EMS Beats on Revenues, Cuts Outlook - Analyst Blog

Emergency Medical Services Corp. (EMS) reported an EPS of 82 cents in the third quarter of fiscal 2010, up 24.7% from 66 cents in the year-ago period. However, the EPS missed the Zacks Consensus Estimate of 85 cents.

During the quarter, Emergency Medical had to incur $3 million (4 cents impact on EPS) of increased employee medical claim charges related to four large claims under its self-insured health plans. Revenues increased 10.8% annually to reach $737.2 million, which surpassed the Zacks Consensus Estimate of $729 million.

Emergency Medical functions through two operating subsidiaries – American Medical Response (AMR), its health care transportation services segment and EmCare Holdings (EmCare), its outsourced hospital-based physician services segment.

The AMR segment generated revenues of $352.2 million, an increase of 4% compared to the year-ago period. The increase was primarily driven by an increase in emergency transports and increases in other revenues, offset partially by lower inter-facility transports.

The EmCare segment reported revenues of $385 million, an increase of 18% compared to the year-ago quarter. The addition of 39 net new contracts since June 30, 2009 and increased revenues from existing contracts were responsible for the improved performance of the segment.  Revenue from existing contracts increased 1.4% despite a 0.9% decline in same-store patient encounters due to the higher patient visits in 2009 related to the H1N1 virus.

In spite of a 6.4% rise in operating expenses, 3.8% rise in insurance expense and 11.8% rise in selling, general and administrative expenses, the EPS increased more than revenues due to a 52.8% reduction in interest expense to $4.9 million. The huge decline in interest expense was primarily due to the new credit facility arrangement entered in April 2010. We also note that long-term debt declined 8.6% to $410.3 million ($415.7 million at the end of the previous quarter) compared to $449.2 million at the end of December 2009.

Emergency Medical exited the quarter with $345.7 million in cash and cash equivalents, 3.8% higher than $332.9 million at the end of December 2009. The company generated free cash flows of $34.4 million.

Outlook

Emergency Medical has lowered its guidance for fiscal 2010 primarily due to increased cost of employee medical claims in the third quarter. Excluding one-time charges related to debt refinancing and the New York accrual, the company has reduced the high end of its previous EPS guidance by 4 cents to $3.20–$3.26.

Our Recommendation

We are quite optimistic about the potential of the emergency medical services market as health authorities and government agencies are increasingly outsourcing these services for cost containment. Moreover, the increase in aging population will be a significant demand driver for health care services, thereby resulting in an increase in ambulance transports, emergency department visits and hospital admissions.

We are currently Neutral on the stock.