EMERGENCY MEDICAL SERVICES CORP – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking Statements and Factors That May Affect Results
Certain statements and information herein may be deemed to be "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Any forward-looking statements herein are made as of the date this Quarterly Report on Form 10-Q is filed with the
Securities and Exchange Commission, and EMSC undertakes no duty to update or revise any such statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in EMSC's filings with the SECfrom time to time, including in the section entitled "Risk Factors" in EMSC's most recent Annual Report on Form 10-K. Among the factors that could cause future results to differ materially from those provided in this Quarterly Report on Form 10-Q are: the impact on our revenue of changes in transport volume, mix of insured and uninsured patients, and third party reimbursement rates and methods; the adequacy of our insurance coverage and insurance reserves; potential penalties or changes to our operations if we fail to comply with extensive and complex government regulation of our industry; the impact of changes in the healthcare industry; our ability to recruit and retain qualified physicians and other healthcare professionals, and enforce our non-compete agreements with our physicians; our ability to generate cash flow to service our debt obligations; the cost of capital expenditures to maintain and upgrade our vehicle fleet and medical equipment; the loss of one or more members of our senior management team; the outcome of government investigations of certain of our business practices; our ability to successfully restructure our operations to comply with future changes in government regulation; the loss of existing contracts and the accuracy of our assessment of costs under new contracts; the high level of competition in our industry; our ability to maintain or implement complex information systems; our ability to implement our business strategy; our ability to successfully integrate strategic acquisitions; our ability to comply with the terms of our settlement agreements with the government; the risk that the benefits from the Merger, and related transactions may not be fully realized or may take longer to realize than expected; and risks related to other factors discussed in the Quarterly Report. Words such as "anticipates," "believes," "continues," "estimates," "expects," "goal," "objectives," "intends," "may," "opportunity," "plans," "potential," "near-term," "long-term," "projections," "assumptions," "projects," "guidance," "forecasts," "outlook," "target," "trends," "should," "could," "would," "will" and similar expressions are intended to identify such forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors.
All references to "we", "our", "us", or "EMSC", refer to
This Quarterly Report should be read in conjunction with EMSC's consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the
Healthcare Reform As currently enacted, the Patient Protection and Affordable Care Act, or PPACA, changes how health care services are delivered and reimbursed, and increases access to health insurance benefits for the uninsured and underinsured population in
the United States. On June 28, 2012, the U.S. Supreme Courtupheld the constitutionality of the individual mandate provisions of the PPACA, but struck down the provisions that would have allowed the Department of Healthand Human Services to penalize states that do not implement Medicaidexpansion provisions through the loss of existing federal Medicaidfunding. It is unclear how many states will decline to implement the Medicaidexpansion. Modification or repeal of the PPACA has become a campaign theme for many of the Presidential and Congressional candidates seeking election in 2012. While the current PPACA law would increase the likelihood of more people in the U.S. with access to health insurance benefits, we cannot quantify or predict with any certainty the likely impact of the PPACA on our business model, financial condition or result of operations. Company Overview We are a leading provider of outsourced facility-based physician services and medical transportation services in the United States. We operate our business and market our services under the EmCare and AMR brands. EmCare, over its 40 years of operating history, is a leading provider of physician services in the United Statesbased on number of contracts with hospitals and affiliated physician groups. Through EmCare, we provide facility-based physician services for emergency departments, anesthesiology, hospitalist/inpatient, radiology, teleradiology and surgery staffing, and other management services. AMR, over its nearly 55 years of 29
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operating history, is a leading provider of ground and fixed-wing ambulance services in
May 25, 2011, the Company merged with affiliates of Clayton, Dubilier & Rice, LLC, or CD&R. This transaction is referred to in this Quarterly Report as the "Merger". See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the year ended December 31, 2011for details related to the Merger. EMSC applied business combination accounting to the opening balance sheet and results of operations on May 25, 2011as the Merger occurred at the close of business on May 24, 2011. The business combination adjustments had a material impact on the Successor periods presented, for the three and nine months ended September 30, 2012, the three months ended September 30, 2011and the period from May 25, 2011through September 30, 2011, due most significantly to the amortization of intangible assets and interest expense and will have a material impact on future earnings. Initial adjustments to allocate the acquisition consideration to fixed assets and identifiable intangible assets were recorded in the third and fourth quarters of 2011 based on a valuation report from a third party valuation firm. The Company finalized its business combination accounting during the first quarter of 2012 with adjustments related to goodwill allocations between segments. Presentation The accompanying Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q are presented for two periods for 2011: Predecessor and Successor, which primarily relate to the periods preceding the Merger and the period succeeding the Merger, respectively. The discussion in this MD&A is presented on a combined basis of the Predecessor and Successor periods for 2011. The 2011 Predecessor and Successor results are presented but are not discussed separately. Management believes that the discussion on a combined basis is more meaningful as it allows the results of operations to be analyzed to a comparable period in 2012. Items that are not comparable between the two periods presented include depreciation and amortization expense, interest expense, interest and other income (expense) and income tax expense, which had significant impacts as a result of the Merger, but are addressed separately in the discussion below. See Note 1 to the accompanying unaudited condensed consolidated financial statements.
Key Factors and Measures We Use to Evaluate Our Business
The key factors and measures we use to evaluate our business focus on the number of patients we treat and transport and the costs we incur to provide the necessary care and transportation for each of our patients.
We evaluate our revenue net of provisions for contractual payor discounts and provisions for uncompensated care.
Medicaid, Medicareand certain other payors receive discounts from our standard charges, which we refer to as contractual discounts. In addition, individuals we treat and transport may be personally responsible for a deductible or co-pay under their third party payor coverage, and most of our contracts require us to treat and transport patients who have no insurance or other third party payor coverage. Due to the uncertainty regarding collectability of charges associated with services we provide to these patients, which we refer to as uncompensated care, our net revenue recognition is based on expected cash collections. Our net revenue represents gross billings after provisions for contractual discounts and estimated uncompensated care. Provisions for contractual discounts and uncompensated care have increased historically primarily as a result of increases in gross billing rates without corresponding increases in payor reimbursement. The table below summarizes our approximate payor mix as a percentage of both net revenue and total patient encounters and transports for the three and nine months ended September 30, 2012and 2011. In determining the net revenue payor mix, we use cash collections in the period as an approximation of net revenue recorded. Percentage of Cash Collections (Net Revenue) Percentage of Total Volume Quarter ended Nine months ended
Quarter ended Nine months ended
September 30, September 30,
2012 2011 2012 2011 2012 2011 2012 2011 Medicare 20.4 % 20.0 % 20.5 % 21.1 % 25.2 % 25.2 % 25.8 % 26.1 % Medicaid 4.9 % 5.4 % 5.0 % 5.5 % 10.7 % 12.3 % 10.9 % 12.7 % Commercial insurance and managed care 53.3 % 50.6 % 52.5 % 50.2 % 45.0 % 43.5 % 45.1 % 42.9 % Self-pay 4.3 % 4.8 % 5.0 % 4.6 % 19.1 % 19.0 % 18.2 % 18.3 % Subsidies & fees 17.1 % 19.2 % 17.0 % 18.6 % - - - - Total 100.0 % 100.0 % 100.0 % 100.0 %
100.0 % 100.0 % 100.0 % 100.0 %
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In addition to continually monitoring our payor mix, we also analyze certain measures in each of our business segments.
EmCare Of EmCare's net revenue for the nine months ended
September 30, 2012, approximately 78% was derived from our hospital contracts for emergency department staffing, 11% from contracts related to anesthesiology services, 4% from our hospitalist/inpatient services, 3% from our radiology/teleradiology services, 1% from our surgery services, and 3% from other hospital management services. Approximately 81% of EmCare's net revenue was generated from billings to third party payors and patients for patient encounters and approximately 19% was generated from billings to hospitals and affiliated physician groups for professional services. EmCare's key net revenue measures are patient encounters, segregated into emergency department visits, radiology reads, and anesthesiology and hospitalist encounters and that we weight in certain analyses, net revenue per patient encounter, and number of contracts. The change from period to period in the number of patient encounters under our "same store" contracts is influenced by general community conditions as well as hospital-specific elements, many of which are beyond our direct control.
The costs incurred in our EmCare business segment consist primarily of compensation and benefits for physicians and other professional providers, professional liability costs, and contract and other support costs. EmCare's key cost measures include provider compensation per patient encounter and professional liability costs.
We have developed extensive professional liability risk mitigation processes, including risk assessments on medical professionals and hospitals, extensive incident reporting and tracking processes, clinical fail-safe programs, training and education and other risk mitigation programs which we believe have resulted in a reduction in the frequency, severity and development of claims. Our EmCare business segment is less capital intensive than AMR, and EmCare's depreciation expense relates primarily to charges for usage of computer hardware and software, and other technologies. Amortization expense relates primarily to intangibles recorded for customer relationships. AMR Approximately 87% of AMR's net revenue for the nine months ended
September 30, 2012was transport revenue derived from the treatment and transportation of patients, including fixed wing medical transportation services, based on billings to third party payors, healthcare facilities and patients. The balance of AMR's net revenue is derived from direct billings to communities and government agencies for the provision of training, dispatch center and other services. AMR's measures for net revenue include transports, segregated into ambulance and wheelchair transports and that we weight in certain analyses, and net revenue per transport. The change from period to period in the number of transports and net revenue per transport is influenced by the mix of emergency versus non-emergency transports, changes in transports in existing markets from both new and existing facilities we serve for non-emergency transports, the effects of general community conditions for emergency transports and the impact of newly acquired businesses and markets AMR has exited. The costs we incur in our AMR business segment consist primarily of compensation and benefits for ambulance crews and support personnel, direct and indirect operating costs to provide transportation services, and costs related to accident and insurance claims. AMR's key cost measures include unit hours and cost per unit hour (to measure compensation-related costs and the efficiency of our ambulance deployment), operating costs per transport, and accident and insurance claims.
We have focused our risk mitigation efforts on employee training for proper patient handling techniques, development of clinical and medical equipment protocols, driving safety, implementation of technology to reduce auto incidents and other risk mitigation processes which we believe have resulted in a reduction in the frequency, severity and development of claims.
Our AMR business segment requires various investments in long-term assets and depreciation expense relates primarily to charges for usage of these assets, including vehicles, computer hardware and software, equipment, and other technologies. Amortization expense relates primarily to intangibles recorded for customer relationships. 31
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Factors Affecting Operating Results
Changes in Net New Contracts Our operating results are affected directly by the number of net new contracts and related volumes we have in a period, reflecting the effects of both new contracts and contract expirations. We regularly bid for new contracts, frequently in a formal competitive bidding process that often requires written responses to a Request for Proposal, or RFP, and, in any fiscal period, certain of our contracts will expire. We may elect not to seek extension or renewal of a contract, or may reduce certain services, if we determine that we cannot continue to provide such services on favorable terms. With respect to expiring contracts we would like to renew, we may be required to seek renewal through an RFP, and we may not be successful in retaining any such contracts, or retaining them on terms that are as favorable as present terms. Inflation Certain of our expenses, such as wages and benefits, insurance, fuel and equipment repair and maintenance costs, are subject to normal inflationary pressures. Fuel expense represented 14.1% and 11.4% of AMR's operating expenses for the three months ended
September 30, 2012and 2011, respectively, and 12.8% and 11.3% for the nine months ended September 30, 2012and 2011, respectively. Although we have generally been able to offset inflationary cost increases through increased operating efficiencies and successful negotiation of fees and subsidies, we can provide no assurance that we will be able to offset any future inflationary cost increases through similar efficiencies and fee changes. Medicare Fee Schedule Changes Medicarelaw requires the Centers for Medicare and Medicaid Services, or CMS, to adjust the Medicare Physician Fee Schedule, or MPFS, payment rates annually based on a formula which includes an application of the Sustainable Growth Rate, or SGR, that was adopted in the Balanced Budget Act of 1997. This formula has yielded negative updates every year beginning in 2002, although CMS was able to take administrative steps to avoid a reduction in 2003 and Congresstook a series of legislative actions to prevent reductions each year from 2004 through 2012. Absent further legislative action by Congress, the reduced MPFS would go into effect on January 1, 2013, and CMS estimates that the reduction in rates for 2013 would then be 26.5%.
Critical Accounting Policies
For a discussion of accounting policies that we consider critical to our business operations and the understanding of our results of operations that affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" contained in our annual report on Form 10-K for the year ended
December 31, 2011. As of September 30, 2012, there were no significant changes in our critical accounting policies or estimation procedures. Results of Operations
Quarter and Nine Months Ended
The following tables present a comparison of financial data from our unaudited condensed consolidated statements of operations for the three and nine months ended
September 30, 2012and 2011 for EMSC and our two operating segments. Non-GAAP Measures Adjusted EBITDA. Adjusted EBITDA is defined as net income before equity in earnings of unconsolidated subsidiary, income tax expense, interest and other income (expense), loss on early debt extinguishment, realized gain (loss) on investments, interest expense, equity-based compensation, related party management fees, restructuring charges, depreciation and amortization expense, and net income attributable to noncontrolling interest. Adjusted EBITDA is commonly used by management and investors as a performance measure and liquidity indicator. Adjusted EBITDA is not considered a measure of financial performance under U.S. generally accepted accounting principles, or GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to such GAAP measures as net income, cash flows provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of financial performance or liquidity. Since Adjusted EBITDA is not a measure determined in accordance with GAAP and is susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The tables set forth a reconciliation of Adjusted EBITDA to net income and cash flows provided by operating activities. 32 --------------------------------------------------------------------------------
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Unaudited Consolidated Results of Operations and as a Percentage of Net Revenue (dollars in thousands) EMSC Successor Successor Successor Combined Quarter ended September 30, Nine months ended September 30, % of net % of net % of net % of net 2012 revenue 2011 revenue 2012 revenue 2011 revenue Net revenue $ 820,811 100.0 % $ 788,087 100.0 % $ 2,428,203 100.0 % $ 2,329,420 100.0 % Compensation and benefits 577,502 70.4 542,655 68.9 1,706,205 70.3 1,639,092 70.4 Operating expenses 100,617 12.3 108,112 13.7 305,005 12.6 306,708 13.2 Insurance expense 22,907 2.8 30,442 3.9 75,352 3.1 87,760 3.8 Selling, general and administrative expenses 18,541 2.3 18,493 2.3 57,670 2.4 54,595 2.3 Equity-based compensation expense (1,062 ) (0.1 ) (910 ) (0.1 ) (3,186 ) (0.1 ) (16,452 ) (0.7 ) Related party management fees (1,250 ) (0.2 ) (1,250 ) (0.2 ) (3,750 ) (0.2 ) (2,163 ) (0.1 ) Interest income from restricted assets 116 0.0 (957 ) (0.1 ) (429 ) (0.0 ) (2,243 ) (0.1 ) Adjusted EBITDA $ 103,440 12.6 % $ 91,502 11.6 % $ 291,336 12.0 % $ 262,123 11.3 % Equity-based compensation expense (1,062 ) (0.1 ) (910 ) (0.1 ) (3,186 ) (0.1 ) (16,452 ) (0.7 ) Related party management fees (1,250 ) (0.2 ) (1,250 ) (0.2 ) (3,750 ) (0.2 ) (2,163 ) (0.1 ) Depreciation and amortization expense (30,592 ) (3.7 ) (29,966 ) (3.8 ) (91,844 ) (3.8 ) (69,494 ) (3.0 ) Restructuring charges (2,028 ) (0.2 ) (3,374 ) (0.4 ) (10,751 ) (0.4 ) (3,374 ) (0.1 ) Interest expense (41,322 ) (5.0 ) (43,745 ) (5.6 ) (126,288 ) (5.2 ) (69,581 ) (3.0 ) Realized gain on investments 5 0.0 30 0.0 366 0.0 28 0.0 Interest and other income (expense) 937 0.1 (2,480 ) (0.3 ) 1,340 0.1 (31,493 ) (1.4 ) Loss on early debt extinguishment (1,561 ) (0.2 ) - - (6,733 ) (0.3 ) (10,069 ) (0.4 ) Income tax expense (11,448 ) (1.4 ) (4,079 ) (0.5 ) (21,952 ) (0.9 ) (27,479 ) (1.2 ) Equity in earnings of unconsolidated subsidiary 90 0.0 82 0.0 304 0.0 258 0.0 Net income $ 15,209 1.9 % $ 5,810 0.7 % $ 28,842 1.2 % $ 32,304 1.4 % 33
Table of Contents Successor Predecessor Period from May 25 Period from January 1 through September 30, through May 24, % of net % of net 2011 revenue 2011 revenue Net revenue $ 1,107,630 100.0 % $ 1,221,790 100.0 % Compensation and benefits 764,459 69.0 874,633 71.6 Operating expenses 149,968 13.5 156,740 12.8 Insurance expense 40,531 3.7 47,229 3.9 Selling, general and administrative expenses 25,354 2.3 29,241 2.4 Equity-based compensation expense (1,340 ) (0.1 ) (15,112 ) (1.2 ) Related party management fees (1,764 ) (0.2 ) (399 ) (0.0 ) Interest income from restricted assets (1,119 ) (0.1 ) (1,124 ) (0.1 ) Adjusted EBITDA $ 131,541 11.9 % $ 130,582 10.7 % Equity-based compensation expense (1,340 ) (0.1 ) (15,112 ) (1.2 ) Related party management fees (1,764 ) (0.2 ) (399 ) (0.0 ) Depreciation and amortization expense (41,027 ) (3.7 ) (28,467 ) (2.3 ) Restructuring charges (3,374 ) (0.3 ) Interest expense (61,695 ) (5.6 ) (7,886 ) (0.6 ) Realized gain (loss) on investments 37 0.0 (9 ) (0.0 ) Interest and other expense (2,620 ) (0.2 ) (28,873 ) (2.4 ) Loss on early debt extinguishment - - (10,069 ) (0.8 ) Income tax expense (8,237 ) (0.7 ) (19,242 ) (1.6 ) Equity in earnings of unconsolidated subsidiary 115 0.0 143 0.0 Net income $ 11,636 1.1 % $ 20,668 1.7 %