Executives
Lynn Franklin – Financial Relations Board
James Hyman – Chairman, CEO and President
John Nieser – SVP, CFO and Treasurer
Analysts
Todd Van Fleet – First Analysis
Manav Patnaik – Barclays Capital
Kevin Campbell – Avondale Partners
Chuck Ruff – Insight Investments
Walt Sosnowski – SRC Capital
Cornell Companies, Inc. (CRN) Q4 2008 Earnings Call Transcript March 5, 2009 11:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Cornell Companies fourth quarter 2008 results conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this call is being recorded today, Thursday, March 5, 2009. I would now like to turn the conference over to Ms. Lynn Franklin of Financial Relations Board. Please go ahead.
Lynn Franklin
Good morning. Thank you for joining us for the Cornell Companies fourth quarter 2008 results conference call. By now everybody should have received a copy of the news release, which was issued earlier today. If you don't have one, please call us at 713-623-0790, and we will provide you with one. On the call today will be James Hyman, Chairman, CEO, and President; and John Nieser, Chief Financial Officer and Treasurer.
Before we get started, I would like to remind you that the information shared on this call about the company, including expected future earnings and results, operations, strategic direction, and any other statements that are not historical facts are forward-looking statements within the meaning of applicable Securities laws. These statements involve certain risks, uncertainties, and assumptions, including general economic and market conditions, including the impact that governmental budgets can have on our per diem rates and occupancy, changes in demand for our services, actions by the governmental agencies and other third parties, access to capital, and other factors that are detailed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. You can access any of these filings free of charge on the SEC's web site, www.sec.gov.
Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. Also, remember that the information on this call should be considered current only as of today. After this, please use it for your reference and know that the company has no duty to update it.
Lastly, our management may use certain non-GAAP measures, including earnings before interest, taxes, depreciation and amortization or EBITDA to help investors analyze Cornell's performance. Our reconciliation of this and any non-GAAP measures to GAAP measures may be found on our Web site at www.cornellcompanies.com. Now I'll turn the call over to James Hyman.
James Hyman
Thanks, Lynn. Good morning and thank you for joining us for Cornell Companies fourth quarter earnings conference call. Today, I'll begin by discussing operational matters, and then John will walk through the fourth quarter financial performance in more detail. Following John, I'll discuss our earnings outlook for 2009 with our assumptions. And, lastly, we'll conclude with our usual Q&A session.
As we announced in this morning's press release, for the fourth quarter, we reported earnings per diluted share of $0.50. For the full year of 2008, we reported earnings per diluted share of $1.51. Both numbers represent significant growth from the same period in 2007. Our fourth quarter earnings were up approximately 37%, and our full-year earnings were up nearly 86%.
In terms of operating margin, the fourth quarter was up 270 basis points over the same period prior year, and for the full year, operating margin expanded 360 basis points. There were a number of moving pieces and one-time events in the fourth quarter that John will review in more detail in a moment. Operationally, the fourth quarter saw progress on several fronts. At our Hinton, Oklahoma facility we completed the ramp to 2,000 inmates for the Arizona DOC without incident. In Walnut Grove, Mississippi, we ramped the facility into the mid-1,200s as expected, leaving another 250-plus beds of capacity available for future customer needs.
As a reminder, the Walnut Grove expansion was funded by the State of Mississippi, and they oversized the expansion to accommodate anticipated growth for this population of youthful offenders. At the RCC, occupancy fluctuated between 500 and 600 beds based on the flow of US Marshall detainees and the Federal Bureau of Prison inmates, leaving us with about 300 beds of capacity to fill in 2009.
Our other adult facilities operated within normal parameters, although we did see a decline in occupancy through the quarter at our two smaller male facilities in California, leaving us with about 100 spare beds by the end of the year. In our Adult Community-based division, our Reid facility in Houston and our Beaumont facility that were both damaged by Hurricane Ike resumed operations in mid October. Beaumont was fully operational a month after Ike. At Reid, we completed the repairs to the 500 bed facility by mid-January, which was a month ahead of the schedule I discussed on our last call. And we are now almost back to full capacity. At Abraxas in the fourth quarter, we continued our slow increase in capacity utilization at our under-utilized facilities.
On our last call, I said we expected to increase occupancy during the fourth quarter at our under-utilized facilities by about 75 beds. We actually increased by 79 beds. However, we continue to have a lot of spare capacity to fill in Abraxas.
In terms of liquidity, on our last call we said we expected to be fully drawn on our $100 million credit facility by the end of the quarter. In fact, we had better cash flow through the year-end than previously forecast which enabled us to reduce our outstanding borrowings during the quarter, so we finished the year with a better cash cushion as well as having continuing availability under our credit facilities.
Regarding our current obligations to complete the capital projects that we announced for 2009, we believe we have sufficient funds available for completion using existing cash from operations. I would now like to turn the call over to John who will discuss the quarter in more detail. John?
John Nieser
Thanks James and good morning everyone. As you know, we are reporting fourth quarter 2008 earnings per diluted share of $0.50. For the full-year 2008, we are reporting earnings per diluted share of $1.51.
I'll now walk through the major components of the income state in greater detail to show you how we got there. Revenues from continuing operations totaled $101.5 million, which is a 10.2% net increase from $92.1 million from last year's fourth quarter. There were really two factors behind this increase. First, we have expansion activation at Big Spring Correctional Center in November 2007 and also at D. Ray James Prison in February 2008. Second, we reactivated the Great Plains Correctional Facility in September 2007 and ramped to a population of approximately 900 during the fourth quarter of 2007. We then activated its 1,100 bed expansion in September 2008, which we ramped during the fourth quarter.
Overall, the contract occupancy levels at our residential facilities were 90.2% for the fourth quarter as compared with 93.9% a year ago. The decrease largely resulted in the additional capacity brought on stream during the third quarter at both Great Plains and the Walnut Grove Youth Correctional Facility, and as well, available capacity at certain of our Abraxas Youth Facilities which we continue to gradually ramp.
Now I'll point out some of the more significant revenue changes in the quarter by division.
Revenues in our Adult Secure Services division increased by approximately $11.8 million to $57.6 million for the fourth quarter. This was primarily due to higher revenues at four facilities.
First, there was approximately $5.1 million from our Great Plains facility. This, as I mentioned, was transitioned to a new customer and reactivated in September 2007, followed by the third quarter 2008 activation of the 1,100 bed expansion which we ramped in the fourth quarter.
Second, $2.3 million resulted from increased occupancy at the Regional Correctional Center. Third, about $1.8 million was contributed by our Big Spring Correctional Center, and fourth, $1.1 million came from increased operations at the D. Ray James Prison when we activated the initial expansion of 300 beds in the first quarter of 2008. The balance of the revenue improvement was spread across our remaining facilities.
The average contract occupancy of the Adult Secure Services Division was 90.2% for the latest quarter, as compared with 92.6% at this time last year. The decrease in occupancy principally reflected the additional capacity brought on stream during the third quarter at Great Plains and at Walnut Grove, both of which we began ramping during the fourth quarter.
In the Abraxas Youth and Family Services Division, revenues were down about $2.3 million in the fourth quarter of 2007 to $26.4 million for this quarter. We experienced a decrease in revenues of $1.7 million at Cornell Abraxas 1 from lower occupancy levels. There was also a decrease in revenues of approximately $1.6 million due to the termination of our management contracts at the Reading Alternative Education School Program and Salt Lake Valley Detention Center in June 2008 and September 2008, respectively.
These were partially offset by an increase in revenues of approximately $0.7 million at the Abraxas Academy and $0.8 million at Southern Peaks Regional Treatment Center due to improved occupancy and mix of clients. The average contract occupancy at the Abraxas Youth and Family Services Division was 81.1% in the most recent quarter compared with 89.2% a year ago. The change reflects both an increase in the reported contract capacity for this division, and reduced occupancy at Abraxas 1, as well as those facilities where we are currently in the ramp phrase, including the Abraxas Academy and our San Antonio, Texas facilities.
The Adult Community-based Services division revenues decreased by approximately $0.2 million to $17.5 million for the latest quarter. We experienced a decrease of approximately $0.5 million due to the termination of our management contract in May 2008 at the Lincoln County Detention Center. The remaining net increase was spread across the various facilities in this business segment. The average contract occupancy for the Adult Community-based Services division was 94.6% for the latest quarter versus 100.5% at this time in 2007. The decrease reflects the service disruptions caused by Hurricane Ike, principally at our Reid Community Residential Facility in Texas.
Now let's move on to other areas of note from the income statement. I'll share information behind the key numbers and then give you some more background on our assumptions for the first quarter and full year of 2009. General and administrative expenses were approximately $6.7 million for the latest three months compared with $5.7 million in 2007. The 2008 period includes higher personal and professional costs of approximately $0.5 million, as well as additional FAS 123(R) share based and other incentive awards expense of approximately $0.9 million, partially offset by the gain on the settlement of a life insurance policy related to the company's founder of approximately $0.7 million. Our current guidance assumes general and administrative expenses of approximately $6.3 million for the first quarter 2009, and approximately $27.1 million for the full-year 2009.
EBITDA was approximately $23.9 million for the latest quarter, which included a $1.5 million settlement of claim pertaining to the Abraxas Academy. 2008 also includes the gain on the settlement of insurance policy related to the company's founder of approximately $0.7 million. This compares with EBITDA of $18.8 million in 2007. For the year ended December 31, 2008, EBITDA was approximately $80.1 million, compared with $61.0 million for the same period last year. EBITDA reported for 2008 includes $1.5 million in revenue associated with the contract-based true-up calculation at the RCC for the contract period ended March 2008, as well as the receipt of the net settlement of claim of approximately $1.5 million. EBITDA reported for 2007 includes those charges associated with a terminated merger agreement of approximately $3.7 million and the receipt of the net settlement of claim of approximately $1.5 million.
Interest expense net of interest income was approximately $6.3 million in the fourth quarter, versus $5.7 million in the same period last year. The increase principally reflects higher average borrowings outstanding during the 2008 period. The capitalized interest of approximately $0.6 million in the latest quarter primarily related to the expansion at D. Ray James Prison facility. A year ago, interest capitalization was approximately $0.5 million. Our current guidance assumes interest expense of approximately $6.4 million for the first quarter of 2009, and approximately $27 million for the full year 2009.
As noted during our third quarter earnings call, we have now fully recognized income to offset the cumulative losses previously recognized by the company in excess of its original equity and the special purpose entity called municipal corrections finance or MCF. As such, minority interest has been adjusted for the income and losses, attributable to the owners of MCF.
The effective tax rate utilized on continuing operations during the full-year 2008 was approximately 40.8% versus 42.6% in 2007. The period reduction in this rate primarily resulted from changes in our FIN 48 liabilities, the decrease in impact of certain non-deductible expenses as well as utilization of certain tax credits. The 2009 guidance that James will be discussing reflects an annual effective tax rate on continuing operations of approximately 42.5%.
As we look forward from the fourth quarter of 2008 to the first quarter of 2009, we would like to highlight several factors which benefited the fourth quarter that we do not expect will repeat in the first. As previously noted, the fourth quarter includes the net settlement of claim recognized of approximately $1.5 million, or approximately $0.06 per diluted share. In addition, as mentioned earlier, we also recorded a gain on a settlement of life insurance policy related to the company's founder of approximately $0.7 million, or approximately $0.03 per diluted share.
Finally, our effective tax rate was approximately 37.6% for the fourth quarter. This rate differential benefited the fourth quarter by approximately $0.04 per diluted share.
The incremental benefit in the 2009 first quarter from the increased population of Great Plains will largely be offset by certain accrual reductions realized in the fourth quarter, which are expected to return to trend in 2009.
The factors that affected the fourth quarter results also had an impact on our year-to-date performance. For the year ended December 31, 2008, revenues rose 7.2% to $380.6 million [ph] from $360.6 million at this time last year. Income from operations was $62.2 million, compared with $45 million in the prior year. Net income was $22.2 million, or $1.51 per diluted share, versus $11.9 million or $0.82 per diluted share. Once again, the 2008 number includes the $1.5 million revenue contract true-up adjustment recognized with the RCC as well as the settlement of claim of $1.5 million. 2007 includes the $3.7 million in pretax charges associated with the terminated merger agreement and the net settlement of claim of approximately $1.5 million.
Moving on to our cash flow statement. Cash used by operating activities was approximately $59 million for the year ended December 31, 2005 [ph]. Cash used in investment activities was also about $81.7 million in 2008. This was principally due to investing of approximately $79.9 million in capital expenditures, primarily for the expansions at D. Ray James and Great Plains. There were also net payments to debt payment account of $2.9 million.
Cash provided by financing activity was approximately $34.3 million in 2008, due mainly to net borrowings of $45 million, which was partially offset by payment on the MCF bonds in the amount of $11.4 million. Maintenance CapEx totaled approximately $6.3 million in 2008. We expect it to be approximately $5 million for 2009.
We expect to use existing cash balances, internally generated cash flows, and borrowings from our credit facility to fulfill anticipated obligations such as capital expenditures for our expansions in process and working capital needs.
If you have any questions on these figures or other aspects of our financial performance, I'll be happy to address them during our Q&A. With that said, I would like to turn the call back over to James.
James Hyman
Thanks, John. First of all, John went through a slight time warp there. The cash flow was $59 million for 2008, not 2005. I would like to now discuss our outlook for 2009. As we announced in this morning’s press release, we project full year earnings per share to range from $1.64 to $1.72 that includes our projections for the first quarter earnings ranging from $0.30 to $0.34 per share.
First, let me talk about our core assumptions as we move through the year. Then I'll provide an overview of the transition from 4Q '08 to 1Q '09, and finally, will give some comments on the overall market. Our guidance assumes that the new 700 plus beds at our D. Ray James facility in Georgia will be ready at the end of the first quarter. However, the guidance assumes it will not actually begin filling those beds until the beginning of July. Should that ramp be delayed, it would negatively impact the year. And for example as mentioned in this morning's press release, if the beds were empty for the entire year, it would reduce our EPS guidance for the year by as much as $0.11. Conversely, if we began ramping in the second quarter, we would expect improved earnings for the year.
At the RCC, we assume a steady ramp through the year to approximately 850 beds by year-end. Also, our guidance excludes the impact of any true-up payment for the RCC for the contract year ending in March of 2009. For our new 1,250-bed facility in Hudson, Colorado, we expect to begin activation at the end of the year. It is possible for this to move forward earlier into the fourth quarter or backwards into the first quarter of 2010 based on the completion of construction and activation training, or even if customers require beds more urgently.
However, our 2009 guidance assumes a December activation with start-up expenses of about $0.04 to $0.06 per share in 2009. If we activate it sooner, start-up expenses would increase in 2009. And conversely, a delayed activation would improve 2009 earnings per share. At all the remaining secure facilities, we assume relatively flat capacity in the first half of the year, with a modest increase in demand for beds in the second half.
Regarding pricing in our secure markets and continuing the theme that I outlined last quarter, we expect a lean year. However, lean does not mean apocalyptic either for Cornell or for the industry more broadly. Our base case guidance assumes per diems will be essentially flat for the year, which seems prudent in this budget environment. On the other hand, many of our contracts do contain CPI, or labor rate escalators, particularly those with the Federal government who represent the largest part of our business, and we believe some specific opportunities for value pricing or mix improvements could emerge within the portfolio. If so, that would represent upside to guidance.
Also, we do not believe we will experience any material margin erosion. This is because when we review our position, facility by facility, we believe we can defend our margins compared to the customer's alternatives, or through population and mix improvement for efficiency opportunities.
In our Adult Community-based division for 2009, we assumed demand for beds remain strong throughout the year, with occupancies increasing modestly from the beginning of the year. As the Pew Foundation report on corrections published earlier this week noted, Community Corrections is one of the few tools that corrections departments and policy makers can use to ease budget pressures in the criminal justice system.
Turning to our Abraxas Youth and Family Services division. We assume a continued slow and steady ramp during the year, particularly at our two under-utilized facilities in Pennsylvania; the Abraxas 1 and the Abraxas Academy. Our base case assumes that Pennsylvania's funding problems will pressure the counties to restrict placement of youth in residential facilities. More broadly this year, we assume that across the Abraxas division, states will pressure providers to keep kids, particularly those with less acute needs, in non-residential treatment. Perhaps counter-intuitively, we actually see this environment as a competitive opportunity for Abraxas.
The budget pressures that our customers feel are causing them to put pressures on all providers. The small providers or those with generic programs for the detention or treatments of less acute kids are feeling squeezed to the point where we are seeing some exit the business. And some make changes of their facilities that undermine the integrity of their programs. Our scale allows us to continue to offer this specialized program, and we can show outcomes that demonstrate keeping the kids safe while delivering the evidence-based curricula that our clients require. That scale also provides resiliency and adaptability to changes in customer requirements.
So for 2009, we have built into our guidance an Abraxas forecast that increases occupancy by about 200 beds over the year. However, that will still leave us at the end of the year with significant number of remaining unutilized beds across the Abraxas division. In terms of other elements of our guidance, in 2009, we expect to invest approximately $11 million in construction CapEx, of which about $6 million is for the completion of the D. Ray James expansion in the first quarter, and about $5 million is for site improvement at our Hudson, Colorado site that will increase optionality regarding future expansion phases in terms of speed of execution, overall design flexibility, and whether we use our balance sheet or third party financing. We also expect to spend about $5 million for maintenance CapEx for the year, and will invest approximately $5 million in the SF&E for Hudson, assuming activation at the end of the fourth quarter.
Let me make a few comments on investment capital. As I mentioned on the last call, we would expect to generate in 2009 free cash sufficient to expand our secure footprint by another 500 to 700 beds this year, with a 1,200 bed expansion in 2010. On top of that cash flow, we could tap into the $50 million accordion feature of our revolver assuming both the banks continue to be willing to lend and that we continue to meet other covenants in our debt agreements. Further, we have the ability to partner with third parties to bring new projects to market. And lastly, we still haven’t [ph] file the Shelf Registration Statement from last summer to raise additional capital. Collectively, these approaches provide us the dry powder necessary to make a significant commitment to growth if the right opportunities emerge.
However, we would only make those construction commitments if the market conditions provide us with comfort that the risk adjusted return on investments from such expansion or new build exceeds the alternate use of cash. We aim to deploy cash and capital to provide the highest risk adjusted return. And as a result, we compare the return on project against alternate uses of cash, such as reducing our debt burden, or even considering reducing the number of shares outstanding. Today, for 2009, our base case assumes no construction commitments other than what we have mentioned earlier, and the use of cash to pay down our revolving line of credit. Our best case assumes flat interest rates and no expenses for any restructuring of our balance sheet or capital market transactions such as the refinancing of our senior notes on which the call premium will fall in July.
Now let me briefly talk about the bridge from the fourth quarter 2008 results to our first quarter 2009 guidance. As a reminder, our first quarter is negatively impacted by two fewer days than the fourth quarter of 2008. And for 2009, we will have one fewer day in the quarter compared to the first quarter of 2008, which was a leap year. The first quarter is also negatively impacted by unemployment taxes as base wage rates reset for state unemployment tax purposes. And also as John mentioned, the fourth quarter included several non-recurring items that affected returns.
Lastly, let me talk about the market. We continue to participate in RFPs for several state and federal customers, and believe that Cornell can offer customers a competitive product. Even though we see our customers experiencing budget pressure for this year, and probably next, we believe customers see the private providers as cost effective solutions for their overcrowding and capital constraint problems. Contrary to some of the almost twilight gloom surrounding the industry, we see the current pressures actually enhancing the long term and near-term value proposition of our industry and Cornell, specifically. And as a result, we continue to believe that the industry will see awards for new contracts this year.
For example, if we just look at RFPs among Cornell's current customers, for the Federal Bureau of Prisons, we expect them to award CARs 8 through 11 this year, comprising 8,000 beds. And that award, we expect – and those should be by the end of the third quarter. Of those 8,000 beds, about 4,000 represent new beds utilizing private providers. For the California Department of Corrections and Rehabilitation, we expect them to contract with private providers for out-of-state beds. Although I've been wrong in the past predicting the timing, we expect a decision from California for a significant number of beds in the first half of the year. What is significant? It would not surprise us to see awards totaling over 5,000 beds by year-end. In the Georgia DOC, we expect them to award on their 1,500 expansion bed RFP in the near team, and their additional RFP for a 1,000 bed new facility by the middle of the year. For the Arizona DOC, we expect them to award the RFP for about 1,000 out-of- state beds during the first half of the year.
So to summarize the quarter and the year, we made really good progress in 2008, producing $1.51 of earnings for shareholders, which was a significant outperformance against our initial guidance this time last year. We've added capacities that can sustain our growth in 2009 and beyond. We have spare capacity across our divisions that can provide growth during the year, particularly in a bed shortage world without expending additional capital. We are now starting to generate cash that we can invest in expansions when the opportunity presents compelling returns on investment and we believe that we've improved our ability to offer our customers a competitive service offering in each element of the portfolio.
I'd now like to open the call for any questions.
Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from the line of Todd Van Fleet from First Analysis. Please go ahead.
Todd Van Fleet – First Analysis
Hi, good morning, guys. I just wanted to clarify, I think you had talked a little bit to the one-time items in Q4. Where do they show up in the P&L?
John Nieser
Todd, the settlement of claim would have been in operating expenses, and then the life insurance would have been in G&A.
Todd Van Fleet – First Analysis
Okay. So G&A, I guess, is up pretty considerably from Q3 anyway. (inaudible) trying to recall us, was this something weighing on Q3 in terms of SG&A?
John Nieser
Well, I think what we talked about – the biggest thing that we saw in the fourth quarter is really two pieces. One, we had some overall higher professional expenses, but also the bigger piece would have been in the fourth quarter, is the expense related to our FAS 123 performance-based awards and some other incentive compensation accruals that were required.
Todd Van Fleet – First Analysis
Okay. With respect to RCC then, James, what's the latest on RCC? With new budget dollars prospectively coming flowing into the BOP, is that going to help you, maybe help the outlook there? Or what's on the horizon in terms of getting those incremental beds filled up?
James Hyman
Sure. There are two missions that the RCC serves the federal government today. One is US Marshalls, sort of normal detention in the area, and that's for the surrounding geography in New Mexico, even stretching down in some cases down to the border in El Paso. And secondly, with the Bureau of Prisons mission for inmates with sentences less than a year. Both of those missions have the potential to expand.
We are also marketing the facility to other customers, and the combination of what we see as sort of demand from the existing customers, other things that we're working on, the remaining – this is sort of from last year of the US Marshall's idea of a JPATS hub trial gives us comfort that we think we'll be able to put into our guidance the ramp up to sort of 850 by the end of the year.
Todd Van Fleet – First Analysis
Okay. I guess that's encouraging. Two other quick ones before I hop off. On the minority interest, 360,000 a quarter, that's going to continue to increase every quarter moving forward. And maybe you can tell us what you're assuming in 2009 for the full year charge?
John Nieser
Well, effectively, Todd, on a go-forward basis, we should not pick up, all things being equal, any income from MCF at all now going forward because we've reached that point. So that number will continue to grow. It's difficult for me not knowing their concrete earnings stream to give you an estimate, but obviously in the guidance that we put out there, there is no assumption that there's any benefit to our numbers from MCF at this point.
Todd Van Fleet – First Analysis
Right. So that means the 360 gets larger?
John Nieser
Correct.
Todd Van Fleet – First Analysis
And is there – is it $1.5 million to $2 million, John? Is it greater than $2 million? Is there any way to calibrate it?
John Nieser
I mean, Todd, to try to guess off their numbers and their earnings stream is somewhat difficult. So I'm going to give you any kind of broad range, and it's just a best guess, it's probably somewhere in the neighborhood of maybe $1.5 million to $2 million, but that number obviously will shift over time as we move forward.
Todd Van Fleet – First Analysis
Okay. Thanks. And one more. On California, you had talked about there being some degree of weakness in the two facilities there, the two community corrections facilities from a population point of view. What's the prognosis there? Is it budget related? What's driving that? And what's the outlook for 2009, I guess, with respect to those two facilities?
James Hyman
The guidance for 2009 assumes first half is probably pretty flat, but it’s increases in the second half. What's driving it, the numbers are pretty small in the grand scheme of things, are California's problem. The missions that those facilities perform are missions which are – some of these are step-down transitional facilities, and if you're trying to deal with the bigger overcrowding problem, it would seem to us that those missions still have validity.
Trying to pierce the veil of the enigma of CDCR and how they operate has been challenging, so we were a little surprised in the fourth quarter to see the weakness there. There are slightly different characteristics between the two facilities. But we believe that the general overcrowding problem in California will cause them to use these beds, particularly as we get into the second half.
Todd Van Fleet – First Analysis
And the headcount declined in those two facilities, James, was 70, you said?
James Hyman
About a 100.
Todd Van Fleet – First Analysis
About a 100 between the two. And the total there, is what 650, 700 between the two facilities?
James Hyman
Correct. It could be as simple as – as you approach the end of the fourth quarter, logistics challenges in vectoring inmates from the source prisons that they come from in CDCR, or it could be that someone was trying to clamp down on money saved, although it's a relatively small amount. I don't have more insight, really.
Todd Van Fleet – First Analysis
But that's probably at least – that's maybe a $0.01 or $0.02 of earnings net impact in the quarter. Is that fair to say?
James Hyman
Net impact, yes.
Todd Van Fleet – First Analysis
Okay. Thank you.
Operator
Thank you, and our next question comes from the line of Manav Patnaik from Barclays Capital. Please go ahead.
Manav Patnaik – Barclays Capital
Thank you. Hi, guys. I was wondering if you would elaborate a little more on some of the industry commentary that you gave. And the first part is, just on the Federal side, you know, clearly the CAR 8 to 11, that's potentially a positive development in terms of the awards towards the end of the year. But about terms of just the pricing, and I guess their situation with the budget, based on your discussions, what risk do you see with respect to that from the Federal customers?
James Hyman
Okay. So there's obviously a lot embedded in the question. Let me take the budget side first. The budgets are extreme, all right? And without anthropomorphizing it, you’ve got this ogre out there of this giant deficit, and we're not sure how people will react to that in different states. They act different ways, particularly with the Feds.
However, for us, when we look at it facility by facility, the question that we start with is does changing the facility's mission for the customer improve the customer's budget position or hurt it? And we feel very comfortable from where we are as we look through our mix of facilities, that – and which is why we have the guidance we do, that we are in a defensible position. That said, the budgets are very large, and they are unpredictable in different ways. So that's sort of the budget piece.
Relative to pricing. Pricing – there's been an enormous amount of commentary, both in terms of articles, as well as industry commentary and certainly both of my competitors, their earnings calls had to address. And I talked about sort of the twilight gloom that has surrounded some of this, one would almost take away that we're in the declining phase of an industry. Well, we're not. We're not some crepuscular creature at the edge of life here. We see this as a temporary position. The customers are clearly pushing on pricing, as they are pushing on staffing, as they are pushing in all elements of their cost structures. But the reality is, I come back to what I said before, we have to look facility by facility, and you look at this for each of our competitors as well as factor the industry, where the pricing is defensible for the value that you're delivering, and, in particular, at certain facilities, what the alternatives are. And if there is pricing pressure, can it be ameliorated with staffing changes, programming changes, or volume increases to offset that.
Again, when I come back to us, we started out on a base case that although we do see actually there will be some places where price will decline, there will be other places where price will increase. Across the portfolio, we are predicting guidance based on flat. We feel that's prudent.
Manav Patnaik – Barclays Capital
Okay. And I guess with respect to just your discussions – I'm not sure how many customers you guys are already sort of in negotiations with and what's going to happen sort of once their budgets are finalized. But what sense do you get from even if there is potential pricing decreases, with that pricing decrease could there be a possible for an increase in volume, like an offset from the volume angle?
James Hyman
Well, I think the – we are in discussions with all of our customers, and we have been in active discussions with them for months, and as the budget deficits have grown, and as the pressure has increased, and particularly as the departments either at the state legal or at the federal level have had to react to internal changes as the government budgets are being put together, they're asking us for different ideas. And so I don't really want to get into specifics by facility, but we've had people ask us, well, how main additional inmates more could you take? We've had frank discussions with every customer on the missions that we are performing and the degrees of freedom around that. It is active. The budgets aren't put to bed.
I expect it to continue to be active, and I think more importantly, we don't think it's going to end. I expect this to continue right through the year. But I think we've taken that into account, again facility by facility as we put our guidance together.
Manav Patnaik – Barclays Capital
Okay. And finally, just across your three segments, the commentary you just provided roughly the same in terms of the customer sentiment and discussions, or is there a difference between maybe what feedback you're getting on your – the youth side versus community-based, or like I said, is it just generally the same?
James Hyman
It is slightly different by segment. So the – on the secure side, which has received most of the commentary, I think what we just talked about and what the others talk about has been fully discussed. On the youth side, it really is a problem where the counties, the judicial justice providers, are looking to deal with less acute kids in non-residential treatment because the step up in per diems is just so dramatically different. And if you sort of think about the Cornell story or Abraxas story as we've been telling it for the past few years, in anticipation of this, we shifted our mix of services to handle more specialized programs with the more acute kids, particularly because we see those as more budget defendable over time.
The mission that we are serving for the customers, they still need those kids to go to residential treatment. But there are certain places where it's going to be really tight, and Pennsylvania was the place I gave as an example, although in Pennsylvania's case, they are still sending a large number of kids out of state at higher rates than what we're getting in state. So my comment on Pennsylvania is we actually see this environment in Abraxas as an opportunity to pick up market share.
And that's sort of very different from secure world where I think the whole industry starts with a relatively modest share, whatever it is, 8%, 7%, depending on how you count it. And therefore, the whole industry, I think the value proposition is solid and will grow share over the next few years. In the juvenile world, it's one, I think very specifically at Cornell we believe Abraxas can pick up share because of what we offer, particularly with the more difficult kids over time.
Manav Patnaik – Barclays Capital
Got it. Thanks a lot, guys.
Operator
Thank you. And our next question comes from the line of Kevin Campbell from Avondale Partners. Please go ahead.
Kevin Campbell – Avondale Partners
Thanks. A couple of quick questions. Could you start with – just looking at your start up expenses and your guidance for D. Ray, how much should we expect and should that all be in the second quarter? Or will some of that be in the first quarter, as well?
James Hyman
Well, let's see. It depends when it ramps. So the guidance assumes ramps July 01. That means you would have pre-activation expenses in the second quarter. We haven't given second quarter guidance, but when we talk again in only what, five weeks, six weeks, whatever it is, sometime at the – soon, we'll give that second quarter guidance and then we'll have more precision around that. So yes, second quarter will have that guidance.
Now, if it slips obviously for the entire year, then that $0.11 that we talked about incorporates the fact there wouldn't be any start up expense because we wouldn't be starting. So depending on the timing of – and similarly if we started earlier in the second quarter, we would actually have some start-up expense in the first quarter that we currently aren't anticipating. So it's going to slide along that.
Kevin Campbell – Avondale Partners
Okay. Looking at your juvenile business then, I know the occupancy was up, but the number of beds looks like it came down sequentially. Was there a facility that you guys closed that you took out of the numbers there, or what drove that change, and is that why the average daily population went down from 3Q to 4Q?
James Hyman
No, there was a management contract in Salt Lake, which was a detention facility, and that was pulled out of the numbers between third quarter and fourth quarter.
Kevin Campbell – Avondale Partners
Okay. And then looking at the Community Corrections, I guess the population decline was related to the hurricane. Was there any impact on revenues at all, or was that all – did you include that – I guess you had business interruption insurance.
James Hyman
Correct. So the revenues were direct, but the BI covered the income.
Kevin Campbell – Avondale Partners
Okay. Is that why – well, looking at your revenues in that segment, looked like it jumped up sequentially from around 6,850 to around 7,370. Was that at all related to that hurricane, the insurance there, or was there something else driving that, and is it sustainable.
James Hyman
You mean the revenue per bed?
Kevin Campbell – Avondale Partners
Yes, sorry.
James Hyman
There were contracts that came into place with certain customers that had higher pricing.
Kevin Campbell – Avondale Partners
Okay. So it's a mixed shift more than anything. Okay.
James Hyman
Like when in doubt, it's always mix.
Kevin Campbell – Avondale Partners
Looking at – just a couple of questions. Do you guys have the segment contributions for each individual segment that you can give us on the call?
John Nieser
We don't now, but we can certainly consider that on a go-forward basis.
Kevin Campbell – Avondale Partners
Okay. That would be helpful rather than having to wait for the Q or the K. And then lastly, looking at your – how much capacity do you have left on your revolver? It sounded like you didn't have to draw down in full as you thought you might need to. So how much do you have left there, outside of the accordion feature? And is the free cash flow expectation still the 500 to 700 beds?
James Hyman
Yes. Two things. So what I talked about on my script, we have reaffirmed that we had could do that 500 to 700 this year, and 1,000 to 1,200 next year. The revolver as of 12/31 was $10.1 million?
John Nieser
Correct, about. That's right.
James Hyman
Okay. About.
Kevin Campbell – Avondale Partners
Okay, great. That's it. Thank you.
Operator
Thank you. And our next question comes from the line of Chuck Ruff from Insight Investments. Please go ahead.
Chuck Ruff – Insight Investments
Good morning. Can you talk a little bit more about both D. Ray James and Hudson and why your assumptions there are reasonable? Just try to help us get comfortable that those are reasonable – that's reasonable guidance there.
James Hyman
Reasonable – okay. Let me start with Hudson. So Hudson, what we – when we announced Hudson, whenever it was, August, I guess, we said that we expected it to come on in the fourth quarter. We didn't provide – 2009. We didn't provide additional guidance around that. We talk about that on the last call, so what we're just giving is more precision around that, which is the end of the fourth quarter.
It's still early enough if in the year that we could flex on the construction side or opening so that if someone came to us tomorrow and said I absolutely must have those beds, and we're willing to pay, we could probably accelerate that to earlier in the quarter. On the other hand, if the budget ogre says no one is going to want these beds at all, we could delay that opening and avoid incurring some expense. What is reasonable, though, is we still think for the customers that we have marketed that facility, Colorado with whom we have the implementation agreement, the size, the location, the characteristics, we believe that will be reasonable to assume we're opening in that time frame. As I said though, it could be earlier, or it could be later, but that's reasonable.
Regarding D. Ray, we will be finished at the end of the first quarter. And the reason why we felt comfortable on the last call saying that we would expect to be ramping, or activating at the end of the first quarter when construction finished or the beginning of the second quarter, was because when we looked into the primary targeted customer which was Georgia, and we looked at the budget situation, what we saw is that within the fiscal year '08, '09 budget, there was money allocated for the use of additional private beds, and we were the only provider able to bring additional beds on stream in that time frame. And when we looked into the request for fiscal year '09, '10, we saw also a request for funds, an RFP, that would service the private providers, and again we are one of the few that can actually bring the beds to bear on time. So it was reasonable on the last call to think that that timing would be used.
However, here we are sitting in the first week of March, and we don't have a contract, and the budget situation in Georgia – they're sitting with a – whatever it is, $2.5 billion deficit, and they're trying to figure out how to handle that issue. I think that has delayed decision-making, not unreasonably, but has delayed decision-making within the Georgia DOC. However, their system is still growing. They're growing a couple of thousand beds a year, and they are overcrowded, which is why we think it's reasonable, and we have pegged the timing of that start, and what we just talked about today, to the beginning of their next fiscal year, so July 1st.
Chuck Ruff – Insight Investments
Okay. And can you tell me what kind of capitalized interest you expect in '09?
John Nieser
Yes, Chuck, I guess at this point my best guess would be in the first quarter we probably would be pretty flat with the fourth quarter, so you're probably looking about maybe $0.6 million. Beyond that, unless we announce some kind of project, there should not be anything meaningful.
Chuck Ruff – Insight Investments
And how about depreciation and amortization for the year
John Nieser
For the year, probably at this point we would estimate it to be somewhere around the neighborhood of, say, $18 million to $19 million.
Chuck Ruff – Insight Investments
Okay. When you talk about having free cash flow, enough free cash flow to build 500 to 700 beds, at the mid-point, that sounds like $30 million or more in cash flow. So I guess I'm having trouble getting there. If your earnings are going to be about $25 million, your CapEx is going to be slightly more than depreciation and amortization, how do we get up to around the mid-point of that free cash flow?
James Hyman
Well, I really don't want to go into the details parsing the numbers, but first of all, we talked about expansions, and expansions have different sizes to them and different costs, depending on whether you're talking about all cells, or dorms, or a mix of dorms and cells. It also depends on which location. So we feel comfortable making that statement.
The other piece, obviously, is the timing by when the cash would be disbursed, and we're sitting here in the first quarter, we aren't announcing any expansions today, so I guess that's probably – I'll leave it open if there's a follow up question.
Chuck Ruff – Insight Investments
But you talked about CapEx this year of $21 million, right?
James Hyman
Correct.
Chuck Ruff – Insight Investments
Okay, and depreciation and amortization of $18 million to $19 million. And the mid-point of your earnings guidance is about $25 million. So, those three numbers give me free cash flow of a little, you know, low $20s. The free cash flow that I'm thinking about when you talk about 500 to 700 beds, is more than $22 million.
James Hyman
Well, about all I can do is reiterate what I said before. If you think that we got it wrong, and the timing doesn't work, then –
John Nieser
Chuck, I think where there is probably a disconnect is going to be around the timing of the spend. I think when James talks about our capacity, again to his point, it's not as if you expend that entire amount of money in a three-month period. Construction cycles can range anywhere from nine to 12-plus months. So I wouldn't focus too tightly on the fact that all of that would necessarily happen within 2009.
Chuck Ruff – Insight Investments
Okay. Maybe I don't understand what you mean when you say you’ve got free cash flow to build 500 to 700 bids. Can you expand on that, what you mean by that?
James Hyman
Sure. What we mean is that we have resources and visibility that we would feel comfortable at this point committing to that construction and that amount of capacity expansion.
Chuck Ruff – Insight Investments
Okay. That explains it.
James Hyman
Okay.
Chuck Ruff – Insight Investments
Thanks.
Operator
Thank you. (Operator instructions) Out first question comes from the line of Todd Van Fleet from First Analysis. Please go ahead.
Todd Van Fleet – First Analysis
On Great Plains, was the expansion completely filled by the end of Q4, or will there be some kind of additional ramping in Q1?
James Hyman
It was full.
Todd Van Fleet – First Analysis
It was full in Q4. Okay.
James Hyman
Let me put it this way, it was full . You then are into the normal fluctuation, a bus comes in, a bus goes out, so you're going to fluctuate around that 2,000.
Todd Van Fleet – First Analysis
Right, but you didn't get full benefit, though, in Q4, I guess is my point.
James Hyman
No, correct.
Todd Van Fleet – First Analysis
So on that expansion of, what was it, 1,200 beds, that occurred pretty quickly, right? That ramping occurred over a three-month period or so?
James Hyman
We started ramping after Labor Day, and we were complete in the fourth quarter.
Todd Van Fleet – First Analysis
Okay. All right. That's good to know. And then on D. Ray. On that $0.11 figure, if you didn't fill a facility at all, can you parse that $0.11 for us between opening expenses, or expense related to the facility, the additional carrying costs, because part of the $0.11 cents, if you leave it empty, you're going to have the carrying costs associated with the asset, or skeleton crew, or what have you, that's part of the $0.11, right?
James Hyman
Yes. There's all sorts of stuff in there. There's the income that we expect to get which, depending on the timing, you have got the third quarter, which obviously would look worse before opening, because we are going to have start up, but then the fourth quarter will look much better when we are full and we have the pricing associated with that. But I think – I would feel uncomfortable at this point just aggregating all the different pieces. It is just sort of collectively when we look at D. Ray, $0.11. That's I think as far as I want to go at this point.
Todd Van Fleet – First Analysis
Nothing regarding start-up, what the expected start-up is, so if it came online –
James Hyman
Well, I think that as we get – for instance, when we do the next quarter call, if at that point we are able to talk about more detail, we would have more precision on the opening date, if that's a second quarter event, similarly on the third quarter event, we'll provide more information about start-up, but right now, I don't think I'd rather go into it.
Todd Van Fleet – First Analysis
Okay. So you understand where I'm coming from, though, James, just want to get some visibility, or at least hoping to provide folks with a bit of visibility on contribution from that facility on an annualized basis once it gets up and running.
James Hyman
Yes.
Todd Van Fleet – First Analysis
Okay. The other question I had, I guess, is on juvenile. And we saw the head – or the compensated man day figure declined sequentially. I think we understand the reason for that. Is the normalized compensation man day, kind of on a quarterly base, obviously you need to adjust for the number of man days, or number of days going from Q2 to Q4 to Q1, but based on the population that's in there today, and ignoring what you guys are expecting for 2009, which I'll get to in a moment, but you ended the quarter with 104,000 compensated man days in juvenile residential, down sequentially.
The population that was there as of the end of the year, should – is it safe to assume that's kind of a quarterly rate, or a quarterly count would be lower than that 104,000? So the 104,000 is kind of like an average, perhaps, throughout the quarter while you were ramping down, or lost some program, or is 104,000 a good baseline for 2009? Maybe that's the short way of asking it.
James Hyman
Yes, I guess roughly the way I would – I think the way I would look at it is we exited the Salt Lake facility in the end of the third quarter. The facilities that we are active on the residential side today are the facilities that we would expect to be active through the entire year. We only have one management contract left on the residential side in juvenile. It's a relatively small number of beds. The rest are controlled.
And the focus in Abraxas is on the – obviously the utilization of the, facilities that we generally always talk about, but we're in a – the budget environment where we know that there's a lot of pressure out there. So I do expect quite a few moving parts during the year, but the fourth quarter, those numbers are, what we are playing with this year. That's the basis. Those are the beds.
Todd Van Fleet – First Analysis
Right. So, 100 in the fourth quarter count then is a good baseline for 2009.
James Hyman
Sure.
Todd Van Fleet – First Analysis
And you said 200 – a ramp of 200 additional beds are being filled, or at least 200 beds by the end of the year is what's assumed in your guidance, is that right?
James Hyman
That assumes from where we finished at the end of the year to where we'll finish at the end of 2009, it's a net increase of 200 beds.
Todd Van Fleet – First Analysis
Net increase of 200 beds, and the movement is primarily related to three or four facilities, the three or four that have the capacity?
James Hyman
Right. Most of that will occur at the Abraxas Academy, the Abraxas 1 facility, our San Antonio facilities, and where we have capacity, primarily Garza, and then also our Southern Peaks facility in Colorado, although there is also assumptions on being able to fill those last few beds at other places. Recognizing that there is a general pressure among the counties around residential treatment, so that we have in our numbers.
Todd Van Fleet – First Analysis
Right. But the 200 – the three or four facilities, the types of kids that those facilities are receiving are –
James Hyman
They are highly acute kids, ranging from specialized services for sex offenders, behavioral co-occurring disorder kids, a range of issues that are pretty deepened and high per diem kids.
Todd Van Fleet – First Analysis
Right. So you would expect – if you are expecting an overall net increase of 200 individuals by the end of the year, that you are going to see, on a mixed basis alone, a pretty positive shift with respect to per diems in that segment?
James Hyman
Yes, somewhat, although the other facilities that we have are not exactly low per diem, so we have eliminated or gotten rid of a number of the programs that we didn't feel offered the risk adjusted profile on returns where we could serve. So, yes, there will – you would expect to see some mix change in pricing, but I think the dominant factor that's going to drive the earnings is just the ability to fill a bed.
Todd Van Fleet – First Analysis
Right. Okay. And then one more quick one, if I could. John, you said depreciation was going to be $18 million, $19 million?
John Nieser
Correct.
Todd Van Fleet – First Analysis
And so $18 million, $19 million – it was $8 million in 2008, you brought on 1,200 beds at Great Plains, you brought on another 700 beds, so just off the top of my head, 1,900 beds in total at a per diem, or, I'm sorry, not per diem but a cost of maybe $60,000 a bed, $114 million divided by 40, that's $2.8 million a year of depreciation. So there are other assets falling off the books that's going to offset that?
John Nieser
Yes, there are – the largest one, just to name one, of course, would be the RCC lease, as it currently exists, matures in June of this year, and also in accordance with GAAP we've been running all of those leasehold improvement over that lifespan that ends in June.
Todd Van Fleet – First Analysis
That ends in June.
John Nieser
Yes, sir. But to your point, there's always the normal items coming off that are being fully expensed that will –
Todd Van Fleet – First Analysis
Right. So we should see depreciation perhaps have sequential bumps up through the first half of the year, and then fall off in the back half?
John Nieser
Yes. Well, yes, with D. Ray picking up, that would be correct, and then you have the impact of RCC, et cetera. That’s right.
Todd Van Fleet – First Analysis
Okay. I think that's all I have. Thanks, guys. Nice quarter.
James Hyman
Thank you.
John Nieser
Thanks, Todd.
Operator
(Operator instructions) Your next question comes from the line of Walt Sosnowski with SRC Capital. Please go ahead.
Walt Sosnowski – SRC Capital
Good quarter, guys. On your full-year outlook for '09, I know you already gave this, but I just want to make sure I heard you correctly, the interest expense is $27 million, is that correct?
John Nieser
That's correct, Walt.
Walt Sosnowski – SRC Capital
And then the G&A expense, that was 20 – I didn't quite get that number. What was it?
John Nieser
Approximately $27.1 million.
Walt Sosnowski – SRC Capital
$27.1 million, and a D&A of 18 to 19, and then the full year CapEx number, was that $16 million, or $21 million?
John Nieser
The CapEx itself is roughly $16 million, with another $5 million FF&E for Hudson if Hudson is activated late in the year.
Walt Sosnowski – SRC Capital
Okay. And then for the March quarter, G&A of $6.3 million, and then what was the D&A number, depreciation and amortization number for the March quarter?
John Nieser
Walt, it's probably somewhere in the range of, say, roughly $4.5 million to $5 million-ish, somewhere in that neighborhood.
Walt Sosnowski – SRC Capital
Okay, great. Thanks, guys.
John Nieser
Thanks, Walt.
Operator
Thank you. And we do have a follow-up question from the line of Todd Van Fleet from First Analysis. Please go ahead.
Todd Van Fleet – First Analysis
Sorry, I lied. We've heard or seen, read, what have you recently, a reasonable amount regarding the new administration's view of the private sector and government contracts with the private sector. What's your view on kind of the level of scrutiny that could prospectively be brought on this industry and your contracts with the BOP, or whatever federal agency – you are not currently doing any work with ICE, but what's your view of the prospective scrutinization, or do you think it's just more for – a lot of the rhetoric that we have heard applies to other industries like defense?
James Hyman
Well, let me start, the Federal Acquisition Requirements, the FARS, require – or the procurement rules apply to us. We are audited by agencies, Feds, states, and counties in some cases for our rates. It depends on what the product is, so we already have a lot of scrutiny the out there. I guess there was something put out yesterday by the administration around government procurement. We haven't studied the details yet. The defense industry, I'm sure, given the size will come under scrutiny, but it may come to this industry as well. The difference is, I think that you can benchmark what we do very well against the services that the states and the Feds provide themselves. So there are alternatives.
If you are buying an aircraft carrier, there aren't too many other guys from the private sector that you're going to go and buy it from. But if you're buying a bed or you are buying treatment services, you have a range of competitive alternatives, as well as the government performing that service themselves, and so from just a pure pricing perspective, or oversight, the quality of delivery of services, there’s a lot of independent benchmarking and competitive pressure out there that I think compels us as an industry or as a provider to give good value to the government for what they are receiving.
So I think that that difference in structure, for me, makes me believe that whatever they put in is not going to affect the way we operate.
Todd Van Fleet – First Analysis
Very good. Thank you.
Operator
Thank you. And I'm showing that we have no further questions at this time. I'll hand it back to management for any closing remarks.
James Hyman
Okay everyone, thank you very much for joining us this morning to discuss the fourth quarter results, and our guidance for 2009. I look forward to providing additional updates as warranted. You may also want to check on our Web site for our investor presentations, which we update after each quarter. And if you need additional information, feel free to contact us neither John or I will get back to you. Thank you very much.
Operator
And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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