. I think, John, last conference call you had said, maybe there were two managed-only contracts that were also re-bid this year.
Has Texas changed that on you... is there more now or were none of your contracts put out for re-bid by Texas?
John D. Ferguson - President and Chief Executive Officer
It's the same as we mentioned last time. But there are five for re-bid, two of them we manage and three of them our competitor manages.
So our B.M. Moore and Diboll facilities that we currently manage will be up for re-bid and then there are three others, Cleveland, SS [ph,] and Lockhart, which we do not, and we’ll of course be deciding whether to compete for all five or not ones we...
those are due first part of June.
Kevin Campbell - Avondale Partners
Okay. And so you had two facilities, what were the number of beds for those facilities?
John D. Ferguson - President and Chief Executive Officer
I think it's...
Kevin Campbell - Avondale Partners
I can look at up, no worry.
John D. Ferguson - President and Chief Executive Officer
I think it's 500 on each, but don't maybe look [inaudible] on our supplemental.
Kevin Campbell - Avondale Partners
Okay. I can look it up in the supplemental.
And if you look at… you’ve had some.. Kit Carson I guess come online.
You've got another Bend County I guess coming online in Colorado. You’d talked about maybe potentially having… finding an interim customer in the meantime.
If you don't, how long would you expect it to take for those two facilities to ramp with just Colorado?
John D. Ferguson - President and Chief Executive Officer
Well, [inaudible] because if you go back the last five years, they've had a… some years in which they were flat and they've had some years in which they've added as many as 700. So, if you take… I think their last several average has probably been in the 400 range.
So if that was the same, you are probably looking at three years to four years. They have had little growth here recently and then of course we’re moving the 480 out of North Fork to make room for other customers, and they would utilize some of these new beds.
So I'd say, three years is not an unreasonable time frame if we were to form [ph] to utilize all of them. And of course, we won’t activate some of the housing units and some of the expansions until they can be fully utilized.
So we won't incur as much expense in the new beds until they’re utilized.
Kevin Campbell - Avondale Partners
Okay. And if we look at Oklahoma, you've got the two facilities coming online there or the two expansions, sorry.
What... have you heard anything from the state there?
Have they passed their budget that calls for utilization of some or all of those beds?
John D. Ferguson - President and Chief Executive Officer
They have not passed their budget yet, as I understand. If I’m incorrect, we’ll get back to you, but right now I think they have not passed their budget and there is still a lot of just jacking [ph] going on as to where does...
on the choices that they have with other things. So I don't...
I'm not in a position I think to call what other thing is going to happen there.
Kevin Campbell - Avondale Partners
Okay. All right, thank you very much.
Operator
Thank you. Next, we'll hear from Todd Van Fleet with First Analysis Investments.
Todd Van Fleet - First Analysis Corporation
Good morning, guys. Todd, did you say earlier that it was $2 million of startup included in the quarter?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Yes. Approximately $2 million, yes.
Todd Van Fleet - First Analysis Corporation
Okay. Let me ask you on pricing.
If you look at where the aggregate per diem went on a sequential basis, Todd, you went to about $56 from… up from about $55.5, a relatively small move, about 1% or so. At the same time, capacity utilization ticked down.
So it wouldn't seem that... well, I just want to ask you, I guess in terms of thinking about sequential pricing moves here for the company, you are going to have a couple of things that can impact that.
You're going to have the utilization potentially because the higher utilization, the lower perhaps incremental per diem associated with each inmate, you're going to have mix... customer mix, that sort of thing.
Do you have a sense for what the pricing movement was comprised of kind of going from the December to the March quarter? And I know it's a relatively small move, but you didn't have any pricing movements… rather in terms of just pricing adjustments on the contracts impacting your March quarter, did you?
Todd Mullenger - Executive Vice President and Chief Financial Officer
March quarter is usually not a quarter we see a lot of routine per diem increases. A lot of those increases are heavily weighted towards July 1st.
There is a mix with increase in California population and some other mix, but no significant re-pricing opportunities in Q1.
Todd Van Fleet - First Analysis Corporation
Okay. So mostly a mix issue then?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Mix, yes.
Todd Van Fleet - First Analysis Corporation
Okay. Let me ask you a couple of different questions, if I could, on the facility...
at the facility level looking at the supplemental, it looks like there was basically a trade-off perhaps in populations between your facilities in Eloy, Red Rock and Saguaro. Could you tell us a little bit more about what's going on there?
John D. Ferguson - President and Chief Executive Officer
Well, there was a trade-off in Saguaro and Red Rock because we were I think finishing up movement of the Hawaiian inmates from Red Rock into Saguaro. And then, California is going to backfill some of those beds and I couldn't tell you exactly where we are on the California inmates moving into Red Rock, but that's probably a little bit of moving around, and --.
Todd Van Fleet - First Analysis Corporation
I just noticed, Red Rock had declined a couple of quarters in a row, meaningful declines I figure--.
John D. Ferguson - President and Chief Executive Officer
Well, that has a lot to do with... we had moved a substantial amount of Hawaiian inmates into Red Rock before Saguaro opened and then we were ramping Saguaro up with Hawaii.
In fact, it’s likely to still a few Hawaiians in… without some early population sheets I couldn’t tell you, but that has a little bit to do and we've had some movement of some Washington State inmates that I think we had at Florence that we moved over there. So some of that is moving around to position so that we can fully utilize the facilities.
Todd Van Fleet - First Analysis Corporation
And so the expectation is that California will backfill Red Rock?
John D. Ferguson - President and Chief Executive Officer
Yes, but it does appear that we had about half of what we were going to get in… 180, I think we announced 360 was where we expanded the contract. And it looks like it’s gaining a month where we're about 180, and at the end of the month we're just about at 360.
Todd Van Fleet - First Analysis Corporation
Okay. Let me ask on Colorado then, first, the per diem increases you're getting in this state, that applies to out-of-state inmates as well, out-of-state transfers?
John D. Ferguson - President and Chief Executive Officer
Well, actually it won't, because by July 1 I think we will have moved all of their inmates in state.
Todd Van Fleet - First Analysis Corporation
Okay. So that leads into my next observation, which is the populations at North Fork have been declining, so apparently you're bringing back Colorado inmates in state from North Fork?
John D. Ferguson - President and Chief Executive Officer
Yes.
Todd Van Fleet - First Analysis Corporation
Okay. And then the [inaudible] facilities that you're expanding, Kit Carson and Bent County, population declines there, that related to the facility expansions then?
John D. Ferguson - President and Chief Executive Officer
Well, are you talking percentages, because I think on absolute we've not here recently had… I’ll ask--.
William F. Andrews - Chairman of the Board
Right. Todd, as you see the percentages decline, that would be the new capacity comes into play.
John D. Ferguson - President and Chief Executive Officer
Yes.
Todd Van Fleet - First Analysis Corporation
All right. That's helpful.
Thank you.
Operator
Next, we'll hear from T.C. Robillard from Banc of America Securities.
T.C. Robillard - Banc of America Securities
Thanks. That's a good attempt.
John D. Ferguson - President and Chief Executive Officer
You need to just go by Rocky or something--.
T.C. Robillard - Banc of America Securities
John, just a quick question for you on California. Maybe I am reading a little too much in here, but I noticed, at your Tallahatchie facility, you've now got that contract term expanded out a few years, it’s now [ph] the term to June 11...
2011, I think it was in '08 or '09 contract. Is there anything to read into that?
I mean is that expectations for continued growth out of California or is that just facility specific? I'm just trying to reconcile.
John D. Ferguson - President and Chief Executive Officer
I'm sorry, say that again T.C., I am not sure how to [inaudible]?
T.C. Robillard - Banc of America Securities
When I look at your supplemental in… on the Tallahatchie facility, it’d be the term, the call [inaudible] you give the terms, it now states that it's through June of 2011. And if I recall, I think at the end of the year that term was some time in either '08 or '09.
So it looks like you have got an extension of the contract there by a couple of years. So I'm just trying to get any color around that.
John D. Ferguson - President and Chief Executive Officer
I am surprised that we may have had the earlier date, and… but maybe it was when we were... we did an early contract and then we modified it to take it up to the 7,772 which of course was then modified again, but the legislation right now says June 30th, 2011.
And I think we were probable just lining everything up to that. So the expectation right now is that all 8,000 or so inmates would be in our systems at least to June 30th, 2011.
T.C. Robillard - Banc of America Securities
Okay. And is...
the 8,000 beds that California has got contracted for you, those are fully funded, correct?
John D. Ferguson - President and Chief Executive Officer
As we understand… you're talking about California is fully funded on--?
T.C. Robillard - Banc of America Securities
For the beds that they are planning to add to go out of state with.
John D. Ferguson - President and Chief Executive Officer
It is definitely funded through June 30th, 2008. And the Governor's bill… budget bill completely funded it for fiscal year 2009.
T.C. Robillard - Banc of America Securities
Okay. And they haven't signed off on their budget yet, correct?
John D. Ferguson - President and Chief Executive Officer
No, they have not. As I understand it, the Governor submits his revised budget sometime in the next week or two.
T.C. Robillard - Banc of America Securities
Okay. And then just on the Las Vegas, I know that there is nothing official yet, but let's say for argument sake you guys win that contract.
Is that a new facility built for you that's not in... that's not been announced yet?
So if you were to win that, would we expect to see another new facility being announced?
John D. Ferguson - President and Chief Executive Officer
Yes.
T.C. Robillard - Banc of America Securities
And how big... can you remind me how big that contract...
was it a 1,000 or 1,500-bed contract?
John D. Ferguson - President and Chief Executive Officer
I think it was just a tad over a 1,000.
T.C. Robillard - Banc of America Securities
Okay. Perfect, that's all I have.
Thanks, guys.
Operator
Thank you. Next, we will hear from Mark Balker [ph] with Bluefin Investments.
Unidentified Analyst - Bluefin Investments
Good morning. Thanks, John and Todd--.
John D. Ferguson - President and Chief Executive Officer
Good morning.
Unidentified Analyst - Bluefin Investments
I wonder... I'm just looking at the supplemental disclosure and maybe just understand that Colorado, the Kit Carson, and North Fork, the occupancy percentage you guys list for Kit Carson at 78%, is that an average throughout the quarter such that...
essentially, I'm asking have you transferred any real prisoners to Colorado?
John D. Ferguson - President and Chief Executive Officer
Hold on one second, I will try to answer that. The Colorado was...
the Kit Carson was almost completely full all the way until we added the 720 beds, and so that changed that percentage. So that's an average percentage rise [ph].
Unidentified Analyst - Bluefin Investments
So basically, it reflects half the quarter being a 100% full and half the quarter...?
William F. Andrews - Chairman of the Board
Yes, because of the new capacity, right.
Unidentified Analyst - Bluefin Investments
Great. Is there any way to quantify, maybe did you move very few prisoners from one facility to another in the quarter and do you reflect several hundred in your Q2 guidance?
John D. Ferguson - President and Chief Executive Officer
One second before I can give you, again April… actually, during the month of April, we only transferred seven out of the 480 out of North Fork. So the quarter would have no… would have all of the California… I mean Colorado inmates still in North Fork.
So there’d be none of the 480 that were in North Fork that transferred prior to March 31, 2008.
Unidentified Analyst - Bluefin Investments
Great. And do you expect to have most of those or were you saying that that's the two to three-year process to move them--?
John D. Ferguson - President and Chief Executive Officer
No, the movement from North Fork back into the expansion beds will probably take place over the next couple of months.
Unidentified Analyst - Bluefin Investments
Great. And then just with respect to the ramp-up cost, can you remind us what that reflects?
Is it mostly staffing and maybe, I don’t know, depreciation before you have any revenues?
Todd Mullenger - Executive Vice President and Chief Financial Officer
It’s primarily salaries and benefits for the staff we hire to train in advance to receiving the inmates as well as some other supplies and another variable costs that we purchased in advance to receiving in those inmates. So, no depreciation expenses included in that number.
Unidentified Analyst - Bluefin Investments
Great. So when you are describing accelerating earnings growth as you go up through the year into Q3 and Q4, particularly thinking about La Palma, basically you’ll have costs in the second quarter with no revenues and as you go through Q3 and Q4 you will have revenues to go along with those costs.
Is that the right way to think about it?
Todd Mullenger - Executive Vice President and Chief Financial Officer
That’s right. So on a new facility, the margins actually start out negative, right.
As you are hiring training staff in advance to receiving inmates, the margins can actually start out negative and then as you ramp up occupancy and start to cover your fixed costs, those margins turns positive to the point where after the… most of your fixed costs are in place at about 70% to 80% of occupancy, after that you’re adding much in the way of fixed cost, and so then the margins on the last, call it, 20% of occupancy… 15% to 20% occupancy are pretty close to equal to revenue minus variable cost per day.
Unidentified Analyst - Bluefin Investments
Sure. So in the...
because La Palma is the biggest, at least in total beds, I know they’re coming out of overtime, but does that make the third quarter the worst quarter for ramp cost for that type of facility or is it really second quarter because you are almost fully… you’ve almost got all the salaries in, but--?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Yes, there is several variables going on there. What's going to happen is on beds at Tallahatchie for example and North Fork and some other beds that we've been ramping-up and we're reaching that 70% to 80% occupancy, those margins per man-day turned very positive and that has an impact, and it’s offset somewhat by the start-up cost on La Palma as we start to ramp that up.
So what're you looking at is an acceleration, primarily in Q3 and Q4.
Unidentified Analyst - Bluefin Investments
Great. Thanks for your time.
Todd Mullenger - Executive Vice President and Chief Financial Officer
Surly.
Operator
Next, we'll hear from Dana Walker with Kalmar Investments.
Dana Walker - Kalmar Investments
Good morning. Can you talk about what the issues are in the Colorado authorities allowing those beds to be used by other state customers?
John D. Ferguson - President and Chief Executive Officer
Well, they do have some phase-out as to the inmates that come into the state. They have indicated that it would be reasonable than what we do.
This… of course one of the issues is though, they would like to know the beds are available as they grow into… over the next three years out. So we have had other state inmates in Colorado in the past, so we’ve had a little bit of experience with them.
Dana Walker - Kalmar Investments
John, would you expect whatever arranging that might need to take place to be resolved in the next three months?
John D. Ferguson - President and Chief Executive Officer
I think it's a high probability it would not be resolved in the next three months. I don't know, based on some...
it's hard to call, Dana. I mean, we have some opportunities that are current.
Some would be quicker than inside of three months, but that's... I don't know how to give you a percentage count on that one.
But we think that it should be attractive to somebody for the short-term.
Dana Walker - Kalmar Investments
As investors, we've tended to focus on your specific state pricing updates. How about a comment on your federal pricing updates and how they work?
William F. Andrews - Chairman of the Board
Well, on the per diems on… mainly the federal contracts are adjusted for a couple of items. One, many federal contracts are operated on what we call Federal Wage Termination where we’re obligated to pay a rate set by the Department of Labor, and those federal contracts that operate under Federal Wage Termination, we get per diem increases to offset the majority of those increases as they occur due to changes set by the Department of Labor.
So, that's the first adjustment. And the second adjustment, many of the contracts have contractual escalators built into the contracts.
Others may have requirements for increases subject to negotiation.
Dana Walker - Kalmar Investments
To the degree that your... I hesitate to use the word leverage, but to the degree that your ability to influence price and benefit from a tighter capacity environment has been helped by the states, does that same equilibrium help you with federal customers or… it sounds like it's more fluid and perhaps less step function change driven?
William F. Andrews - Chairman of the Board
I'd say where we have the opportunity is on new contract proposals. That's where we have the opportunity to leverage price based on where the market is.
On an existing contract less so.
Dana Walker - Kalmar Investments
As we might look at a CAR 8 or a Car 9, that would fill the definition of new circumstance?
William F. Andrews - Chairman of the Board
Yes.
Dana Walker - Kalmar Investments
Okay. The...
how about a thought or two on your healthcare expense and your healthcare performance in Q1?
William F. Andrews - Chairman of the Board
Are you talking about employee healthcare or inmate healthcare?
Dana Walker - Kalmar Investments
Inmate healthcare.
William F. Andrews - Chairman of the Board
Inmate healthcare. Our performance on the inmate healthcare over the last several years has been fairly good.
We've got a fantastic healthcare department here at the [inaudible] sports center focused on controlling those costs, and unlike employee healthcare we had a lot more control over where those inmates go and the level of service and healthcare they receive. And so that's allowed us significant control.
But say, over the last two to three years, average inflation on healthcare costs have been 5% or less on cost per man-day basis.
John D. Ferguson - President and Chief Executive Officer
Let me reinforce that we provide quality healthcare to our inmates at all times.
William F. Andrews - Chairman of the Board
And the point I was making is that they can't go out, and if they’ve got a runny nose they don’t run out to the emergency room to seek health care, unlike the employee healthcare we’ve got that issue.
Dana Walker - Kalmar Investments
Now, have either the Obama campaign or the Clinton campaign approached you on the privatization and the offering of care to all those who are uninsured, since you do it so well?
William F. Andrews - Chairman of the Board
Well, they have not.
John D. Ferguson - President and Chief Executive Officer
No, they haven’t.
Dana Walker - Kalmar Investments
Or you might want to get on top of that. Final question is, you've talked and we've noticed that the federal system tends to operate in excessive capacity.
To what degree do you believe that there is a push to bring that closer to parity, if any?
John D. Ferguson - President and Chief Executive Officer
I don't [inaudible] we don't. It just varies per location and per contract.
So… and has a lot to do with the availability of beds.
Dana Walker - Kalmar Investments
You are not... since there is no mandate though within the Bureau of Prisons to drive more towards operating prisons at their stated… or nameplate rather than in excess of their nameplate?
John D. Ferguson - President and Chief Executive Officer
Well, I think I’d mentioned that the BoP had [inaudible] that operated a 115%, that's their desire. And of course they have operated at 137% and it's because they've got to make do with the appropriations that they have.
So all those kinds of things would drive it.
Dana Walker - Kalmar Investments
That's all I have. Thank you.
Operator
We'll hear a follow-up from Todd Van Fleet with First Analysis Investments.
Todd Van Fleet - First Analysis Corporation
I want to ask you kind of big picture item as well the food costs, have you guys seeing any pressures there? Have you taken steps to kind of mitigate any exposure that you might have on that?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Todd, all of our food service is outsourced and we are operating under a contract that goes through December of 2009, that contract got an annual escalator, which will go into affect this year in the fourth quarter and that escalator effect in the fourth quarter of this year will be equal... will be the same escalator that they have received for the past three years.
Todd Van Fleet - First Analysis Corporation
Okay. Let me switch gears a little bit then I ask you back on...
I'm trying to get arms around on all the different moving parts and pieces and shifting inmate populations and to find out where you guys might possibly have any sort of capacity to take on a customer such as Arizona, did you guys responded to that RFP?
John D. Ferguson - President and Chief Executive Officer
Yes, we have.
Todd Van Fleet - First Analysis Corporation
Can you tell us which facility or facilities you put in the mix there?
John D. Ferguson - President and Chief Executive Officer
I prefer not to.
Todd Van Fleet - First Analysis Corporation
But, you do have capacity then to accommodate Arizona?
John D. Ferguson - President and Chief Executive Officer
We would, yes.
Todd Van Fleet - First Analysis Corporation
Let me ask you something different. In the event that California is a little bit slower on the draw here on some of these beds, not necessarily referring to Arizona, but would CCA consider allocating some of that previously earmarked bed space for customers that are a little bit quicker on the draw?
John D. Ferguson - President and Chief Executive Officer
I would say, as it relates California, no, because we are not talking about long periods of time we are just... we are saying that if California was supposed to be… planned to be 6,800 inmates at the end of the calendar year, there could be something that inmates [ph] are only at six.
But, unless we knew the other 800 were never coming, we would be reluctant to utilize any of the beds we've planned for them or somebody else.
Todd Van Fleet - First Analysis Corporation
Okay. So on North Fork, where you have 2,400-bed capacity and 63% utilization at this stage.
So, it looks like about 900 empty beds or so. Portion of those are earmarked for California, but it sounds like you are going to be losing 480 Colorado inmates there?
John D. Ferguson - President and Chief Executive Officer
Yes.
Todd Van Fleet - First Analysis Corporation
Over the course of next several months, you can remind me, how many inmates from California have you kind of earmarked for California in North Fork?
John D. Ferguson - President and Chief Executive Officer
I think with... we're looking at right at 1,100 once we get...
Todd Van Fleet - First Analysis Corporation
Okay.
John D. Ferguson - President and Chief Executive Officer
So, there will be some available beds in North Fork after Colorado lease and California utilizes all the beds they have.
Todd Van Fleet - First Analysis Corporation
All right. Thanks, guys.
Operator
We also have a follow-up from Kevin Campbell with Avondale Partners.
Kevin Campbell - Avondale Partners
Thanks. Just a quick question on the margins permit and actually the expenses on only-managed side.
How should we think about those going forward? You had a nice, say, sequential decline in your variable expense from 17.2% to 16.1%.
Should we expect that to A, what drove that and B, should we expect that to pick back up or stay down around that 16.1% level? And then on the flip side, on the fixed expense, it was an increase of about 80 basis points.
How should we expect that to play out going forward? And obviously, I know you talked about it accelerating in the back half of the year, but anyway just some additional color on that would be great.
William F. Andrews - Chairman of the Board
Are you looking at all facilities?
Kevin Campbell - Avondale Partners
Just the managed and owned was all I was referencing there.
William F. Andrews - Chairman of the Board
The managed-only, I think as we've said in the past, we'll probably continue to see some pressure on pricing on the managed-only. So, the margins there, not looking for any...
Kevin Campbell - Avondale Partners
I'm sorry, I missed... both the managed and owned side of the business.
The variable expense came down from 17.2% to 16.1%. Should we expect that to stay down, is that going to pick back up?
You had a similar 16.4% number in the first quarter of last year. But then it picked back up to the 17%, 18% level for the rest of the year.
Todd Mullenger - Executive Vice President and Chief Financial Officer
Yes, now there will be some volatility there related to start up costs with the facilities and related to geographical differences and operating costs based on where the inmates are going. So, you could see some variability there.
So, it's… [inaudible] interesting in giving to you.
Kevin Campbell - Avondale Partners
Okay. Thank you.
Operator
We do have a follow-up from Dana Walker.
Dana Walker - Kalmar Investments
One question relates to with the economy appearing to be more troubled with demographic supporting a rise in crime, and with the economy possibly pressuring state receipts and how that might affect either their build or their desire to incarcerate, maybe you'd update us on what you're hearing from your customers on those topics and whether if you're likely to see more other new states work their way into your customer list in a way that would be material?
William F. Andrews - Chairman of the Board
Having been through this experience about six years ago when there were some pretty tough budgets and observing that correctional of budgets for not being increased to deal with any infrastructure… future growth, we think we'll see similar kind of experience now that many of our customers will not be preparing for the future bid growth. It might mean that you do nothing for longer than they would otherwise, which is really built some pent-up demand, that is our job to try to identify that so that we can do what we refer to many times as develop just-in-time beds.
We've learned that that governments will put off spending additional money on things like correctional beds as long as they can than also when they need them and then if they need them, they need them pretty quickly because they're now getting themselves in a overcrowding situation. So, we would assume that continued infrastructure expenditures by state governments will continue to be hampered by the current budgets that they are dealing with.
Dana Walker - Kalmar Investments
John, do you see any indication now that your list of 20 privatized states expands to 21 or greater?
John D. Ferguson - President and Chief Executive Officer
Wouldn't want to mention any by name, but we do have a handful of prospective states that we continue to work with.
Dana Walker - Kalmar Investments
Would you say the drive behind their need is different today than it would be in some different time?
John D. Ferguson - President and Chief Executive Officer
Yes. It will look like what it did in other...
some of our current state customers that we're not customers five years ago.
Dana Walker - Kalmar Investments
Thank you.
Operator
And we will hear a last follow-up from Todd Van Fleet.
Todd Van Fleet - First Analysis Corporation
Sorry. How many Colorado inmates you're going to be managing after everyone is back in state?
John D. Ferguson - President and Chief Executive Officer
Can we get to hear on that later? I mean…
Todd Van Fleet - First Analysis Corporation
That's fine.
John D. Ferguson - President and Chief Executive Officer
If you take, I guess, the percentages we're showing or not, I'll tell you, if you took the percentages that were in the fourth quarter, it probably hadn't changed dramatically on the count, and add 480, that would be a pretty close number, but we will try to get you the exact.
Todd Van Fleet - First Analysis Corporation
Okay. And then, Todd, can you tell us what's affecting your guidance with respect to your debt load by the end of the year?
Todd Mullenger - Executive Vice President and Chief Financial Officer
Wouldn't be interested in getting down to that level of detail.
Todd Van Fleet - First Analysis Corporation
Okay. Thanks.
Operator
And gentlemen, that appears that is all the questions we have at this time. Mr.
Andrews, I would like to turn the conference back up to you for any additional or closing remarks.
William F. Andrews - Chairman of the Board
Okay. I'll try to sum this up pretty quickly.
Our revenues were up 11%, earnings per share were up 8%, and our adjusted cash flow was up 18% for the quarter. Our occupancy slipped about 1% from 98% to 97% because we added 5,000 new beds since the first quarter of '07.
Our operating margins were down three-tenths a percent. I think Todd indicated we had higher ramp-up cost in this first quarter of about $2 million, which caused these slightly lower margins.
We are projecting that we try to keep SG&A at 5% of revenue. We are projecting that in the forecast going forward, we’ll do between $0.28 and $0.30 in the second quarter, and $1.21 to $1.28 for the full year.
In this forecast, we're planning on 6,900 more beds coming on stream in the balance of this year. And this again causes us higher ramp up cost in the short-term, probably the second quarter with higher future margins in the third and fourth quarter.
I think John gave you a very favorable outlook with the market. In the federal area, the BOP looks like they're going out for 4,000 new beds in their RFPs in the future for CAR 8 and 9.
The Marshals Service has grown at 7% in the past and we believe it will continue to grow at this rate. And immigrations from custom enforcement has received funding for additional 1,000 beds.
In the states, John indicated over a period of time going forward to 2011, we see a growth of 80,000 more beds needed by these 20 states that we operate in. In the first quarter of 2008 and in 2007, we did add 5,500 beds.
Under expansion for the rest of 2008 and 2009, we plan to add another 10,486 beds and this brings us to about 16,000 new beds that we're bringing on stream in 2007, 2008 and 2009. Fortunately, our balance sheet can support this growth and somebody mentioned that what's going to happen with us going forward because of a potential downturn in the economy and maybe more pressure of states needing more beds and our balance sheet could support a further growth of another 8,000 or 9,000 beds.
So, we continue to see progress in our business. We thank you all for your interest and good afternoon.
Operator
This does conclude our conference call. We thank you for your participation and everyone have a great day.