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 SEC from 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 Emergency Medical
Services Corporation and its subsidiaries. Our business is conducted primarily
through two operating subsidiaries, EmCare Holdings Inc., or EmCare, and
American Medical Response, Inc., or AMR.
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 SEC on March 16, 2012.
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 Court upheld
the constitutionality of the individual mandate provisions of the PPACA, but
struck down the provisions that would have allowed the Department of Health and
Human Services to penalize states that do not implement Medicaid expansion
provisions through the loss of existing federal Medicaid funding. It is unclear
how many states will decline to implement the Medicaid expansion. 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 States based 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 operating history, is a leading provider of ground and
fixed-wing ambulance services in the United States based on net revenue and
number of transports.
On 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, 2011 for details related to the
Merger.
EMSC applied business combination accounting to the opening balance sheet and
results of operations on May 25, 2011 as 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 six months ended
June 30, 2012 and the period from May 25, 2011 through June 30, 2011, due most
significantly to the amortization of intangible assets and interest expense and
will have a material
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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 results, 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 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, Medicare and 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 six months
ended June 30, 2012 and 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 Six months ended Quarter ended Six months ended
June 30, June 30, June 30, June 30,
2012 2011 2012 2011 2012 2011 2012 2011
Medicare 20.5 % 21.7 % 20.7 % 22.0 % 25.8 % 26.1 % 26.0 % 26.3 %
Medicaid 5.0 % 6.3 % 5.0 % 6.1 % 11.0 % 12.8 % 11.0 % 13.1 %
Commercial
insurance and
managed care 53.0 % 49.0 % 52.2 % 48.7 % 45.0 % 43.1 % 45.0 % 42.6 %
Self-pay 5.0 % 5.1 % 5.0 % 4.9 % 18.2 % 18.0 % 18.0 % 18.0 %
Subsidies & fees 16.5 % 17.9 % 17.1 % 18.3 % - - - -
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
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 six months ended June 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
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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 six months ended June 30, 2012
was 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.
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.
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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 13.2% and 11.7% of AMR's operating expenses
for the three months ended June 30, 2012 and 2011, respectively, and 12.2% and
11.2% for the six months ended June 30, 2012 and 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
Medicare law requires the Centers for Medicare and Medicaid Services (CMS) to
adjust the Medicare Physician Fee Schedule (MPFS) payment rates annually based
on a formula which includes an application of the Sustainable Growth Rate (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 Congress took 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.
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 June 30, 2012, there were
no significant changes in our critical accounting policies or estimation
procedures.
Results of Operations
Quarter and Six Months Ended June 30, 2012 Compared to the Quarter and Six
Months Ended June 30, 2011
The following tables present a comparison of financial data from our unaudited
consolidated statements of operations for the three months ended June 30, 2012
and 2011 for EMSC and our two operating segments.
Non-GAAP Measures
Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) attributable to
EMSC before equity in earnings of unconsolidated subsidiary, income tax expense,
interest and other income (expense), loss on early debt extinguishment,
interest, 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.
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Unaudited Consolidated Results of Operations and as a Percentage of Net Revenue
(dollars in thousands)
EMSC
Successor Combined Successor Combined
Quarter ended June 30, Six months ended June 30,
% of net % of net % of net % of net
2012 revenue 2011 revenue 2012 revenue 2011 revenue
Net revenue $ 801,098 100.0 % $ 780,498 100.0 % $ 1,607,392 100.0 % $ 1,541,333 100.0 %
Compensation and
benefits 562,838 70.3 559,360 71.7 1,128,703 70.2 1,096,437 71.1
Operating expenses 96,807 12.1 101,633 13.0 204,388 12.7 198,596 12.9
Insurance expense 27,555 3.4 30,779 3.9 52,445 3.3 57,318 3.7
Selling, general
and administrative
expenses 20,136 2.5 18,267 2.3 39,129 2.4 36,102 2.3
Equity-based
compensation
expense (1,062 ) (0.1 ) (13,580 ) (1.7 ) (2,124 ) (0.1 ) (15,542 ) (1.0 )
Related party
management fees (1,250 ) (0.2 ) (663 ) (0.1 ) (2,500 ) (0.2 ) (913 ) (0.1 )
Interest income
from
restricted assets (258 ) (0.0 ) (890 ) (0.1 ) (545 ) (0.0 ) (1,286 ) (0.1 )
Adjusted EBITDA $ 96,332 12.0 % $ 85,592 11.0 % $ 187,896 11.7 % $ 170,621 11.1 %
Equity-based
compensation
expense (1,062 ) (0.1 ) (13,580 ) (1.7 ) (2,124 ) (0.1 ) (15,542 ) (1.0 )
Related party
management fees (1,250 ) (0.2 ) (663 ) (0.1 ) (2,500 ) (0.2 ) (913 ) (0.1 )
Depreciation and
amortization
expense (30,762 ) (3.8 ) (22,003 ) (2.8 ) (61,252 ) (3.8 ) (39,528 ) (2.6 )
Restructuring
charges (2,744 ) (0.3 ) - - (8,723 ) (0.5 ) - -
Interest expense (41,514 ) (5.2 ) (21,019 ) (2.7 ) (84,966 ) (5.3 ) (25,836 ) (1.7 )
Realized gain
(loss) on
investments 63 0.0 2 0.0 361 0.0 (2 ) (0.0 )
Interest and other
income (expense) 241 0.0 (27,267 ) (3.5 ) 403 0.0 (29,013 ) (1.9 )
Loss on early debt
extinguishment (5,172 ) (0.6 ) (10,069 ) (1.3 ) (5,172 ) (0.3 ) (10,069 ) (0.7 )
Income tax expense (6,266 ) (0.8 ) (748 ) (0.1 ) (10,504 ) (0.7 ) (23,400 ) (1.5 )
Equity in earnings
of unconsolidated
subsidiary 105 0.0 85 0.0 214 0.0 176 0.0
Net income
attributable to
noncontrolling
interest (130 ) (0.0 ) - - - - - -
Net income (loss)
attributable to
EMSC $ 7,841 1.0 % $ (9,670 ) (1.2 )% $ 13,633 0.8 % $ 26,494 1.7 %
Successor Predecessor
Period from May 25 Period from April 1 Period from January 1
through June 30, through May 24, through May 24,
% of net % of net % of net
2011 revenue 2011 revenue 2011 revenue
Net revenue $ 319,543 100.0 % $ 460,955 100.0 % $ 1,221,790 100.0 %
Compensation and benefits 221,804 69.4 337,556 73.2 874,633 71.6
Operating expenses 41,856 13.1 59,777 13.0 156,740 12.8
Insurance expense 10,089 3.2 20,690 4.5 47,229 3.9
Selling, general and
administrative expenses 6,861 2.1 11,406 2.5 29,241 2.4
Equity-based compensation
expense (430 ) (0.1 ) (13,150 ) (2.9 ) (15,112 ) (1.2 )
Related party management
fees (514 ) (0.2 ) (149 ) (0.0 ) (399 ) (0.0 )
Interest income from
restricted assets (162 ) (0.1 ) (728 ) (0.2 ) (1,124 ) (0.1 )
Adjusted EBITDA $ 40,039 12.5 % $ 45,553 9.9 % $ 130,582 10.7 %
Equity-based compensation
expense (430 ) (0.1 ) (13,150 ) (2.9 ) (15,112 ) (1.2 )
Related party management
fees (514 ) (0.2 ) (149 ) (0.0 ) (399 ) (0.0 )
Depreciation and
amortization expense (11,061 ) (3.5 ) (10,942 ) (2.4 ) (28,467 ) (2.3 )
Interest expense (17,950 ) (5.6 ) (3,069 ) (0.7 ) (7,886 ) (0.6 )
Realized gain (loss) on
investments 7 0.0 (5 ) (0.0 ) (9 ) (0.0 )
Interest and other
expense (140 ) (0.0 ) (27,127 ) (5.9 ) (28,873 ) (2.4 )
Loss on early debt
extinguishment - - (10,069 ) (2.2 ) (10,069 ) (0.8 )
Income tax (expense)
benefit (4,158 ) (1.3 ) 3,410 0.7 (19,242 ) (1.6 )
Equity in earnings of
unconsolidated subsidiary 33 0.0 52 0.0 143 0.0
Net income (loss) $ 5,826 1.8 % $ (15,496 ) (3.4 )% $ 20,668 1.7 %
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