AmSurg Corp. (AMSG) reported an EPS of 43 cents in the third quarter of fiscal 2010, surpassing the Zacks Consensus Estimate by a penny. However, earnings were lower than 44 cents reported in the year-ago period. Results for the third quarter of 2010 had a negative impact of 1 cent from the revision of the Medicare payment system for ambulatory surgical centers (ASCs) and 4 cents due to higher interest cost related to debt refinancing.

AmSurg reported revenues of $180.3 million, marginally missing the Zacks Consensus Estimate of $181 million but 7% higher than $167.9 million in the year-ago period. Although revenues increased by 7%, EPS came down because of a 10.1% rise in operating expenses (excluding depreciation and amortization). Moreover, interest expenses increased by 110% to reach $4 million.

The company recorded a 2% decline in same-center revenues due to the difficult economic environment. However, we are pleased to note that total procedures increased 5% due to the addition of 12 centers since the third quarter of last year. An increase in the number of centers (206 with 2 acquisitions during the quarter from 194 in the year-ago period) along with a rise in average revenue per center ($877 from $865) contributed to the top line growth.

A 10.1% rise in operating expenses restrained operating income, which increased by only 2.7% to $64.2 million. Moreover, the operating margin declined 164 basis points to 35.6%. Increase in salary-related costs (6.0%) and other operating expenses (12.1%) led to a lower operating margin.

AmSurg exited the third quarter of 2010 with $28.8 million ($29.37 million at the end of December 2009) of cash and cash equivalents and $284.8 million ($289 million at the end of December 2009) in long-term debt. In the second quarter, the company had refinanced its debt in the form of a revolving credit facility ($375 million) and private placement of senior notes ($75 million).

We are pleased to note that the ratio of total debt to trailing twelve months EBITDA came down to 2.4 from 2.6 at the end of March 2010. Cash flow from operating activities during the quarter was $57.9 million, lower than $61.1 million in the corresponding period of 2009.

Outlook

Economic uncertainty continues to be the major concern for AmSurg which forced the company to lower its revenue outlook for 2010. Revenues are now expected in the range of $710-$720 million (previous guidance of $715-$735 million) with same center revenues expected to decline 2% (decline of 1%-2%). The company lowered the upper end of its previous EPS guidance by 4 cents to $1.69-$1.71. However, the plan to open 13−16 new centers remains unchanged.

For the fourth quarter of 2010, the company expects earnings in the range of 41−43 cents per share. The Zacks Consensus Estimate of 43 cents is already towards the upper-end of this range.

Recommendation

With a relatively solid development and acquisition pipeline in place, supported by a fairly strong cash position, we believe AmSurg is well placed to handle the current economic uncertainty. This is the major area of concern since physician office visits get reduced thereby impacting surgical volume and same center revenue. Although the company reduced its outlook for 2010, we expect the situation to improve going forward with a gradual recovery in the economy.

We are currently Neutral on the stock.

 
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