Feb 9, 2012
Executives
Damon Hininger – President and CEO Todd Mullenger – CFO
Analysts
Kevin Campbell – Avondale Partners Todd Van Fleet – First Analysis Manav Patnaik – Barclay’s Capital Tobey Summer – SunTrust Derrick Broadnax – Macquarie Barry Klein – Macquarie Jonathan Evans – Edmunds White Partners Dennis Wurst – Britton Hill Capital
Operator
Good morning, everyone, and welcome to CCA’s Fourth Quarter 2011 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.cca.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 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 and included in the supplemental financial data 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 unanticipated events.
Participating on today’s call will be our President and CEO, Damon Hininger, and Chief Financial Officer, Todd Mullenger. I’d now like to turn the call over to Mr.
Hininger. Please go ahead, sir.
Damon Hininger
Thank you, Lauren. Good morning and thank you, all, for joining our call today.
With me today also is our Chairman, John Ferguson, and CFO, Todd Mullenger. Also joining us is our Chief Corrections Officer, Harley Lappin, and our VP of Finance, David Garfinkle.
In a few minutes, Todd will take you through the numbers for the quarter and the year and I will discuss the marketplace and new opportunities after which we look forward to taking your questions. First, I’d like to make some comments on the past quarter and the full year.
I am very pleased with the fourth quarter results which capped off another successful year overall. I believe that our performance over the past year demonstrates clearly that we’re executing on a strategy very well.
From a financial perspective, our full year diluted EPS was 10.8%. This made for 11 consecutive years of EPS growth for CCA in with the worst economic environment of our lifetime, a compounded annual growth rate over the last three years is just under 9%.
Revenue was up nearly 4% and income was nearly 3.5%, even though we reinstated our merit increase program in 2011. But more importantly, 2011 will be seen as a very significant year for CCA.
During the year, we made real progress on many fronts at a time when there has been a lot of doubt and uncertainty about the economy. After I received a call back from Todd, I will outline the factors that have given us real momentum as we head into 2012.
So, overall, I am very pleased with our performance in 2011. I’d especially like to thank all of my fellow CCA colleagues for their commendable achievements.
They have been able to achieve and accomplish for our company during the course of 2011. I am eternally grateful to all of them.
Now I’d like to hand the call over to Todd to discuss the financials and our EPS guidance for the year and after which I will discuss how we see the market and the opportunities going forward. Todd?
Todd Mullenger
Thank you, Damon, and good morning, everyone. We are very pleased with our fourth quarter operating results.
In the fourth quarter of 2011, we generated $0.41 of EPS. Our fourth quarter financial performance exceeded our guidance, due primarily to higher US Marshal populations, lower effective income tax rate and lower than anticipated operating costs.
Average US Marshal populations in Q4 increase over Q3, with increases coming at facilities that were operating at very high occupancy rates, thus generating attractive incremental margin dollars on those inmates in the quarter. The effective income tax rate for Q4 was 35.6%, which was significantly below the approximately 38%.
We have been averaging for the first three quarters. The lower tax rate was a result of several tax credits available at the end of the year.
This lower tax rate added $0.02 to Q4 EPS. So adjusting for the unusually low tax rate for Q4, we really need to think about Q4 as a $0.39 quarter on a normalized basis, which is still ahead of the guidance range for Q4 2011 of $0.37 to $0.38.
As a reminder, in early January, we closed on a new $785 million all revolver bank credit facility, replaced our previous $450 million revolving bank facility. The increased capacity under the new facility will be used to repay $335 million of the $375 million outstanding under our 6 1/4% senior notes that mature in March of 2013.
The refinancing of the notes will be completed on February 13 when we finalize and fund redemption call. This will leave $40 million outstanding under those senior notes.
Moving next to the discussion on our guidance, as indicated in the press release, Q1 2012 guidance is in a range of $0.32 to $0.33. Guidance for the full year is in range of a $1.62 to $1.70 and then AFFO guidance for the full year is in a range of $2.35 to $2.50.
Guidance excludes any charges that will be taken Q1 associated with the partial tendering call of the 2013 senior notes. Our guidance is impacted by several key items which I would like to outline.
First, the sequential decline from $0.41 of EPS in Q4 to a range of $0.32 to $0.33 in Q1 and largely be explained by several items. As I mentioned earlier, the unusually low tax rate for Q4 of 35.6%, which benefited Q4 EPS by $0.02, a benefit we don’t expect to be replicated in Q1 2012 as we expected 2012 income tax rate to average 38%.
Next, you will recall from prior years that Q1 is always weaker compared to Q4 due to a large seasonal increase in unemployment taxes. Generally speaking, we pay over two-thirds of our annual unemployment taxes in Q1 because of how the taxes are calculated and when they are paid.
That translates into a $0.03 negative impact on Q1 EPS versus Q4. The first quarter 2012 also includes approximately $3 million in startup costs related to the opening of our Jenkins, Georgia facility and the ramp-up of Puerto Rico inmates at our Cimarron, Oklahoma facility.
This amount is around $2 million higher than the amount of startup costs occurred in Q4, which negatively impacts Q1 EPS by a $0.01. In addition, beginning later in December and continuing into Q1 of this year, we’ve experienced a decline in U.S.
Marshal populations at several facilities, which we believe is due to transfers and detainees from Marshal custody to the custody of the BOP. This occurred at the same time the new prosecutions slowed over the holidays.
A negative impact on margins per mandate from these transfers will be material as populations decline at facilities that are operating at a very high occupancy rates. We are forecasting around $0.03 of impact on Q1 this year versus Q4 2011 as a result of these declines, with the expectation that populations rebound by Q2.
Finally, we have around $0.02 of favorable impact on EPS from a combination of new Lake Erie, Ohio facilities as well as lower G&A and interest expenses. So to recap, the crosswalk from Q4 EPS of $0.41 to the Q1 guidance range of $0.32 to $0.33, the total impact of these items just outlined is around $0.78 net, a $0.02 reduction from the increase in the effective tax rate, $0.03 reduction from higher unemployment taxes, $0.01 from increased startup cost, around $0.03 from declines in Marshal populations, but these items being partially offset by $0.02 from EBITDA at our new Lake Erie facility and a reduction in G&A and interest expenses.
Looking past Q1 into Q2 and forward, in addition to the rebound in U.S. martial populations in Q2, we will benefit from a material reduction in unemployment taxes from Q1 to Q2 of approximately $4 million.
Q2 forward also benefit from the completion later this month of the refinancing of $335 million to 6.25% senior note debt with borrowings under the expanded bank facility, where our current rate is LIBOR plus 1.5% around 2% in today. Next, the ramp of Puerto Rico inmates to Cimarron will begin with the small transport in February and additional transports in March, April and May with 480 Puerto Rico inmates expected in total.
We will also activate the Jenkins Georgia facility with a gradual ramp up of populations beginning in March with the completion of the ramp expected in the third quarter when the population will reach approximately 1135. Guidance also assumes no additional share repurchase were made, general and administrative expenses for 2012 should approximate 5% of revenues, depreciation and amortization expense is forecast at approximately $115 million for the full year and an AFFO guidance for 2012 impacted by the assumption that the low 2011 cash tax rate of around 27% increases to 38% in 2012.
I will now turn it back over to Damon.
Damon Hininger
Thanks so much, Todd. As I said earlier, we see this past year as a defining moment for CCA.
What has helped us build the momentum? Several factors were key.
First, we have made some significant progress in educating our government partners on the value proposition of partnership corrections. We witnessed tremendous strides by states like Ohio, Florida, Puerto Rico, and New Hampshire to use the private sector for their correctional needs.
We closed the first of its kind transaction on January 1 with the state of Ohio by buying the Lake Erie facility. This type of solution which is monetized in the state asset with a fixed income stream provided through a long-term management contract, we know is very attractive to other states.
And with New Hampshire, they are taking steps to close a facility that is 130 years old and replacing it with a modern and cost-effective facility provided by the private sector. And with our new contract with Puerto Rico, the Commonwealth was attracted to a similar solution that has been extremely effective for many years with the State of Hawaii with them using an existing capacity within our system.
The reason for this momentum is our continued focus on providing innovative high-quality, cost-effective solutions to our partners. Second, critics of the company and the industry will continue to discount the cost savings with irrational and incorrect claims.
This year we observed an enhanced appreciation of the significant cost savings we can provide our partners, especially at the state level. Examples of this include the states of Ohio, New Hampshire, Puerto Rico and Florida are taking with their individual initiatives.
These discussions validate that our solutions are compelling from a cost and quality perspective. But I would also state that states and other stakeholders are looking more closely at their actual cost of corrections.
And I would like to give you a couple of recent examples to support this point. The Vera Institute of Justice released a report last month entitled The Price of Prisons.
In it, it reports that of the 40 states it surveyed the total taxpayer cost of prisons and the 40 states was on average nearly 14% higher than the cost represented by their combined corrections budget. Now this is because of what I highlighted last year which is, many state DOC budgets typically have not fully embedded the costs for pensions, healthcare benefits and capital outlays.
With these cost factored in, which clearly has not been the case in the past when cost comparisons are done, our value proposition is even further enhanced. The other example is that the Florida Department of Management Services, DMS, testified in January at a House Appropriations Committee hearing at CCA and the other vendors in the state are saving the taxpayers in the State of Florida 10% to 27% when compared to publicly operated facilities.
And this wasn’t a third-party making this claim, it was a state agency with oversight on our contracts. My final point on 2011, which is, we had a second consecutive year of no new prison construction at the state level.
I cannot underscore how significant and dynamic this is for the industry. The partnership corrections industry makes up approximately 9% of the total prison capacity in the United States with public facilities encompassing the other 91%.
As the public sector, the 91% of the marketplace continues to defer the cost associated with growth, overcrowding, an old dilapidated facilities, the partnership corrected industry is well positioned to fill this void and at the same time delivering cost savings and capital voidance to distressed state budgets. Given CCA’s existing capacity, plus our strong balance sheet, we are extremely well positioned to help states deal with correctional challenges for many years to come.
We will know our federal partners proposed funding when the President releases his budget on February 13 with it being an election year, I suspect (inaudible) could be sometime after the election. We will report on this next quarter but it is still the case that this fiscal environment in Washington has created real challenges for the BOP on getting funding for new capacity which we believe the BOP will not receive any new funding in fiscal year 2013.
With this, we are estimating that the BOP could need up to 15,000 to 20,000 new beds in the next five years. So, now to significant pending procurements and the first of which is Arizona, and the requirements for 2000 new beds owned and operated in state.
Arizona released the procurement last Thursday for a contractor-owned – contractor operated 2,000 bed in state facility. Proposals are due March 6th and we anticipate a second or third quarter award.
We also anticipate a start date in late 2013 or early 2014. In Florida, as widely reported in the media, the Florida State Legislatures debated a bill in the Senate to reauthorize privatization of the state’s region for facilities.
Clarity should be achieved in the next couple of weeks on what will happen within the state. New Hampshire released a series of procurements late last year the primary one being for a new 1,550 bed in stay facility.
Proposals are due on February 24th and we anticipate a second or third quarter award. We also anticipate a start date in 2014.
With ICE in 2011 our locations were selected as preferred sites and we are working with integration and customs enforcement on new facilities in Florida and Illinois. If we are successful in working on agreement on both facilities it will require that we build approximately 1,500 beds in Florida and 750 beds in Illinois with an anticipated opening of each facility in late 2013 early 2014.
Harris County Texas, which is Houston issued a request for proposal on June of this last year under, which the county is seeking proposals for the management of the entire Harris County jail system of approximately 9000 beds. We understand it currently cost the county more than 200 million per year to operate their jail system.
And we were asked to do a daylong presentation in December to various stakeholders in Harris County and it is clear that the county has taken a close look at our proposal. So significant amount of activity for the industry with approximately 32,000 new beds opportunities around the country.
And now our brief update on a couple of topics relative to California. The state has made progress with the realignment program which went into effect October 1st, 2011 California’s population has decreased by over 14,000 since the start of the program and as of January 25th, their population was 129,720.
The next big milestone for the state is achieving a population of 124,000 by June. Now as it relates to our contract and I’ll say program, I’d like to report on two very notable events.
First, the state has to file monthly updates to the court on progress the state is making on reducing overcrowding. In the state’s January report it’s highlighted for the first time our out-of-state program and its contribution on helping to stay be successful in reducing overcrowding.
Additionally, Governor Brown’s proposed fiscal year 2013 budget which he released in January proposes full funding of our contract which would fund 9,858 beds. That includes the additional funding for the 270 inmates previously held with another vendor and language that protects CCA from losing its population to another private provider.
In this section it also gives the CDCR the flexibility to move population to other CCA facilities which is a new provision compared to last year’s bill. I think this signal is clearly the recognition from the Brown administration on the value of the program as well as the need for flexibility the program provides to address the mandates of the court for the foreseeable future.
As it relates to our near-term capital strategy as you know, the company in the past has supported cash primarily on speculative capacity, build to suit opportunities, facility acquisitions and the share repurchase program. We are still holding off on new spec capacity and aggressively pursuing build to suit opportunities and also facility acquisition opportunities.
Like we pursued in New Hampshire and also completed in Ohio. As I mentioned earlier, we have demonstrated durable earnings over a very challenging economic environment and with that, we continue to evaluate these and other strategic and capital structure alternatives the company can pursue to further enhance shareholder value.
So let me bring to a close my comments and make these final points. We believe that the company is very well-positioned in a market that has tremendous opportunity for the company.
As mentioned earlier, states are moving forward on meaningful efforts to use the private sector because of compelling cost savings, severe capital constraints and the need to avoid increase in their pensions and healthcare liabilities. With all of these factors, cost factored into the equation, our value proposition to customers is getting stronger and actions underway in Florida, Arizona, New Hampshire, Ohio and Puerto Rico prove this.
Last quarter, we announced a new partner in the State of Ohio that momentum continue this quarter which led us to secure another new partner. We are very excited about our new relationship with the Commonwealth of Puerto Rico and implementing innovative solution for them by using the existing capacity.
And it doesn’t stop with Puerto Rico, we are actively talking to other states needing this type of solution utilizing existing CCA capacity. With our available capacity of over 12,000 beds in inventory already bought and paid for securing more partners like Puerto Rico could be extremely impactful to earnings.
Building all these capacity will generate $0.72 in EPS and 117 million in incremental EBITDA. Financially our business is very sound.
We have a strong balance sheet, good liquidity to fund new capacity development and focus operations in a largely and penetrated U.S. market.
Our recent upgrade by Moody’s and favorable rating by Fitch supports this point. In summary, the business is performing well and we have taken actions in the short and long-term to make sure it continues to do so.
As mentioned earlier I am very optimistic about the business. We have been very deliberate on how we manage expenses and capital in order to grow and deliver healthy financial performance but also position the company for long-term growth and we will continue with this strategy well into the future.
That concludes my prepared remarks. Thank you, again for calling today’s conference and let me now turn it over to Lauren for Q&A.
Thank you.
Operator
Thank you. (Operator Instructions) And our first question comes from Kevin Campbell With Avondale Partners.
Kevin Campbell – Avondale Partners
Good morning. Thanks for taking my questions.
Just a couple of quick ones here. Damon, I miss the timing on Arizona in terms of when you thought that might actually ramp.
What was the timing on that?
Damon Hininger
We’re hearing that it will be late 2013 or early 2014.
Kevin Campbell – Avondale Partners
And just a couple of other questions. You guys – GEO had a facility open up in Georgia in the fourth quarter, you have one this quarter, and your existing Georgia facility that housed Georgia inmates are over their stated capacity, so can you give us some sense as to whether or not, you might lose some inmates from those existing facilities that are pulled to ramp up these new ones, or do you think that they’ll maintain those populations and pull them from other state run facilities?
Todd Mullenger
We’re not expecting any material impact with the GEO facility opening up late last year. We saw a little bit of up and down our facilities, but it wasn’t material.
So I suspect we’ll see a little bit of the same thing here later this quarter or early next quarter with a ramp up of Jenkins, but not a material impact.
Kevin Campbell – Avondale Partners
So are those inmates then coming from existing state run facilities that they have closed or that are overcrowded themselves?
Todd Mullenger
I think it’s probably all the above. I suspect we’ll see a little bit – like the little bit from more facilities, I will not see a material impact, we’ll see some public facilities and maybe some facilities that are looking to ramp down, so I’ll say it’s probably any and all facilities public or private.
Kevin Campbell – Avondale Partners
Okay, great. And on California, you mentioned the funding for 9858 inmate and I think you currently have roughly 9,400 there are now.
So you expect that to go after that
Todd Mullenger
Okay great on California mention the funding for 9858 and mates and I think you currently have 9,400 there now, so do you expect that to go up to the 9858 or do you feel like this is – they’re just giving themselves a little bit of wiggle room to move around, but it – there’s probably not a material change in additional inmates from where we are at today from California?
Damon Hininger
I think the latter is correct. I think they’re giving us a little bit of wiggle room.
We’ve crept up a little bit since the 270 was put into our system late last year and they have never run consistently write at 100%, so I think we’re probably at the level that would be a good run rate for this year.
Kevin Campbell – Avondale Partners
Okay. And then just a question for Todd, the press release mentioned some unfavorable claims experience in the fourth quarter, could you give us a sense as to the magnitude of that and whether or not that was sort of a one-time negative in the quarter as well?
Todd Mullenger
I don’t recall the magnitude, Kevin, but this is an expense item where we can see some variability from quarter-to-quarter we’ve seen in past and we saw claims increasing Q4, but there is no indication that’s beginning of a trend.
Kevin Campbell – Avondale Partners
Okay. And then the last question on the buyback, you did not do much in the quarter, is there anything we should sort of read into that and your thoughts about how you’re going to use capital going forward?
Damon Hininger
No, nothing to read there or implied. We’ve got the authority and we will move forward on the plans appropriate, but I wouldn’t say there is anything you should take away from the quarter.
Kevin Campbell – Avondale Partners
Okay. Great.
Thank you very much. Congratulations on the excellent quarter.
Damon Hininger
Thanks Kevin.
Operator
Our next question comes from Todd Van Fleet with First Analysis.
Todd Van Fleet – First Analysis
Hi, good morning guys. Congratulations on a good 2011.
Todd Mullenger
Thank you.
Todd Van Fleet – First Analysis
I wanted to just kind of – I mean you ran through the pipeline, Damon, but I just want to get a sense, so if you could summarize for us the procurement that you think could come to resolution here in 2012. That is we have an award announcement, if you could just run those down for us real quickly.
Todd Mullenger
I would say, so I would say in Arizona, Florida obviously is tied by what happened in the legislature but if that goes through and that would be this year. New Hampshire we understand will be this year.
And if we are successful in the new contracts with ICE that will be this year and Harris County potentially could be this year. So everything I mentioned in the pipeline potentially could be awarded and executed on this year.
Todd Van Fleet – First Analysis
Okay.
Todd Mullenger
And the impact of those, depending if it’s new, obviously will be later years but everything could be acted on this year.
Todd Van Fleet – First Analysis
Yeah. Okay.
And what’s your current read of the Florida situation?
Todd Mullenger
Oh boy, a lot of people in the media down in Florida that are provided a lot of different opinions and I don’t know if I can provide any additional color to what has been reported in various news outlets. I think as I said in my comments, I think next couple of weeks we will see some clarity but obviously it’s a lot of activity going on within the center, right now.
Todd Van Fleet – First Analysis
And I guess just to clarify, would you guys be inclined to be buyers of the stock share at these prices?
Todd Mullenger
I wouldn’t care to comment on that.
Todd Van Fleet – First Analysis
All right. Thanks guys.
Todd Mullenger
No harm in asking.
Operator
And our next question comes from Manav Patnaik from Barclay’s Capital.
Manav Patnaik – Barclay’s Capital
Hey, guys. How are you doing?
Damon Hininger
Morning, Manav.
Manav Patnaik – Barclay’s Capital
Good. Congrats on the quarter and an ‘11 and a couple of questions here.
So firstly, in your prepared remarks you mentioned something about the language in the California budget I, sort of, miss what you exactly said but I think you reference something like you had a clause in there that you could not lose inmates to any other competitors, could you just rephrase that?
Damon Hininger
Absolutely, so really kind of three key points in the budget. The first is fully funding our beds, which includes the 270 that were displaced last fall.
So nearly 95, 9,800 beds totally fully funded for 2013. That is number one.
Number two is, the way the budget proposals structured, in essence, puts fence around the funding to only CCA facilities, so instead of kind of general budget language where it is said we will fully fund 9,000 beds, but didn’t necessarily identified solely. The opposite is in place here, they actually identify each individual CCA facility for this funding, so put a sensor around that funding and the then the third thing it gives the CDCR flexibility that they need to move population around within the CCA facilities they could go to another CCA facility currently in our system.
Manav Patnaik – Barclay’s Capital
Great, that’s helpful. And just around that front, with all the moving parts, Todd, are you willing to provide what sort of inmate reduction are you expecting from USMS in this quarter and so like are we talking about 500 inmates and then that ramps back up in second quarter, just the magnitude of what the decline and subsequent ramp back up you are expecting?
Damon Hininger
I don’t have specific numbers in front of me Manav, but I did try to – well I did provide an EPS.
Manav Patnaik – Barclay’s Capital
Yes. Okay.
Fair enough.
Damon Hininger
And so since they’re coming out of facilities that are already at very high actual rates, incremental margin dollars are impacted.
Manav Patnaik – Barclay’s Capital
Okay. And then I guess, just to get some color and what’s going on, other than what you said in the press release in Kentucky and Mississippi.
So in either place, you have another facility one in Mississippi that you are managing in Kentucky and you still own one, what do you see, are they going to be similar potential risks with those facilities, what’s the dynamics going on in those two areas?
Damon Hininger
We don’t own the facility in Mississippi, so I don’t see any additional risk there. And again that was a facility that was, best case, breakeven many times ran at a loss.
So that’s been a pretty straightforward transition. It was very collaborative effort with the State of Mississippi and so we were fine on that transition.
And then the same thing with Kentucky, again, that’s kind of a breakeven at best and run a little bit of loss here in 2011. So, obviously that’s owned by CCA and we will pursue other opportunities for in-state or out-of-state solutions for that facility.
Manav Patnaik – Barclay’s Capital
Got it. I was referring to the other facility that you own in Kentucky.
I was just wondering, are there other dynamics that could put that at risk as well?
Damon Hininger
No, we’re off very early in the legislative cycle for state budgets, but I will tell you, we’ve got 16 state partners right now and 11 of those 16 have released budgets for this coming fiscal year. Also I gave a lot of commentary earlier about California, but the other 10 budgets that we’ve seen released to-date look favorable for the exception obviously with Auto Creek in Kentucky.
The one state that has not released is Louisiana, which will be late this year, but I’m not expecting anything controversial there and then we’ve Four State Partners at work on two-year budgets. And there – so this is an off here.
So we’ve in essence, got a pretty good preview of all of the budget proposals from our respective state partners and outside of Auto Creek up in Kentucky, don’t see anything troubling or concerning. Like I said, it’s early in the season and these are just budgets out from governors.
They haven’t made their way through legislators, so we’ll provide a lot more commentary in our May call, but at least the initial proposals are looking pretty favorable.
Manav Patnaik – Barclay’s Capital
Okay. And last question, with all the refinancing and the favorable reads you are getting, what’s the discussion in the backrooms around just the covenant restrictions you currently have for buyback?
Todd Mullenger
Manav, this is Todd, on the refinancing of the bank facility, we were successful in obtaining greater flexibility on restrictions around dividends and share repurchases, so the bank facility, the restrictions have improved significantly. So right now under the bank facility so long as we’re less than three and half times in total debt to EBITDA leverage, we essentially have no restrictions on the amount of shares we can buyback or dividends we can pay.
But we are still governed by the more restrictive covenants under senior note indentures. So we’re hopeful that the greater flexibility we obtained from the bank community, which I think is always viewed as more conservative than the bond community, will help us argue for greater flexibility and we start to refinance our senior notes indentures.
But right now, we are still governed by those more restrictive provisions in the senior note indentures which limits that basket of 50% of net income.
Manav Patnaik – Barclay’s Capital
All right. Great.
Thanks a lot.
Todd Mullenger
Manav, let me just add one more point to on the Marshals, your question earlier, because...
Manav Patnaik – Barclay’s Capital
Sure.
Todd Mullenger
We saw one unique thing late last year so to reinforce a couple of Todd’s points, so we typically do see a little bit of seasonal slowdown during the last part of the year. As Todd said, it was the prosecutions of slowing down and slowing down a little bit with the courts, because of the holiday.
But also, we talk about this in the call on previous quarter but haven’t talked about it probably in the last couple of quarters, but I think everybody remembers that the FAIR act went in to play so last year and it was put in place where it deal with the delta between PREC and powder cocaine sensing for offenders vendors, that went into effect to where it impacted the BOP population in a way where they were releasing 1500 inmates from early November through early January. So during November and December, we had kind of a slow down for the Marshals service typically because of the courts you also have 1500 inmates also being released by the BOP.
So we had a little bit of a situation kind of unique situation where you had the capacity opened up during the time we had the typical slow down so that is one thing we were seeing also during this period of time in addition to the kind of typical slow down with Marshals.
Operator
And our next question come from Tobey Summer with SunTrust.
Tobey Summer – SunTrust
Hi. Thanks for taking my question.
This is Frank in for Tobey. I wanted to ask about, I know it is early in the cycle, but the tone of your discussions with the state at this point given their kind of revenue trajectories do you see any moderation and pressure on per diems, increase for services?
And then two, as you look out a little bit further, do you see any more possibility for funding of new state facilities, you spoke to 2012 budgets but anything a little further out, do you have any thoughts on that?
Damon Hininger
Yeah. So, let me give a little commentary on both.
As you made your first point, it is also very early in the legislative season but I would say this year feels better than it did to it two year ago, or three years ago from a budget kind of the state budget pressure perspective and also pricing pressure on CCA, again obviously we got to wait till we gets to the rest of the season, but it does feel a lot better this year than it does back in say 2009 and 2010. As it relates to prison capacity, the only thing we’re seeing right now for 2013 for new prison capacity as part of this procurement, the state Department of Corrections is asking for some money for some new maximum-security beds, and we don’t understand that to be very much from a dollar perspective or bed quantity perspective.
But that’s the only one I’m aware of kind of early in the season where we’re seeing any movement from a state to try to secure funding for new prison capacity. So if that’s the case, that’s the only thing that comes to pass and it will be again a third year in a row, very limited new development of capacity for public facilities.
Tobey Summer – SunTrust
Okay, great. And then kind of looking at the cost side of the equation, you gave some nice color on wages; do you expect anything else there, and if you could comment on either commodity food costs, SG&A, other initiatives kind of you expect to play out this year?
Damon Hininger
Yeah. On the salaries, the employee salaries and merit increase that typical decision we’ll do in the spring, evaluate all the various factors and also look at the business and looking at what the opportunities and challenges are with our customer base, so that will be the game plan going into the spring.
I’ll let Todd comment on the other cost categories.
Todd Mullenger
Sure. On the food – and we have a fixed price contract in place that limits any impact on inflation, it’s a fixed escalator, I want to say around 2.5%, and then the rest of our cost, we haven’t seen any meaningful indications of significant inflation.
Tobey Summer – SunTrust
Great. Thank you very much.
Damon Hininger
Thank you.
Operator
Our next question comes from Kevin McVeigh with Macquarie.
Derrick Broadnax – Macquarie
Good morning, guys. This is Derrick Broadnax for Kevin Macquarie.
Thanks for taking my question. Guys, just had a quick question, sorry if I missed this, did you provide what the total CapEx was in 2011?
Damon Hininger
We did in the – that include in press release.
Todd Mullenger
Press release.
Damon Hininger
It’s not incurred in the press release, it will be in the cash flow statement. And so expenditures for facility development and expansion for the full year $126 million roughly and then expenditures for maintenance CapEx what we call other capital improvements, a little over $48 million full year.
Derrick Broadnax – Macquarie
Okay. Thanks.
And then just kind of looking forward to your 2012 guidance, 50 to 55 million for maintenance and technology. Can you kind of parse out how much each of those is for maintenance and how much is it for technology?
Todd Mullenger
Maybe around $10 million for information technology and then the balance for facility maintenance CapEx.
Derrick Broadnax – Macquarie
Okay. And just one final question, we’ve been hearing about Harris County for a while now.
It’s fairly substantial contract, can you guys give a little more color on where you are in those discussions and whether – since we first heard about it early in the year, whether you kind of made any progress or any headway there?
Damon Hininger
Yeah, I would say it’s a very, very large opportunity, 9000 beds for major metropolitan area, that’s a very large project, and when it becomes pass it would be the largest ever done by a local government. And so I think just the sheer size of that is, making the folks in Harris County and the stakeholders to really take their time and evaluate everything and ask all the right questions.
So all of the discussions, I guess late last year going to this year have been very – what I would say, interactive, a lot of feedback back and forth. And so all indications that I’m getting and what I participated in today, it looks like they’re taking this very seriously and really evaluating this type of solutions we’re going to provide.
These type of solutions at the local level can be very controversial. For many different reason; one of which is that you’ve got situation where you’ve got different governing bodies that manage both the budget and operations at jail.
So I think that is going to take a little while also to kind of work its way through to make sure all of the various stakeholders are truly aligned on this type of solution and are comfortable with this type of approach. But as I said in the prepared remarks, they invited us for a daylong presentation in December, where we sat in a room with about a dozen various employees from Harris County asking questions had going in detail through our proposal and that was followed up with two or so.
It appears that they like to taking it seriously, but taking their time with such an important decision.
Derrick Broadnax – Macquarie
Great. That’s helpful.
Thank you.
Todd Mullenger
Thank you.
Operator
Our next question comes from Barry Klein with Macquarie. Please go ahead.
Barry Klein – Macquarie
Hey, I have a few questions. It looks like you’re operating margin per man-day has decreased quarter-on-quarter, can you please address this.
And also, it looks like you lost or cut back on a number of beds that seem to have been operating at a loss. Was this more strategic and do you have the flexibility to purge additional beds for you have been losing money?
Thank you.
Damon Hininger
Yeah, let me address the last part of the question first, one thing that we’re always looking at is looking at our system-wide capacity and looking at opportunities to optimize and/or change customer mix. And so yes, these types of decisions that you see has taken the last year with the two properties you just mentioned, but also even with California our North Fork facility, we’re always looking at opportunities to optimize the capacity and get a better return on those facilities.
But also trying to be sensitive to customer demand and need and make sure we accommodate all those various needs. So don’t be surprised if we continue to do those types of decisions.
That’s part of our playbook that we’re always evaluating.
Todd Mullenger
And with regards to your question on margins, year-over-year, Q4 2011 versus Q4 2010, the margin decline was due largely to the merit increase.
Barry Klein – Macquarie
Okay. Thanks.
Operator
Our next question comes from Kevin Campbell with Avondale partners.
Kevin Campbell – Avondale Partners
Thanks. Two other quick questions.
First, obviously you have the facility in Ohio that you bought and I’m curious if you – if that is sort of spurred discussions with other customers about going along the same route and maybe just give us some overall bigger picture commentary as it relates to the interest and other asset sales from customers.
Todd Mullenger
Absolutely. So we think this was a great transaction and I think if you talk to anybody in Ohio, within the State Government, I think they would say the same thing.
It was a great solution for them and it helped them to get some money into fiscal year where they can address some really pressing priorities. So by all accounts, the various stakeholders thought this was a great transaction.
And even the community loves it because even the facility was not going to go anywhere, they are now recipients of some property tax money since we now own that asset and it is publicly owned. So that is a solution that we think can really be duplicated in other states around the country and as you saw my prepared remarks, I said is such we think various states as they think about some of the challenges they have got in physical environment and any some of the capital priorities they have got with existing facilities this may be a way to help them address of some of those issues, those priorities, especially if they have been going on for several years and we provide a solution that is not only taking an asset off their balance sheet and make helping them with priorities, but also providing some meaningful cost savings.
Kevin Campbell – Avondale Partners
Have you had any meaningful or even early-stage discussions with other potential customers about pursuing the same route?
Damon Hininger
I would say this, the transaction in Ohio is well known around the country. Obviously, you know as well they Directors of Corrections talk to each other a lot.
There is a lot of Association meeting, so the solution is well known and as Mike I said, I think if anybody picks up the phone and talks to anybody in Ohio, I think everybody would say this was a good solution for the state and provide a lot of value to them. So we’re seeing that type of message resonating with a lot of other prospective states.
Kevin Campbell – Avondale Partners
And then last question on your comments Damon about the U.S. commission and the crack versus powder cocaine, that change in inmates going out of the BOP system 1,500 inmates or so, that was – really we should think of that as sort of one-time thing, it’s not as if there’s going to be – that was going back and making things retroactive, is that correct?
Damon Hininger
That’s correct. And it was front end loaded.
So, you’ll see little bit of an impact I think over the next I think six to eight years. But this was the big increment that you’re going to see right now and when the President releases his budget; I think there’s a good chance that we will see a revised top projection from the bureau of prisons, so we will get a little bit more clarity there but all indications is that you take out this one-time event with these 1,500 inmates.
Their normal rate of growth was normal – the greater growth I should say was kind of normal which has been significant as you know over the last couple of years.
Kevin Campbell – Avondale Partners
Okay. Great.
Thank you very much.
Todd Mullenger
You bet, Kevin, thank you.
Operator
And our next question comes from Todd Van Fleet with First Analysis.
Todd Van Fleet – First Analysis
I just wanted to follow-up on the pipeline. I think you guys have been helpful in providing some positive catalysts over the past year or two and producing a new piece of business that really wasn’t necessarily on the radar screen of anyone.
I am just wondering off the radar type opportunities that could land this year, are there any in the pipeline that you think are out there at this point?
Damon Hininger
I think, you asked me I think this question last year and I think I said that there was a possibility and also we had a couple of paths especially with Puerto Rico. So I would say, yes, we have got conversations with some potential partners that are off the radar screen that could top this year.
Todd Van Fleet – First Analysis
Okay. And then Todd, what was the – can you give us the aggregate pricing increase for the fed contracts this year, was at 2%, 1.5%?
Todd Mullenger
Well, the year-over-year increase in revenue is 1.2% on the fed side, I don’t recall off the top of my head what the increase was on the federal side.
Todd Van Fleet – First Analysis
Is that impacted by a mix or is that just a pure pricing?
Todd Mullenger
It’s going to be impacted by mix as well as absolute increases in the mix could impact it favorably or negatively.
Todd Van Fleet – First Analysis
Right. So you don’t want to give me the raw increase or pricing?
Todd Mullenger
That would be a fair statement.
Todd Van Fleet – First Analysis
Okay. Thanks.
Operator
Our next question comes from John Evans with Edmunds White Partners.
Jonathan Evans – Edmunds White Partners
I know you gave annual guidance and your kind of quarterly guidance, but could you help us understand a little bit better kind of the ramp of how your earnings ramps as you go through the year? Because it sounds like you have some cost in the first quarter and are expecting populations to be better in the back half, et cetera?
Todd Mullenger
That’s correct, as I’ve mentioned in the prepared remarks, we will have the rebounding U.S. Marshals populations in Q2.
Jonathan Evans – Edmunds White Partners
Okay.
Todd Mullenger
We will benefit from a material reduction in unemployment taxes from Q1 to Q2, about $4 million.
Jonathan Evans – Edmunds White Partners
Okay.
Todd Mullenger
And Q2 forward, we will also benefit from the completion level this month of the refinancing of 335 million of the $375 million of 6 1/4% senior notes with borrowings from extended bank facilities. While our current borrowing rate is LIBOR plus 1.5% around 2%, so we’re going to be going from 6 1/4% debt to 2% debt.
And we will have the ramp of Puerto Rico inmates at Cimarron which will begin with a small transport in February and then additional transports March, April and May that will benefit Q2 in subsequent quarters and will also activate the Jenkins, Georgia facility, the gradual ramp up of populations beginning in March and with completion of that ramp expected in the third quarter...
Jonathan Evans – Edmunds White Partners
Got it. So we should think that Q2 would be up year-over-year and then you see an acceleration in Q3, is that fair of the growth rate?
Todd Mullenger
That is a good way to look at it, yes.
Jonathan Evans – Edmunds White Partners
Okay. Got it, thank you.
Todd Mullenger
Thank you.
Operator
And our next question comes from Dennis Wurst with Britton Hill Capital.
Dennis Wurst – Britton Hill Capital
Good morning. I wanted to ask about the – you had a pretty hefty early tender bonus and I was wondering why so much motivation to get the bonds in as early as possible.
It seems to eat up like half of the difference between the old rate and the new rate.
Damon Hininger
There was an incentive to try to get them to tender early. And as it turned out, it was not high enough.
But even with that tendered premium, it was still NDP positive, not materially so, but it was still NDP positive. But at the end of the day, the premium wasn’t high enough, there wasn’t enough of new activity available where their investors could redeploy the cash they have received from the tender into bonds that were generating similar yields, and so most of them decided to hold onto the cash and wait for the redemption.
Dennis Wurst – Britton Hill Capital
Got you. It just seem like a big chunk of it went to that.
And I want to kind of bring up the other elephant in the room, the PR stuff, you guys did a good job, you did this CCA 360.com website to respond to the CNBC piece.
Damon Hininger
Yes.
Dennis Wurst – Britton Hill Capital
I just want to – have all of that kind of media distraction, all of the PR stuff, what does that cost you?
Damon Hininger
Not much. Not much.
We’ve always have had critics of the company and industry but yeah at the end of the day, it is not a material cost.
Dennis Wurst – Britton Hill Capital
Okay. And then what is the cost, I live out in Arizona and I watched your bidding process and it was on again then it was off again, then it was on again, what is that aggravation cost, say, if there is a beauty contest, is it – geo gets it or you do get it, what is that process normally cost or where do you account for that?
Damon Hininger
It is in G&A.
Dennis Wurst – Britton Hill Capital
Okay.
Damon Hininger
So we have got, I’d say kind of a couple of, probably two buckets. We have got just resource here in this building and this office in Nashville.
We have got people putting together a proposal for the RFP and then you may have some actual development costs in state. So if we’re – not necessarily the case with Arizona and Alaska procurements because we offered existing facilities.
But you could have some site development costs or option on a piece of property if you are looking at a new build, but again that’s not material. Most of the time we’re able to do options on property versus buying it outright.
Dennis Wurst – Britton Hill Capital
Okay. So it is not like the whole Arizona dance cost you to the 2.5 million for the facility?
Damon Hininger
No.
Dennis Wurst – Britton Hill Capital
Okay. I was trying to get a handle on the numbers.
Thank you so much.
Operator
It appears, there are no further questions at this time. Mr.
Hininger, I’d like to turn the conference back to you for any additional or closing remarks, sir.
Damon Hininger
Lauren, thank you and thank you to everyone who called in for your time and attention. But more importantly, thank you for your investment in CCA, the management team here in Nashville is focused on executing another good quarter and a strong year.
And we look forward to reporting our progress during the course of 2012, so thanks again for calling in.
Operator
This concludes today’s conference. Thank you for your participation.